U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended January 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to
Commission file number: Z-24196
MEDPLUS, INC.
(Name of small business issuer in its charter)
OHIO 48-1094982
{State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
8805 Governor's Hill Drive, Ste. 100, Cincinnati OH 45249
(Address of principal executive offices) (Zip Code)
Issuer's telephone number 513-583-0500
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
(Cover Page continued on Page 2)
The Company's revenues from continuing operations for its fiscal
year ended January 31, 1999 were $11,429,984.
The aggregate market value of the voting stock held by non-
affiliates of the Company as of April 26, 1999 was $6,073,645,
based on the average bid and ask price of such stock on that date
as reported on the Nasdaq National Market.
As of April 26, 1999, 6,055,269 shares of the Company's no par
value common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on June 18, 1999, are incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes ________ No _____X_____
INTEGRATED REPORTS TO SECURITY HOLDERS
Pursuant to General Instruction F of Form 10-KSB and Regulation
240.14a(d) of the Securities Exchange Act of 1934, the Company's
Annual Report to Security Holders for its fiscal year ended
January 31, 1999 has been combined with the required information
of Form 10-KSB and is being filed with the U.S. Securities and
Exchange Commission and submitted to the registrant's shareholders
on an integrated basis.
A list of the exhibits to this Form 10-KSB is included in Part III
hereof under the caption "Exhibits and Reports on Form 8-K."
MedPlus, Inc. will provide a copy of any such exhibit to any of
its shareholders upon written request and payment of a copying
charge of $.10 per page. Requests for copies should be directed
to: Investor Relations, MedPlus, Inc., 8805 Governor's Hill
Drive, Suite, 100, Cincinnati, Ohio 45249.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
MedPlus[r], Inc. (the "Company") was incorporated in 1991. The
Company's principal executive offices are located at 8805
Governor's Hill Drive, Suite 100, Cincinnati, Ohio, 45249 and its
Web site address is http://www.medplus.com. The Company's
telephone number is (513) 583-0500.
The Company operates primarily in three operating segments:
Healthcare Solutions, Workflow and Document Management (through
its wholly-owned subsidiary Universal Document Management Systems,
Inc.) and Distributed Computing Products and Services (through its
majority owned subsidiary DiaLogos Incorporated).
Healthcare Solutions: The Company provides state-of-the-art
information management technology products and consulting services
to customers predominantly in the healthcare industry. The
Company's products and services presently consist of enterprise-
wide electronic patient record systems, optical document archival
and retrieval systems and process improvement and automation
services, primarily in the area of patient care and laboratory
services. The Company's products and consulting services are
designed to allow healthcare providers to achieve quality and
productivity enhancements quickly and easily. Moreover, this
technology enables the providers to reach cost containment goals
which are increasingly imposed upon them by legal and regulatory
requirements as well as economic and consumer pressures.
Workflow and Document Management: The Company's Universal Document
Management Systems, Inc. subsidiary ("Universal Document")
develops and sells Step2000[r], a workflow, document management
and application development software product that enhances the
utilization of information on an enterprise-wide basis. Universal
Document serves customers primarily in the manufacturing,
engineering, pharmaceutical and healthcare industries.
Distributed Computing Products and Services: On January 30, 1998,
the Company acquired a majority interest in DiaLogos[tm]
Incorporated ("DiaLogos"). DiaLogos specializes in assisting
organizations in the integration of enterprise-wide business
systems with existing applications and data using distributed
object computing, including CORBA and Java technologies, through
education, consulting and implementation services. DiaLogos is in
the initial phases of developing several products designed to
simplify the effort of legacy system integration and is currently
focusing on creating the technology to provide Internet based
training. DiaLogos' customers are primarily in the technology
related industries.
In January 1998, the Company completed the sale of all the assets
of its IntelliCode division to Becton, Dickinson and Company for
approximately $17.3 million plus royalty payments over five years.
As of January 31, 1998, the Company changed its fiscal year end
from December 31 to January 31. Accordingly, the Company's
current fiscal year commenced on February 1, 1998 and ended on
January 31, 1999 ("fiscal 1999").
Industry Background
Over 80% of the Company's fiscal 1999 revenues were related to the
healthcare industry. The Company's remaining revenues were
derived from manufacturing, engineering, pharmaceutical and
technology markets. Fortune 500 companies represented the
predominance of customers in these other markets and the Company
did not rely on any one customer or market for these revenues.
The healthcare industry continues to be subject to the pressures
of various economic, regulatory and operational factors creating
the need for better information systems and processes. As a
result, this industry has increased its spending on information
systems and services such as those offered by the Company. The
Company intends to capitalize on this trend. During fiscal 1999,
however, many institutions within the industry were focused on
ensuring that their existing systems are Year 2000 compliant.
Although the Company cannot be certain when these institutions
will resolve all of their Year 2000 compliance issues, the Company
anticipates that as fiscal 2000 progresses, more of these
institutions will have resolved these issues and will begin
investing in technology and systems to address their information
and efficiency needs.
Economic. The dramatic increase in healthcare costs in the United
States has caused significant change in the healthcare industry.
Managed care organizations such as health maintenance
organizations, preferred providers and independent physician
associations, as well as other payers, have developed alternative
payment models to control costs, including procedure-based cost
limitations, contractually approved providers and capitation (a
fixed monthly fee for members as payment for all required
services). The result has been a continuing shift of financial
risk from the payers to both the physician/provider and the
institutional provider (hospitals, clinics, long-term care, acute
providers and rehabilitative care centers). In response,
healthcare organizations are aligning themselves with one another
in order to form integrated delivery systems in an effort to lower
costs and compete more effectively in the changing healthcare
environment.
The economic viability of many providers will be dependent upon
their ability to continue to provide quality healthcare services
while dramatically cutting costs and increasing productivity. The
delivery of healthcare services is both labor and information
intensive because the functions of tracking, organizing,
retrieving, evaluating and generally managing the high volume of
healthcare data that providers generate are essential to any
provider. Compared to other industries, however, the healthcare
industry has been slow to automate its information management
needs.
Hospitals, because of the lack of efficiency incentives,
historically have underinvested in information technology,
spending only 2-3% of their operating budgets on information
technology compared to the 6-8% allocated by other industries.
According to the research firm of Sheldon Dorenfest and
Associates, an enterprise-wide computer-based patient record
system is one of the top five information technology purchases
planned by integrated delivery systems in the near term. Another
study conducted by Input, a Mountain View, California research
firm, found that U.S. hospitals plan to spend more than $14
billion on information technology software and services for
critical applications over the next three years.
Regulatory. Various regulatory bodies have begun to focus on the
information management function. For example, the Joint
Commission for Accreditation of Healthcare Organizations
("JCAHO"), which is responsible for accrediting all hospitals, has
determined that records management can have an important clinical
impact. As a result, JCAHO has begun to impose specific
information management requirements for accreditation. Most of
the new requirements mandate performance levels difficult to
achieve without computerization. The Company's products and
services are specifically designed to help providers comply with
these requirements.
Operational. Hospitals and other healthcare organizations
comprise numerous departments, such as the accounting, laboratory,
radiology, pharmacy, medical records, business office and clinical
areas. The information management requirements of these
departments are very distinct. To the extent that computerized
systems have been purchased, most hospitals have historically
acquired a collection of separate, stand-alone information systems
for their various departments. Moreover, even within a particular
systems category, such as the laboratory, there are no system
standards. Numerous vendors sell proprietary systems which often
are not directly compatible with either competitive systems or the
systems of other departments. The Company's products and services
enhance the capabilities of the existing systems by adding
functionality and facilitating integration not otherwise present
in these systems.
Products and Services
Healthcare Solutions
The products and services in the Company's Healthcare Solutions
segment consist of an automated data storage and retrieval system,
OptiMaxx[r] Archival System, a computerized enterprise-wide
electronic patient record system, ChartMaxx[tm] Enterprise-Wide
Patient Record System, and a consulting services division,
FutureCORE[r], Inc. The Company designed its products with open
architecture and modular functionality which are compatible with
most existing systems to which they will interface, without
requiring any support or cooperation from the systems vendors. By
designing products to be entirely independent of, but compatible
with, other system vendors, potential customer acceptance of the
Company's products is not limited in any way by their existing
information system configurations. As a result, the Company's
ability to market its products generally is not subject to the
cooperation of third party systems vendors.
OptiMaxx Archival System
As described above, the Company offers an optical disk storage and
retrieval system under the name "OptiMaxx" specially customized
for hospitals, medical practices and other healthcare providers.
It consists of hardware (optical drives, disk "jukeboxes" and
personal computers) and software, purchased from outside vendors,
which are combined with the Company's proprietary software in a
manner that provides specific benefits to healthcare industry
users. At its most basic level, OptiMaxx permits a user to store
automatically on an optical disk any data that it previously would
have printed out of its system and then stored as paper or on
microfilm/microfiche. OptiMaxx can also scan and manage existing
paper documents. OptiMaxx has been installed and is operational at
over 100 customer sites to date.
Specifically, OptiMaxx provides in a single system:
- - information collected from a variety of information systems
without the need for a complex interface or programming expertise;
- - scanned documents or images;
- - instant access to information for ad hoc query and analysis;
- - simple, common user interface for searching and retrieving
information regardless of origin; and
- - ability to fax, print or e-mail search results.
A key feature of OptiMaxx is its ability to capture data directly
from existing computer information systems without special
software, other interfaces or any data manipulation. Most optical
storage systems must have the "host" information system computer
configure files in a specific manner or convert the electronic
format of the outgoing data into a particular format, often
proprietary, which the optical system can then recognize and use
when the data is received. OptiMaxx, which was designed to act as
a system peripheral (such as a printer), can work with most host
systems without the need for data configuration by the host
system. Every host system must have the capacity to output data
to a printer, and OptiMaxx can accept any such output "as is"
without any special treatment by the host system. Moreover,
OptiMaxx itself does not convert or change the incoming data.
OptiMaxx stores the data and can retrieve it in its native format,
without conversion.
During fiscal 1999, the Company entered into an agreement to
license a customized version of OptiMaxx to be used throughout
Quest Diagnostics Incorporated's laboratory facilities nationwide.
This agreement is unique because it combines the functionality of
the OptiMaxx system with the workflow documentation system created
by Universal Document. Under the agreement, Quest Diagnostics is
committed to the implementation of five sites, with the potential
of an additional thirteen sites. The Company is currently in the
process of implementing the first five sites and the thirteen
sites are contingent upon Quest Diagnostics' approval of the first
five sites and acceptance of the use of OptiMaxx in its global
model. Quest Diagnostics is currently evaluating the effect of a
recent acquisition on its global model; the Company does not
anticipate acceptance of the use of OptiMaxx in Quest Diagnostics'
global model until some time during the first half of fiscal 2000.
ChartMaxx Enterprise-Wide Patient Record System
The ChartMaxx system is an enterprise-wide electronic medical
records system that combines multiple technical and functional
approaches to computer-based patient records development. The
Company has installed, or is currently installing, the ChartMaxx
system at over 20 customer sites nationwide. ChartMaxx is an
integrated software and hardware platform which:
- - creates complete, digital medical records that meet
administrative and legal requirements;
- - manages multimedia digital data (structured and unstructured)
in both report-oriented and discreet data element formats;
- - manages scanned documents (imaging);
- - manages workflow and the work processes associated with health
information management;
- - builds a data repository based on an SQL (an industry standard)
database and mass storage;
- - forms a system that has both enterprise-wide and remote
connections;
- - provides application software to further automate the medical
records and patient accounts departments;
- - may be used by providers of care and other healthcare staff
members; and
- - facilitates communication of clinical information within the
healthcare organization and to external sources.
To complement the immediate benefits provided by ChartMaxx -
automating an organization's medical records department and
creating an electronic patient record - the Company has been
consistently developing a data repository that can encompass the
entire integrated delivery system. In 1997, the Company
introduced ChartMaxx Web Navigator[tm], a web-based application
which provides authorized clinicians with chart viewing and query
capabilities from remote locations via the hospital Intranet. In
February 1998, the Company issued Web Completion, a new Web-based
application ChartMaxx. The new application enables authorized
clinicians to sign patient charts with an encrypted digital
signature from the convenience of their offices via the hospital
Intranet. With both ChartMaxx Web applications, clinicians, for
the first time, can perform both of their routine chart functions
after the patient is discharged - chart completion and access to
historical charts from any location using a Netscape Navigator or
Internet Explorer Web browser.
In addition, in September 1998, a significant ChartMaxx release
(version 2.4) was issued which included numerous enhancements
designed to improve physician access to vital patient information.
In addition to the Web-based chart completion discussed above,
physician-oriented ChartMaxx 2.4 features include the ability to
distribute patient documentation to physician systems, capture and
display of structured lab results and role-based security that
provides chart viewing and signing privileges to physicians.
FutureCORE
The acquisition of FutureCORE in July 1996 significantly enhanced
the Company's product lines by providing the Company's customers
with access to consultants who can analyze customers' information
systems and provide process improvement methodologies in
laboratories, physician offices, hospitals, major healthcare
instrumentation firms and integrated delivery networks. Thus, the
Company has the unique advantage of being able to assist
healthcare providers re-engineer their existing processes while
implementing the Company's product line so as to maximize a
customer's return on its investment (ROI) in technology.
Specifically, FutureCORE's "Check-Up" service includes an on-site
operational analysis to assist clients in implementing process
improvements and an ROI analysis that documents available cost
savings by implementing FutureCORE's recommended process
improvements and ChartMaxx and OptiMaxx products and services.
Workflow and Document Management
Universal Document, acquired by the Company in 1995, offers
workflow and document management and products (including its
"Step2000[r]" product) and consulting services related to those
products. Step2000 is the only development solution that provides
totally integrated workflow, document management and application
development power. It enables developers easily and quickly to
create and deploy workflow-enabled application solutions
throughout the enterprise. Universal Document boasts a solid base
of Fortune 500 clients including Mercedes-Benz, Marathon Oil,
Boeing North American, Inc. (formerly Rockwell International Space
Systems Division), PPG Industries, Abbott Laboratories Diagnostics
Division and many others.
Distributed Computing Products and Services
In January 1998, the Company purchased a majority ownership in
DiaLogos, a Cincinnati-based provider of distributed object
computing training and technology. The Company currently has a
56.5% ownership interest in DiaLogos. DiaLogos focuses on
educational services, consulting and products using CORBA and JAVA
technologies.
DiaLogos' primary focus is distributed technology education. As
such, it has been creating partnerships and education programs
with top Fortune 500 companies who are demanding that CORBA and
Java be deployed in critical projects in industries spanning such
fields as healthcare, electronic commerce and manufacturing.
DiaLogos provides the Senior Developers and System Architects of
these organizations with the education necessary to craft CORBA
and Java based solutions. DiaLogos works with the directors of
education of companies such as Oracle to define and deliver the
required high-tech training necessary for their software
developers in the year 2000 and beyond. DiaLogos is currently
developing a solution called "Global Distributed Registration"
which provides enterprise-wide Web access to healthcare
organizations' disparate legacy systems.
In addition, DiaLogos is developing an innovative Internet-based
educational model, "CyberDean[tm]." DiaLogos will develop
courseware using the CyberDean model that will allow a company to
provide an Internet-based training program for its employees
through customized courses geared toward the specifics of the
information systems of the particular company or for a particular
technological focus. The initial CyberDean course is targeted for
beta release on May 31, 1999. The first course is expected to be
released during the second quarter of fiscal 2000. DiaLogos plans
to forge relationships with emerging Internet companies to enhance
its marketing and distribution strategy.
Strategy
The Company's strategies vary by segment, based upon each
segment's goals and initiatives:
Healthcare Solutions: The Company's business strategy since its
inception has been to focus on specific healthcare information
problems that the Company believes have not been adequately
addressed by other vendors. It is the Company's goal to develop
appropriate information management systems that address market
needs, are affordable and can be easily integrated with the major
systems currently in place at most healthcare organizations in the
United States. The Company's products and services are designed
to give customers the ability to leverage their existing
investments in computerized information systems rather than
forcing them to replace entire systems at a much greater cost.
The Company concentrates on specific segments of information
technology for the healthcare industry including imaging, data
storage and retrieval, enterprise-wide electronic patient records,
integration of enterprise-wide business systems with existing
applications using distributed object computing and process
engineering and consulting services. The Company believes this
niche has enabled it to provide high technology solutions at an
affordable per-user cost. It is the Company's intention to adapt
its current products to changing needs, to develop and/or acquire
new products and services, and to address selected information
management needs throughout the typical healthcare organization.
Another goal of this segment is to grow through the use of
partnership/distributor relationships to increase market
penetration both in the U.S. and in international markets to which
the Company has had limited exposure in the past.
Workflow and Document Management: This segment, through Universal
Document, licenses a workflow development product that facilitates
the flow of information for its customers in various markets. The
goal of Universal Document is to continue to maintain a superior,
versatile product and to obtain the market penetration necessary
for continual growth. The Company has integrated, and will
continue to integrate, Step2000 into the Company's Healthcare
Solutions products to create a comprehensive product package for
its customers.
Distributed Computing Products and Services: This segment,
through DiaLogos, develops and delivers distributed systems
intelligence to a diversity of national and international clients
in a broad range of industries through education, mentoring and
collaborative teamwork. The strategy of DiaLogos is to enhance
its market penetration by continuing its superior education
services and promoting the use of computer based training through
the use of its innovative Internet-based educational model,
CyberDean. In addition, the Company plans to build upon DiaLogos'
already strong foundation and reputation in distributed object
technologies by developing more extensive applications and
creating other educational requirements. DiaLogos can provide
exceptional solutions to benefit a broad range of industries and
has already started to sell in international markets.
Sales and Marketing
The Company utilizes selected strategic resellers and reference
selling arrangements and employs a direct sales force to market
its products. Recently, the Company has become less reliant on a
direct sales organization as a result of its strategic alliances
with value added distribution partners. These alliances provide
the Company with access to a broad customer base. Its sales
philosophy is to provide consultative selling services to end
users, conducted by both direct and indirect sales sources
knowledgeable about the healthcare industry and information
management technologies.
Because of its products' ability to interface with major
information system vendors, the Company is able to market its
products directly to end users and is not required to enter into
costly technical support, joint selling or other collaborative
selling arrangements with vendors of health information systems
merely to obtain access to the market. However, the Company has
found it to be advantageous to enter into reseller and reference
seller agreements for strategic reasons, including increased
acceptance by customers due to the association with familiar
vendors and exposure to the existing customer bases of the
resellers and reference sellers. Recently, the Company announced
some new strategic alliances, including its agreement with
Datacom, Inc. (a leading provider of document conversions and
information management services in Canada), Medical Systems
Management, Inc. (system integrators for MEDITECH environments),
and StorCOMM, Inc. (a leading provider of enterprise-wide clinical
image management systems). The Company previously entered into
similar agreements, which are still in effect, with Quorum Health
Resources, Inc. (one of the nation's largest managers of not-for-
profit hospitals), MAGNET, Inc. (a regional purchasing
organization) and Sunquest Information Systems, Inc. (a provider
of laboratory information systems).
Competition
The market for information technology in the healthcare industry
is intensely competitive. The Company believes that the principal
competitive factors in this market include the breadth and quality
of system and product offerings, product pricing, the reputation
and stability of the information systems provider, the features
and capabilities of the information systems, management of the
system implementation cycle, ongoing support for such systems, the
potential for enhancements thereto and technical and financial
resources. Certain of the Company's competitors have
significantly greater resources than the Company. In addition,
the Company's products compete with other technologies as well as
similar products developed by other major information management
companies who may enter the markets in which the Company competes.
Competitive pressures and other factors, such as new product
introductions by the Company or its competitors, or the entry into
new geographic markets, may result in significant pricing
pressures that could have a material adverse effect on the
Company's business.
There can be no assurance that the Company will be able to
continue to compete successfully with its existing or any future
competitors. However, the Company believes that it possesses
certain competitive advantages, by virtue of its concentration on
the healthcare market enabling it to tailor products to the needs
of that particular market. The compatibility of the Company's
products with most of the information systems with which they must
interact also constitutes an advantage over its present
competitors, most of whom must secure the support and cooperation
of third party vendors in order for their products to operate.
The compatibility of the Company's products with other systems
will likely be to the Company's advantage in the future if, as the
Company believes, future enterprise-wide systems become quite
expensive. In such a situation, the Company's products will be
attractive to customers that already have made substantial
investments in numerous departmental systems and may have limited
budgets for future purchases.
Product Manufacturing and Sources
The Company does not possess internal hardware manufacturing
capacity and instead relies upon third party manufacturers to
fulfill its hardware requirements. This reliance on outside
suppliers involves several risks, including limited control over
pricing, availability, quality and delivery schedules. Hardware
incorporated into the Company's products, such as optical disk
drives and computers, are non-proprietary items which are
potentially available from multiple sources, although the Company
currently has limited its purchases to certain vendors based on
delivery, service and cost factors. To the extent the Company
relies on single sources of components, it is vulnerable to
potential disruptions in supply should such a manufacturer become
insolvent or otherwise experience production problems. The
Company believes, however, that any such disruption would be
temporary since there are numerous alternative sources of supply
available.
The Company relies to a large extent on licensed third party
software which is integrated into its products through the use of
proprietary software. The Company's internal software development
capacity is limited, and the Company therefore concentrates its
efforts on developing and enhancing proprietary software that
enables various third party software products to work together.
The Company must rely on the third party suppliers for
enhancements and ongoing support for the acquired products. The
failure of one or more of such vendors to provide services for any
reason could, at least temporarily, adversely affect the Company's
business.
Customers
The Company's contracts for certain systems and related services
it sells may approach or exceed $1,000,000 per individual
customer. As a result, the Company may have certain customers in
any one year which represent a significant portion of the
Company's total revenues for that year. For the years ended
January 31, 1999 and 1998, and December 31, 1996, a single
customer accounted for 31%, 12% and 15% of the Company's total
revenues, respectively.
Product Development
When possible, the Company has developed new products internally.
However, the Company believes it can sometimes respond more
quickly to market requirements by acquiring complementary products
or technology. The Company believes that continued investment in
research and development for both internally developed and
acquired products is critical to its long-term growth and success.
The Company's product development strategy is to continue to focus
on specific healthcare related information management requirements
and to expand its existing product lines in its other segments by
adapting them to related applications.
The Company's total product development expenditures were
$3,123,018, $1,597,461 and $1,717,923 for the years ended January
31, 1999 and 1998, and December 31, 1996, respectively.
Government Regulation
The United States Food and Drug Administration (the "FDA") has
issued a series of draft guidance documents addressing the
regulation of certain computer products as medical devices under
the Federal Food, Drug, and Cosmetic Act (the "FDC Act"). To the
extent that a particular computer software product is considered a
"medical device" under the FDC Act, the manufacturer of such a
product is required (depending on the product) to: (i) register
and list such product with the FDA; (ii) notify the FDA of and
demonstrate substantial equivalence to other products on the
market before marketing such a product; or (iii) obtain FDA
approval by filing a pre-market application that establishes the
safety and effectiveness of the product. The Company expects that
the FDA is likely to become increasingly active in regulating
computer software that is intended for use in healthcare settings.
None of the Company's products currently is regulated by the FDA.
The FDA indicated its intention to consider more extensive
regulation of additional types of computer software, which could
include existing or future products offered by the Company, and
has solicited industry input as to the regulation of computer
products as medical devices. The FDA has reached no decision to
date on this issue. The FDA, if it chooses to regulate such
software, can impose extensive requirements governing pre- and
post-market conditions relating to clinical investigations,
approvals and manufacturing. In addition, such products would be
subject to the FDC Act's general controls, including those
relating to good manufacturing practices and adverse experience
reporting.
Licenses and Proprietary Rights
To a significant degree, the Company's products consist of third
party hardware and software integrated with proprietary software
of the Company. The Company does not hold any patents with
respect to any of its current products, nor does it expect to
apply for any patents in the foreseeable future. To the extent
possible, the Company attempts to protect its use of third party
hardware and software with contractual exclusivity and
nondisclosure provisions, but because the Company does not own the
rights to these third party products, there can be no assurance
that competitors or others will not attempt to integrate the same
or similar products into systems competitive with those sold by
the Company. To protect its proprietary product components, the
Company relies upon the law of copyrights, trade secrets,
nondisclosure agreements with employees and others, and
restrictions incorporated into agreements with customers.
Notwithstanding these safeguards, it could be possible for
competitors to obtain and/or imitate the Company's software and/or
hardware. Further, there can be no assurance that others will not
independently develop products similar or superior to those of the
Company. The Company also explores technology developed by other
entities that may be licensed or acquired in an effort to reduce
the product development cycle or to complement existing product
lines.
Federal trademark protection has been obtained for the names
"MedPlus," "OptiMaxx," "FutureCORE," "ObjectScholar" and
"Step2000." The Company has entered into an agreement to use the
name "ChartMaxx" with the owner of the trademark, and has applied
for federal trademark protection for the names "DiaLogos" and
"CyberDean."
Employees
As of January 31, 1999 and 1998, the Company had 111 and 101 full-
time employees, respectively. The Company's future success will
depend, in part, on its ability to continue to attract, retain and
motivate highly qualified technical, marketing and management
personnel who are in great demand.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently leases approximately 34,000 square feet of
high quality office space in various locations located in
Cincinnati, Ohio. The varying lease terms expire during 2003 and
2004.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, the Company is not a party to any material
legal proceeding and, to the Company's knowledge, there are no
material legal proceedings pending against the Company, as
described in SEC Reg. Sec. 228.103. However, as mentioned in the
Notes to Consolidated Financial Statements, the Company has been
arbitrating a dispute since September 1998 through the American
Arbitration Association in Cincinnati, Ohio with Valcor
Associates, Inc., an independent contractor previously retained by
the Company to sell certain of its products (the "independent
contractor"). The independent contractor has demanded $1,076,000
in past and future commissions it believes it is owed as a result
of a representative sales agreement by and between the contractor
and MedPlus. MedPlus believes the contractor's position is
without merit and intends to vigorously contest the arbitration.
In addition, MedPlus has filed a counterclaim against the
contractor to recover lost sales which resulted from the
contractor's failure to provide its best efforts under the
representative sales agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market
System ("NMS") under the symbol "MEDP." There were approximately
2,700 record holders of the Company's common stock as of April 26,
1999. The following table sets forth, for the periods indicated,
as reported by Nasdaq, the range of high and low sales price (not
closing bids) of the Company's common stock on the NMS. All
prices are rounded to the nearest one-eighth, and bid prices
reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Fiscal Year/Quarter High Low
___________________ _______ _______
Fiscal Year Ended January 31, 1999
__________________________________
First Quarter $ 8.875 $ 6.250
Second Quarter 8.000 5.500
Third Quarter 7.250 1.625
Fourth Quarter 3.375 1.375
Fiscal Year Ended January 31, 1998
__________________________________
First Quarter $ 7.750 $ 4.625
Second Quarter 7.500 5.125
Third Quarter 10.500 6.625
Fourth Quarter 11.000 6.750
The Company has not paid any cash dividends on its common stock
since its inception. No dividends on its common stock are
expected to be declared in the foreseeable future.
Subsequent to year-end, the Company has agreed, subject to
shareholder approval, to the issuance of 2,371,815 shares of
convertible Preferred Shares. If approved, the Preferred Shares
will start paying dividends in the third quarter of fiscal year
2000 at a rate of 4% per share for the first four years,
increasing to 10% thereafter and accruing on a cumulative basis.
The issuance of Preferred Shares has been further described in
Note 17 of the Company's Annual Report to Shareholders included as
Exhibit 13 to this document.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
General
MedPlus[r], Inc. (the "Company") provides information technology
solutions designed to enable customers to manage information
efficiently and cost effectively through innovative technology,
consulting, and education. It has been the Company's practice to
continue to develop new products, enhance existing applications,
make selected strategic acquisitions, and introduce consulting
services, which has led to consistent revenue growth since the
commencement of operations. The Company's solutions focus on
various elements of process analysis and redesign, document
imaging and management, workflow, systems integration and
technology education.
The Company's healthcare related products presently consist of the
ChartMaxx[tm] Enterprise-wide Patient Record System ("ChartMaxx")
and the OptiMaxx[r] Archival System ("OptiMaxx"). ChartMaxx is an
enterprise-wide electronic patient record system that enables
healthcare organizations to create and manage a fully paperless
electronic patient record comprising clinical, financial and
administrative data captured from scanned paper and digital data.
OptiMaxx is an optical disk-based archival system designed to meet
the departmental needs of healthcare providers that require
electronic storage and quick retrieval of information. The
Company's FutureCORE[r], Inc. subsidiary ("FutureCORE") provides
process improvement and automation services, primarily in the
areas of medical records and patient accounts departments,
hospital and reference laboratories and physician offices.
The Company's Universal Document Management Systems, Inc.
subsidiary ("Universal Document") develops and sells Step2000[r],
a workflow, document management and application development
software product that enhances the utilization of information on
an enterprise-wide basis, regardless of hardware platform or
operating environment.
In January 1998, the Company acquired a majority interest in
DiaLogos[tm] Incorporated ("DiaLogos"). DiaLogos specializes in
assisting organizations in the integration of enterprise-wide
business systems with existing applications and data using
distributed object computing, including CORBA and Java
technologies, through education, consulting and implementation
services.
The Company's IntelliCode division, which was sold in January
1998, developed and sold the IntelliCode Intelligent Bar Code
System ("IntelliCode"), an intelligent bar coding system for
hospitals and other healthcare organizations. The IntelliCode
division has been accounted for as discontinued operations in the
accompanying consolidated financial statements.
Revenue Recognition Cycle
The Company's revenues are derived from systems sales, including
software licenses and hardware, support contracts and
installation, implementation, training and education and
consulting services. Systems sales consist of software licenses
for proprietary software, third party software and hardware, and
related installation services. The gross profit percentage on
systems sales may vary among customers based upon the relative
proportion of proprietary software and third party software and
hardware included in a sale. Revenues from support contracts
include software and hardware maintenance and support. Consulting
services revenues are derived from implementation, training and
education, custom software development and process improvement
services. Revenues from support contracts and consulting services
are expected to increase as the number of installed systems
increases. The gross profit percentage on support contracts and
consulting services may fluctuate based upon the negotiated terms
of each contract and the Company's ability to fully utilize its
customer support, implementation and consulting personnel.
The decision by a healthcare provider to replace, substantially
modify or upgrade its information systems is a strategic decision
and often involves a large capital commitment requiring an
extended approval process. The sales cycle for the Company's
ChartMaxx systems' sales is typically six to eighteen months from
initial contact to the execution of a sales agreement. As a
result, the sales cycle causes variations in quarter to quarter
results. These agreements cover the entire implementation of the
system and specify the implementation schedule, which typically
takes place in one or more phases. The agreements generally
provide for the licensing of the Company's software and third
party software with a one-time perpetual license fee that is
adjusted depending on the number of concurrent users using the
software. Third party hardware is usually sold outright, with a
one-time fee charged for installation and training. Site specific
customization, interfaces with existing customer systems and other
consulting services are sold on a fixed fee or a time and material
basis.
Effective for the fiscal 1999 year, revenue related to system
sales is recognized in compliance with American Institute of
Certified Public Accountants Statements of Position ("SOP") 97-2,
and 98-4, Software Revenue Recognition. For OptiMaxx systems,
revenue is generally recognized upon shipment. Revenue
recognition for ChartMaxx systems generally commences when a
contract is signed and, the system is configured and shipped. If
a contract requires the Company to perform services or provide
modifications that are deemed significant to system acceptance,
the Company recognizes revenue for the entire contract under the
percentage of completion method of accounting. Revenues from
installation, implementation, training and education and
consulting services are recognized in the period in which the
services are performed. Revenue from support contracts is
recognized ratably over the term of the contract. Deferred
revenues primarily represent support contracts that have been
billed in advance of the support to be provided.
Fluctuations in Results of Operations
The Company has historically experienced significant quarterly and
annual fluctuations in revenues and operating results which may
continue in the future. The Company's revenues have fluctuated
due to the length of the sales cycle, the number and timing of
systems sales, and the timing of installation, implementation and
consulting services. As a significant percentage of the Company's
operating expenses are fixed, quarterly operating results will
vary with the fluctuation in revenues. As a result, period to
period comparisons of the Company's past operating results may not
be necessarily indicative of future operating results of the
Company.
Fiscal Year
The Company changed its fiscal year end from December 31 to
January 31 effective for the 1998 fiscal year. Accordingly, the
Company's 1999 and 1998 fiscal years commenced on February 1 and
ended on January 31 of the respective years. Information for the
year ended January 31, 1998 is also compared with information for
the year ended December 31, 1996. No analysis is provided for the
one month ended January 31, 1997. The amounts reflected for the
one month period ended January 31, 1997 would not necessarily be
indicative of results that would have been obtained for a full
fiscal year.
DiaLogos Acquisition
Prior to January 30, 1998, the company maintained a minority
interest in DiaLogos, which was accounted for under the equity
method. On January 30, 1998, based upon a previously defined
letter of agreement, the Company converted aggregate advances of
$1,191,960 to DiaLogos into common shares of DiaLogos stock. Upon
conversion of these advances, MedPlus became a majority owner of
DiaLogos with 56.5% ownership. The acquisition of the shares by
the Company has been accounted for under the purchase method.
Accordingly, the financial position of DiaLogos has been included
in the Company's Consolidated Balance Sheet as of January 31,
1998, and the results of operations of DiaLogos have been included
in the Company's Consolidated Statement of Operations effective
February 1, 1998.
Discontinued Operations
In January 1998, the Company completed the sale of all the assets
of its IntelliCode division to Becton Dickinson and Company
("Becton Dickinson") for an initial payment of $17,408,847 plus
royalty payments over five years. The final closing of the
transaction in April 1998 reduced the initial payment by $74,259.
In connection with the sale, Becton Dickinson also assumed certain
liabilities of the IntelliCode division, primarily deferred
revenues and obligations related to service contracts and an
office lease. The Company recognized a pre-tax gain of $14,724,720
and an after-tax gain of $10,268,710 related to this transaction
for the year ended January 31, 1998. The royalty payments are
based on future defined revenues and are recorded as income when
earned. No royalty payments were earned for the year ended
January 31, 1999.
In January 1998, the Company had decided to sell the net assets of
the Step2000 segment of Universal Document. However, during
fiscal 1999, the Company decided to retain the segment and reduce
operations to primarily research and development and customer
support while a new generation of products was developed. The
Step2000 segment had previously been accounted for as a
discontinued operation. However, as a result of the Company's
decision to retain the Step2000 segment, the results of operations
and financial position of the segment have been included in
continuing operations in the Company's consolidated financial
statements as of and for the twelve months ended January 31, 1999.
Prior years' financial statements have been presented on a
comparable basis.
Synergis Commitments
The Company's Universal Document subsidiary hired a senior
management team and entered into agreements with two consulting
firms in 1997 to assist it in the identification and recruitment
of certain design automation software resellers and integrators
(collectively the "Founding Companies") that Universal Document
would acquire or with which it would combine (the "Acquisitions"),
and to assist Universal Document in an initial public offering of
its common stock. In late 1997, Universal Document entered into
definitive merger agreements, which were contingent upon a
successful initial public offering, to acquire nine such
companies. Also, in October 1997, Universal Document filed a
registration statement on Form S-1 with the Securities and
Exchange Commission, which was subsequently amended in December
1997 and January 1998, to offer its common stock to the public.
The Company would retain a minority interest in Universal Document
after the initial public offering. In connection with its initial
public offering, Universal Document planned to change its name to
Synergis Technologies, Inc. Due to adverse market conditions for
initial public offerings in January 1998, Universal Document
postponed the initial public offering upon the advice of its
underwriters.
During early 1998, the Company evaluated the business operations
of Universal Document and determined that it no longer
complemented the businesses of the Founding Companies. As a
result, the Company created its Synergis subsidiary to serve as
the acquirer in the Acquisitions. The Company expected the newly
created Synergis subsidiary to complete the Acquisitions and an
initial public offering of its common stock. Due to adverse
conditions in the equity capital markets, Synergis' plans to
conduct an initial public offering were postponed for a second
time in August 1998. Currently, all plans for an initial public
offering have been cancelled.
Because the proposed public offering related to the Synergis
transaction has been cancelled, the Company has significantly
reduced the on-going expenses related to this subsidiary. The
Company is currently evaluating the feasibility of a merger of
Synergis and certain of the Founding Companies into a new entity.
Such a merger would be financed on a private basis. However,
definitive plans related to any such merger have not been
finalized. Various agreements related to the merger, including
employment agreements for the new entity's management, are
contingent upon the successful completion of the merger. Based
upon the final outcome of the transaction, these agreements may be
terminated or significantly amended.
Results of Operations
Years Ended January 31, 1999 and 1998
Revenues: Revenues for the year ended January 31, 1999 were
$11,429,984, an increase of $1,228,832, or 12% over the
$10,201,152 reported for the comparable period in 1998. Systems
sales decreased $1,756,777, or 22%, from the year ended January
31, 1999 primarily as a result of a decrease in the number and
relative size of ChartMaxx and OptiMaxx systems sold during the
year. Support and consulting revenues increased $2,985,609, or
130%, from the year ended January 31, 1998 due to the addition of
consulting and education revenues from DiaLogos and increased
support and consulting revenues from the Company's ChartMaxx and
OptiMaxx product lines as the number of installed sites of these
products continued to increase.
Gross Profit: Gross profit for the year ended January 31, 1999
was $3,100,009, or 27% of revenues, compared to $2,974,961, or 29%
of revenues, for the year ended January 31, 1998. The gross profit
percentage on systems sales increased from 35% for the year ended
January 31, 1998 to 45% for the year ended January 31, 1999 due to
a higher proportion of proprietary software relative to lower
margin third party hardware and software included in sales. The
gross profit percentage for support and consulting revenues
decreased from 10% for the year ended January 31, 1998 to 7% for
the year ended January 31, 1999. The decrease in this percentage
was primarily a result of an increase in customer support,
installation, and consulting personnel in advance of related
revenues and lower than expected utilization rates of those
personnel. These items were partly offset by the addition of the
gross profit on DiaLogos' consulting and education revenues and
the increased support revenues noted above. Future gross profit
margins for support and consulting services may continue to be
depressed in the near term as a result of the timing of systems
sales, unforeseen delays in implementation schedules, the number
and timing of additions to the implementation and consulting staff
relative to when they become billable to customers, or the need to
use independent consultants while the Company is further
developing its implementation and consulting staff.
Operating Expenses: Operating expenses for the year ended January
31, 1999 were $11,652,949 compared to $10,552,270 for the
comparable period of 1998, an increase of 11%. Included in
operating expenses for the year ended January 31, 1998 were non-
recurring charges of $710,318 and $774,677 related to the write
off of acquired in-process technology related to the DiaLogos
acquisition and the impairment losses related to the excess of
cost over fair value of net assets acquired for Universal
Document. Excluding these non-recurring charges, operating
expenses increased by 29% between periods. This increase relates
primarily to the inclusion of operating expenses for DiaLogos and
a focus in product development and other research and development
activities related activities for both ChartMaxx and OptiMaxx. As
product development related activities are the cornerstone to
maintaining a competitive position in the market, the Company has
increased its investing in these types of activities during fiscal
1999. In addition, the Company had continued to increase its
investment in sales and marketing efforts for the ChartMaxx
product line and DiaLogos in the areas of direct sales, channel
partner programs, national accounts and general marketing
activities. General and administrative expenses had an increase of
7% between years, largely due to DiaLogos.
Other Income(Expense): Expenses related to the employment of
Synergis management, acquisition, and offering costs discussed
above under "Synergis Commitments" were $2,070,731 and $3,707,945
for the years ended January 31, 1999 and 1998, respectively.
Other expenses decreased to $14,751 for the year ended January 31,
1999 from expense of $231,922 for the year ended January 31, 1998.
The decrease in expense is primarily due to an increase in
interest income as a result of an increase in the Company's
average cash and cash equivalents balances from fiscal 1998 due to
cash received from the sale of the Company's IntelliCode division
to Becton, Dickinson and Company in January 1998. For the year
ended January 31, 1999, the Company also recognized $297,000 of
income related to the recognition of minority shareholders'
interest in losses incurred through the results of operations of
DiaLogos. During 1999, the Company has recognized greater than
its majority interest in the operating losses of DiaLogos as the
minority shareholders' interest investment in DiaLogos was reduced
to zero.
Income Tax Benefit: The Company's income tax benefit was
$1,616,370 in the year ended January 31, 1999, compared to
$3,475,777 for fiscal 1998. The Company recognized a portion of
the benefit of its net operating loss for income tax purposes for
fiscal 1999 through the carryback of this loss against taxable
income in fiscal 1998 generated by the sale of the IntelliCode
division. However, the Company did not recognize for accounting
purposes the full tax benefit of its net operating losses for
fiscal 1999 or 1998 as the realization of these benefits did not
meet the recognition criteria at the end of either period due to
the Company's history of operating losses. The Company's ability
to recognize the full benefit of its net operating loss in future
periods will be dependent upon the generation of future taxable
income, limitations imposed by the Internal Revenue Service, and
other matters potentially affecting the realizability of these
carryforwards.
Discontinued Operations: Discontinued operations for the fiscal
1999 represents the reversal of the accrued loss related to the
Step2000 segment which the Company decided to retain in August
1998. Discontinued operations for the year ended January 31, 1998
represents the gain on the sale and the results of operations of
the Company's IntelliCode division, as well as the accrued losses
related to the Step2000 segment.
Net Income(Loss): While revenues increased 12% over the year ended
January 31, 1998, the decrease in gross margins and significant
increase in operating expenses, particularly research and
development, resulted in a loss of $8,725,052, or $1.43 per share,
from continuing operations for the year ended January 31, 1999
compared to a loss of $8,011,399, or $1.35 per share, for the year
ended January 31, 1998. Net income(loss) decreased from net
income for the year ended January 31, 1998 of $3,105,089, or $.52
per share, to a net loss of $8,547,753, or $1.40 per share, for
the year ended January 31, 1999 primarily due to income from
discontinued operations of $11,116,488 recognized in 1998 offset
by the items discussed above.
Years Ended January 31, 1998 and December 31, 1996
Revenues. Revenues for the year ended January 31, 1998 were
$10,201,152, an increase of $5,633,508, or 123% over the
$4,567,644 reported for the comparable period in 1996. System
sales increased $4,785,859 or 153% from the year ended December
31, 1996 primarily due to increased sales of ChartMaxx systems.
Support and consulting revenues increased $847,649 or 59% from the
year ended December 31, 1996 due to higher support revenues
resulting from an increase in the installed base of all systems
and higher consulting revenues from a full year of revenues from
consulting services provided by FutureCORE.
Gross Profit. Gross profit for the year ended January 31, 1998 was
$2,974,961 compared to $2,057,652 for the year ended December 31,
1996, an increase of $917,309 or 45%. The overall gross profit
margin as a percent to sales decreased from 45% in the year ended
December 31, 1996 to 29% in the year ended January 31, 1998. The
gross profit margin on systems sales decreased from 46% in the
year ended December 31, 1996 to 35% in the year ended January 31,
1998 due to an aggressive pricing strategy and an increase in
capitalized software amortization, including a write-off of
Universal Document capitalized software. Gross profit margins on
support and consulting revenues decreased from 42% in the year
ended December 31, 1996 to 10% in the year ended January 31, 1998
due to an increase in customer support, installation, and
consulting personnel in advance of related revenues and lower than
expected utilization rates of those personnel.
Operating Expenses. Operating expenses increased from $6,173,975
in the year ended December 31, 1996 to $10,522,270 in the year
ended January 31, 1998, an increase of 70%. Included in operating
expenses in the year ended January 31, 1998 are non-recurring
charges of $710,318 and $774,677, respectively, related to the
write off of acquired in-process technology related to the
DiaLogos acquisition and impairment losses related to the excess
of cost over fair value of net asset acquired for Universal
Document. The Company also continued to add a significant number
of employees in the areas of product development and sales and
marketing during the year ended January 31, 1998. Substantial
expenditures were made to increase market awareness of the
Company's products and to expand the direct and indirect channels
of distribution.
Other Income (Expense). Other income (expense) decreased from
$124,663 of income for the year ended December 31, 1996 to
$3,939,867 of expense for the year ended January 31, 1998. The
change resulted primarily from expenses of $3,707,945 associated
with management expenses, acquisition and offering costs related
to Synergis, as discussed above. Also, the Company's interest
expense increased from $23,493 of income for the year ended
December 31, 1996 to $346,315 of expense for the year ended
January 31, 1998 due to increased borrowing requirements to fund
the Synergis acquisition and initial public offering efforts and
the Company's operations. Consequently, the Company's interest
income decreased from $308,992 for the year ended December 31,
1996 to $94,703 for the year ended January 31, 1998.
Discontinued Operations. Income from discontinued operations, net
of income tax expense, increased from $923,129 for the year ended
December 31, 1996 to $11,116,488 for the year ended January 31,
1998. The primary reason for the increase was a pre-tax gain of
$14,724,720 related to the sale of the assets of the IntelliCode
division to Becton Dickinson as discussed above. The Company
realized an after-tax gain of $10,268,710 on this transaction.
Net Income (Loss). While net revenues increased 123% over the year
ended December 31, 1996, the significant increase in operating
expenses, the Synergis management expenses, acquisition and
offering costs, and the non-recurring charges for the acquired in-
process technology of DiaLogos and Universal Document non-
recurring charges resulted in a loss of $8,011,399 from continuing
operations for the year ended January 31, 1998 compared to a loss
of $3,395,321 for the year ended December 31, 1996. Net income
(loss) increased from a net loss for the year ended December 31,
1996 of $2,472,192 to net income of $3,105,089 for the year ended
January 31, 1998 primarily due to income from discontinued
operations of $11,116,488 offset by the items discussed in the
preceding sentence.
Liquidity and Capital Resources
The Company's business requires significant amounts of working
capital to finance new product research and development, the
expansion of its sales and marketing organization, anticipated
revenue growth, capital expenditures and strategic investments.
The Company has financed its operations, working capital needs,
and investments through the sale of common stock, bank borrowings,
capital lease financing agreements and the sale of the assets of
its IntelliCode division. The Company's principal uses of cash
since inception have been for funding operations, capital
expenditures, research and development activities, investments in
and advances to companies which are deemed to have strategic value
to the Company and funding costs associated with the Synergis
acquisitions, initial public offering, and private financing.
In December 1998, the term on a $10,000,000 revolving line of
credit agreement with a bank expired. A new month-to-month
agreement with the same bank was executed with a limit of
$3,250,000. At January 31, 1999, the amount outstanding under the
line of credit was $2,757,017. No amounts were outstanding under
the line of credit at January 31, 1998. Interest is payable at
the bank's prime rate plus 1/2 %, which was 8.25% as of January
31, 1999. The line of credit is secured by all assets of the
Company. Subsequent to year-end, the bank amended the agreement to
reduce the limit to $3,000,000 and to extend the expiration of
$2,250,000 of this limit to February 2000, subject to a defined
net worth formula and the completion of certain debt and equity
financing executed subsequent to year end. As a result, the
Company classified $2,250,000 of the outstanding balance at
January 31, 1999 as non-current in the consolidated balance sheet.
The current portion is payable to the bank in specified amounts
throughout fiscal 2000. The interest rate on the new financing
agreement is payable at the bank's prime rate plus 1 1/2 %. The
new agreement contains a closing fee of $60,000 and a commitment
fee of 1% on the line of credit limit.
Subsequent to year-end, the Company entered into an Agreement (the
"Agreement") with three investment firms (the "Investors") to
obtain $6,100,000 in debt and equity financing. The terms of the
Agreement provide for financing of $4,100,000 in Series A
Convertible Preferred Shares (the "Preferred Shares") and
$2,000,000 in subordinated debentures (the "Notes"). The proceeds
of the financing will be utilized to fund working capital
requirements and continue the market penetration of certain of the
Company's core products. Certain terms of the agreement,
including the authorization of the Preferred Shares, are subject
to shareholder approval at the Company's special and annual
shareholders' meeting scheduled for June 18, 1999.
On April 30, 1999, the Company issued the Notes, due 2004, with a
coupon rate of 10% in the first year and 12% thereafter. The
principal portion of the Notes is payable as follows: $666,666 in
April 2002, $666,667 in April 2003 and $666,667 in April 2004;
however, the Company may redeem the Notes at any time during their
term without penalty. The Notes provide that if the Preferred
Shares are authorized, and certain additional terms related to the
Agreement are approved, by the Company's shareholders prior to
July 30, 1999, then the Company will issue to the holders of the
Notes five-year warrants to purchase 281,137 Preferred Shares at
an exercise price not to exceed $1.90. This warrant price is
subject to adjustment if the Company does not meet specified
requirements relating to the appreciation of its stock price at
the end of a defined two-year period. However, the Notes also
provide that if the Preferred Shares are not authorized, and
certain additional terms related to the Agreement are not
approved, by the Company's shareholders prior to July 30, 1999,
then (a) the entire amount of principal and interest which remains
unpaid shall become due and payable as of November 28, 1999 and
(b) the Company shall immediately issue to the holders of the
Notes, for no additional consideration shares of the Company's
Common Stock as described in the Agreement and 281,137 warrants to
purchase shares of Common Stock.
In addition, subject to shareholder approval on or before July 30,
1999, the Company has agreed to issue to the Investors 2,371,815
Preferred Shares at a purchase price of $1.729 per share. The
Preferred Shares will pay dividends quarterly at a rate of 4% per
share for the first four years, increasing to 10% thereafter, and
accruing on a cumulative basis. The Preferred Shares include (a)
voting rights, (b) receive preferential treatment upon liquidation
of the Company and (c) convert into Common Shares upon certain
events. The designation, rights, preferences and other terms and
conditions relating to the Preferred Shares is described in detail
in the Agreement. Also, subject to shareholder approval on or
before July 30, 1999, the Company has agreed to issue to the
Investors ten-year warrants for the purchase (subject to
adjustment as provided therein) of 759,562 Preferred Shares.
These warrants cannot be exercised unless the value of the
Company's stock price as traded on the NASDAQ over a twenty-day
period exceeds $7.28.
The Company's Board of Directors authorized a common stock
repurchase program in November 1996. Under the program the
Company may repurchase up to 500,000 shares of the Company's
common stock. For the year ended January 31, 1999 the Company's
repurchases totaled 189,500 shares at a cost of $809,943. On a
cumulative basis, the Company has repurchased 200,000 shares.
Cash flows used in operating activities was $9,495,660 and
$2,726,648 for the years ended January 31, 1999 and 1998,
respectively. The Company has continued to incur operating losses
from continuing operations. During fiscal 1999, the Company has
made significant cash expenditures in the areas of research and
development, sales and marketing, customer support and
implementation consulting in anticipation of higher revenues.
However, revenues have been lower than expected during the period
of the operating losses. Management has continued to review the
Company's current operations to identify areas to reduce or
maintain current levels of expenses until revenues increase
sufficiently to justify increased investments in certain areas. In
addition to expense reductions, increased revenues will also be
needed to improve operating cash flow. Management believes that
the Company's current pipeline for its ChartMaxx product, its
contract for an imaging and workflow solution for Quest
Diagnostics Incorporated and the marketing of this solution to
other reference laboratories will result in significant
opportunities to increase revenues over the next twelve to
eighteen months.
The Company believes that improvements in operating cash flow from
the expense reductions and increased revenues noted above combined
with its cash and cash equivalents and available line of credit
will be sufficient to finance its expected growth and cash
requirements. The Company also believes that its debt and equity
financings which occurred subsequent to year end will provide
adequate funding necessary to continue its current level of
operations. There can be no assurance, however, as to the extent
or timing of the Company's success in increasing revenues, that
additional sources of financing, if needed, will be available on a
timely basis or on terms satisfactory to the Company.
Year 2000 Compliance
Some existing computer programs use only the last two digits to
refer to a year. Because these programs may not properly
recognize a year that begins with "20" rather than "19" and thus
may fail or create errors in the year 2000, they are not
considered "year 2000 compliant." The Company has been reviewing,
and continues to review, all potential year 2000 compliance issues
which may have a material effect on the Company's business,
results of operations or financial condition.
Specifically, the most recent releases of the Company's ChartMaxx
and OptiMaxx products have both been developed using four digit
date fields and, as such, are year 2000 compliant. The Company's
standard license agreements for the most recent releases of each
of these products now include a year 2000 compliance warranty.
Customers who have earlier versions of these products may upgrade
to the versions warranted by the Company as year 2000 compliant
under the terms of their license agreements with the Company or
the Company's standard maintenance and support agreements, as the
case may be.
Although the most recent releases of the Company's ChartMaxx and
OptiMaxx products are year 2000 compliant, the Company is also
working to ensure that its customers do not experience problems
where data entered into a ChartMaxx or OptiMaxx system includes
two digit date fields. Currently, if a two digit date field is
passed from another system to ChartMaxx or OptiMaxx, the product's
four digit date field is automatically populated with the first
two digits of the current ChartMaxx or OptiMaxx system date. The
Company has completed final year 2000 testing for these systems
and verified that the most recent releases are year 2000
compliant.
In addition, both systems incorporate third party software and
hardware. While the Company's year 2000 compliance warranty
covers the components of third party products which are
incorporated into the ChartMaxx or OptiMaxx application, the
Company does not independently warrant any third party product.
The Company has received certifications from many of its third
party vendors that their products are year 2000 compliant and is
currently reviewing the remaining third party products, and
working with those vendors, to determine what steps, if any, are
required to ensure compliance.
Furthermore, the ChartMaxx and OptiMaxx products operate in
conjunction with third party hardware and operating systems
provided by the Company, but excluded from the Company's year 2000
compliance warranty. The Company has advised, and continues to
advise, its customers to contact the manufacturers of the hardware
and operating systems in order to upgrade these systems to the
year 2000 compliant versions, if necessary. Where possible, the
Company will provide its customers with specific information
regarding how they may obtain upgrades to their operating system
software via the Internet or other means.
The Company's Universal Document subsidiary has completed its
testing of the Step2000 software product and verified that it is
year 2000 compliant. Step2000, however, may be used by a customer
to develop other software applications. The customer is
responsible for ensuring that these developed applications are
also year 2000 compliant. Universal Document has provided a year
2000 compliance warranty to its customers, but the warranty
excludes developed applications from coverage.
The Company's internal software systems are either already
compliant or will be upgraded to available year 2000 compliant
versions.
The Company has to date, and will in the foreseeable future use,
internal resources to continue to monitor its products for year
2000 compliance. If modifications to any of the Company's
products are required to ensure year 2000 compliance, the Company
plans to use internal resources for those modifications. The
Company does not anticipate the total cost of its year 2000
compliance measures to be material based on the results of its
review and testing to date. The cost of the year 2000 effort will
be funded by cash on hand and cash from operations. The Company
does not anticipate, based on its current understanding of the
year 2000 issue and the results of its review and testing to date,
that the year 2000 issue will have a material effect on the
Company's results of operations or result in significant
operational problems for the Company.
Forward Looking Statements
The Company notes that many of the statements made herein are
forward-looking statements. As such, factors may occur which
could cause actual events to differ materially from those
anticipated in these statements.
Although management believes that the Company's current pipeline
for its ChartMaxx product, its recent contract for an imaging and
workflow solution for Quest Diagnostics Incorporated and the
marketing of this solution to other reference laboratories will
result in significant opportunities to increase revenues over the
next twelve to eighteen months, any number of factors, including
those beyond the control of MedPlus such as each potential
customer's financial condition and/or the time frame in which it
may receive contract approval, could prevent the execution of such
agreements during this period. Furthermore, whether (i)
improvements in operating cash flow from the expense reductions
and increased revenues combined with cash and cash equivalents,
(ii) the Company's available line of credit and (iii) cash
received from the debt and equity financing occurring subsequent
to year-end will be sufficient to finance expected growth and cash
requirements is also uncertain. Finally, although the Company
believes the Preferred Stock described Under "Liquidity and
Capital Resources" above will be approved by the Company's
shareholders and subsequently issued, there can be no assurance
that such approval and issuance will take place as anticipated.
If the Preferred Stock is not issued on or before July 31, 1999,
then the Notes will become immediately payable and Company will be
required to grant to the investment firm and its affiliates a
percentage of its then-outstanding common stock as a penalty.
ITEM 7. FINANCIAL STATEMENTS
Information called for by this item is set forth in the Company's
Consolidated Financial Statements contained in this report.
Specific financial statements and supplemental data can be found
at the pages listed in the following index:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
Description In This Report
Independent Auditors' Report of KPMG LLP 23
Consolidated Balance Sheets as of January 31, 1999
and 1998 24
Consolidated Statements of Operations for the years
ended January 31, 1999 and 1998, one month ended
January 31, 1997 and year ended December 31, 1996 25
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the years ended
January 31, 1999 and 1998, one month ended
January 31, 1997 and year ended December 31, 1996 26
Consolidated Statements of Cash Flows for the years
ended January 31, 1999 and 1998, one month ended
January 31, 1997 and year ended December 31, 1996 27
Notes to Consolidated Financial Statements 28 to 54
Independent Auditors' Report
The Board of Directors
MedPlus, Inc.:
We have audited the accompanying consolidated balance sheets of
MedPlus, Inc. and subsidiaries as of January 31, 1999 and 1998,
and the related consolidated statements of operations,
shareholders' equity and comprehensive income, and cash flows for
the years ended January 31, 1999 and 1998, the one month period
ended January 31, 1997 and the year ended December 31, 1996.
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of MedPlus, Inc. and subsidiaries as of January 31, 1999
and 1998, and the results of their operations and their cash flows
for the years ended January 31, 1999 and 1998, the one month
period ended January 31, 1997 and the year ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Cincinnati, Ohio
April 30, 1999
<TABLE>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 1999 and 1998
<CAPTION>
January 31, January 31,
1999 1998
_____________ ___________
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,148,099 13,794,473
Accounts receivable, less allowance for doubtful accounts of
$155,000 in 1999 and $115,000 in 1998 5,595,273 4,520,333
Other receivables 70,769 71,728
Income tax receivable 550,000 -
Inventories 442,312 757,471
Prepaid expenses 656,588 568,769
Deferred tax asset - 328,497
_____________ ___________
Total current assets 8,463,041 20,041,271
Capitalized software development costs, net 2,559,823 2,020,613
Fixed assets, net 1,648,093 1,484,875
Excess of cost over fair value of net assets acquired, net 714,448 781,391
Other assets 291,402 328,141
_____________ ___________
$13,676,807 24,656,291
_____________ ___________
_____________ ___________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases $ 222,558 132,206
Borrowings on line of credit 507,017 1,496,353
Accounts payable 1,712,392 2,892,891
Accrued expenses 2,099,124 2,675,996
Accrued income taxes payable - 1,346,869
Deferred revenue 1,158,128 635,463
Other current liabilities - 297,000
_____________ ___________
Total current liabilities 5,699,219 9,476,778
Long-term borrowings on line of credit 2,250,000 -
Obligations under capital leases, excluding current installments 148,746 167,884
Deferred tax liability - 534,644
_____________ ___________
Total liabilities 8,097,965 10,179,306
_____________ ___________
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, authorized 15,000,000
shares; issued 6,225,371 shares in 1999 and
6,171,212 shares in 1998 - -
Additional paid-in capital 17,639,105 17,338,111
Treasury stock, at cost, 200,000 shares in 1999 and
10,500 shares in 1998 (863,497) (53,554)
Accumulated deficit (11,167,502) (2,619,749)
Unearned stock compensation (29,264) (187,823)
_____________ ___________
Total shareholders' equity 5,578,842 14,476,985
_____________ ___________
$13,676,807 24,656,291
_____________ ___________
_____________ ___________
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE><CAPTION>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended January 31, 1999 and 1998, One Month Ended
January 31, 1997 and Year Ended December 31, 1996
Year Ended Year Ended Month Ended Year Ended
January 31, January 31, January 31, December 31,
1999 1998 1997 1996
____________ ____________ ____________ ____________
<S> <C> <C> <C> <C>
Revenues:
Systems sales $ 6,155,381 7,912,158 138,785 3,126,299
Support and consulting revenues 5,274,603 2,288,994 109,659 1,441,345
____________ ____________ ____________ ____________
Total revenues 11,429,984 10,201,152 248,444 4,567,644
____________ ____________ ____________ ____________
Cost of revenues:
Systems sales 3,411,387 5,171,635 96,817 1,676,525
Support and consulting revenues 4,918,588 2,054,556 124,207 833,467
____________ ____________ ____________ ____________
Total cost of revenues 8,329,975 7,226,191 221,024 2,509,992
____________ ____________ ____________ ____________
Gross profit 3,100,009 2,974,961 27,420 2,057,652
Operating expenses:
Sales and marketing 5,542,008 5,309,109 338,023 2,902,388
Research and development 2,062,848 713,124 72,023 485,898
General and administrative 4,048,093 3,789,719 217,307 2,785,689
Acquired in-process technology - 710,318 - -
____________ ____________ ____________ ____________
Total operating expenses 11,652,949 10,522,270 627,353 6,173,975
____________ ____________ ____________ ____________
Operating loss (8,552,940) (7,547,309) (599,933) (4,116,323)
Other income (expense):
Synergis management expenses,
Acquisition and offering costs (2,070,731) (3,707,945) - -
Other income (expense), net (14,751) (231,922) 4,721 124,663
Minority interest 297,000 - - -
____________ ____________ ____________ ____________
Total other
income (expense), net (1,788,482) (3,939,867) 4,721 124,663
____________ ____________ ____________ ____________
Loss before income
tax benefit (10,341,422) (11,487,176) (595,212) (3,991,660)
Income tax benefit (1,616,370) (3,475,777) - (596,339)
____________ ____________ ____________ ____________
Loss from continuing operations (8,725,052) (8,011,399) (595,212) (3,395,321)
Income (loss) from
discontinued operations 177,299 11,116,488 (26,549) 923,129
____________ ____________ ____________ ____________
Net income (loss) $(8,547,753) 3,105,089 (621,761) (2,472,192)
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Earnings (loss) per share - basic and diluted:
Continuing operations $ (1.43) (1.35) (0.10) (0.58)
Discontinued operations .03 1.87 (0.01) 0.16
____________ ____________ ____________ ____________
Net income (loss) $ (1.40) 0.52 (0.11) (0.42)
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
Weighted average number of shares of
common stock 6,109,439 5,922,781 5,911,971 5,868,954
____________ ____________ ____________ ____________
____________ ____________ ____________ ____________
See accompanying notes to consolidated financial statements </TABLE>
<TABLE><CAPTION>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years Ended January 31, 1999 and 1998, One Month Ended
January 31, 1997 and Year Ended December 31, 1996
Accumulated
Common Additional Unearned other Total
stock - paid-in Treasury Accumulated stock comprehensive shareholders'
shares capital stock deficit compensation income(loss) equity
__________ __________ __________ ___________ ______________ _______________ _____________
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 5,808,524 $14,036,784 $ - $(2,377,388) $ (39,105) $ 3,258 $11,623,549
Comprehensive income (loss):
Unrealized
gains on
investment securi-
ties, net of tax - - - - - (1,434) (1,434)
Net loss - - - (2,472,192) - - (2,472,192)
____________
Total comprehensive
income (loss) (2,473,626)
Issuance of common
stock 64,749 403,886 - - - - 403,886
Options exercised 36,933 220,19 - - - - 220,193
Unearned compensation
under employee
stock award plan,
net of amortization 9,000 74,249 - - 9,742 - 83,991
__________ __________ __________ ___________ ______________ _______________ ____________
Balances at December
31, 1996 5,919,206 14,735,112 - (4,849,580) (29,363) 1,824 9,857,993
Issuance of common
stock, net of
issuance costs 2,500 15,000 - - - - 15,000
Net loss - - - (621,761) - - (621,761)
Unearned compensation under employee stock
award plan, net of amortization - - - - 1,712 - 1,712
Fair value of options issued
to nonemployees - 188,074 - - (176,503) - 11,571
__________ __________ __________ ___________ ______________ _______________ ___________
Balances at January 31, 1997 5,921,706 14,938,186 - (5,471,341) (204,154) 1,824 9,264,515
Comprehensive income:
Unrealized gains on investment
securities, net of tax - - - - - (1,824) (1,824)
Net income - - - 3,105,089 - - 3,105,089
__________
Total comprehensive income 3,103,265
Issuance of common stock,
net of issuance costs 225,056 2,010,549 - - - - 2,010,549
Purchase of treasury shares (10,500) - (53,554) - - - (53,554)
Options exercised 16,666 109,719 - - - - 109,719
Tax benefit associated with exercise
of options - 93,500 - - - - 93,500
Minority shareholders' interest
in accumulated
deficit of DiaLogos - - - (253,497) - - (253,497)
Unearned compensation under employee
stock award plan, net of
amortization 7,784 63,610 - - (4,449) - 59,161
Fair value of options issued to
nonemployees - 122,547 - - 20,780 - 143,327
__________ __________ __________ ___________ ______________ _______________ ___________
Balances at January 31, 1998 6,160,712 17,338,111 (53,554) (2,619,749) (187,823) - 14,476,985
Net issuances of common stock 32,232 217,574 - - - - 217,574
Purchase of treasury shares (189,500) - (809,943) - - - (809,943)
Options exercised 7,673 58,085 - - - - 58,085
Net loss - - - (8,547,753) - - (8,547,753)
Stock compensation under employee stock
award plan, net of amortization 14,254 25,335 - - 2,832 - 28,167
Net amortization of options
issued to nonemployees - - - - 155,727 - 155,727
__________ __________ __________ ___________ ______________ _______________ ____________
Balances at January 31, 1999 6,025,371 $17,639,105 $(863,497) $(11,167,502) $ (29,264) $ - $5,578,842
__________ __________ __________ ___________ ______________ _______________ ____________
__________ __________ __________ ___________ ______________ _______________ ____________
See accompanying notes to consolidated financial statements. </TABLE>
<TABLE><CAPTION>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended January 31, 1999 and 1998, One Month Ended
January 31, 1997 and Year Ended December 31, 1996
Year Ended Year Ended Month Ended Year Ended
January 31, January 31, January 31, December 31,
1999 1998 1997 1996
__________ __________ __________ ___________
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $(8,725,052) (8,011,399) (595,212) (3,395,321)
Adjustments to reconcile loss
from continuing operations
to net cash used in operating
activities:
Synergis acquisition and offering
costs 573,724 2,979,555 - -
Impairment losses related to UDMS - 1,241,513 - -
Acquired in-process technology - 710,318 - -
Amortization of capitalized
software development costs 520,960 531,024 32,200 248,228
Amortization of unearned stock
compensation costs 158,559 222,487 23,283 85,689
Depreciation and amortization of
fixed assets 566,812 226,200 26,894 143,789
Amortization of excess of cost
over fair value of net
assets acquired 86,801 130,705 548 161,575
Provision for loss on doubtful
accounts 123,749 112,348 - 88,512
Deferred income taxes (206,147) (359,224) - (57,880)
(Gain) loss on sale of investment
securities and fixed assets 103,414 (3,691) - (18,507)
Changes in assets and liabilities,
net of business acquisitions:
Accounts receivable (1,104,911) (3,017,908) 84,288 (496,884)
Other receivables 959 (35,581) (1,411) 121,991
Inventories 315,159 (471,902) (55,946) (62,961)
Prepaid expenses and other assets (84,857) 1,165 (69,984) (144,111)
Accounts payable and accrued
expenses (450,625) 2,835,279 (462,776) 153,963
Income taxes (1,896,869) - - -
Deferred revenue 522,664 182,463 3,006 150,982
__________ __________ __________ ___________
Net cash used in operating
activities (9,495,660) (2,726,648) (1,015,110) (3,020,935)
__________ __________ __________ ___________
Cash flows from investing activities:
Capitalization of software
development costs (1,060,170) (884,337) (90,817) (1,232,025)
Purchases of fixed assets (507,008) (351,229) (54,632) (643,779)
Proceeds from sales of investment
securities and fixed assets - 318,248 - 518,507
Cash acquired in (payments made for)
business acquisitions (19,858) 16,375 - (67,328)
Synergis acquisition and offering
costs (1,725,452) (1,478,838) - -
Other advances and investments - (927,695) (157,406) (454,788)
__________ __________ __________ ___________
Net cash used in investing
activities (3,312,488) (3,307,476) (302,855) (1,879,413)
__________ __________ __________ ___________
Cash flows from financing activities:
Proceeds from issuance of common
stock, net of issuance costs 83,420 2,105,269 - 461,653
Purchase of treasury stock (809,943) (53,554) - -
Proceeds from borrowings on
line of credit 7,143,759 11,721,152 - 1,587,815
Repayments on line of credit (5,883,094) (10,224,799) - (1,587,815)
Payment of debt issue costs (60,000) - - -
Principal payments on capital
lease obligations and
notes payable (217,863) (39,345) (2,598) (37,275)
__________ __________ __________ ___________
Net cash provided by
(used in) financing activities 256,279 3,508,723 (2,598) 424,378
__________ __________ __________ ___________
Discontinued operations (94,505) 15,306,854 (367,024) (317,517)
__________ __________ __________ ___________
Net increase (decrease) in cash
and cash equivalents (12,646,374) 12,781,453 (1,687,587) (4,793,487)
Cash and cash equivalents,
beginning of period 13,794,473 1,013,020 2,700,607 7,494,094
__________ __________ __________ ___________
Cash and cash equivalents,
end of period $ 1,148,099 13,794,473 1,013,020 2,700,607
__________ __________ __________ ___________
__________ __________ __________ ___________
Interest paid $ 113,920 282,963 1,029 23,493
__________ __________ __________ ___________
__________ __________ __________ ___________
Income taxes paid (refunds received) $ 600,000 - - (66,192)
__________ __________ __________ ___________
__________ __________ __________ ___________
See accompanying notes to consolidated financial statements.</TABLE>
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of the Business
MedPlus[r], Inc. (the "Company") provides information
technology solutions designed to enable customers to manage
information efficiently and cost effectively through innovative
technology, consulting, and education. The Company's solutions
focus on various elements of process analysis and redesign,
document imaging and management, workflow, systems integration and
technology education.
The Company's healthcare related products, included in its
Healthcare Solutions segment, presently consist of the
ChartMaxx[tm] Enterprise-wide Patient Record System ("ChartMaxx")
and the OptiMaxx[r] Archival System ("OptiMaxx"). ChartMaxx is an
enterprise-wide electronic patient record system that enables
health care organizations to create and manage a fully paperless
electronic patient record comprising clinical, financial and
administrative data captured from scanned paper and digital data.
OptiMaxx is an optical disk-based archival system designed to meet
the departmental needs of health care providers that require
electronic storage and quick retrieval of information. The
Company's FutureCORE[r], Inc. subsidiary ("FutureCORE") provides
process improvement and automation services, primarily in the
areas of medical records and patient accounts departments,
hospital and reference laboratories and physician offices.
The Company's Universal Document Management Systems, Inc.
subsidiary ("Universal Document"), included in its Workflow and
Document Management Segment, develops and sells Step2000[r], a
workflow, document management and application development software
product that enhances the utilization of information on an
enterprise-wide basis, regardless of hardware platform or
operating environment.
DiaLogos[tm] Incorporated ("DiaLogos"), included in the
Company's Distributed Computing Products and Services Segment, is
a majority-owned subsidiary and specializes in assisting
organizations in the integration of enterprise-wide business
systems with existing applications and data using distributed
object computing, including CORBA and Java technologies, through
education, consulting and implementation services. DiaLogos is in
the initial phases of developing several products designed to
simplify the effort of legacy system integration.
Substantially all of the Company's operations are located in
Cincinnati, Ohio.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Universal Document
and FutureCORE. The accounts of DiaLogos, its 56.5% majority-
owned subsidiary, have been included in the
consolidated financial statements as of the date of the Company's
acquisition of a majority interest, January 30, 1998. During
1999, a liability that related to a minority shareholder's
interest in DiaLogos was reduced to zero. As a result, the
Company has recognized greater than 56.5% of the losses from
operations of DiaLogos in the consolidated statements of
operations. All intercompany accounts and transactions have been
eliminated in consolidation.
The Company's IntelliCode division was sold on January 28,
1998 and, as a result, has been accounted for as a discontinued
operation (see Note 4 to the consolidated financial statements).
The accompanying notes present amounts related only to continuing
operations, unless otherwise indicated.
(b) Fiscal Year
As of January 31, 1998, the Company changed its fiscal
year end from December 31 to January 31. Accordingly, the years
ending January 31, 1999 and 1998 commenced on February 1 and ended
on January 31 of the respective year. Due to the change in fiscal
year, the consolidated statements of operations, cash flows and
shareholders' equity and comprehensive income also present the
period from January 1, 1997 to January 31, 1997. The amounts
reflected for the one month period ended January 31, 1997 are not
indicative of results that would have been obtained for a full
fiscal quarter or fiscal year.
(c) Revenue Recognition
The Company's revenues are derived from systems sales,
including software licenses and hardware, support contracts,
installation, implementation, training and education, and
consulting services.
Revenue related to system sales is recognized in
compliance with American Institute of Certified Public Accountants
Statements of Position ("SOP") 97-2 and 98-4, Software Revenue
Recognition. For OptiMaxx systems, revenue is generally recognized
upon shipment. Revenue recognition for ChartMaxx systems
generally commences when a contract is signed, the system is
configured and shipped. If a contract requires the Company to
perform services or provide modifications that are deemed
significant to system acceptance, the Company recognizes revenue
for the entire contract under the percentage of completion method
of accounting.
Revenues from installation, implementation, training and
education, and consulting services are recognized in the period in
which the services are performed. Revenue from support contracts
is recognized ratably over the term of the contract. Deferred
revenues primarily represent support contracts that have been
billed in advance of the support to be provided.
(d) Cash and Cash Equivalents
At January 31, 1999, cash equivalents of $1,010,351
consisted of investments in money market funds with initial terms
of less than three months. At January 31, 1998, cash equivalents
of $13,691,025 consisted of overnight repurchase agreements and
investments in money market funds with initial terms of less than
three months. Due to the short-term nature of these investments,
the carrying value of cash and cash equivalents approximates fair
value.
Interest income from cash equivalents and investment
securities, included in other income (expense) in the consolidated
statements of operations, was $260,481, $94,703, and $308,992 for
the years ended January 31, 1999, January 31, 1998, and December
31, 1996, respectively.
(e) Concentrations of Credit Risk
Financial instruments potentially exposing the Company to
concentrations of credit risk, as defined by SFAS No. 105,
Disclosure of Information about Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations
of Credit Risk, consist primarily of cash equivalents and trade
accounts receivable. The Company's cash equivalents consist of
highly liquid money market funds. The Company's trade accounts
receivables are largely concentrated in the health care industry.
However, the Company's credit risk is limited due to the
geographic dispersion and diversity of customers making up the
Company's receivable portfolio.
(f) Inventories
Inventories generally relate to computer equipment
purchased for resale and are stated at the lower of cost or
market. Cost is determined by the first-in, first-out (FIFO)
method.
(g) Capitalized Software Development Costs
The Company accounts for software development costs in
accordance with the provisions of SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. Costs incurred in designing and developing computer
software products are expensed as research and development until
technological feasibility has been established. Technological
feasibility is established upon completion of a detail program
design or, in its absence, completion of a working model. Upon
the achievement of technological feasibility, software production
costs are capitalized and subsequently reported at the lower of
unamortized cost or net realizable value.
Annual amortization expense, included in cost of revenues
in the consolidated statements of operations, is the greater of
the amount computed, using the ratio of the current year's
revenues to the total of current and anticipated future revenues,
or the straight-line method over the remaining economic life which
does not exceed five years. Amortization amounted to $520,960,
$531,024, and $248,228, for the years ended January 31, 1999,
January 31, 1998, and December 31, 1996, respectively.
Accumulated amortization for capitalized software development
costs was $1,356,737, and $835,777 at January 31, 1999 and 1998,
respectively.
(h) Fixed Assets
Fixed assets are stated at cost for purchased assets,
fair value for assets obtained through acquisitions, and the
present value of minimum lease payments for equipment held under
capital leases. Depreciation, including amortization of capital
leases, is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to
ten years. Leasehold improvements and equipment held under
capital leases are amortized using the straight -line method over
the shorter of the lease term or estimated useful life of the
asset.
(i) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of the cost over fair value of net assets
acquired from business acquisitions is being amortized on the
straight-line method over the expected periods to be benefited,
which is principally ten years. Accumulated amortization of the
excess of the cost over the fair value of net assets acquired was
$86,801 and $35,095 at January 31, 1999 and 1998, respectively.
The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the
intangible balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired
operation. The amount of the intangible impairment, if any, is
measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of the intangible
asset will be impacted if estimated future operating cash flows
are not achieved.
(j) Income Taxes
The provisions for income taxes are accounted for in
accordance with SFAS No. 109, Accounting for Income Taxes. Under
the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled.
(k) Stock Option Plan
The Company accounts for its stock option plan in
accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. As a result, the Company recognizes
no compensation cost in its consolidated statements of operations
because the exercise price of its stock options is equal to the
market price of the underlying stock on the date of grant. In
addition, the Company provides pro forma disclosure of the
provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, which is an alternative method of accounting for
stock options.
(l) Earnings (Loss) Per Share
The Company calculates earnings (loss) per share in
accordance with the provisions of SFAS No. 128, Earnings per
Share, which requires the calculation of "basic" and "diluted"
earnings per share. Basic earnings per share excludes any
dilutive effects of options, warrants or convertible securities.
Diluted earnings per share reflects the assumed conversion of all
dilutive securities.
Basic and diluted earnings per share are based on the
weighted average number of shares of common stock outstanding for
each period excluding any shares related to nonvested employee
stock awards. Dilutive securities have not been included in the
weighted average shares used for the calculation of diluted
earnings per share in periods of losses from continuing operations
because the effect of such securities would be antidilutive. At
January 31, 1999, dilutive securities consisted of options to
purchase 1,294,727 shares of common stock.
(m) Comprehensive Income (Loss)
Consistent with SFAS No. 130, Reporting Comprehensive
Income, the Company includes comprehensive income (loss) in its
consolidated statement of shareholders' equity and comprehensive
income. Comprehensive income represents the net change in
shareholders' equity during a period from sources other than
transactions with shareholders. Amounts included in this
statement represent net income (loss) and unrealized gains
(losses) on investment securities.
(n) Supplemental Cash Flow Information
Stock Transactions: During the year ended January 31,
1999, the Company issued 32,232 shares of common stock, valued at
$217,574 at the date of issuance as a contribution into the
Company's 401(k) benefit plan. In the year ended January 31,
1998, the Company converted $1,191,960 of advances to DiaLogos
into common shares of DiaLogos in connection with its acquisition
of a majority interest in the subsidiary. In the year ended
December 31, 1996, the Company issued 14,429 shares of common
stock, valued at $160,728 at the date of issuance in connection
with the acquisition of Universal Document.
Stock Option Transactions: During the years ended January
31, 1999, January 31, 1998, and December 31, 1996, the Company
granted employees 14,254, 7,784, and 8,900 shares of common stock,
respectively, under a stock award plan. The market value of the
stock at the dates of grant was approximately $23,000, $64,000,
and $74,000, respectively, and is being amortized over periods of
one to three years in accordance with the terms of the awards. In
January and February 1997, the Company issued 5,000 shares of
restricted common stock valued at $30,000 to a vendor in exchange
for services rendered. In January 1997 and December 1997, the
Company also granted options to purchase 85,000 and 50,000 shares,
respectively, of the Company's common stock as compensation to
consultants to the Company. These options have a fair value of
approximately $188,000 and $155,000, respectively, which is being
amortized into expense over the related service periods of one to
two years. In addition, the Company realized a tax benefit of
$93,500 during the year ended January 31, 1998 associated with the
exercise of stock options. The tax benefit reduced the income tax
liability and was credited to paid-in capital.
Capital Leases: The Company entered into capital leases
for equipment totaling approximately $327,792 during the year
ended January 31, 1999.
As these are non-cash transactions, they have not been
presented in the Consolidated Statements of Cash Flows.
(o) Use of Estimates
Preparing financial statements in conformity with
generally accepted accounting principles requires the Company's
management to make a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities. Actual results could differ
from those estimates.
(p) Reclassifications
Certain reclassifications have been made to the
consolidated financial statements previously reported to conform
to the current period presentation.
(3) Acquisitions
(a) DiaLogos
Prior to January 30, 1998, the Company maintained a
minority interest in DiaLogos, which was accounted for under the
equity method. On January 30, 1998, based upon a previously
defined letter of agreement, the Company converted aggregate
advances of $1,191,960 to DiaLogos into common shares of DiaLogos
stock. Upon conversion of these advances, the Company became a
majority owner of DiaLogos with 56.5% ownership. The acquisition
of the shares by the Company has been accounted for under the
purchase method. Accordingly, the financial position of DiaLogos
has been included in the Company's Consolidated Balance Sheet as
of January 31, 1998, and the results of operations of DiaLogos
have been included in the Company's Consolidated Statement of
Operations effective February 1, 1998. Under the purchase method
of accounting, at January 31, 1998, the Company recorded a
$253,497 reduction to shareholders' equity equal to the amount the
minority shareholders interest in the historical accumulated
deficit exceed their contributed capital.
The Company's purchase price for its majority interest in
DiaLogos was $1,693,959 which included the conversion of
$1,191,960 of advances and the assumption of $501,999 of DiaLogos
liabilities. The purchase price was allocated to the identifiable
tangible and intangible assets acquired based on their estimated
fair values. The Company allocated $774,677 of the purchase
price to the excess of cost over the fair value of net assets
acquired. An additional $710,318 of the purchase price was
allocated to acquired in-process technology and was expensed at
the date of acquisition. To determine the fair market value of the
acquired in-process technology, the Company utilized the income
approach which focuses on the income-producing capability of the
assets acquired and best represents the present value of the
future economic benefits expected to be derived from these assets.
Technological feasibility for the acquired in-process technology
had not been reached based on design and development activities in
place, requiring further refinement and testing. The acquired
technology represents unique and emerging technology, the
application of which is limited to the Company's legacy system
integration software strategy. Accordingly, the acquired
technology had no alternative future use.
The following unaudited pro forma data presents the
results of operations as if the acquisition of DiaLogos had
occurred at the beginning of each period. This summary is
provided for information purposes only and does not necessarily
reflect the actual results that would have occurred had the
acquisitions been made as of those dates or of results that may
occur in the future.
Year Ended Year Ended
January 31, December 31,
1998 1996
___________ ____________
Revenues $ 10,776,730 4,569,802
___________ ____________
___________ ____________
Loss from continuing
operations $ (9,260,082) (3,896,996)
___________ ____________
___________ ____________
Net income (loss) $ 1,856,406 (2,973,867)
___________ ____________
___________ ____________
Earnings (loss)
per share - basic
and diluted:
Continuing
operations $ (1.56) (0.66)
___________ ____________
___________ ____________
Discontinued
operations $ 1.87 0.16
___________ ____________
___________ ____________
Net income (loss) $ 0.31 (0.51)
___________ ____________
___________ ____________
(b) FutureCORE
Effective June 28, 1996, the Company acquired all of the
assets of FutureCORE, Ltd., a hospital, laboratory, and physician
services consulting firm. The acquisition has been accounted for
under the purchase method; accordingly, the results of operations
of FutureCORE have been included in the Company's consolidated
financial statements since the date of the acquisition. The
effect of FutureCORE on the results of operations for periods
prior to its acquisition would not have been material. The total
consideration paid for these assets consisted of cash of $61,250.
(4) Discontinued Operations
In January 1998, the Company completed the sale of all the
assets of its IntelliCode division to Becton Dickinson and Company
("Becton Dickinson") for an initial payment of $17,408,847 plus
royalty payments over five years. The final closing of the
transaction in April 1998 reduced the initial payment by $74,259.
In connection with the sale, Becton Dickinson also assumed certain
liabilities of the IntelliCode division, primarily deferred
revenues and obligations related to service contracts and an
office lease. The Company recognized a pre-tax gain of $14,724,720
and an after-tax gain of $10,268,710 related to this transaction
for the year ended January 31, 1998. The royalty payments are
based on future defined revenues and are recorded as income when
earned. No royalty payments were earned for the year ended
January 31, 1999.
In January 1998, the Company also decided to sell the net
assets of the Step2000 segment of Universal Document and began
negotiating with prospective buyers. The Company had expected to
complete the sale by December 1998. However, the Company's
efforts to sell the net assets of Step2000 ended in August 1998
after negotiations with the prospective buyers were terminated by
the Company. After reviewing the operations of the Step2000
segment and how it might complement a current business initiative
of the Company, the Company decided to retain the segment and
reduce operations to primarily research and development and
customer support while a new generation of products is being
developed.
The Step2000 segment had previously been accounted for as a
discontinued operation. However, as a result of the Company's
decision to retain the Step2000 segment, the results of operations
and financial position of the segment have been included in
continuing operations in the Company's consolidated financial
statements as of and for the twelve months ended January 31, 1999.
Prior years' financial statements have been presented on a
comparable basis. The Step2000 segment had assets of $546,978 and
liabilities of $418,217 as of January 31, 1998. For the year
ended January 31, 1998, Step2000 had revenues of $1,169,509 and an
operating loss of $1,620,823. Included in the fiscal 1998
operating loss were impairment losses related to the excess of
cost over fair value of net assets acquired and capitalized
software development costs of $774,677 and $466,836, respectively.
The Company had also accrued a loss of $180,000 for the disposal
of the net assets of the segment and for its estimated net
operating losses through its expected date of disposal. The
Company reversed this accrual during fiscal year 1999 as a result
of its decision to retain Step2000. These reversals are included
in discontinued operations for the year ended January 31, 1999.
Income from the IntelliCode discontinued operations and the
reversal of accrued losses related to the disposal of the net
assets of the Step2000 segment, as shown on the accompanying
Consolidated Statements of Operations, includes the following
Year Ended Year Ended Year Ended
January 31, January 31, December 31,
1999 1998 1996
__________ __________ ___________
Revenues $ - 7,274,279 6,408,184
__________ __________ ___________
__________ __________ ___________
Operating income $ 290,654 1,515,087 1,521,365
Gain on sale of
Intellicode - 14,724,720 -
Income tax expense (113,355) (5,123,319) (598,236)
__________ __________ ___________
Net income from
discontinued
operations $ 177,299 11,116,488 923,129
__________ __________ ___________
__________ __________ ___________
(5) Synergis Commitments and Contingencies
The Company's Universal Document subsidiary hired a senior
management team and entered into agreements with two consulting
firms in 1997 to assist it in the identification and recruitment
of certain design automation software resellers and integrators
(collectively the "Founding Companies") that Universal Document
would acquire or with which it would combine (the "Acquisitions"),
and to assist Universal Document in an initial public offering of
its common stock. The Company would have owned a minority
interest in the newly acquired entity that would potentially serve
as a distribution channel for the Company's products. In
September and October 1997, Universal Document entered into
definitive merger agreements, which were contingent upon a
successful initial public offering, to acquire nine such
companies. In October 1997, Universal Document filed a
registration statement on Form S-1 with the Securities and
Exchange Commission, which was subsequently amended in December
1997 and January 1998, to offer its common stock to the public.
In connection with its initial public offering, Universal Document
planned to change its name to Synergis Technologies, Inc. Due to
adverse market conditions for initial public offerings in January
1998, Universal Document postponed the initial public offering
upon the advice of its underwriters.
During early 1998, the Company evaluated the business
operations of Universal Document and determined that it no longer
complemented the businesses of the Founding Companies. As a
result, the Company created its Synergis subsidiary to serve as
the
acquirer in the Acquisitions. The Company expected the newly
created Synergis subsidiary to complete the Acquisitions and an
initial public offering of its common stock. Due to adverse
conditions in the equity capital markets, Synergis' plans to
conduct an initial public offering were postponed for a second
time
in August 1998. Currently, all plans for an initial public
offering have been cancelled.
For the years ended January 31, 1999 and 1998, the Company
has
expensed $573,724 and $2,979,555, respectively, for acquisition
and
offering costs related to accountants', attorneys', and
consultants' fees incurred on behalf of the postponed initial
public offerings. In addition, the Company also incurred and
expensed $1,497,007 and $728,390 for 1999 and 1998, respectively,
for operating costs associated with the senior management team
hired to manage the Acquisitions, offering, private financing and
integration of the Founding Companies. As of January 31, 1999,
the
Company has costs accrued in its Consolidated Balance Sheet of
approximately $120,000 related to the Company's decision to
discontinue the employment of certain members of the management
team hired to manage and complete the transaction.
As the proposed public offering related to the Synergis
transaction has been cancelled, the Company has significantly
reduced the on-going expenses related to this affiliate. The
Company is currently evaluating the feasibility of a merger of
Synergis with certain of the Founding Companies into a new entity
financed on a private basis. However, definitive plans related to
any future transaction have not been finalized. Various
agreements
related to the transaction, including employment agreements, are
contingent upon the successful completion of the transaction.
Based upon the final outcome of the transaction, these agreements
may be terminated or significantly amended.
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Fixed Assets
Fixed assets consisted of the following at January 31, 1999
and 1998:
January 31, January 31,
1999 1998
_____________ _____________
Equipment $ 1,903,949 1,408,996
Furniture and fixtures 596,076 493,470
Leasehold improvements 198,710 157,742
Purchased software 163,535 112,519
_____________ _____________
2,862,270 2,172,727
Accumulated depreciation
and amortization (1,214,177) (687,852)
_____________ _____________
$ 1,648,093 1,484,875
_____________ _____________
_____________ _____________
(7) Bank Agreements
At the end of 1995, the Company had a $10,000,000 revolving
line of credit agreement with a bank, which was subject to a
defined net worth formula. The amended term of the agreement
extended the term to December 31, 1998. In January 1999, this
agreement was cancelled and a new agreement with the same bank was
entered into with a limit of $3,250,000 and a term expiring on a
monthly basis.
The maximum amount available under the line of credit was
$3,250,000 and $2,757,017 was outstanding as of January 31, 1999.
No amounts were outstanding under the line of credit at January
31, 1998. Interest is payable at the bank's prime rate plus 1/2%,
which was 8.25% as of January 31, 1999. The line of credit is
secured by all assets of the Company. Due to the variable rate
and the short-term nature of the agreement, its carrying value
approximates fair value.
On September 9, 1997, the Company and Company's Universal
Document subsidiary entered into a line of credit agreement
("Universal line of credit") with a bank to fund the costs
associated with Universal Document's acquisitions and initial
public offering discussed in Note 5 and for working capital. The
amount outstanding under the Universal line of credit at January
31, 1998 was $1,496,353. The Universal line of credit was paid in
full and canceled on February 10, 1998.
Interest expense included in other income (expense) from the
lines of credit and capital lease obligations was $146,378,
$346,315, and $23,493 for the years ended January 31, 1999 and
1998, and December 31, 1996, respectively.
Subsequent to year-end, the bank amended the $3,250,000
revolving line of credit agreement described above to reduce the
limit to $3,000,000 and to extend the expiration of $2,250,000 of
this limit to February 2000, subject to a defined net worth
formula and the completion of the debt and equity financing
described in Note 17 of the notes to the consolidated financial
statements. As a result, the Company classified $2,250,000 of the
outstanding balance as non-current at January 31, 1999 in the
consolidated balance sheet. The current portion is payable to the
bank in specified amounts throughout fiscal 2000. The interest
rate on the new financing agreement is payable at the bank's prime
rate plus 1 1/2%. The new agreement contains a closing fee of
$60,000 and a commitment fee of 1% on the line of credit limit.
The line of credit is secured by all assets of the Company.
Subsequent to year-end, the Company also entered into an
agreement with an investment firm to obtain $6,100,000 of debt and
equity financing. The terms of the agreement are described more
fully in Note 17, Subsequent Events and Liquidity, of the notes to
the consolidated financial statements.
(8) Common Stock and Related Transactions
In connection with the sale of the IntelliCode assets to
Becton Dickinson, the Company sold 222,556 shares of its common
stock to Becton Dickinson in exchange for $2,000,000 in cash on
January 28, 1998. The sale price was based on the average closing
price of the Company's common stock for the thirty days prior to
the announcement on November 21, 1997 of the signing of a letter
of intent relating to the sale of the IntelliCode assets.
Subsequent to year-end, the Company entered into an agreement
with an investment firm to obtain $6,100,000 of debt and equity
financing. The terms of the agreement are described more fully in
Note 17, Subsequent Events and Liquidity, of the notes to the
consolidated financial statements.
(9) Income Taxes
Total income tax benefit for the years ended January 31,
1999, January 31, 1998 and December 31, 1996 was allocated as
follows:
January 31, January 31, December 31,
1999 1998 1996
___________ ___________ ____________
Loss from operations $(1,616,370) (3,475,777) (596,339)
Discontinued
operations 113,355 5,123,319 598,236
Shareholders' equity,
for compensation
expense for tax
purposes in excess of
amounts recognized
for financial
reporting purposes - (93,500) -
Shareholders' equity,
unrealized gains
(losses) on marketable
securities recorded for
financial reporting
purposes - (1,026) (806)
___________ ___________ ____________
$(1,503,015) 1,553,016 1,091
___________ ___________ ____________
___________ ___________ ____________
Income tax benefit attributable to loss from continuing operations
was as follows:
January 31, January 31, December 31,
1999 1998 1996
___________ ___________ ____________
Federal:
Current $(1,229,425) (2,574,749) (508,521)
Deferred (179,718) (231,146) (54,900)
___________ ___________ ____________
(1,409,143) (2,805,895) (563,421)
___________ ___________ ____________
State:
Current (180,798) (541,804) (29,938)
Deferred (26,429) (128,078) (2,980)
___________ ___________ ____________
(207,227) (669,882) (32,918)
___________ ___________ ____________
$(1,616,370) (3,475,777) (596,339)
___________ ___________ ____________
___________ ___________ ____________
Income tax benefit differs from the amounts computed by
applying the Federal statutory rate to pre-tax loss from
continuing operations as a result of the following:
January 31, January 31, December 31,
1999 1998 1996
___________ ___________ ____________
Computed "expected"
benefit $(3,516,083) (3,905,640) (1,358,043)
Change in valuation
allowance 2,265,566 468,754 843,673
State income taxes,
net of Federal
benefit (494,810) (574,634) (21,726)
Acquired in-process
technology - 241,508 -
Other 128,957 294,235 (60,243)
___________ ___________ ____________
$(1,616,370) (3,475,777) (596,339)
___________ ___________ ____________
___________ ___________ ____________
The significant components of deferred income tax expense
(benefit) attributable to loss from continuing operations for the
years ended January 31, 1999, January 31, 1998, and December 31,
1996 are as follows:
January 31, January 31, December 31,
1999 1998 1996
___________ ___________ ____________
Deferred tax expense
(exclusive of the
effects of other
components listed
below) $ 281,586 186,193 321,435
Increase in net
operating losses (3,557,961) (209,509) (1,222,988)
Synergis acquisition
and offering costs 804,662 (804,662) -
Increase in the
beginning-of-the-year
balance of the
valuation allowance
for deferred taxes 2,265,566 468,754 843,673
___________ ___________ ____________
$ (206,147) (359,224) (57,880)
___________ ___________ ____________
___________ ___________ ____________
Included in income tax expense for discontinued operations
for the year ended January 31, 1998 is $2,115,339 of deferred tax
expense associated with the utilization of approximately
$5,420,000 in net operating loss carryforwards. This deferred tax
expense is offset by a deferred tax benefit of $1,396,449 related
to the reduction of the valuation allowance previously established
for those net operating loss carryforwards.
The tax effects of temporary differences that give rise to
deferred tax assets and deferred tax liabilities at January 31,
1999 and 1998 are as follows:
January 31, January 31,
1999 1998
_____________ _____________
Deferred tax assets:
Net operating loss
carryforward $ 4,378,589 820,628
Accruals 223,010 297,666
Capital loss
carryforward 84,922 84,922
Research and
experimentation
credit carryforward 2,612 2,612
Alternative minimum tax 50,000 -
Synergis acquisition and
offering costs - 804,662
Other - 25,105
_____________ _____________
Total gross
deferred
tax assets 4,739,133 2,035,595
Less valuation
allowance (3,554,543) (1,288,977)
_____________ _____________
Net deferred
tax assets 1,184,590 746,618
_____________ _____________
Deferred tax liabilities:
Software costs (998,331) (767,617)
Fixed assets (153,756 (159,269)
Other (32,503) (25,879)
_____________ _____________
Total gross
deferred tax
liabilities (1,184,590) (952,765)
_____________ _____________
Net deferred
tax liabilities $ - (206,147)
_____________ _____________
_____________ _____________
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. Due to the
Company's recent history of operating losses, management has
established valuation allowances against its deferred tax assets
as of January 31, 1999.
At January 31, 1999, the Company and DiaLogos had net
operating loss carryforwards for Federal income tax purposes of
approximately $7,200,000 and $3,900,000, respectively, which are
subject to realization based upon the Company's ability to
generate future taxable income, limitations imposed by the
Internal Revenue Service, and other matters potentially affecting
the realizability of these carryforwards. The net operating loss
carryforwards expire at various periods through 2018. As DiaLogos
files a separate Federal income tax return, its net operating loss
carryforwards cannot be used to offset future taxable income of
the MedPlus consolidated tax group. The Company also has a
capital loss carryforward of approximately $218,000 which is
available to offset future capital gains, if any, through 2001.
(10) Stock Incentive Plans
In 1994, the Company adopted the 1994 Long-Term Stock
Incentive Plan ("Long-Term Plan") and the Directors'
Nondiscretionary Stock Option Plan ("Directors' Plan"),
collectively the "Option Plans." The Long-Term Plan provides for
the grant of stock-based incentives to employees in the form of
stock options, stock appreciation rights, stock awards, or any
combination thereof. The Long-Term Plan was amended in December
1998, to increase the maximum number of shares with respect to
which stock incentives may be granted from 1,000,000 to 2,000,000
shares. A total of 100,000 shares is reserved for issuance under
the Directors' Plan.
Options granted under the Long-Term Plan may be either
nonqualified or incentive options. Under the terms of both the
Long-Term Plan and the Directors' Plan, options may not be granted
at less than fair market value on the date of the grant. Options
granted under both plans are exercisable in installments; however,
no options are exercisable earlier than six months or later than
ten years from the date of the grant.
At January 31, 1999, there were 651,411 shares available for
grant under the Long-Term Plan and 63,225 additional shares
available for grant under the Directors' Plan.
The per share weighted average fair values at the date of
grant for options granted during the years ended January 31, 1999
and 1998, and December 31, 1996 were $3.10, $3.25, and $4.83,
respectively. These fair values were estimated using the Black
Scholes option-pricing model with the following weighted average
assumptions: 1999- expected dividend yield 0%, risk-free interest
rate of 5.07%, expected volatility of 53%, and an expected life of
4.8 years; 1998 - expected dividend yield 0%, risk-free interest
rate of 6.16%, expected volatility of 41%, and an expected life of
4.8 years; 1996 - expected dividend yield 0%, risk-free interest
rate of 6.09%, expected volatility of 38%, and an expected life of
4.8 years.
The Company applies APB Opinion No. 25 in accounting for the
Option Plans; accordingly, no compensation cost has been
recognized for its options granted to employees in the
consolidated financial statements. The Company recognized
$190,483, $59,160 and $85,689 of compensation cost during the
years ended January 31, 1999 and 1998 and December 31, 1996
related to stock awards granted under the Long-Term Plan. Had
the
Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have been reduced (increased) to
the pro forma amounts indicated below:
January 31, January 31, December 31,
1999 1998 1996
___________ ___________ ____________
Net income (loss)
As reported $(8,547,753) 3,105,089 (2,472,192)
Pro forma (9,500,571) 2,239,941 (3,321,232)
___________ ___________ ____________
___________ ___________ ____________
Net income (loss)
per share -
basic and diluted
As reported $ (1.40) 0.52 (0.42)
Pro forma (1.56) 0.38 (0.57)
___________ ___________ ____________
___________ ___________ ____________
The Company also granted options to purchase 85,000 shares of
common stock as compensation to consultants during January 1997.
These options had an estimated fair value of approximately
$188,000 on the date of grant. In December 1997, the Company
granted options to purchase an additional 50,000 shares of the
Company's common stock as compensation to one of these
consultants. These options had an estimated fair value of
approximately $155,000 on the date of grant. The estimated fair
value of the options granted to the consultants in January 1997
and December 1997 was determined using the Black Scholes option-
pricing model with the same weighted average assumptions as those
used for
the employee option grants during the years ended
December 31, 1996 and January 31, 1998, respectively, with the
following exceptions: 1996 - expected life of 2.5 years; 1998 -
expected life of 2.5 years. The fair value of these options is
being amortized over the related service periods of one to two
years. The Company recognized $155,727 and $143,327 in
amortization expense related to these option grants in the years
ended January 31, 1999 and 1998, respectively.
Transactions with respect to options, including options
granted to consultants, for the years ended January 31, 1999 and
1998, the one month ended January 31, 1997 and the year ended
December 31, 1996 were as follows:
Number of Weighted Average
Shares Exercise Price
____________ ________________
Shares under option,
December 31, 1995 237,500 $ 6.99
Options exercised (36,933) 5.96
Options forfeited or canceled (6,667) 7.56
Options granted 352,500 11.34
____________
Shares under option,
December 31, 1996 546,400 9.86
Options forfeited or canceled (50,000) 6.88
Options granted 270,250 5.82
____________
Shares under option,
January 31, 1997 766,650 8.63
Options exercised (16,666) 5.97
Options forfeited or canceled (12,467) 9.51
Options granted 275,775 7.26
____________
Shares under option,
January 31, 1998 1,013,292 8.29
Options exercised (7,673) 7.57
Options forfeited or canceled (41,892) 7.95
Options granted 331,000 6.12
____________
Shares under option,
January 31, 1999 1,294,727 7.74
____________
___________
<TABLE>
The following table summarizes information about options, including options granted to consultants, at January 31, 1999:
<CAPTION>
<S>
Options Outstanding Options Exercisable
__________________________________________________________________________ ________________________________________
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices of Options Contractual Life Exercise Price of Options Exercise Price
_________________ ______________ __________________ ___________________ ____________________ _________________
<C> <C> <C> <C> <C> <C>
$ 2.28 30,000 3.2 $ 2.28 - -
5.13 - 7.69 838,894 3.2 6.29 486,278 $ 6.18
7.70 - 11.53 201,500 2.6 9.65 181,834 9.76
11.54 - 14.13 224,333 2.2 12.20 164,000 12.19
______________ ____________________
1,294,727 3.0 7.74 832,112 8.15
______________ ___________________
</TABLE>
In June 1998, the Board of Directors approved the MedPlus,
Inc. Employee Stock Purchase Plan (the "Plan"), to provide
employees of the Company the opportunity to purchase shares of the
Company's common stock. The Company is authorized to issue up to
350,000 shares of common stock to its full-time employees, nearly
all of whom are eligible to participate. Under the terms of the
Plan, employees can choose biannually, to have up to 10% of their
annual base earnings withheld to purchase the Company's common
stock. The purchase price of the stock is 85% of the lower of its
beginning-of-period or end-or-period market price. The initial
offering period of the Plan commenced on August 1, 1998 and
extended to January 31, 1999. In February 1999, the Company
issued 17,701 shares to employees for stock purchases with respect
to the initial offering period. As the Plan has been created as a
noncompensatory plan, no compensation expense under APB 25 has
been recognized in the Company's financial statements. Under SFAS
123, the weighted-average fair value of the employee's purchase
rights, estimated using the Black-Scholes model with the following
assumptions: dividend yield of 0%, expected life of 6 months,
expected volatility of 53%, and risk free interest rate of 4.9%,
was $.55 for fiscal year 1999. The effect of the purchase rights
to the Company's net loss, on a pro forma basis, was not material.
(11) Retirement Savings and Investment Plan
The Company has a Retirement Savings and Investment Plan, a
401(k) Plan, in which employees may participate by contributing
specified percentages of qualified compensation subject to
Internal Revenue Service limitation. The Company may make
discretionary contributions to a maximum of 100% of each
participant's contribution. For the year ended January 31, 1999,
the Company recognized expense of $23,633 for discretionary
contributions into the Plan. For the year ended January 31,
1998, the Company recognized expense of $213,495, of which
$147,174 related to continuing operations. The Company's
contributions to the Plan were funded subsequent to each year end
through the issuance of 12,197 and 31,629 shares of the Company's
common stock for fiscal 1999 and 1998, respectively. There were
no expenses recorded related to the Plan for the year ended
December 31, 1996.
(12) Related Party Transactions
During 1997, the Company arranged for approximately $400,000
of funding for DiaLogos from investors, which consisted of
officers and directors of the Company. In exchange for the
funding, investors received 18.5% of DiaLogos' common shares.
Prior to January 31, 1998, DiaLogos has leased office space
from the Company under a sublease beginning October 1996. The
Company recognized $120,204 and $15,195 of sublease income from
DiaLogos for the years ended January 31, 1998 and December 31,
1996.
(13) Commitments and Contingencies
(a) Leases
The Company leases office space and certain equipment
under noncancelable operating lease agreements extending through
May, 2004. Rent expense related to these operating leases
amounted to approximately $403,000, $201,000, and $168,000 for the
years ended January 31, 1999 and 1998, and December 31, 1996,
respectively.
The Company also leases certain equipment and furniture
and fixtures under capital leases with terms ranging from three to
five years. At January 31, 1999, fixed assets on the consolidated
balance sheets included capital leased assets with a cost of
$598,626 and accumulated amortization of $274,513. Amortization
expense related to fixed assets held under capital leases is
included with depreciation and amortization expense.
Future minimum lease payments under non-cancelable
operating leases with remaining terms in excess of one year and
future minimum lease payments under capital leases as of January
31, 1999 are as follows:
Capital Operating
Leases Leases
____________ ____________
Year ending January 31:
2000 $ 253,932 $ 401,500
2001 98,455 388,500
2002 47,019 369,600
2003 17,964 214,200
2004 5,988 21,100
____________ ____________
Total minimum lease payments 423,358 $ 1,394,900
____________
____________
Less amounts representing interest (52,054)
Present value of minimum lease ____________
payments 371,304
Less current portion of capital
lease obligations 222,558
____________
Long-term portion of capital
lease obligations $ 148,746
____________
____________
(b) Employment Agreements
The Company has entered into an employment agreement with
an officer that expires on June 30, 2001. In addition to a
defined base salary, the officer is entitled to discretionary
bonus and stock incentive arrangements, as approved by the Board
of Directors. The annual discretionary bonus is to be determined
by the Board of Directors and cannot exceed 100% of the annual
base salary. This individual is also entitled to defined
termination benefits under specified employment or change in
control conditions.
The Company has also entered into employment agreements
with other officers and employees that generally provide annual
salary, discretionary bonus and stock incentive provisions, all
subject to the approval of the Board of Directors.
(c) Legal Contingencies
Various lawsuits arising during the normal course of
business are pending against the Company and its consolidated
subsidiaries. Currently, the Company is involved with preliminary
negotiations relating to an arbitration where the third party is
seeking to recover damages of approximately $1,000,000.
Management believes that the case is without merit and intends on
vigorously contending the arbitration. As the arbitration is
still in the very early stages, no meaningful evaluation of the
amount or range of possible loss or gain can be made at the
present time. In the opinion of management, the ultimate
liability, if any, resulting from this action or other matters
will have no material effect on the Company's consolidated
financial position or results of operations.
(14) Operating Segments
Based upon management's organization of its products and
services, the company has three reportable segments: Healthcare
Solutions (ChartMaxx, OptiMaxx, and FutureCore), Workflow and
Document Management (Universal Document), and Distributed
Computing Products and Services (DiaLogos). The Company's
management evaluates performance of each segment based on profit
or loss from operations before allocation of corporate expenses,
unusual, infrequent and extraordinary items, interest and income
taxes. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies
(see Note 1 to the Consolidated Financial Statements).
The following table presents the revenues, segment operating
loss, capital expenditures, depreciation and amortization, and
total assets of the Company by operating segment:
<TABLE><CAPTION>
January 31, January 31, December 31,
1999 1998 1996
_______________ _______________ ______________
<S> <C> <C> <C>
Revenues
Healthcare solutions $ 9,285,097 9,256,064 3,467,592
Workflow and Document Management 1,421,963 1,186,825 1,100,052
Distributed Computing Products and Services 1,471,046 - -
Less intercompany (a) (748,122) (241,737) -
_______________ _______________ ______________
$ 11,429,984 10,201,152 4,567,644
_______________ _______________ ______________
_______________ _______________ ______________
Segment operating loss (b)
Healthcare solutions $ 3,233,699) (1,049,406) (1,010,276)
Workflow and Document Management (27,231) (1,498,981) 130,302
Distributed Computing Products and Services (1,857,143) - -
_______________ _______________ ______________
$ (5,118,073) (2,548,387) (879,974)
_______________ _______________ ______________
_______________ _______________ ______________
Capital expenditures (c)
Healthcare solutions (d) $ 471,337 326,747 586,612
Workflow and Document Management 7,460 24,482 57,167
Distributed Computing Products and Services 28,211 - -
_______________ _______________ ______________
_______________ _______________ ______________
$ 507,008 351,229 643,779
Depreciation and amortization
Healthcare solutions (d) $ 324,459 201,717 132,468
Workflow and Document Management 30,643 24,483 11,321
Distributed Computing Products and Services (e) 211,710 - -
_______________ _______________ ______________
$ 566,812 226,200 143,789
_______________ _______________ ______________
_______________ _______________ ______________
Total assets
Healthcare solutions (d) $ 11,397,917 22,917,353 10,401,315
Workflow and Document Management 475,932 546,978 1,698,382
_______________ _______________ ______________
Distributed Computing Products and Services 1,802,958 1,191,960 -
$ 13,676,807 24,656,291 12,099,697
_______________ _______________ ______________
_______________ _______________ ______________
</TABLE>
(a) Intercompany revenues are based upon fair value of the
transaction.
(b) Before corporate expenses and unusual items
(c) Includes acquisitions, excludes capital lease purchases of
$327,792 related to DiaLogos for the year ended January 31,
1999.
(d) The Company has not historically maintained a separate
balance sheet for its corporate assets. The Healthcare
Solutions' balances include segment and corporate activity.
(e) DiaLogos also had amortization of excess of cost over fair
value of net assets acquired of $86,801 for the year ended
January 31, 1999.
Reconciliations of segment data to the Company's consolidated
data follow:
January 31, January 31, December 31,
1999 1998 1996
___________ ___________ ____________
Operating loss:
Segments $ (5,118,073) (2,548,387) (879,974)
Corporate (3,434,867) (4,288,604) (3,236,349)
Acquired in-process
technology - (710,318) -
___________ ___________ ____________
Operating loss (8,552,940) (7,547,309) (4,116,323)
Other income (expenses):
Synergis expenses (2,070,731) (3,707,945) -
Other income-net (14,751) (231,922) 124,663
Minority interest 297,000 - -
___________ ___________ ____________
Loss from continuing
operations before
income tax benefit $(10,341,422) (11,487,176) (3,991,660)
___________ ___________ ____________
___________ ___________ ____________
All of the company's operations are located in the United
States. Also, the company primarily sells to customers within the
United States. Revenues from customers located internationally
were not material.
(15) Significant Customers
Due to the size of certain of the Company's contracts, one
contract can represent a significant portion of the Company's
total revenue in a given year. However, the customer base
representing this portion of revenue varies each year making the
Company not necessarily dependent upon one significant customer.
For the years ended January 31, 1999 and 1998, and December 31,
1996, a single customer accounted for 31%, 12%, and 15% of the
Company's total revenues, respectively.
<TABLE> <CAPTION>
(16) Quarterly Results of Operations (Unaudited)
The following tables set forth selected quarterly financial information for the fiscal years ended January 31, 1999 and 1998.
Year ended January 31, 1999:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
___________ ____________ _____________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Revenues $ 1,933,351 1,843,429 3,949,127 3,704,077 11,429,984
Operating loss from
continuing operations (a) (2,457,131) (2,863,825) (1,615,181) (1,616,803) (8,552,940)
Loss from continuing
operations (1,754,417) (2,776,860) (1,500,058) (2,693,717) (8,725,052)
Income from discontinued
operations 8,443 168,856 - - 177,299
Net loss $(1,745,974) (2,608,004) (1,500,058) (2,693,717) (8,547,753)
___________ ____________ _____________ ____________ ____________
___________ ____________ _____________ ____________ ____________
Earnings per share - basic
and diluted:
Continuing operations $ (0.29) (0.45) (0.25) (0.45) (1.43)
Discontinued operations - 0.03 - - .03
___________ ____________ _____________ ____________ ____________
Net loss $ (0.29) (0.42) (0.25) (0.45) (1.40)
___________ ____________ _____________ ____________ ____________
___________ ____________ _____________ ____________ ____________
Weighted average shares
outstanding 6,160,157 6,170,726 6,085,537 6,016,325 6,109,439
___________ ____________ _____________ ____________ ____________
___________ ____________ _____________ ____________ ____________
Year ended January 31, 1998:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
___________ ____________ _____________ ____________ ____________
Revenues $ 1,413,119 3,049,527 3,122,789 2,615,717 10,201,152
Operating loss from
continuing operations (a) (b) (1,738,155) (724,098) (1,513,708) (3,571,348) (7,547,309)
Loss from continuing
operations (c) (1,614,060) (550,847) (1,446,387) (4,400,105) (8,011,399)
Income from discontinued
operations (d) 185,672 347,781 269,036 10,313,999 11,116,488
Net income (loss) $(1,428,388) (203,066) (1,177,351) 5,913,894 3,105,089
___________ ____________ _____________ ____________ ____________
___________ ____________ _____________ ____________ ____________
Earnings per share - basic
and diluted:
Continuing operations (e) $ (0.27) (0.09) (0.24) (0.74) (1.35)
Discontinued operations 0.03 0.06 0.04 1.73 1.87
___________ ____________ _____________ ____________ ____________
Net income (loss) (e) $ (0.24) (0.03) (0.20) 1.00 .52
___________ ____________ _____________ ____________ ____________
___________ ____________ _____________ ____________ ____________
Weighted average shares
outstanding 5,921,546 5,913,413 5,919,985 5,936,139 5,922,781
___________ ____________ _____________ ____________ ____________
___________ ____________ _____________ ____________ ____________
</TABLE>
Notes to quarterly results of operations:
(a) Certain amounts from prior quarters have been restated to
conform to fourth quarter, fiscal 1999 presentation.
(b) During the fourth quarter of the year ended January 31, 1998
and in conjunction with the Company's acquisition of a
majority interest in DiaLogos, $710,318 of in-process
research and development was charged to the results of
operations as of the date of acquisition.
(c) During the fourth quarter of the year ended January 31, 1998,
the Company expensed $2,979,555 in deferred acquisition and
offering costs related to the postponed initial public
offering and acquisitions by its subsidiary, Universal
Document.
(d) Income from discontinued operations for the fourth quarter
includes a $10,268,710 after-tax gain related to the sale of
the assets of the Company's IntelliCode division.
(e) Quarterly amounts are not additive.
(17) Subsequent Events and Liquidity
Subsequent to year-end, the Company entered into an Agreement
(the "Agreement") with three investment firms (the "Investors") to
obtain $6,100,000 in debt and equity financing. The terms of the
Agreement provide for financing of $4,100,000 in Series A
Convertible Preferred Shares (the "Preferred Shares") and
$2,000,000 in subordinated debentures (the "Notes"). The proceeds
of the financing will be utilized to fund working capital
requirements and continue the market penetration of certain of the
Company's core products. Certain terms of the agreement,
including the authorization of the Preferred Shares, are subject
to shareholder approval at the Company's special and annual
shareholders' meeting scheduled for June 18, 1999.
On April 30, 1999, the Company issued the Notes, due 2004,
with a coupon rate of 10% in the first year and 12% thereafter.
The principal portion of the Notes is payable as follows: $666,666
in April 2002, $666,667 in April 2003 and $666,667 in April 2004;
however, the Company may redeem the Notes at any time during their
term without penalty. The Notes provide that if the Preferred
Shares are authorized, and certain additional terms related to the
Agreement are approved, by the Company's shareholders prior to
July 30, 1999, then the Company will issue to the holders of the
Notes five-year warrants to purchase 281,137 Preferred Shares at
an exercise price not to exceed $1.90. This warrant price is
subject to adjustment if the Company does not meet specified
requirements relating to the appreciation of its stock price at
the end of a defined two-year period. However, the Notes also
provide that if the Preferred Shares are not authorized, and
certain additional terms related to the Agreement are not
approved, by the Company's shareholders prior to July 30, 1999,
then (a) the entire amount of principal and interest which remains
unpaid shall become due and payable as of November 28, 1999 and
(b) the Company shall immediately issue to the holders of the
Notes, for no additional consideration shares of the Company's
Common Stock as described in the Agreement and 281,137 warrants to
purchase shares of Common Stock.
In addition, subject to shareholder approval on or before
July 30, 1999, the Company has agreed to issue to the Investors
2,371,815 Preferred Shares at a purchase price of $1.729 per
share. The Preferred Shares will pay dividends quarterly at a rate
of 4% per share for the first four years, increasing to 10%
thereafter, and accruing on a cumulative basis. The Preferred
Shares include (a) voting rights, (b) receive preferential
treatment upon liquidation of the Company and (c) convert into
Common Shares upon certain events. Also, subject to shareholder
approval on or before July 30, 1999, the Company has agreed to
issue to the Investors ten-year warrants for the purchase (subject
to adjustment as provided therein) of 759,562 Preferred Shares.
These warrants cannot be exercised unless the value of the
Company's stock price as traded on the NASDAQ over a twenty-day
period exceeds $7.28.
In conjunction with the new financing agreement previously
described, the Company's existing line of credit with a limit of
$3,250,000 was amended to reduce the limit and to extend a portion
of the term until February 2000. This line of credit is senior to
the subordinated debt referred to in the preceding paragraphs.
See Note 7 to the consolidated financial statements for the terms
of the new financing.
Since its inception in 1991, the Company has funded its
operations, working capital needs and capital expenditures
primarily through a combination of cash generated by operations,
debt financing and offerings of its common stock to the public.
Over the past few years, the Company's net cash outlays have
exceeded its ability to generate revenue and cash through
operations resulting in a working capital deficit. Management
believes that the additional financing agreements entered into
subsequent to year-end, along with the execution of its current
operating plan, will be sufficient to finance current working
capital requirements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART II
<TABLE><CAPTION>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Company's executive officers and directors are as follows:
Name Age Position
<S> <C> <C>
Richard A. Mahoney 51 Chairman of the Board, Chief Executive Officer and President
Philip S. Present II 48 Senior Vice President, Chief Operating Officer and Director
Timothy P. McMullen 44 Vice President of Sales and Marketing
Daniel A. Silber 50 Vice President of Finance and Chief Financial Officer
Paul F. Albrecht 44 Vice President and Chief Technology Officer
Jay Hilnbrand 65 Director and Retired General Manager of Universal Document
Robert E. Kenny III 43 Secretary and Director
Martin A. Neads 50 Director
Paul J. Stein 52 Director
</TABLE>
Directors are elected annually by the shareholders and serve for
one year terms. Officers serve at the discretion of the Board of
Directors and are elected on an annual basis.
Richard A. Mahoney has been the Company's President and a director
of the Company since January 1991. While Mr. Mahoney has been
the President of the Company since its inception, Mr. Mahoney has
held the titles of Chairman of the Board and Chief Executive
Officer of the Company since November 1995.
Philip S. Present II joined the Company in April 1995 as Vice
President of Corporate Development. Mr. Present was named the
Chief Operating Officer of the Company in June 1996. He became a
director of the Company on December 13, 1997 to fill a vacancy
created on the board by an increase in the number of directors of
the Company from five to six. From September 1973 to March 1995,
Mr. Present was employed by the certified public accounting firm
of KPMG LLP.
Timothy P. McMullen has been the Vice President of Sales and
Marketing since December 13, 1997. He joined the Company as Vice
President, Corporate Accounts and Managed Care in June 1996 after
sixteen years with the Hill-Rom Co. Inc. At Hill-Rom, the world's
largest manufacturer and distributor of patient beds and patient
environments, he held several senior positions including Vice
President of Corporate Accounts, Merchandising, International, and
Domestic Sales.
Daniel A. Silber joined the Company as Vice President of Finance
and Chief Financial Officer in May 1995. From 1993 until he
joined the Company, he was Chief Financial Officer for Saturday
Knight LTD, a manufacturer and distributor of bathroom
accessories.
Paul F. Albrecht was elected Vice President and Chief Technology
Officer on December 13, 1997 following his tenure as General
Manager of the ChartMaxx Division of MedPlus since May 16, 1994.
Prior to joining the Company, Mr. Albrecht had been the Director
of the Systems Development Area for Cincinnati Bell Information
Systems since December 1991.
Jay Hilnbrand, age 65, has been since April 1994, except for the
period from December 1, 1998 until February 16, 1999, a director
of the Company and is the retired General Manager of Universal
Document Management Systems, Inc., which became a wholly-owned
subsidiary of the Company in 1995.
Robert E. Kenny III, an attorney engaged in the private practice
of law since 1980, has served as Secretary and a director of the
Company since its inception.
Martin A. Neads became a director of the Company in December 1998.
Mr. Neads is currently an executive director and business
consultant with European IT Solutions, Ltd. ("EITS"). Prior to
joining EITS, Mr. Neads was Vice President and General Manager of
Operations and Senior Vice President and General Manager of the
Software Products Division for Structural Dynamics Research Corp.
("SDRC"), a leading international provider of mechanical design
automation software and engineering services.
Paul J. Stein has been a director of the Company since 1991. Mr.
Stein has been a self-employed marketing consultant and
manufacturer's representative since October 1990.
Additional information regarding the Company's officers and
directors is incorporated herein by reference to the information
set forth under the caption "Certain Relationships and Related
Transactions" of the Proxy Statement for the Company's Annual
Meeting of Shareholders to be held on June 18, 1999. Such Proxy
Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year
covered by this Form 10-KSB.
Compliance with Section 16(a) of the Securities Exchange Act of
1934
All transactions executed in 1998 by the Company's directors,
officers and beneficial owners, were, to the Company's knowledge,
reported in a timely fashion as required by Section 16(a).
ITEM 10. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive
Compensation" of the Proxy Statement for the Company's Annual and
Special Meeting of Shareholders scheduled for June 18, 1999, is
incorporated herein by reference. Such Proxy Statement will be
filed with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this Form 10-KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" of the Proxy Statement
for the Company's Annual and Special Meeting of Shareholders
scheduled for June 18, 1999, is incorporated herein by reference.
Such Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Relationships
and Related Transactions" of the Proxy Statement for the Company's
Annual and Special Meeting of Shareholders scheduled for June 18,
1999, is incorporated herein by reference. Such Proxy Statement
will be filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year covered by this Form 10-
KSB.
<TABLE><CAPTION>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are hereby filed as part of this Form 10-KSB:
Sequential
Exhibit Number Description of Exhibits Page Number
______________ _____________________________________________________________________________________________________ ___________
<S> <C> <C>
2 Asset Purchase Agreement, dated January 28, 1998, by and between Becton, Dickinson and Company and
MedPlus, Inc. See note 1
3 Amended Articles of Incorporation and Code of Regulations See note 2
10.1 Lease between MedPlus, Inc. and Duke Realty Limited Partnership for principal offices,
dated April 24, 1995 See note 3
10.2 Executive Employment Agreement dated October 31, 1995 between MedPlus, Inc. and Richard A. Mahoney See note 3
10.3 First Lease Amendment between MedPlus, Inc. and Duke Realty Limited Partnership for principal
offices, dated December 6, 1996 See note 4
10.4 Second Lease Amendment between MedPlus, Inc. and Duke Realty Limited Partnership for principal
offices, dated December 6, 1996 See note 4
10.5 Letter Agreement between MedPlus, Inc. and Dialogos Incorporated dated January 31, 1997 See note 4
10.6 Agreement by and between MedPlus, Inc. and Growth Management Advisors, Inc. dated July 10, 1997 See note 5
10.7 Amendment to Stock Purchase Agreement by and among Universal Document, Jay and Judy Hilnbrand and
Robert C. Weiss dated August 12, 1997 See note 5
10.8 Agreement by and between MedPlus, Inc. and Jay Hilnbrand dated May 1, 1997 See note 5
10.9 Second Amendment of Stock Purchase Agreement by and among Universal Document, Jay and Judy Hilnbrand
and Robert C. Weiss dated December 10, 1997 See note 6
10.10 Amendment to Agreement by and between Jay Hilnbrand and MedPlus, Inc. dated December 10, 1997 See note 6
10.11 OptiMaxx[tm] And Step2000[r] Software License, Hardware Purchase and Related Services Agreement dated
August 31, 1998 by and between MedPlus, Inc. and Quest Diagnostics Incorporated
10.12 Employment Agreement dated February 1, 1999 by and between MedPlus, Inc. and Philip S. Present II
10.13 Employment Agreement dated February 1, 1999 by and between Timothy P. McMullen and MedPlus, Inc.
10.14 Employment Agreement dated February 1, 1999 by and between Daniel A. Silber and MedPlus, Inc.
10.15 Employment Agreement dated February 1, 1999 by and between Paul F. Albrecht and MedPlus, Inc.
10.16 Securities Purchase Agreement dated April 30, 1999 by and among MedPlus, Inc. and Cahill, Warnock
Strategic Partners, L.P., et al.
13 Annual Report to Shareholders See note 7
21 Subsidiaries of MedPlus, Inc.
23 Consent of KPMG LLP
</TABLE>
Note 1: Incorporated by reference to the Company's Report on Form
8-K filed on February 11, 1998.
Note 2: Incorporated by reference to the Registration Statement on
Form SB-2, Registration No. 33-77896C, effective May 24, 1994.
Note 3: Incorporated by reference to the Registration Statement on
Form S-1, Registration No. 33-98696, effective November 21, 1995.
Note 4: Incorporated by reference to the Company's Annual Report
on Form 10-KSB filed March 27, 1997.
Note 5: Incorporated by reference to the Company's Quarterly
Report on Form 10Q-SB/A filed August 18, 1997.
Note 6: Incorporated by reference to the Company's Annual Report
on Form 10-KSB filed May 1, 1998
Note 7: Pursuant to general Instruction F of Form 10-KSB and
Regulation 240.14a(d) of the Securities Exchange Act of 1934, the
Issuer's Annual Report to the Security Holders for its fiscal year
ended January 31, 1999 has been combined with the required
information of Form 10-KSB and is being filed with the U.S.
Securities and Exchange Commission and submitted to the
registrant's shareholders on an integrated basis.
(b) The following report on Form 8-K was filed during the
three-month period ended January 31, 1999:
(i) Current Report on Form 8-K filed December 23, 1998 announcing
that On December 12, 1998, the registrant's Board of Directors
issued a press release announcing (1) the resignation of Jay
Hilnbrand from the registrant's Board of Directors, (2) the
election of Martin Neads to the registrant's Board of Directors and
(3) the adoption of a stock option repricing plan pursuant to which
full-time employees of the registrant and its subsidiaries who
owned options to purchase the registrant's common stock as of
December 11, 1998 can elect to exchange all of those options for
options with an exercise price of $2.28.
<TABLE><CAPTION>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEDPLUS, INC., Registrant
By:__/s/ Richard A. Mahoney_____
Richard A. Mahoney
President
Date: April 30, 1999
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
<S> <C> <C>
_/s/ Richard A. Mahoney__ Chairman of the Board, Chief April 30, 1999
Richard A. Mahoney Executive Officer and President
(Principal Executive Officer)
_/s/ Daniel A. Silber_____ Vice President of Finance and April 30, 1999
Daniel A. Silber Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Robert E. Kenny III Secretary and Director April 30, 1999
Robert E. Kenny III
/s/ Paul Stein Director April 30, 1999
Paul Stein
_/s/ Jay Hilnbrand________ Director April 30, 1999
Jay Hilnbrand
/s/ Martin A. Neads Director April 30, 1999
Martin A. Neads
/s/ Philip S. Present II Director April 30, 1999
Philip S. Present II
</TABLE>
MEDPLUS, INC.
OPTIMAXX AND STEP2000 SOFTWARE
LICENSE, HARDWARE PURCHASE AND
RELATED SERVICES AGREEMENT
Agreement No. Q983001
This Agreement is made effective as of August 31, 1998 ("Effective
Date") by and between MedPlus, Inc. (hereinafter "MedPlus"), an
Ohio corporation with its principal place of business located at
8805 Governor's Hill Drive, Ste. 100, Cincinnati, Ohio 45249 and
Quest Diagnostics Incorporated (hereinafter "Quest Diagnostics"),
a Delaware corporation with its principal place of business
located at One Malcolm Avenue, Teterboro, New Jersey 07608.
W I T N E S S E T H:
WHEREAS, MedPlus directly licenses certain software, Enhancements
(as defined below), releases and updates thereto and provides
certain hardware and services related thereto (the "OptiMaxx
System"); and
WHEREAS, MedPlus sublicenses certain document management and
workflow software and Enhancements (as defined below), releases
and updates thereto ("Step2000") licensed to MedPlus by its
wholly-owned subsidiary Universal Document Management Systems,
Inc. ("UDMS") and provides application building, interfacing and
software customization through a subcontract with UDMS (the "UDMS
Services"); and
WHEREAS, MedPlus provides certain document management analysis and
related consulting services (the "Consulting Services") through a
subcontract with its wholly-owned subsidiary FutureCORE, Inc.
("FutureCORE"); and
WHEREAS, Quest Diagnostics desires to license the software and
purchase the hardware associated with the OptiMaxx System, license
Step2000, and purchase the UDMS Services and the Consulting
Services for use in at least two of its laboratory sites located
in the United States (all of such sites referred to as the
"Sites") and desires to have the option to license the software
and purchase the hardware associated with the OptiMaxx System,
license Step2000, and purchase the UDMS Services and the
Consulting Services from MedPlus for use at the remainder of its
Sites (and/or by other Quest Diagnostics Affiliates, as the case
may be), and MedPlus desires to provide Quest Diagnostics with
such products and services; and
WHEREAS, the needs of Quest Diagnostics related to the OptiMaxx
System, Step2000, the UDMS Services and the Consulting Services,
including but not limited to pricing, configuration specifications
and analysis parameters, may vary from Site to Site (the "Site
Specifics"); and
WHEREAS, for each Site at which Quest Diagnostics desires to use
the OptiMaxx System, Step2000, the UDMS Services and/or the
Consulting Services, the parties will execute a Site Technical
Specification and Pricing Approval Form to which various schedules
indicating such Site Specifics will be attached (the "Site
Approval Forms")(an example of a Site Approval Form and related
schedules is attached as Exhibit A to this Agreement); and
WHEREAS, the parties desire to formalize the general terms and
conditions governing each Site Approval Form and pursuant to which
MedPlus will provide Quest Diagnostics with access to the OptiMaxx
System, Step2000, the UDMS Services and the Consulting Services
for use at each of the Sites; and
WHEREAS, in exchange for the consideration described herein and
more specifically on Schedule A to each Site Approval Form, for
all of the Sites, MedPlus agrees to (1) license the Software (as
defined below) to Quest Diagnostics for Quest Diagnostics' own
uses on a non-transferable and non-exclusive basis, (2) sell to
Quest Diagnostics the Hardware (as defined below), (3) provide to
Quest Diagnostics service and support with respect to the Software
and the Hardware and (4) provide to Quest Diagnostics the UDMS
Services and the Consulting Services.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties agree
as follows:
A. GENERAL DEFINITIONS
The following terms shall be defined herein as follows:
1. "Computer System(s)" means the computer hardware configuration
at each Site on which Quest Diagnostics has elected to install
and/or execute the Software from time to time, provided that such
hardware configuration has a central processing unit that is
capable of running the Software and is an authorized hardware
configuration that is supported by MedPlus. A Computer System
includes any Hardware (as defined below and as further specified
on Schedule B to each Site Approval Form) purchased by Quest
Diagnostics.
2. "Concurrent User" means a single user accessing or logged on to
the Software at any one time regardless of the Computer System
being used. The number of Concurrent Users at each Site shall be
stipulated on the Software Configuration attached as Schedule C to
each Site Approval Form.
3. "Consulting Services" means the consulting services to be
provided by FutureCORE as more specifically described in and in
accordance with the terms of Addendum 1 hereto.
4. "Documentation" means documentation relating to or describing
the Software including, but not limited to, user manuals now or
hereafter provided by MedPlus or by third parties through MedPlus.
5. "Hardware" means the equipment, including the operating system
embedded therein, to be purchased by Quest Diagnostics from
MedPlus for use with the Software, as more specifically described
on Schedule B to each Site Approval Form.
6. "Illicit Code" means any computer instructions commonly known
as computer viruses, anomalies or any other computer instructions
which interfere with or prevent Quest Diagnostics from using the
Software as contemplated by this Agreement, but does not include
errors or bugs in the Software.
7. "Quest Diagnostics Affiliates" shall include all of Quest
Diagnostics' affiliates, subsidiaries, joint venture entities in
which Quest Diagnostics is a partner and parent entities.
8. "Software" means the executable code of the OptiMaxx System
software and of Step2000 described on Exhibit A(8) hereto and as
more specifically described on Schedule C to each Site Approval
Form.
9. "Software Specifications" means the specifications described in
MedPlus' written response to Quest Diagnostics' Request for
Proposal as supplemented and clarified by Exhibit A(8) hereto.
10. "UDMS Services" means application building, interfacing and
software customization provided by UDMS as more specifically
described in and in accordance with the terms of Addendum 2
hereto.
B. SOFTWARE LICENSE TERMS AND CONDITIONS
1. Software License Grant. MedPlus hereby furnishes to Quest
Diagnostics the Software and Documentation under a perpetual, non-
exclusive and, except to Quest Diagnostics Affiliates or as
otherwise provided herein, non-transferable license. The Software
and the Documentation are furnished solely for Quest Diagnostics'
own use on the designated Computer System(s) on which the Software
is installed or such other designated Computer System(s) on which
the Software is subsequently installed from time to time at
various Sites in accordance with the terms of this Agreement.
2. Use of the Software.
2.1 Installation/Configuration/Implementation. MedPlus shall
provide installation, configuration and implementation services
with respect to the Software as described on Exhibit B(2) hereto
and more specifically in the schedules to each Site Approval Form.
2.2 Computer System(s). The Software may only be accessed on
the Computer System located at each Site. If Quest Diagnostics is
unable to operate the Software on a Computer System at a
particular Site due to equipment malfunction, the Software may be
transferred temporarily to another Computer System at such Site
during the period of equipment malfunction. However, in no event
may the Software be reverse compiled, disassembled or otherwise
reverse engineered.
2.3 Concurrent Users. The Software may only be accessed on a
Site's Computer System by the specific number of Concurrent User
licenses purchased by Quest Diagnostics for that Site. Upon Quest
Diagnostics' request, and following an amendment to the Software
Configuration for the particular Site, the number of Concurrent
User licenses may be increased for that Site at a cost based on
MedPlus' then-current license fees.
3. Enhancements. During the period(s) that Quest Diagnostics is a
party to a Service and Support Agreement with MedPlus, MedPlus
shall distribute to Quest Diagnostics, at no charge, those
Enhancements to the specific Applications included in the Software
which are released by MedPlus and/or UDMS, as the case may be, for
general commercial availability to other similar licensees.
("Applications" are collections of related features and/or
functions integrated into executable programs which are accessible
from the OptiMaxx System main menu). Specifically, "Enhancements"
to the Software consist of new or added features or functionality
to existing Applications of the Software, but do not include (a)
entirely new Applications or (b) customization or other services
included in the UDMS Services. Quest Diagnostics shall have a
perpetual license hereunder to any and all Enhancements custom-
designed for Quest Diagnostics by MedPlus at MedPlus' then-current
fees, provided that all proprietary rights in such Enhancements
shall remain in MedPlus. MedPlus shall provide installation and
implementation or training with respect to Upgrades and/or
Enhancements as indicated on the Service and Support Agreement
attached as Exhibit D. If any additional Hardware, additional
third-party software or hardware or third-party software updates
to the Computer System are necessary for Quest Diagnostics to gain
the full benefit of an Enhancement, and such Enhancement is
required to provide functionality warranted by MedPlus, the cost
of such additional hardware and/or software shall be borne solely
by MedPlus. MedPlus shall not be responsible for the cost of any
other additional hardware, additional third-party software or
hardware or third-party software updates to the Computer System,
including but not limited to those which are required to complete
any customization requested by Quest Diagnostics or by an increase
in the number of Concurrent Users by Quest Diagnostics.
4. Software License Fee. The Software license fee for each Site
shall be based on the number of Concurrent Users stipulated in the
Software Configuration attached as Schedule C to the Site Approval
Form for that Site and shall be calculated as described in Exhibit
B(4) hereto.
5. Proprietary Rights in Software and Data.
5.1 Title to and Proprietary Rights in the Software. No title to
or ownership in the Software or Documentation is transferred to
Quest Diagnostics hereby. Title to and all applicable rights in
patents, copyrights and trade secrets in the Software and the
Documentation, including but not limited to the format of screens
and reports associated with the Software, shall remain in MedPlus
or third parties from whom MedPlus has obtained rights to license
the Software or Documentation (which third parties shall be
considered third party beneficiaries of the license agreement
contained herein). Except as may be permitted in writing by
MedPlus, Quest Diagnostics shall not provide, or otherwise make
available, the Software or Documentation or copies thereof to any
third party.
5.2 Copies of Software/Documentation. Quest Diagnostics may make
one copy of the Software for archival purposes and one copy for
back-up purposes. Quest Diagnostics may make additional copies of
the Documentation solely for Quest Diagnostics' internal use. All
copies of the Software and/or Documentation must include MedPlus'
and/or UDMS' copyright notice and other proprietary notices and
legends as indicated thereon and shall be subject to the terms and
conditions of this Agreement.
5.3 Permitted Disclosure. Notwithstanding the above, the
foregoing shall not prohibit (i) disclosure of the Software to any
third party (such as an independent contract programmer) who is
obligated to protect as confidential the Software and MedPlus',
UDMS' or any third party's proprietary rights therein and who is
under written contract to Quest Diagnostics for the purpose of
assisting Quest Diagnostics in the customization, maintenance or
other use of the Software in a manner not prohibited by this
Agreement, or (ii) delivery of copies of the Software to any third
party disaster recovery firm engaged by Quest Diagnostics, in each
case so long as the applicable third party is informed of and
bound by an obligation to use the Software under the terms of this
Agreement.
5.4 Escrow. MedPlus and/or UDMS, as the case may be, shall place
in escrow, and will regularly update, one electronic copy of the
OptiMaxx System software source code and related documentation and
the Step2000 source code and related documentation in accordance
with the Escrow Agreements attached hereto as Exhibits B(5)(a) and
(b) (the "OptiMaxx Escrow Agreement" and the "Step2000 Escrow
Agreement"). MedPlus acknowledges that once Quest Diagnostics has
gained access to either the OptiMaxx System source code or the
Step2000 source code in accordance with either Escrow Agreement,
it can modify the source code, or have a third party modify the
source code on its behalf, to maintain the Software as described
in and in accordance with this Agreement. MedPlus acknowledges
that it cannot terminate either Escrow Agreement without notice to
Quest Diagnostics and without having entered into an escrow
agreement with another escrow agent which will give Quest
Diagnostics substantially similar rights as it has under the
Escrow Agreement being terminated.
6. Term and Termination of Software License.
6.1 Term of License. The term of the license granted hereunder
shall commence upon delivery of the Software by MedPlus to Quest
Diagnostics and shall continue until terminated, as provided
herein, or, as to a particular Computer System, until such time as
Quest Diagnostics discontinues use of the Software on that
particular Computer System. Otherwise, this license shall be
without restriction as to time (the "License Term").
6.2 Termination of License by MedPlus. MedPlus shall have the
right to terminate this license if Quest Diagnostics materially
defaults under these license terms and conditions or breaches the
terms of paragraph B(10) hereof. MedPlus shall give written
notice to Quest Diagnostics of any such breach or default and if
the breach or default is not remedied, or Quest Diagnostics has
not initiated action to cure such breach or default, within 30
days after such notice, the license shall terminate.
6.3 Disposition of Software Upon Termination. Quest Diagnostics
agrees, upon expiration of the License Term, immediately to return
to MedPlus or destroy the Software and Documentation, and copies
thereof, as directed by MedPlus and, if requested by MedPlus, to
certify in writing as to such destruction or return.
7. Software Warranty. The following warranty information is in
addition to any service obligations to be provided by MedPlus
pursuant to the Service and Support Agreement attached as Exhibit
D.
7.1 Right to License. MedPlus represents and warrants to Quest
Diagnostics that MedPlus has, and will throughout the term of this
Agreement have, all right, title and interest in the Software, or
has been granted the right by a third party who has the right,
title and interest in the Software, to license the Software to
Quest Diagnostics in accordance with terms and provisions of this
Agreement free from any lien, claim or encumbrance of any third
party and without violation of any agreements, rights or
obligations existing between MedPlus and any other party.
7.2 Warranty of Performance/Extended Warranty. MedPlus warrants
that (i) for a period of one year from Quest Diagnostics' receipt
of the OptiMaxx System software, and (ii) for a period of thirty
days from Quest Diagnostics' receipt of the Step2000 software,
such software will perform in accordance with the Documentation
and with the Software Specifications ((i) and (ii) collectively
the "Software Warranty"). If the Software does not perform in
accordance with the Software Warranty, then with respect to any
defect or variation as to which MedPlus is notified by Quest
Diagnostics during the applicable warranty period, MedPlus shall,
at its option, either (i) correct such defect or variation so as
to cause the Software to perform in the manner set forth in the
Documentation or the Specifications or (ii) replace the Software
with functionally equivalent software ((i) and (ii) shall be
referred to as "Corrective Actions"). If the defect or variation
(i) causes a broad system failure affecting the overall use of the
OptiMaxx System or problems involving loss of data, and MedPlus
has failed to take Corrective Action within 30 days of its receipt
of written notice of such defect or variation from Quest
Diagnostics, or (ii) affects a material portion of the OptiMaxx
System, but the OptiMaxx System is still usable and there has been
no loss of data, and MedPlus has failed to take Corrective Action
within 180 days of its receipt of written notice of such defect or
variation from Quest Diagnostics, then the license granted
hereunder shall terminate with respect to such Site and Quest
Diagnostics shall receive a repayment of all monies paid to
MedPlus hereunder for Software and services at such Site (and, if
Quest Diagnostics desires to return to MedPlus any Hardware
purchased specifically for use with the OptiMaxx System at such
Site, the monies paid to MedPlus hereunder for the purchase price
of that Hardware). In no event shall MedPlus be required to
refund monies to Quest Diagnostics for a failure or defect in the
Software which is immaterial to the functionality of the OptiMaxx
System unless such failure or defect is not remedied within a
commercially reasonable time. The Software Warranty shall only
apply provided that: (i) the Software has not been modified by
anyone other than MedPlus or someone authorized in writing by
MedPlus; (ii) the Computer System on which the Software has been
installed has not been modified in any way that impairs the
functioning of the Software; (iii) the Software and the Computer
System on which it has been installed have been maintained
according to procedures recommended by the relevant hardware
manufacturer(s) and/or provided to Quest Diagnostics in writing by
MedPlus; and (iv) all fees due MedPlus under this Agreement have
been paid. Notwithstanding anything contained in this paragraph
to the contrary, so long as Quest Diagnostics is a party to a
service and support agreement with MedPlus, the one year and
thirty day warranty periods during which the Software Warranty
applies shall each be extended through the first five years of the
license granted hereunder.
7.3 Illicit Code Warranty. During the License Term, MedPlus will
use commercially reasonable efforts to ensure that the Software is
free from Illicit Code.
THE ABOVE WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS,
IMPLIED OR STATUTORY, WHICH WARRANTIES ARE HEREBY DISCLAIMED,
EXCEPT THE WARRANTY OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
8. Patent and Copyright Indemnification as to Software.
Notwithstanding anything herein to the contrary, MedPlus shall
protect, indemnify, hold harmless and defend any action, suit or
proceeding brought against Quest Diagnostics insofar as it is
based on a claim that the products or services delivered hereunder
infringes any patent, copyright, or any other intellectual
property of a third party ("Infringement"), provided that MedPlus
is promptly notified by Quest Diagnostics of the action and given
full authority, information and assistance (at MedPlus' expense)
for the defense of the action. MedPlus shall pay all damages and
costs awarded therein against Quest Diagnostics, but shall not be
responsible for any compromise made without its written consent.
In the event that the products or services provided by MedPlus
hereunder, or any portions thereof, are held to constitute an
Infringement, MedPlus shall have the obligation to, at its option
and expense, (i) modify the product or service without impairing
in any material respect the functionality or performance thereof
so that it does not constitute and Infringement, (ii) procure for
Quest Diagnostics the right to continue to use the infringing or
violative product or service, or (iii) replace said product or
service with an equally suitable, non-infringing product or
service. If none of the foregoing alternatives is available to
MedPlus, the license granted hereunder shall terminate and Quest
Diagnostics shall receive a repayment of all monies paid to
MedPlus hereunder. In addition, Quest Diagnostics shall have no
obligation to make any additional payments to MedPlus for the
products or services and MedPlus shall accept return of all
products sold or licensed hereunder at its sole expense once Quest
Diagnostics has arranged for the continuation of the functions
performed thereby. MedPlus' commitment hereunder shall not extend
to any infringement or claim thereof which is based upon the
combination of the products or services supplied by MedPlus
hereunder with products or services not supplied by MedPlus.
9. Use of Software. Quest Diagnostics acknowledges and agrees
that the Software is designed merely to assist Quest Diagnostics
and its agents in the performance of their professional activities
and is not intended to replace the professional skill and judgment
of Quest Diagnostics and/or its agents. Quest Diagnostics shall
retain full control over the use of the Software, including input
of information and analysis thereof, and any modifications or
enhancements thereto. Accordingly, except as specifically
described in the exhibits hereto and in the schedules to each Site
Approval Form, Quest Diagnostics agrees to be solely responsible
for Quest Diagnostics' design, repair and configuration of Quest
Diagnostics' equipment, machinery, systems and/or products. Quest
Diagnostics understands the crucial nature of all tape backup
procedures and the importance of maintaining archive discs at an
off-site location.
10. Confidential Information. As used in this Agreement,
"Confidential Information" of either party shall include the
computer programs and other programs/modules and may include
(without limitation) information relevant to computer programs,
documentation, source code, research, research efforts, product
development, product plans and timing, intellectual property,
names and addresses of clients, referring physicians, and patients
or the design, manufacturing, testing, purchasing, accounting,
marketing, merchandising and/or service operations of such party's
business, so long as they are identified by the disclosing party
as confidential. Confidential Information shall also include
patient medical records. In performing services related to this
Agreement, MedPlus may have access to patient medical records (the
"Records"). The Records are Confidential Information and shall
not be copied, revealed or disclosed in any manner to anyone. The
Records are subject to confidentiality laws and requirements
applicable to medical records, and disclosure of any information
in the Records would violate the laws. By soliciting or providing
services or products hereunder, neither party surrenders any claim
to or interest in such Confidential Information, nor does the
other party make or create any claim to them. The confidentiality
obligations in this Agreement shall not extend to any item of
information identified as Confidential Information which is
disclosed or made available by one party (disclosing party) to the
other party and received by that other party (receiving party) and
which:
(a) was in the receiving party's possession before receipt
from the disclosing party;
(b) is or becomes a matter of public knowledge through no fault
of the receiving party;
(c) is rightfully received by the receiving party from a
rightfully possessing third party without a duty of
confidentiality;
(d) is disclosed by the receiving party in accordance with the
disclosing party's prior written approval;
(e) is independently developed by the receiving party without
access to Confidential Information exchanged hereunder, as
provable by competent evidence; or
(f) is provided or disclosed pursuant to applicable laws,
regulations or court order.
The parties acknowledge and agree that all Confidential
Information is confidential and a valuable trade secret which is
and shall remain the sole property of the disclosing party. The
receiving party shall not, during performance under this Agreement
(and thereafter until the information is no longer confidential),
reveal, divulge, copy, make known or disseminate in any manner any
Confidential Information. Each receiving party represents and
warrants that it will treat the received Confidential Information
as it treats its own confidential information and, at a minimum,
will use safeguards one would reasonably use to prevent
unauthorized disclosure of the Confidential Information. The
parties agree to advise all employees, representatives, and/or
contractors performing services for them of the terms of this
paragraph B(10) and shall advise them that they are bound by the
terms hereof. The obligations of the parties pursuant to the terms
of this paragraph B(10) shall be in addition to obligations
described in paragraph B(5) above.
11. Export/Limitations on Dangerous Application. Quest
Diagnostics acknowledges that the Software provided hereunder is
subject to export and import controls. Quest Diagnostics agrees
that any Software licensed hereunder will not be exported,
directly or indirectly, separately or as part of a system, without
Quest Diagnostics, at its own cost, first obtaining all licenses
from any applicable government agency of the United States,
including but not limited to the United States Department of
Commerce and any other appropriate agency of the United States
Government as may be required by law. In addition, Quest
Diagnostics acknowledges that the Software contains software which
on its own is not specifically developed or licensed for use in
any nuclear, aviation, mass transit or medically diagnostic
application or in any other inherently dangerous application and
neither MedPlus nor any third party vendor whose software is
contained in the Software shall be liable for any damages
resulting from such uses.
12. Year 2000 Warranty. MedPlus represents and warrants that the
Software shall be Year 2000 Compliant. "Year 2000 Compliant"
means that performance and functionality is not affected by dates
prior to, during and after January 1, 2000. Specifically, this
means that (a) no value for current dates will cause an
interruption in operation of the Software, (b) date-based
functionality shall behave consistently for dates prior to, during
and after January 1, 2000 in all interfaces and data storage, (c)
the century in any date should be specified explicitly ("CCYY"),
and (d) the year 2000 must be recognized as a leap year.
In the event the Software requires a modification to prevent
MedPlus from being in breach of the foregoing warranty, MedPlus
represents and warrants to Quest Diagnostics that it will
immediately assign senior engineering staff to work continuously
until the Software is returned to the same level of functionality
as warranted herein at no charge to Quest Diagnostics, and without
interruption to the ongoing business of Quest Diagnostics, time
being of the essence.
In the event MedPlus breaches the foregoing warranty, MedPlus
shall defend, indemnify and hold harmless (including reasonable
attorney's fees) Quest Diagnostics, its employees, officers and
directors against all costs, expenses and liability arising from
or in connection with such breach and shall provide Quest
Diagnostics, free of charge, with any new versions and upgrades of
all Software which prevent or correct a breach of warranty. In
addition, a breach of the foregoing warranty will be considered a
"Producer Default" as defined in the OptiMaxx Escrow Agreement or
the Step2000 Escrow Agreement, as the case may be, if MedPlus does
not provide Quest Diagnostics, free of charge, with any such new
versions and upgrades of all Software which prevent or correct a
breach of warranty within thirty days of such breach.
MedPlus' commitment pursuant to this paragraph B(12) shall not
extend to any failure of the Software to be Year 2000 Compliant
which is caused by the combination of the Software with software
not supplied by MedPlus. In the event of such failure, MedPlus
will immediately dedicate resources to work continuously until the
Software is returned to the same level of functionality as existed
prior to the millenium change. The cost of any such resources
shall be borne by Quest Diagnostics.
NOTWITHSTANDING ANY PROVISION TO THE CONTRARY WHICH MAY BE
CONTAINED IN THIS AGREEMENT, THERE SHALL BE NO LIMITATION OF
LIABILITY FOR MEDPLUS' BREACH OF THE FOREGOING WARRANTY. The
obligations of this Section shall survive termination of this
Agreement.
Quest Diagnostics may have the Software tested for Year 2000
compliance through Ft. Knox Escrow Services, Inc. in accordance
with the Escrow Agreements attached hereto as Exhibits B(5)(a) and
(b).
C. HARDWARE PURCHASE TERMS AND CONDITIONS.
1. Purchase of Hardware. MedPlus agrees to sell to Quest
Diagnostics, and Quest Diagnostics agrees to buy from MedPlus, the
Hardware according to the terms and at the purchase prices
indicated on Exhibit C(1) hereto and as described on Schedule B to
each Site Approval Form.
2. Insurance. Following Quest Diagnostics' receipt of the
Hardware, until MedPlus is paid in full for the Hardware, Quest
Diagnostics shall insure the Hardware against loss or damage by
insurance carriers and/or with types of insurance which are
commercially reasonable.
3. Security Interest. Until MedPlus is paid in full for the
Hardware, Quest Diagnostics hereby grants to MedPlus a purchase
money security interest in the Hardware and all additions,
replacements and proceeds thereof. A copy of this Agreement may
be filed with appropriate state, local or other authorities as a
financing statement in order to perfect MedPlus' security interest
in the Hardware. (At MedPlus' reasonable request, Quest
Diagnostics shall sign UCC financing statements or any other
documentation MedPlus deems reasonably necessary or advisable in
order to perfect its security interest.)
4. Delivery and Installation. Delivery and installation of the
Hardware shall be made in accordance with the following general
provisions subject to the specific terms of Schedule B to each
Site Approval Form.
4.1 Site Preparation. Prior to shipment of the Hardware, Quest
Diagnostics shall prepare the location at which the Hardware is to
be installed at each Site in accordance with installation
specifications provided by MedPlus based on its pre-installation
inspection of the Site and recommendations of third party hardware
manufacturers ("Delivery Specifications") and in accordance with
the Hardware manufacturers' specifications received by Quest
Diagnostics. At Quest Diagnostics' request, MedPlus shall inspect
a Site following its preparation to ensure that the Site meets all
Delivery Specifications ("Follow-Up Inspection"). All time
reasonably expended and expenses reasonably incurred by MedPlus as
a result of such Follow-Up Inspection shall immediately be billed
to and payable by Quest Diagnostics.
4.2 Expense of Delivery and/or Installation. Extraordinary
expenses associated with delivery and/or installation of the
Hardware shall be the responsibility of Quest Diagnostics. For
purposes of this Section C(4.2), "extraordinary expenses" shall
mean those expenses which result from the actions or inactions of
Quest Diagnostics, including but not limited to Quest Diagnostics'
failure to properly prepare a Site for installation, Quest
Diagnostics' failure to correctly advise MedPlus as to physical
parameters of the proposed physical location(s) of the Software
and/or Hardware, or any other similar substantial expense not
included in the prices listed on Schedule B to a Site Approval
Form. Notwithstanding anything contained in this Section C(4) to
the contrary, extraordinary expenses associated with delivery
and/or installation of the Hardware which result solely from
incorrect Delivery Specifications provided by MedPlus shall be the
responsibility of MedPlus.
4.3 Cancellation or Rescheduling of Delivery or Installation. If
Quest Diagnostics desires to reschedule or cancel shipment of the
Hardware or any component thereof, Quest Diagnostics shall
immediately notify MedPlus in writing. If Quest Diagnostics
provides MedPlus with less than 45 days written notice of such
rescheduling or cancellation, then all time reasonably expended
and expenses reasonably incurred by MedPlus as a result of such
rescheduling or cancellation shall immediately be billed to and
payable by Quest Diagnostics, including, but not limited to, any
penalty imposed by the Hardware manufacturer and/or vendor so long
as Quest Diagnostics is given written notification of the expenses
involved at the time of cancellation.
5. Title and Risk of Loss with Respect to Hardware. Title to and
risk of loss with respect to the Hardware shall pass to Quest
Diagnostics on receipt.
6. Hardware Warranty. MedPlus warrants that the Hardware purchased
hereunder shall be Year 2000 Compliant. In addition, MedPlus
shall be responsible for fulfilling all warranties on the
Hardware, if any, made by the Hardware manufacturer(s), to the
extent permitted by the Hardware manufacturer(s). Quest
Diagnostics acknowledges that, except as otherwise provided in
this Agreement, warranties and remedies with respect to the
Hardware are limited to those provided by the Hardware
manufacturer(s) and MedPlus has not made and does not make any
representation or warranty, express or implied, as to the
Hardware. MedPlus' obligation to fulfill any manufacturer's
warranty for the Hardware shall be contingent upon proper use of
the Hardware by Quest Diagnostics and shall apply only if (i) any
proprietary notices have not been removed from the Hardware, (ii)
Quest Diagnostics notifies MedPlus immediately of any problem with
the Hardware and (iii) Quest Diagnostics has paid all amounts owed
MedPlus by Quest Diagnostics.
THE WARRANTIES CONTAINED IN THIS SECTION C ARE IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, WHICH WARRANTIES
ARE HEREBY DISCLAIMED, INCLUDING THE WARRANTY OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
7. Additional Hardware. Additional Hardware requested by Quest
Diagnostics for use at a particular Site will be furnished by
MedPlus in accordance with the terms and conditions, including any
increase in support fees, and upon execution, of an Addendum to
Schedule B to the Site Approval Form for such Site. Except as
expressly set forth in any Addendum, such additional Hardware
shall be subject to the terms and conditions of this Agreement.
8. Hardware Operation and Limitation of Liability. Quest
Diagnostics shall be responsible for the operation of the Hardware
and for the accuracy and adequacy of the data input thereto or
data derived therefrom. MedPlus shall be liable for damage to the
Hardware which is caused directly by the actions or inactions of
MedPlus. In no event shall MedPlus be liable for any damages
whatsoever related to Quest Diagnostics' use of the Hardware,
including but not limited to consequential damages and/or damages
related to or resulting from loss of data. Quest Diagnostics
understands the crucial nature of all tape backup procedures and
the importance of maintaining archive discs at an off-site
location.
D. MAINTENANCE AND SUPPORT TERMS AND CONDITIONS
1. Support Services. MedPlus shall provide, and Quest Diagnostics
agrees to accept, maintenance and support services for the
Software and the Hardware as more specifically described in the
Service and Support Agreement attached as Exhibit D hereto.
2. Support Fees. In exchange for the support services to be
provided in accordance with Exhibit D, Quest Diagnostics shall pay
to MedPlus an annual support fee for each Site (the "Annual
Support Fee"). The Annual Support Fee for each Site shall equal
the sum of (a) 16% of the value of the license granted hereunder
(which value shall be equal to the software license fee paid by
Quest Diagnostics for its then-current release of the OptiMaxx
System software and the Step2000 software multiplied by the number
of Concurrent Users of each then licensed to Quest Diagnostics at
such Site) and (b) 16% of the total purchase price of the Hardware
purchased for use at such Site. Notwithstanding anything
contained herein to the contrary, the percentages indicated in
sections (a) and (b) of this paragraph shall be 18% for the first
year of Annual Support at each Site and 17% for the second year of
Annual Support at each Site. MedPlus shall invoice Quest
Diagnostics for the Annual Support Fee for a particular Site once
installation at that Site has been completed by MedPlus and "Sign-
Off" requirements have been met. Each Annual Support Fee will be
calculated based on the twelve month period beginning February 1
and ending January 31 ("Fiscal Year"). As such, the initial
payment for service and support for installations that are
completed during a Fiscal Year shall be prorated accordingly.
E. PRICING AND PAYMENT TERMS AND EXPENSES.
1. General Payment Terms/Milestones. Quest Diagnostics shall pay
all license fees, Hardware costs, configuration, installation,
implementation, project management, training, maintenance,
enhancement and support fees and all other amounts payable
pursuant to this Agreement in accordance with the terms and
conditions described on Exhibit E(1) hereto and the "Sign-Off"
requirements set forth on Schedule D to each Site Approval Form,
and in no event later than thirty (30) days from the receipt of
invoice therefor. Quest Diagnostics shall provide MedPlus with
any and all information reasonably requested by MedPlus to
complete the items necessary for Sign-Off.
2. Tax Liability. Quest Diagnostics shall be responsible for and
shall pay or reimburse MedPlus for any fees, assessments, charges,
duties and taxes (including, but not limited to, sales or use
taxes) which may now or later be paid or payable by Quest
Diagnostics or by MedPlus by virtue of this Agreement or the
performance of any duty under this Agreement, excluding (i) taxes
based upon the net income of MedPlus and (ii) non-sales taxes
imposed on the performance of services hereunder or the payment
for such services, including withholding of state and federal
income, unemployment compensation, worker's compensation, Federal
Insurance Contributions Act and Federal Unemployment Tax Act
taxes. Upon receipt of a valid tax exemption certificate from
Quest Diagnostics, MedPlus will honor the certificate to the
extent permitted by law.
3. Consulting Services and UDMS Services. Notwithstanding
paragraph E(1) above, payment for the Consulting Services and the
UDMS Services shall be made in accordance with Addenda 1 and 2
hereto, respectively.
4. Expenses. MedPlus shall be responsible for all ordinary and
reasonable expenses that it may incur in connection with this
Agreement, including the Addenda and Exhibits attached hereto.
Quest Diagnostics agrees, however, to reimburse MedPlus for any
extraordinary expenses previously approved in writing by Quest
Diagnostics.
F. MISCELLANEOUS
1. Termination of Agreement. Either party shall have the right to
terminate this Agreement if the other party hereto materially
defaults hereunder or breaches the terms of paragraph B(10)
hereof. The non-breaching party shall give written notice to the
breaching party of any such breach or default and if the breach or
default is not remedied, or the breaching party has not initiated
action to cure such breach or default, within 30 days after such
notice, this Agreement shall terminate. Upon termination of this
Agreement, licenses previously granted hereunder shall not
terminate unless terminated in accordance with section B(6)
hereof. Notwithstanding anything contained herein to the
contrary, Quest Diagnostics shall have no obligation to license
the Software or purchase the Hardware or Consulting Services for
additional Sites following completion of installation at the first
five Sites.
2. Limitation to Actual Damages/Indemnification. Unless otherwise
specifically provided herein, except for injury to person or
property caused directly by an employee, agent or representative
of a party hereto while on the premises of the other party hereto
("Injury"), in no event shall either party be liable to the other
for lost profits, consequential, exemplary, special, indirect,
incidental, or punitive damages, howsoever arising from its
performance hereunder and any permitted liability, regardless of
the form or forum, shall not exceed the total amount paid by Quest
Diagnostics to MedPlus hereunder or $1,000,000 per incident,
whichever is greater. Any liability for Injury, regardless of the
form or forum, shall not exceed the total amount paid by Quest
Diagnostics to MedPlus hereunder or $5,000,000 per incident,
whichever is greater. MedPlus and Quest Diagnostics shall each
indemnify, defend and save the other harmless from and against any
and all losses, claims, suits, damages, liabilities and expenses
(including, without limitation, reasonable attorneys' fees) based
upon, arising out of or attributable to any acts or omissions
arising from such party's performance hereunder or otherwise
related to this Agreement. This provision shall survive
termination of this Agreement.
3. System Capacity. Quest Diagnostics acknowledges that the
capacity of each OptiMaxx System (including the Hardware and the
Software) at a particular Site shall be limited to the number of
total Concurrent Users and by the magnetic and optical storage
specifications specifically described on Schedules B and C to the
Site Approval Form for such Site.
4. Privileged Data. Quest Diagnostics acknowledges that it
accepts full responsibility for complying with Federal, state and
local laws, rules and regulations concerning use and disclosure of
privileged data as the laws, rules and regulations may relate to
any information placed in or stored through use of the Software or
in the Hardware or related to output from the Hardware.
5. Payment for Additional Items. Quest Diagnostics shall be
responsible for the purchase of all discs, tapes, cables, ribbons,
forms and other items required for use in conjunction with the
Hardware and Software. All such additional items must conform to
specifications, if any, provided by MedPlus and the Hardware
manufacturer(s).
6. Assignment. This Agreement is not assignable in whole or in
party by either party with the prior written consent of the other
party hereto, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, Quest Diagnostics shall be entitled
to assign this Agreement and its rights hereunder to an affiliate,
successor or parent corporation upon notice to MedPlus.
7. Notices. All notices will be said to have been properly given
hereunder when delivered in person or mailed via certified mail,
return receipt requested, to:
MedPlus:
MedPlus, Inc.
8805 Governor's Hill Drive, Ste. 100
Cincinnati, Ohio 45249
Attention: Moira J. Squier, Esq.
Quest Diagnostics:
Quest Diagnostics Incorporated
One Malcolm Avenue
Teterboro, New Jersey 07608.
Attention: Chief Information Officer
With a copy to:
Ed Reiher
Quest Diagnostics Incorporated
3 Sterling Drive
Wallingford, CT 06492
Each party shall inform the other in writing of a change of
address or contact person.
7. Corporate Authority/Resources. Each of the parties hereby
warrants and represents that it has full corporate power and
authority to enter into this Agreement without the consent of any
other person, organization or other entity, that this Agreement
represents the valid and binding agreement of such party
enforceable in accordance with its terms. Quest Diagnostics
represents that it has the financial resources to perform this
Agreement.
8. Severability. The invalidity in whole or in part of any
provision of this Agreement shall not effect the validity of any
other provision. In the event that a court of competent
jurisdiction determines that any part or provision of this
Agreement is unlawful or unenforceable, then such part or
provision shall be revised as appropriate to make it lawful and
enforceable.
9. Amendments and Waiver. No waiver, alteration or modification
of any of the provisions of this Agreement shall be binding unless
in writing and signed by a duly authorized representative of the
party to be bound thereby.
10. Choice of Law. The rights and obligations of the parties
hereto shall be construed under and be governed in all respects by
the internal laws of the State of New Jersey excluding any
provisions of law governing conflicts of law.
11. Entire Agreement. This Agreement, along with all Exhibits and
addenda hereto and any Site Approval Forms and schedules issued in
accordance herewith, contains the entire agreement between the
parties with respect to the subject matter hereof. All previous
and collateral agreements, representations, warranties, promises
and conditions of sale are superseded by this Agreement with the
exception of the Confidentiality and Non-Disclosure Agreement
agreed to previously by Quest Diagnostics and MedPlus which shall
remain in full force and effect. Any representation, promise or
condition not incorporated in this Agreement shall not be binding
on either party.
12. Uncontrollable Circumstances. If the performance of any part
of this Agreement by MedPlus or Quest Diagnostics is prevented or
delayed by acts of civil or military authority, flood, fire,
epidemic, war or riot, or other acts beyond the reasonable control
of either party, the party affected shall be excused from such
performance only during the continuance of any such event;
provided, however, that if such delay in performance extends for
more than 60 days, the other party, at its discretion, upon giving
written notice, may terminate this Agreement. The arrival of the
new millenium shall not be considered a force majeure.
13. Independent Contractor. It is understood that MedPlus' and
its agents' services hereunder are to be rendered in the capacity
of an independent contractor of Quest Diagnostics, and that
neither MedPlus nor its agents are in any respect or under any
circumstances employees of Quest Diagnostics. Neither party has
authority to enter into contracts or assume any obligations for or
on behalf of the other party or to make any warranties or
representations for or on behalf of the other party.
14. Disclosure of Customer Status/Public Representations. During
the License Term and thereafter, MedPlus shall not represent
itself to be owned or controlled by Quest Diagnostics or as
authorized to represent Quest Diagnostics or to obligate Quest
Diagnostics with respect to any matters not expressly provided
herein. MedPlus may represent to the general public or to any
person that it is an independent contractor affiliated with Quest
Diagnostics, and shall do so if reasonably necessary to clarify
any misunderstanding by the general public of the relationship of
the parties. In addition, neither party, its employees, agents
and/or representatives shall not originate any publicity, news
release, or other public announcement, whether written or oral,
relating to the terms hereof, to any amendment hereto or to any
performance hereunder, without the prior written approval of the
other party hereto. Notwithstanding anything herein to the
contrary, Quest Diagnostics agrees that MedPlus may disclose to
third parties the fact that Quest Diagnostics is a client or
customer of MedPlus.
15. Computer Access Agreements. MedPlus represents and warrants
that it and its agents will use Quest Diagnostics' computers and
all related computer programs only for purposes authorized or
permitted by Quest Diagnostics hereunder or in writing and take
appropriate steps to see that they are protected from accidents,
tampering or unauthorized use or modification. In addition,
MedPlus acknowledges that most software purchased or developed for
use in connection with computers is proprietary and may not be
copied without permission of the owner; MedPlus agrees to read and
follow all terms and conditions, including liability notices and
back-up procedures, that may apply to a software package.
Furthermore, MedPlus recognizes that information stored on a
computer and on diskettes must be provided the appropriate level
of security to prevent unauthorized access to that information and
that the appropriate level of security will vary from department
to department. MedPlus agrees to follow the specific instructions
regarding the security requirements of a Site, as amended from
time to time, as provided to MedPlus by Quest Diagnostics or a
Site. Finally, MedPlus agrees to report to Quest Diagnostics any
possible or actual violation of data security that comes to
MedPlus' attention.
16. Quest Diagnostic's Copyrighted Information. Use of Quest
Diagnostics' proprietary information by MedPlus, its employees,
agents and/or representatives, the copyright of which is owned by
Quest Diagnostics, does not in any way constitute permission for
MedPlus to use or reproduce such copyrighted or other material
except in the specific conduct of business under the terms of this
Agreement and as requested by Quest Diagnostics.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to
be executed as of the date first written above.
QUEST DIAGNOSTICS MEDPLUS, INC.
INCORPORATED
By:______________________ By:______________________
Name:____________________ Name:____________________
Title:_____________________ Title:_____________________
13
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into effective as of the 1st day
of February, 1999 by and between MedPlus, Inc., an Ohio
corporation (the "Company"), and Philip S. Present II (the
"Employee").
WHEREAS, the Company desires to employ or continue to employ the
Employee on certain terms and conditions as set forth herein; and
WHEREAS, the Employee is willing to accept such employment;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants and promises hereinafter contained, do hereby agree as
follows:
1. Employment. The Company hereby employs or continues to employ
the Employee in the capacity of Senior Vice President and Chief
Operating Officer, or in such other position as the Company may
direct or desire and Employee hereby accepts the employment, on
the terms and conditions hereinafter set forth.
2. Duties. The Employee's principal duties and responsibilities
shall include overseeing all of the Company's corporate operations
and such other duties which may be assigned to him from time to
time by the Company in connection with the conduct of its
business. Nothing herein shall preclude the Company from changing
the Employee's title and duties if the Company's Board of
Directors has concluded in its reasonable judgement that such
change is in the Company's best interests and commensurate with
the skills and experience of Employee. Employee agrees to well
and faithfully perform and discharge such services and duties and
hold such offices as may be assigned to him from time to time by
the Company and to devote substantially his full time, energies,
and best efforts to the performance thereof to the exclusion of
all other business activities. In the event the Employee is
elected a Director of the Company or any subsidiary during the
term of this Agreement, the Employee agrees to serve in such
capacity without further compensation.
3. Term. The term of employment shall begin on February 1, 1999
and shall continue for a period of twelve (12) months, unless
earlier terminated pursuant to the provisions of this Agreement.
4. As compensation for the services to be rendered by the
Employee to the Company pursuant to this Agreement, the Employee
shall be paid the following compensation and other benefits:
(a) Salary. During the term of this Agreement, Employee shall be
paid at the rate of Fifteen Thousand and 00/100 Dollars
($15,000.00) per month, payable monthly in arrears. If the
Company records Consolidated Net Income (as reported in the
Company's quarterly financial statements) for any quarter during
the term of this Agreement, then, for the balance of the term
following the quarter in which such Consolidated Net Income was
recorded, Employee shall receive a one-time pay increase totaling
$18,000, payable to Employee in equal installments on a semi-
monthly basis. Should the employee become disabled, which for
purposes of this Subsection means the inability because of any
physical or emotional illness to perform his assigned duties under
this Agreement at least forty (40) hours per week, the Employee's
salary shall be adjusted in the proportion which the number of
hours the Employee is able to perform his assigned duties during a
week bears to forty (40). If the Employee, during any period of
disability, receives any periodic payments representing lost
compensation under any health and accident policy or under any
salary continuation insurance policy, the premiums for which have
been paid by the Company, the amount of salary that the Employee
would be entitled to receive from the Company during the
disability shall be decreased by the amounts of such payments.
(b) Corporate Bonus. For each fiscal quarter of the Company in
which the Company has Consolidated Net Income (as defined above)
greater than $250,000, the Employee shall earn a bonus of $12,500.
For each fiscal quarter of the Company in which the Company's
Consolidated Net Income exceeds $250,000 by at least $12,500, the
Employee shall earn an additional bonus of $12,500. Any bonus
earned shall be paid to Employee on the last day of the month in
which the Company issues its quarterly earnings release to the
public.
(c) Automobile Allowance. During the term of this Agreement, the
Company shall pay Employee a $450.00 per month automobile
allowance in order to reimburse Employee for the expense of
owning, operating, maintaining and insuring a personal automobile
for use in performing Employee's duties hereunder.
(d) MedPlus, Inc. 1994 Long-Term Stock Incentive Plan. Subject
to the terms and conditions of the MedPlus, Inc. 1994 Long-Term
Stock Incentive Plan (the "Plan") and to the availability of stock
options for issuance under the Plan, in the event the Board of
Directors of the Company, in its sole and absolute discretion,
elects Employee as President of the Company, Employee shall be
awarded stock options to purchase fifty thousand (50,000) shares
of Company's common stock under the Plan. Such stock option grant
shall be subject to all the terms and conditions of the Plan and
shall be upon such terms and conditions (ex. grant date(s),
vesting period, expiration date, etc.) as the Company's
Compensation Committee shall determine in its sole and absolute
discretion.
(e) Employee Benefit Plans. Employee shall be eligible to
participate, to the extent he may be eligible to participate
pursuant to the terms of such plans, in any profit sharing,
retirement, insurance or other employee benefit plans maintained
by the Company.
5. Key Man Life Insurance. The Company, in its discretion, may
apply for and procure in its own name and for its own benefit,
life insurance on the life of the Employee in any amount or
amounts considered advisable by the Company, and the Employee
shall submit to any medical or other examination, and shall
execute and deliver any application or other instrument in
writing, reasonably necessary to effectuate such insurance.
6. Expenses. The Company shall pay, or reimburse the Employee,
for all reasonable and necessary business expenses of the
Employee, approved by the Company.
7. Vacation and Leave. The Employee shall be entitled to the
same vacation and leave time as the other executive officers of
the Company. Officers of the Company may not carry unused
vacation time from one calendar year to another calendar year.
8. Non-Disclosure of Confidential Information. The Employee
acknowledges that in and as a result of his employment by the
Company, he will be making use of, acquiring, and/or adding to
confidential information of a special and unique nature and value
relating to such matters as the Company's patents, copyrights,
proprietary information, trade secrets, systems, procedures,
manuals, confidential reports, and lists of customers (which are
deemed for all purposes confidential and proprietary), the
equipment and methods used and preferred by the Company's
customers, and the fees paid by them. As a material inducement to
the Company to enter into this Agreement and to pay to Employee
the compensation stated in Section 4, Employee covenants and
agrees that he shall not, at any time during or following the term
of his employment, directly or indirectly divulge or disclose for
any purpose whatsoever any confidential information that has been
obtained by, or disclosed to, him as a result of his employment by
the Company. In the event of a breach or threatened breach by
Employee of any of the provisions of this Section 8, the Company,
in addition to, and not in limitation of, any other rights,
remedies, or damages available to the Company at law or in equity,
shall be entitled to a permanent injunction in order to prevent or
restrain any such breach by the Employee or by Employee's
partners, agents, representatives, servants, employers, employees,
family members, and/or any and all persons directly or indirectly
acting for or with him.
Confidential information does not include information which: (i)
is in the public domain through no act, or failure to act, on the
part of the Employee, (ii) was known to the party receiving the
information prior its disclosure by the Employee, provided such
information did not become known, directly or indirectly, to the
party receiving the information through an act, or failure to act,
on the part of the Employee, and (iii) is required to be disclosed
pursuant to an order of a court of court or governmental authority
of competent jurisdiction, provided Employee gives the Company
notice of such order prior to such disclosure.
9. Covenants Against Competition. The Employee acknowledges that
the services he is to render are of a special and unusual
character with a unique value to the Company, the loss of which
cannot adequately be compensated by damages in an action at law.
In view of the unique value to the Company of the services of
Employee because of the confidential information to be obtained by
or disclosed to Employee, as hereinabove set forth, and as a
material inducement to the Company to enter into this Agreement
and to pay to Employee the compensation stated in Section 4,
Employee covenants and agrees that during Employee's employment
and for a period of two (2) years after he ceases to be employed
by the Company for any reason, he will not, except as otherwise
authorized by this Agreement, compete with the Company or any
affiliate of the Company, solicit the Company's customers or the
customers of an affiliate, or directly or indirectly solicit for
employment any of the Company's employees. For purposes of this
Section 9:
(i) the term "compete" means engaging in any manner whatsoever
(other than as a passive investor) in any business which sells or
otherwise provides, or intends to sell or otherwise provide,
directly or indirectly, products or services similar to those
products and services which the Company or any of its affiliates
sells or otherwise provides, or intends to sell or otherwise
provide, including without limitation, as a proprietor, partner,
investor, shareholder, director, officer, employee, consultant,
independent contractor, or otherwise, within a geographic areas
served by the Company or any of its affiliates;
(ii) the term "affiliate" means any legal entity that directly or
indirectly through one or more intermediaries controls, is
controlled by, or is under common control with the Company; and
(iii) the term "customers" means all persons to whom the Company
or any of its affiliates has sold any product or service, whether
or not for compensation, within a period of two (2) years prior to
the time the Employee ceases to be employed by the Company.
10. Reasonableness of Restrictions.
(a) The Employee has carefully read and considered the provisions
of Sections 8 and 9, and, having done so, agrees that the
restrictions set forth in said Sections, including, but not
limited to, the time period of restriction and geographical areas
of restriction are fair and reasonable and are reasonably required
for the protection of the interests of the Company and its parent
or subsidiary corporations, officers, directors, shareholders, and
other employees.
(b) In the event that, notwithstanding the foregoing, any of the
provisions of Sections 8 and 9 shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless
continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included therein. In the event
that any provision of Sections 8 or 9 relating to the time period
and/or the areas of restriction and/or related aspects shall be
declared by a court of competent jurisdiction to exceed the
maximum restrictiveness such court deems reasonable and
enforceable, the time period and/or areas of restriction and/or
related aspects deemed reasonable and enforceable by the court
shall become and thereafter be the maximum restriction in such
regard, and the restriction shall remain enforceable to the
fullest extent deemed reasonable by such court.
11. Remedies for Breach of Employee's Covenants of Non-Disclosure
and Non-Competition. In the event of a breach or threatened
breach of any of the covenants in Sections 8 and 9, the Company
shall have the right to seek monetary damages for any past breach
and equitable relief, including specific performance by means of
an injunction against the Employee or against the Employee's
partners, agents, representatives, servants, employers, employees,
family members, and/or any and all persons acting directly or
indirectly by or with him, to prevent or restrain any further
breach. In lieu thereof, or should a court refuse for any reason
to grant equitable relief to prevent continuing breaches of the
covenants in Sections 8 and 9, the Company shall be entitled to
liquidated damages equal to fifty percent (50%) of the gross
amount derived by the breaching party from all transactions in
breach of said covenants, it being agreed that such amount
represents the estimated amount of profit the Company could have
derived if it had transacted the business in question and is not a
penalty.
12. Termination. Employment of the Employee under this Agreement
will be terminated upon the occurrence of any one or more of the
following events:
(a) By the Employee's death.
(b) If the Employee is Totally Disabled. For the purposes of
this Agreement, the Employee will be Totally Disabled if he (1)
has been declared legally incompetent by a final court decree (the
date of such decree being deemed to be the date on which the
disability occurred), (2) receives disability insurance benefits
from any disability income insurance policy maintained by the
Company for a period of three (3) consecutive months, or (3) has
been found to be disabled pursuant to a Disability Determination.
A "Disability Determination" means a finding that the Employee,
because of a medically determinable disease, injury, or other
mental or physical disability, is unable to perform substantially
all of his regular duties to the Company and that such disability
is determined or reasonably expected to last at least three (3)
months. The Disability Determination shall be based on the
written opinion of the physician regularly attending the Employee.
If the Company disagrees with the opinion of this physician (the
"First Physician"), it may engage at its own expense another
physician (the "Second Physician") to examine the Employee. If
the First and Second Physicians agree in writing that the Employee
is or is not disabled, their written opinion shall, except as
otherwise set forth in this Subsection, be conclusive on the issue
of disability. If the First and Second Physicians disagree on the
disability of the Employee, they shall choose a third consulting
physician (whose expense shall be borne by the Company), and the
written opinion of a majority of these three physicians shall,
except as otherwise provided in this Subsection, be conclusive as
to the Employee's disability. The date of any written opinion
conclusively finding the Employee to be disabled is the date on
which the disability will be deemed to have occurred. If there is
a conclusive finding that the Employee is not Totally Disabled,
the Company shall have the right to request additional Disability
Determinations, provided it agrees to pay all the expenses of the
Disability Determinations and does not request an additional
Disability Determination more frequently than once every two (2)
months. In conjunction with a Disability Determination, the
Employee hereby consents to any required medical examination, and
agrees to furnish any medical information requested by any
examining physician and to waive any applicable physician-patient
privilege that may arise because of such examination. All
physicians except the First Physician must be board-certified in
the specialty most closely related to the nature of the disability
alleged to exist.
(c) At the election of either the Employee or the Company without
cause, upon ninety (90) days written notice; provided however,
that in the event this Agreement is terminated by the Company
pursuant to this Subsection 12(c), at the expiration of the
ninety-day period, Employee shall receive severance pay in the
amount of six months salary at the rate being paid to Employee
under Subsection 4(a) at the time written notice of termination is
given, less any required withholding and deductions.
(d) When the Employee reaches mandatory retirement age under any
retirement policy applicable to all executive officers adopted by
the Company.
(d) By mutual agreement of the Employee and the Company.
(e) By the dissolution and liquidation of the Company (other than
as part of a reorganization, merger, consolidation, or sale of all
or substantially all of the assets of the Company whereby the
business of the Company is continued).
(f) By the Company for Just Cause. For purposes of this
Agreement "Just Cause" shall mean the following: (i) a conviction
of or a plea of guilty or nolo contendre by the Employee to a
felony or misdemeanor involving fraud, embezzlement, theft, or
dishonesty or other criminal conduct against the Company; (ii)
habitual neglect of the Employee's duties or failure by the
Employee to perform or observe any substantial lawful obligation
of such employment that is not remedied within thirty (30) days
after written notice thereof from the Company or its Board of
Directors; or (iii) any material breach of this Agreement by the
Employee. Should the Employee dispute whether he was terminated
for Just Cause, then the Company and the Employee shall enter
immediately into binding arbitration pursuant to the Commercial
Arbitration Rules of the American Arbitration Association, the
cost of which shall be borne by the non-prevailing party.
(g) Liquidation, Dissolution, Consolidation or Merger of Company.
Employee's employment with the Company may be terminated by the
Company upon thirty (30) days prior written notice, with or
without cause, in the event of the liquidation, dissolution,
consolidation, merger or other business combination of the
Company, or transfer of all or substantially all of its assets
("Business Change"). If Employee is terminated as described in
the preceding sentence, the Company shall pay in a lump sum on the
date of such Business Change compensation to the Employee in an
amount derived by multiplying the factor 2.50 by the sum of the
Employee's annual salary, plus the aggregate quarterly bonus
payments paid to Employee from the beginning of the term of this
Agreement through the date of termination [2.50 x (annual salary +
aggregate quarterly bonus payments paid)] (the "Termination Fee").
Provided that, if a successor in interest of the Company as a
result of a Business Change offers to retain Employee in a
position substantially similar to the position held by Employee
with the Company prior to the Business Change, and at a
substantially similar salary, Employee shall only receive payment
of the Termination Fee if he agrees to be employed by such
successor in interest for at least one year. Further, in the
event of such liquidation, dissolution or business combination,
all stock options granted to Employee prior to such event shall
immediately become fully vested in Employee. Notwithstanding the
foregoing sentence, however, in no event shall any stock options
become vested earlier that the minimum vesting period provided by
the Plan, and nothing in this Agreement shall be deemed to modify,
contradict or supercede any provision of the Plan.
In the event of termination of this Agreement other than for
death, the Employee hereby agrees to resign from all positions
held in the Company, including without limitation any position as
a director, officer, agent, trustee, or consultant of the Company
or any affiliate of the Company. For the purposes of this
provision, the term "affiliate" has the same meaning as in Section
9.
13. Waiver. A party's failure to insist on compliance or
enforcement of any provision of this Agreement, shall not affect
the validity or enforceability or constitute a waiver of future
enforcement of that provision or of any other provision of this
Agreement by that party or any other party.
14. Governing Law. This Agreement shall in all respects be
subject to, and governed by, the laws of the State of Ohio.
15. Severability. The invalidity or unenforceability of any
provision in the Agreement shall not in any way affect the
validity or enforceability of any other provision and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision had never been in the Agreement.
16. Notice. Any and all notices required or permitted herein
shall be deemed delivered if delivered personally or if mailed by
registered or certified mail to the Company at its principal place
of business and to the Employee at the address hereinafter set
forth following the Employee's signature, or at such other address
or addresses as either party may hereafter designate in writing to
the other.
17. Assignment. This Agreement, together with any amendments
hereto, shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors, assigns, heirs
and personal representatives, except that the rights and benefits
of either of the parties under this Agreement may not be assigned
without the prior written consent of the other party.
18. Amendments. This Agreement may be amended at any time by
mutual consent of the parties, provided, however, that no such
amendment shall be valid or enforceable unless in a writing signed
by the Company and the Employee.
19. Applicability of Invention and Non-Disclosure Agreement.
This Employment Agreement is supplemented by that certain
Invention and Non-Disclosure Agreement of even date herewith
between the Company and the Employee, a copy of which is attached
hereto as Schedule A and made a part hereof. These two documents
contain the entire agreement and understanding by and between the
Employee and the Company with respect to the employment of the
Employee with the Company and supersedes and merges all prior
proposals, understandings and all other agreements, oral and
written between the parties. No representations, promises,
agreements, or understandings, written or oral, with respect to
such employment not contained in these two documents shall be of
any force or effect.
20. Headings. The various headings in this Agreement are
inserted for convenience only and are not part of the Agreement.
IN WITNESS WHEREOF, the Company and Employee have duly executed
this Agreement as of the day and year first above written.
MEDPLUS, INC., Company: Philip S. Present II, Employee:
By:________________________ ____________________
Richard A. Mahoney, President Philip S. Present II
Address for Notice Purposes: Address for Notice Purposes:
8805 Governors Hill Drive 10719 Weatherstone Court
Cincinnati, OH 45249 Loveland, OH 45140
SCHEDULE A
INVENTION AND NON-DISCLOSURE AGREEMENT
This Agreement made and entered into effective as of the 1st day
of February, 1999 by and between MedPlus, Inc., an Ohio
corporation (hereinafter called the "Company," which term includes
any parent or subsidiary corporation as defined in Section 425 of
the Internal Revenue Code), and Philip S. Present II (hereinafter
called "Employee").
In consideration of the employment or continued employment of
Employee by the Company and for other good and valuable
consideration, the parties hereto agree as follows:
1. Disclosure of Inventions to Employer. For the purpose of this
Agreement, the word "invention" shall include, but not be limited
to, the following: any discovery, idea, device, process, design,
development, improvement, conception, concept, application,
technique, or invention whether patentable or not, and whether
reduced to practice or not; provided, however, that any invention
as so defined, conceived or made by Employee after termination of
employment with the Company, shall not be deemed to be within this
Agreement if it is not within the scope of the Company's business,
research, and investigations, or resulting from or suggested by
any of the work Employee has performed or may perform for the
Company. Employee will forthwith communicate to the President of
the Company (or such other individual as the President may
designate from time to time) a full and complete disclosure of
each and every invention conceived or made by Employee whether
solely or jointly with others (a) while in the employ of the
Company, whether or not while actually engaged in the Company's
affairs, and (b) within two years subsequent to termination of the
employment for any reason.
2. Assignment of Inventions. Employee agrees to assign and
transfer to the Company, without any separate remuneration or
compensation other than the wages or salary received or
compensation paid to Employee from time to time in the course of
his employment by the Company, his entire right, title, and
interest in and to all inventions conceived or made by Employee,
together with all United States and foreign patent rights and any
other legal protection in and with respect to any and all such
inventions, (a) while in the employ of the Company, whether or not
while Employee is actually engaged in the Company's affairs, or
(b) within two years subsequent thereto and as a direct or
indirect result of such employment. Upon request by the Company,
Employee agrees to execute, and deliver all appropriate patent
applications for securing all United States and foreign patents on
all such inventions, and to do, execute, and deliver any and all
acts and instruments that may be necessary or proper to vest all
such inventions and patents in the Company or its designee, and to
enable the Company or its designee to obtain all such letters
patent. Employee agrees to render to the Company or its designee
all such assistance as may be required in the prosecution of all
such patent applications and applications for the reissue of such
patents and in the prosecution or defense of all interferences
which may be declared involving any of said patent applications or
patents. Employee further agrees not to contest the validity of
any patent, United States or foreign, which is issued to the
Company or its designee, on which Employee made any contribution,
or in which Employee participated in any way, and not to assist
any other party in any way in contesting the validity of any such
patent. Employee further agrees that the obligations and
undertakings stated in this Section 2 shall continue beyond the
termination of his employment by the Company, but if Employee
shall be called upon to render such assistance after the
termination of his employment, Employee shall be entitled to a
fair and reasonable per diem fee in addition to reimbursement of
any expenses incurred at the request of the Company.
3. Prior Inventions. As a matter of record, Employee may include
a complete list of inventions made by him prior to the date of
employment by the Company as an appendix to this Agreement. Only
those inventions so listed shall be deemed to be excluded from the
terms and conditions of this Agreement.
4. Unauthorized Disclosure. Except in connection with regularly
assigned duties for the Company, Employee agrees that he will not,
without prior written approval of the President (or such other
person as the president may designate from time to time), divulge
or disclose to anyone outside of the Company, whether by private
communication or by public address or publication, or otherwise,
any invention or any specification, technical or engineering data,
or report, or any other information relating to the business or
affairs of the Company, and will not during his employment by the
Company or at any time thereafter disclose or use for his own
benefit such information or any trade secrets or confidential
information pertaining to any of the business of the Company or
any of its clients, customers, consultants, licensees, or
affiliates, whether or not such information or trade secrets were
acquired while Employee was engaged in the Company's affairs and
regardless of by whom such information or trade secrets were
generated, either by the Company or by the Employee or others in
the employ of the Company. All copies of any such information,
however and wherever produced, shall be and remain the sole
property of the Company and shall not be removed from the premises
or custody of the Company without prior written consent or
authorization of the President of the Company (or such other
person as the President may designate from time to time).
5. Remedies for Breach. Employee expressly recognizes that any
breach of this Agreement by him is likely to result in irreparable
injury to the Company and agrees that the Company shall be
entitled, if it so elects, to institute and prosecute proceedings
in any court of competent jurisdiction, either in law or in
equity, to obtain damages for any breach of this Agreement, or to
enforce the specific performance of this Agreement by Employee, or
to enjoin Employee from activities in violation of this Agreement.
6. Modification. This instrument contains the entire Agreement
of the parties with respect to the subject matter contained herein
and may be altered, amended, or superseded only by an agreement in
writing, signed by the party against whom enforcement of any
waiver, change, modification, extension, or discharge is sought.
No action or course of conduct shall constitute a waiver of any of
the terms and conditions of this Agreement, unless such waiver is
specified in writing, and then only to the extent so specified. A
waiver of any of the terms and conditions of this Agreement on one
occasion shall not constitute a waiver of the other terms and
conditions of this Agreement, or of such terms and conditions on
any other occasion.
7. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if mailed to
the party to whom such notice is given at the address of such
party hereinafter set forth or at such other address as such party
may provide in writing from time to time. Any such notice mailed
to such address shall be effective when deposited in the United
States mail, duly addressed and with first class postage prepaid.
Such notice may, but need not, be by certified mail, return
receipt requested.
8. Assignment. This Agreement shall be binding upon and shall
inure to the benefit of Employee, without regard for the duration
of his employment by the Company or the reasons for the cessation
of such employment, and upon the administrators, executors, heirs,
and assigns of Employee and shall be binding upon and shall inure
to the benefit of the successors and assigns of the Company, its
subsidiaries, and affiliates.
9. Governing Law. The validity, interpretation and performance
of this Agreement shall be governed and construed by the laws of
Ohio.
10. Severability. The invalidity or unenforceability of any
provision in this Agreement shall not in any way affect the
validity or enforceability of any other provision and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision had never been in the Agreement.
11. References to Gender and Number Terms. In construing this
Agreement, feminine or neuter pronouns shall be substituted for
those masculine in form and visa versa, and plural terms shall be
substituted for singular and singular for plural in any place in
which the context requires.
12. Headings. The section numbers and headings in this Agreement
are inserted for convenience only and are not part of the
Agreement.
IN WITNESS WHEREOF, the Company and the Employee have duly
executed this Agreement as of the date and year first above
written.
MEDPLUS, INC., Company: Employee:
By:________________________ ____________________
Richard A. Mahoney, President Philip S. Present II
Address for Notice Purposes: Address for Notice Purposes:
8805 Governors Hill Drive 10719 Weatherstone Court
Cincinnati, OH 45249 Loveland, OH 45140
APPENDIX TO INVENTION AND NON-DISCLOSURE AGREEMENT
Employee's inventions excluded from this Agreement as authorized
by Section 3:
NONE
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
_____________.
February 1, 1999
__________________________
Philip S. Present II
-8-
-4-
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into effective as of the 1st day
of February, 1999 by and between MedPlus, Inc., an Ohio
corporation (the "Company"), and Timothy McMullen (the
"Employee").
WHEREAS, the Company desires to employ or continue to employ the
Employee on certain terms and conditions as set forth herein; and
WHEREAS, the Employee is willing to accept such employment;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants and promises hereinafter contained, do hereby agree as
follows:
1. Employment. The Company hereby employs or continues to employ
the Employee in the capacity of Vice President of Sales and
Marketing or in such other position as the Company may direct or
desire and Employee hereby accepts the employment, on the terms
and conditions hereinafter set forth.
2. Duties. The Employee's principal duties and responsibilities
shall include planning and managing the sales and marketing of the
Company's products and services, and such other duties which may
be assigned to him from time to time by the Company in connection
with the conduct of its business. The Employee shall report to
the Company's Chief Operating Officer or to such other officer
designated by the Company from time to time. Nothing herein shall
preclude the Company from changing the Employee's title and duties
if the Company's Board of Directors has concluded in its
reasonable judgement that such change is in the Company's best
interests and commensurate with the Employee's skills and
experience. Employee agrees to well and faithfully perform and
discharge such services and duties and hold such offices as may be
assigned to him from time to time by the Company and to devote
substantially his full time, energies, and best efforts to the
performance thereof to the exclusion of all other business
activities. In the event the Employee is elected a Director of
the Company or any subsidiary during the term of this Agreement,
the Employee agrees to serve in such capacity without further
compensation.
3. Term. The term of employment shall begin on February 1, 1999
and shall continue for a period of twelve (12) months, unless
earlier terminated pursuant to the provisions of this Agreement.
The parties hereto anticipate that within thirty days prior to the
end of the term of this Agreement, the parties will enter into
negotiations for renewal of the Employee's employment by the
Company upon such terms and conditions as may then be agreeable to
each of the parties. Each of the parties hereto understands that
the preceding sentence does not constitute evidence of any
obligation or agreement, express or implied, on the part of the
Company or Employee to employ or be employed for any term beyond
the term set forth in the first sentence of this Section 3.
4. Salary and Other Compensation. As compensation for the
services to be rendered by the Employee to the Company pursuant to
this Agreement, the Employee shall be paid the following
compensation and other benefits:
(a) Base Salary. During the term of this Agreement, Employee
shall be paid at the rate of Thirteen Thousand Three Hundred
Thirty-Three and 33/100 Dollars ($13,333.33) per month, payable
monthly in arrears. If the Company records Consolidated Net Income
(as reported in the Company's quarterly financial statements) for
any quarter during the term of this Agreement, then, for the
balance of the term following the quarter in which such
Consolidated Net Income was recorded, Employee shall receive a
one-time pay increase totaling $9,600, payable to Employee in
equal installments on a semi-monthly basis. Should the Employee
become disabled, which for purposes of this Subsection means the
inability because of any physical or emotional illness to perform
his assigned duties under this Agreement at least forty (40) hours
per week, the Employee's salary shall be adjusted in the
proportion which the number of hours the Employee is able to
perform his assigned duties during a week bears to forty (40). If
the Employee, during any period of disability, receives any
periodic payments representing lost compensation under any health
and accident policy or under any salary continuation insurance
policy, the premiums for which have been paid by the Company, the
amount of salary that the Employee would be entitled to receive
from the Company during the disability shall be decreased by the
amounts of such payments.
(b) Commission. Employee shall be paid a commission equal to
1.00% of the gross margin earned by the Company's ChartMaxx and
OptiMaxx divisions. The commission shall be paid to Employee in
accordance with the then current commission payment practices of
the Company.
(c) Bonus. Employee shall be paid a one-time $30,000 bonus if
the aggregate net revenues (as described in the Company's
financial statements) for ChartMaxx and OptiMaxx exceeds
$16,000,000 for fiscal year 2000.
(d) Automobile Allowance. During the term of this Agreement, the
Company shall pay Employee a $833.33 per month automobile
allowance in order to reimburse Employee for the expense of
owning, operating, maintaining and insuring a personal automobile
for use in performing Employee's duties hereunder.
(e) Employee Benefit Plans. The Employee shall be eligible to
participate in any profit sharing, retirement, insurance or other
employee benefit plans maintained by the Company in accordance
with and subject to the terms of those plans.
5. Key Man Life Insurance. The Company, in its discretion, may
apply for and procure in its own name and for its own benefit,
life insurance on the life of the Employee in any amount or
amounts considered advisable by the Company, and the Employee
shall submit to any medical or other examination, and shall
execute and deliver any application or other instrument in
writing, reasonably necessary to effectuate such insurance.
6. Expenses. The Company shall pay, or reimburse the Employee,
for all reasonable and necessary business expenses of the
Employee, approved by the Company.
7. Vacation and Leave. The Employee shall be entitled to the
same vacation and leave time as the other executive officers of
the Company. Officers of the Company may not carry unused
vacation time from one calendar year to another calendar year.
8. Non-Disclosure of Confidential Information. The Employee
acknowledges that in and as a result of his employment by the
Company, he will be making use of, acquiring, and/or adding to
confidential information of a special and unique nature and value
relating to such matters as the Company's patents, copyrights,
proprietary information, trade secrets, systems, procedures,
manuals, confidential reports, and lists of customers (which are
deemed for all purposes confidential and proprietary), as well as
the nature and type of services rendered by the Company, the
equipment and methods used and preferred by the Company's
customers, and the fees paid by them. As a material inducement to
the Company to enter into this Agreement and to pay to Employee
the compensation stated in Section 4, Employee covenants and
agrees that he shall not, at any time during or following the term
of his employment, directly or indirectly divulge or disclose for
any purpose whatsoever any confidential information that has been
obtained by, or disclosed to, him as a result of his employment by
the Company. In the event of a breach or threatened breach by
Employee of any of the provisions of this Section 8, the Company,
in addition to, and not in limitation of, any other rights,
remedies, or damages available to the Company at law or in equity,
shall be entitled to a permanent injunction in order to prevent or
restrain any such breach by the Employee or by Employee's
partners, agents, representatives, servants, employers, employees,
family members, and/or any and all persons directly or indirectly
acting for or with him.
9. Covenants Against Competition. The Employee acknowledges that
the services he is to render are of a special and unusual
character with a unique value to the Company, the loss of which
cannot adequately be compensated by damages in an action at law.
In view of the unique value to the Company of the services of
Employee because of the confidential information to be obtained by
or disclosed to Employee, as hereinabove set forth, and as a
material inducement to the Company to enter into this Agreement
and to pay to Employee the compensation stated in Section 4,
Employee covenants and agrees that during Employee's employment
and for a period of two (2) years after he ceases to be employed
by the Company for any reason, he will not, except as otherwise
authorized by this Agreement, compete with the Company or any
affiliate of the Company, solicit the Company's customers or the
customers of an affiliate, or directly or indirectly solicit for
employment any of the Company's employees. For purposes of this
Section 9:
(i) the term "compete" means engaging in the same or any similar
business as the Company or any of its affiliates in any manner
whatsoever (other than as a passive investor), including without
limitation, as a proprietor, partner, investor, shareholder,
director, officer, employee, consultant, independent contractor,
or otherwise, within a geographic areas served by the Company or
any of its affiliates;
(ii) the term "affiliate" means any legal entity that directly or
indirectly through one or more intermediaries controls, is
controlled by, or is under common control with the Company; and
(iii) the term "customers" means all persons to whom the Company
or any of its affiliates has sold any product or service, whether
or not for compensation, within a period of two (2) years prior to
the time the Employee ceases to be employed by the Company.
10. Reasonableness of Restrictions.
(a) The Employee has carefully read and considered the provisions
of Sections 8 and 9, and, having done so, agrees that the
restrictions set forth in said Sections, including, but not
limited to, the time period of restriction and geographical areas
of restriction are fair and reasonable and are reasonably required
for the protection of the interests of the Company and its parent
or subsidiary corporations, officers, directors, shareholders, and
other employees.
(b) In the event that, notwithstanding the foregoing, any of the
provisions of Sections 8 and 9 shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless
continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included therein. In the event
that any provision of Sections 8 or 9 relating to the time period
and/or the areas of restriction and/or related aspects shall be
declared by a court of competent jurisdiction to exceed the
maximum restrictiveness such court deems reasonable and
enforceable, the time period and/or areas of restriction and/or
related aspects deemed reasonable and enforceable by the court
shall become and thereafter be the maximum restriction in such
regard, and the restriction shall remain enforceable to the
fullest extent deemed reasonable by such court.
11. Remedies for Breach of Employee's Covenants of Non-Disclosure
and Non-Competition. In the event of a breach or threatened
breach of any of the covenants in Sections 8 and 9, the Company
shall have the right to seek monetary damages for any past breach
and equitable relief, including specific performance by means of
an injunction against the Employee or against the Employee's
partners, agents, representatives, servants, employers, employees,
family members, and/or any and all persons acting directly or
indirectly by or with him, to prevent or restrain any further
breach. In lieu thereof, or should a court refuse for any reason
to grant equitable relief to prevent continuing breaches of the
covenants in Sections 8 and 9, the Company shall be entitled to
liquidated damages equal to fifty percent (50%) of the gross
amount derived by the breaching party from all transactions in
breach of said covenants, it being agreed that such amount
represents the estimated amount of profit the Company could have
derived if it had transacted the business in question and is not a
penalty. The parties understand that the preceding sentence is
not applicable where no breach of the covenants of Section 8 or 9
occurs.
12. Termination. Employment of the Employee under this Agreement
will be terminated upon the occurrence of any one or more of the
following events:
(a) By the Employee's death.
(b) If the Employee is Totally Disabled. For the purposes of
this Agreement, the Employee will be Totally Disabled if he (1)
has been declared legally incompetent by a final court decree (the
date of such decree being deemed to be the date on which the
disability occurred), (2) receives disability insurance benefits
from any disability income insurance policy maintained by the
Company for a period of three (3) consecutive months, or (3) has
been found to be disabled pursuant to a Disability Determination.
A "Disability Determination" means a finding that the Employee,
because of a medically determinable disease, injury, or other
mental or physical disability, is unable to perform substantially
all of his regular duties to the Company and that such disability
is determined or reasonably expected to last at least six (6)
months. The Disability Determination shall be based on the
written opinion of the physician regularly attending the Employee.
If the Company disagrees with the opinion of this physician (the
"First Physician"), it may engage at its own expense another
physician (the "Second Physician") to examine the Employee. If
the First and Second Physicians agree in writing that the Employee
is or is not disabled, their written opinion shall, except as
otherwise set forth in this Subsection, be conclusive on the issue
of disability. If the First and Second Physicians disagree on the
disability of the Employee, they shall choose a third consulting
physician (whose expense shall be borne by the Company), and the
written opinion of a majority of these three physicians shall,
except as otherwise provided in this Subsection, be conclusive as
to the Employee's disability. The date of any written opinion
conclusively finding the Employee to be disabled is the date on
which the disability will be deemed to have occurred. If there is
a conclusive finding that the Employee is not Totally Disabled,
the Company shall have the right to request additional Disability
Determinations, provided it agrees to pay all the expenses of the
Disability Determinations and does not request an additional
Disability Determination more frequently than once every two (2)
months. In conjunction with a Disability Determination, the
Employee hereby consents to any required medical examination, and
agrees to furnish any medical information requested by any
examining physician and to waive any applicable physician-patient
privilege that may arise because of such examination. All
physicians except the First Physician must be board-certified in
the specialty most closely related to the nature of the disability
alleged to exist.
(c) At the election of either the Employee or the Company without
cause, upon ninety (90) days written notice; provided however,
that in the event this Agreement is terminated by the Company
pursuant to this Subsection 12(c), at the expiration of the
ninety-day period, Employee shall receive severance pay in the
amount of three months salary at the Base Salary being paid to
Employee under Subsection 4(a) at the time written notice of
termination is given, less any required withholding and
deductions.
(b) When the Employee reaches mandatory retirement age under any
retirement policy applicable to all executive officers adopted by
the Company.
(e) By mutual agreement of the Employee and the Company.
(f) By the dissolution and liquidation of the Company (other than
as part of a reorganization, merger, consolidation, or sale of all
or substantially all of the assets of the Company whereby the
business of the Company is continued).
(g) By the Company for Just Cause. For purposes of this
Agreement "Just Cause" shall mean the following: (i) a conviction
of or a plea of guilty or nolo contendre by the Employee to a
felony or misdemeanor involving fraud, embezzlement, theft, or
dishonesty or other criminal conduct against the Company; (ii)
habitual neglect of the Employee's duties or failure by the
Employee to perform or observe any substantial lawful obligation
of such employment that is not remedied within thirty (30) days
after written notice thereof from the Company or its Board of
Directors; or (iii) any material breach of this Agreement by the
Employee. Should the Employee dispute whether he was terminated
for Just Cause, then the Company and the Employee shall enter
immediately into binding arbitration pursuant to the Commercial
Arbitration Rules of the American Arbitration Association, the
cost of which shall be borne by the non-prevailing party.
In the event of termination of this Agreement other than for
death, the Employee hereby agrees to resign from all positions
held in the Company, including without limitation any position as
a director, officer, agent, trustee, or consultant of the Company
or any affiliate of the Company. For the purposes of this
provision, the term "affiliate" has the same meaning as in Section
9.
13. Waiver. A party's failure to insist on compliance or
enforcement of any provision of this Agreement, shall not affect
the validity or enforceability or constitute a waiver of future
enforcement of that provision or of any other provision of this
Agreement by that party or any other party.
14. Governing Law. This Agreement shall in all respects be
subject to, and governed by, the laws of the State of Ohio.
15. Severability. The invalidity or unenforceability of any
provision in the Agreement shall not in any way affect the
validity or enforceability of any other provision and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision had never been in the Agreement.
16. Notice. Any and all notices required or permitted herein
shall be deemed delivered if delivered personally or if mailed by
registered or certified mail to the Company at its principal place
of business and to the Employee at the address hereinafter set
forth following the Employee's signature, or at such other address
or addresses as either party may hereafter designate in writing to
the other.
17. Assignment. This Agreement, together with any amendments
hereto, shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors, assigns, heirs
and personal representatives, except that the rights and benefits
of either of the parties under this Agreement may not be assigned
without the prior written consent of the other party.
18. Amendments. This Agreement may be amended at any time by
mutual consent of the parties, provided, however, that no such
amendment shall be valid or enforceable unless in a writing signed
by the Company and the Employee.
19. Applicability of Invention and Non-Disclosure Agreement.
This Employment Agreement is supplemented by that certain
Invention and Non-Disclosure Agreement of even date herewith
between the Company and the Employee, a copy of which is attached
hereto as Schedule A and made a part hereof. These two documents
contain the entire agreement and understanding by and between the
Employee and the Company with respect to the employment of the
Employee with the Company and supersedes and merges all prior
proposals, understandings and all other agreements, oral or
written between the parties. No representations, promises,
agreements, or understandings, written or oral, with respect to
such employment not contained in these two documents shall be of
any force or effect.
20. Headings. The various headings in this Agreement are
inserted for convenience only and are not part of the Agreement.
IN WITNESS WHEREOF, the Company and Employee have duly executed
this Agreement as of the day and year first above written.
MEDPLUS, INC., Company: Timothy McMullen, Employee:
By:____________________ ____________________
Richard A. Mahoney, President Timothy McMullen
Address for Notice Purposes: Address for Notice Purposes:
8805 Governors Hill Drive 8557 Twilight Tear Lane
Cincinnati, OH 45249 Cincinnati, OH 4524
SCHEDULE A
INVENTION AND NON-DISCLOSURE AGREEMENT
This Agreement made and entered into effective as of the 1st day
of February, 1999 by and between MedPlus, Inc., an Ohio
corporation (hereinafter called the "Company," which term includes
any parent or subsidiary corporation as defined in Section 425 of
the Internal Revenue Code), and Timothy McMullen (hereinafter
called "Employee").
In consideration of the employment or continued employment of
Employee by the Company and for other good and valuable
consideration, the parties hereto agree as follows:
1. Disclosure of Inventions to Employer. For the purpose of this
Agreement, the word "invention" shall include, but not be limited
to, the following: any discovery, idea, device, process, design,
development, improvement, conception, concept, application,
technique, or invention whether patentable or not, and whether
reduced to practice or not; provided, however, that any invention
as so defined, conceived or made by Employee after termination of
employment with the Company, shall not be deemed to be within this
Agreement if it is not within the scope of the Company's business,
research, and investigations, or resulting from or suggested by
any of the work Employee has performed or may perform for the
Company. Employee will forthwith communicate to the President of
the Company (or such other individual as the President may
designate from time to time) a full and complete disclosure of
each and every invention conceived or made by Employee whether
solely or jointly with others (a) while in the employ of the
Company, whether or not while actually engaged in the Company's
affairs, and (b) within two years subsequent to termination of the
employment for any reason.
2. Assignment of Inventions. Employee agrees to assign and
transfer to the Company, without any separate remuneration or
compensation other than the wages or salary received or
compensation paid to Employee from time to time in the course of
his employment by the Company, his entire right, title, and
interest in and to all inventions conceived or made by Employee,
together with all United States and foreign patent rights and any
other legal protection in and with respect to any and all such
inventions, (a) while in the employ of the Company, whether or not
while Employee is actually engaged in the Company's affairs, or
(b) within two years subsequent thereto and as a direct or
indirect result of such employment. Upon request by the Company,
Employee agrees to execute, and deliver all appropriate patent
applications for securing all United States and foreign patents on
all such inventions, and to do, execute, and deliver any and all
acts and instruments that may be necessary or proper to vest all
such inventions and patents in the Company or its designee, and to
enable the Company or its designee to obtain all such letters
patent. Employee agrees to render to the Company or its designee
all such assistance as may be required in the prosecution of all
such patent applications and applications for the reissue of such
patents and in the prosecution or defense of all interferences
which may be declared involving any of said patent applications or
patents. Employee further agrees not to contest the validity of
any patent, United States or foreign, which is issued to the
Company or its designee, on which Employee made any contribution,
or in which Employee participated in any way, and not to assist
any other party in any way in contesting the validity of any such
patent. Employee further agrees that the obligations and
undertakings stated in this Section 2 shall continue beyond the
termination of his employment by the Company, but if Employee
shall be called upon to render such assistance after the
termination of his employment, Employee shall be entitled to a
fair and reasonable per diem fee in addition to reimbursement of
any expenses incurred at the request of the Company.
3. Prior Inventions. As a matter of record, Employee may include
a complete list of inventions made by him prior to the date of
employment by the Company as an appendix to this Agreement. Only
those inventions so listed shall be deemed to be excluded from the
terms and conditions of this Agreement.
4. Unauthorized Disclosure. Except in connection with regularly
assigned duties for the Company, Employee agrees that he will not,
without prior written approval of the President (or such other
person as the president may designate from time to time), divulge
or disclose to anyone outside of the Company, whether by private
communication or by public address or publication, or otherwise,
any invention or any specification, technical or engineering data,
or report, or any other information relating to the business or
affairs of the Company, and will not during his employment by the
Company or at any time thereafter disclose or use for his own
benefit such information or any trade secrets or confidential
information pertaining to any of the business of the Company or
any of its clients, customers, consultants, licensees, or
affiliates, whether or not such information or trade secrets were
acquired while Employee was engaged in the Company's affairs and
regardless of by whom such information or trade secrets were
generated, either by the Company or by the Employee or others in
the employ of the Company. All copies of any such information,
however and wherever produced, shall be and remain the sole
property of the Company and shall not be removed from the premises
or custody of the Company without prior written consent or
authorization of the President of the Company (or such other
person as the President may designate from time to time).
5. Remedies for Breach. Employee expressly recognizes that any
breach of this Agreement by him is likely to result in irreparable
injury to the Company and agrees that the Company shall be
entitled, if it so elects, to institute and prosecute proceedings
in any court of competent jurisdiction, either in law or in
equity, to obtain damages for any breach of this Agreement, or to
enforce the specific performance of this Agreement by Employee, or
to enjoin Employee from activities in violation of this Agreement.
6. Modification. This instrument contains the entire Agreement
of the parties with respect to the subject matter contained herein
and may be altered, amended, or superseded only by an agreement in
writing, signed by the party against whom enforcement of any
waiver, change, modification, extension, or discharge is sought.
No action or course of conduct shall constitute a waiver of any of
the terms and conditions of this Agreement, unless such waiver is
specified in writing, and then only to the extent so specified. A
waiver of any of the terms and conditions of this Agreement on one
occasion shall not constitute a waiver of the other terms and
conditions of this Agreement, or of such terms and conditions on
any other occasion.
7. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if mailed to
the party to whom such notice is given at the address of such
party hereinafter set forth or at such other address as such party
may provide in writing from time to time. Any such notice mailed
to such address shall be effective when deposited in the United
States mail, duly addressed and with first class postage prepaid.
Such notice may, but need not, be by certified mail, return
receipt requested.
8. Assignment. This Agreement shall be binding upon and shall
inure to the benefit of Employee, without regard for the duration
of his employment by the Company or the reasons for the cessation
of such employment, and upon the administrators, executors, heirs,
and assigns of Employee and shall be binding upon and shall inure
to the benefit of the successors and assigns of the Company, its
subsidiaries, and affiliates.
9. Governing Law. The validity, interpretation and performance
of this Agreement shall be governed and construed by the laws of
Ohio.
10. Severability. The invalidity or unenforceability of any
provision in this Agreement shall not in any way affect the
validity or enforceability of any other provision and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision had never been in the Agreement.
11. References to Gender and Number Terms. In construing this
Agreement, feminine or neuter pronouns shall be substituted for
those masculine in form and visa versa, and plural terms shall be
substituted for singular and singular for plural in any place in
which the context requires.
12. Headings. The section numbers and headings in this Agreement
are inserted for convenience only and are not part of the
Agreement.
IN WITNESS WHEREOF, the Company and the Employee have duly
executed this Agreement as of the date and year first above
written.
MEDPLUS, INC., Company: Employee:
By:_____________________ ____________________
Richard A. Mahoney, President Timothy McMullen
Address for Notice Purposes: Address for Notice Purposes:
8805 Governors Hill Drive 8557 Twilight Tear Lane
Cincinnati, OH 45249 Cincinnati, OH 45249
APPENDIX TO INVENTION AND NON-DISCLOSURE AGREEMENT
Employee's inventions excluded from this Agreement as authorized
by Section 3:
NONE
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
______________.
February 1, 1999
________________
Timothy McMullen
-6-
-3-
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into effective as of the 1st day
of February, 1999 by and between MedPlus, Inc., an Ohio
corporation (the "Company"), and Daniel A. Silber (the
"Employee").
WHEREAS, the Company desires to employ or continue to employ the
Employee on certain terms and conditions as set forth herein; and
WHEREAS, the Employee is willing to accept such employment;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants and promises hereinafter contained, do hereby agree as
follows:
1. Employment. The Company hereby employs or continues to employ
the Employee in the capacity of Vice President of Finance,
Treasurer and Chief Financial Officer, or in such other position
as the Company may direct or desire and Employee hereby accepts
the employment, on the terms and conditions hereinafter set forth.
2. Duties. The Employee's principal duties and responsibilities
shall include: maintenance of adequate systems of internal
control; timely financial reporting to management, shareholders
and governmental agencies; implementation of appropriate
accounting practices and policies; optimization of return on all
corporate assets; oversight of annual audits of financial
statements; preparation of corporate tax returns; and such other
duties which may be assigned to him from time to time by the
Company in connection with the conduct of its business. Nothing
herein shall preclude the Company from changing the Employee's
title and duties if the Company's Board of Directors has concluded
in its reasonable judgement that such change is in the Company's
best interests. Employee agrees to well and faithfully perform
and discharge such services and duties and hold such offices as
may be assigned to him from time to time by the Company and to
devote substantially his full time, energies, and best efforts to
the performance thereof to the exclusion of all other business
activities. In the event the Employee is elected a Director of
the Company or any subsidiary during the term of this Agreement,
the Employee agrees to serve in such capacity without further
compensation.
3. Term. The term of employment shall begin on February 1, 1999
and shall continue for a period of twelve (12) months, unless
earlier terminated pursuant to the provisions of this Agreement.
4. Salary and Other Compensation. As compensation for the
services to be rendered by the Employee to the Company pursuant to
this Agreement, the Employee shall be paid the following
compensation and other benefits:
(a) Salary. During the term of this Agreement, Employee shall
be paid at the rate of Ten Thousand and 00/100 Dollars
($10,000.00) per month, payable monthly in arrears. If the
Company records Consolidated Net Income (as reported in the
Company's quarterly financial statements) for any quarter during
the term of this Agreement, then, for the balance of the term
following the quarter in which such Consolidated Net Income was
recorded, Employee shall receive a one-time pay increase totaling
$12,000, payable to Employee in equal installments on a semi-
monthly basis. Should the Employee become disabled, which for
purposes of this Subsection means the inability because of any
physical or emotional illness to perform his assigned duties under
this Agreement at least forty (40) hours per week, the Employee's
salary shall be adjusted in the proportion which the number of
hours the Employee is able to perform his assigned duties during a
week bears to forty (40). If the Employee, during any period of
disability, receives any periodic payments representing lost
compensation under any health and accident policy or under any
salary continuation insurance policy, the premiums for which have
been paid by the Company, the amount of salary that the Employee
would be entitled to receive from the Company during the
disability shall be decreased by the amounts of such payments.
(b) Corporate Bonus. For each fiscal quarter in which the
Company's income exceeds its expenses, i.e., the Company records a
profit, Employee shall receive a bonus of $5,000. For each fiscal
quarter in which the Company's income exceeds the Company's
consolidated net income goal, the Employee shall receive an
additional bonus of $2,500. The bonus shall be paid to Employee
on the last day of the month in which the Company issues its
quarterly earnings release to the public.
(c) Automobile Allowance. During the term of this Agreement, the
Company shall pay Employee a $450.00 per month automobile
allowance in order to reimburse Employee for the expense of
owning, operating, maintaining and insuring a personal automobile
for use in performing Employee's duties hereunder.
(d) Employee Benefit Plans. Employee shall be eligible to
participate, to the extent he may be eligible to participate
pursuant to the terms of such plans, in any profit sharing,
retirement, insurance or other employee benefit plans maintained
by the Company.
5. Key Man Life Insurance. The Company, in its discretion, may
apply for and procure in its own name and for its own benefit,
life insurance on the life of the Employee in any amount or
amounts considered advisable by the Company, and the Employee
shall submit to any medical or other examination, and shall
execute and deliver any application or other instrument in
writing, reasonably necessary to effectuate such insurance.
6. Expenses. The Company shall pay, or reimburse the Employee,
for all reasonable and necessary business expenses of the
Employee, approved by the Company.
7. Vacation and Leave. The Employee shall be entitled to the
same vacation and leave time as the other executive officers of
the Company. Officers of the Company may not carry unused
vacation time from one calendar year to another calendar year.
8. Non-Disclosure of Confidential Information. The Employee
acknowledges that in and as a result of his employment by the
Company, he will be making use of, acquiring, and/or adding to
confidential information of a special and unique nature and value
relating to such matters as the Company's patents, copyrights,
proprietary information, trade secrets, systems, procedures,
manuals, confidential reports, and lists of customers (which are
deemed for all purposes confidential and proprietary), as well as
the nature and type of services rendered by the Company, the
equipment and methods used and preferred by the Company's
customers, and the fees paid by them. As a material inducement to
the Company to enter into this Agreement and to pay to Employee
the compensation stated in Section 4, Employee covenants and
agrees that he shall not, at any time during or following the term
of his employment, directly or indirectly divulge or disclose for
any purpose whatsoever any confidential information that has been
obtained by, or disclosed to, him as a result of his employment by
the Company. In the event of a breach or threatened breach by
Employee of any of the provisions of this Section 8, the Company,
in addition to, and not in limitation of, any other rights,
remedies, or damages available to the Company at law or in equity,
shall be entitled to a permanent injunction in order to prevent or
restrain any such breach by the Employee or by Employee's
partners, agents, representatives, servants, employers, employees,
family members, and/or any and all persons directly or indirectly
acting for or with him.
9. Covenants Against Competition. The Employee acknowledges that
the services he is to render are of a special and unusual
character with a unique value to the Company, the loss of which
cannot adequately be compensated by damages in an action at law.
In view of the unique value to the Company of the services of
Employee because of the confidential information to be obtained by
or disclosed to Employee, as hereinabove set forth, and as a
material inducement to the Company to enter into this Agreement
and to pay to Employee the compensation stated in Section 4,
Employee covenants and agrees that during Employee's employment
and for a period of two (2) years after he ceases to be employed
by the Company for any reason, he will not, except as otherwise
authorized by this Agreement, compete with the Company or any
affiliate of the Company, solicit the Company's customers or the
customers of an affiliate, or directly or indirectly solicit for
employment any of the Company's employees. For purposes of this
Section 9:
(a) the term "compete" means engaging in the same or any similar
business as the Company or any of its affiliates in any manner
whatsoever (other than as a passive investor), including without
limitation, as a proprietor, partner, investor, shareholder,
director, officer, employee, consultant, independent contractor,
or otherwise, within a geographic areas served by the Company or
any of its affiliates;
(b) the term "affiliate" means any legal entity that directly or
indirectly through one or more intermediaries controls, is
controlled by, or is under common control with the Company; and
(c) the term "customers" means all persons to whom the Company
orany of its affiliates has sold any product or service, whether
or not for compensation, within a period of two (2) years prior to
the time the Employee ceases to be employed by the Company.
10. Reasonableness of Restrictions.
(a) The Employee has carefully read and considered the provisions
of Sections 8 and 9, and, having done so, agrees that the
restrictions set forth in said Sections, including, but not
limited to, the time period of restriction and geographical areas
of restriction are fair and reasonable and are reasonably required
for the protection of the interests of the Company and its parent
or subsidiary corporations, officers, directors, shareholders, and
other employees.
(b) In the event that, notwithstanding the foregoing, any of the
provisions of Sections 8 and 9 shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless
continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included therein. In the event
that any provision of Sections 8 or 9 relating to the time period
and/or the areas of restriction and/or related aspects shall be
declared by a court of competent jurisdiction to exceed the
maximum restrictiveness such court deems reasonable and
enforceable, the time period and/or areas of restriction and/or
related aspects deemed reasonable and enforceable by the court
shall become and thereafter be the maximum restriction in such
regard, and the restriction shall remain enforceable to the
fullest extent deemed reasonable by such court.
11. Remedies for Breach of Employee's Covenants of Non-Disclosure
and Non-Competition. In the event of a breach or threatened
breach of any of the covenants in Sections 8 and 9, the Company
shall have the right to seek monetary damages for any past breach
and equitable relief, including specific performance by means of
an injunction against the Employee or against the Employee's
partners, agents, representatives, servants, employers, employees,
family members, and/or any and all persons acting directly or
indirectly by or with him, to prevent or restrain any further
breach. In lieu thereof, or should a court refuse for any reason
to grant equitable relief to prevent continuing breaches of the
covenants in Sections 8 and 9, the Company shall be entitled to
liquidated damages equal to fifty percent (50%) of the gross
amount derived by the breaching party from all transactions in
breach of said covenants, it being agreed that such amount
represents the estimated amount of profit the Company could have
derived if it had transacted the business in question and is not a
penalty.
12. Termination. Employment of the Employee under this Agreement
will be terminated upon the occurrence of any one or more of the
following events:
(a) the Employee's death.
(b) If the Employee is Totally Disabled. For the purposes of
this Agreement, the Employee will be Totally Disabled if he (1)
has been declared legally incompetent by a final court decree (the
date of such decree being deemed to be the date on which the
disability occurred), (2) receives disability insurance benefits
from any disability income insurance policy maintained by the
Company for a period of three (3) consecutive months, or (3) has
been found to be disabled pursuant to a Disability Determination.
A "Disability Determination" means a finding that the Employee,
because of a medically determinable disease, injury, or other
mental or physical disability, is unable to perform substantially
all of his regular duties to the Company and that such disability
is determined or reasonably expected to last at least three (3)
months. The Disability Determination shall be based on the
written opinion of the physician regularly attending the Employee.
If the Company disagrees with the opinion of this physician (the
"First Physician"), it may engage at its own expense another
physician (the "Second Physician") to examine the Employee. If
the First and Second Physicians agree in writing that the Employee
is or is not disabled, their written opinion shall, except as
otherwise set forth in this Subsection, be conclusive on the issue
of disability. If the First and Second Physicians disagree on the
disability of the Employee, they shall choose a third consulting
physician (whose expense shall be borne by the Company), and the
written opinion of a majority of these three physicians shall,
except as otherwise provided in this Subsection, be conclusive as
to the Employee's disability. The date of any written opinion
conclusively finding the Employee to be disabled is the date on
which the disability will be deemed to have occurred. If there is
a conclusive finding that the Employee is not Totally Disabled,
the Company shall have the right to request additional Disability
Determinations, provided it agrees to pay all the expenses of the
Disability Determinations and does not request an additional
Disability Determination more frequently than once every two (2)
months. In conjunction with a Disability Determination, the
Employee hereby consents to any required medical examination, and
agrees to furnish any medical information requested by any
examining physician and to waive any applicable physician-patient
privilege that may arise because of such examination. All
physicians except the First Physician must be board-certified in
the specialty most closely related to the nature of the disability
alleged to exist.
(c) At the election of either the Employee or the Company without
cause, upon ninety (90) days written notice; provided however,
that in the event this Agreement is terminated by the Company
pursuant to this Subsection 12(c), at the expiration of the
ninety-day period, Employee shall receive severance pay in the
amount of six months salary at the rate being paid to Employee
under Subsection 4(a) at the time written notice of termination is
given, less any required withholding and deductions.
(d) When the Employee reaches mandatory retirement age under any
retirement policy applicable to all executive officers adopted by
the Company.
(e) By mutual agreement of the Employee and the Company.
(f) By the dissolution and liquidation of the Company (other than
as part of a reorganization, merger, consolidation, or sale of all
or substantially all of the assets of the Company whereby the
business of the Company is continued).
(g) By the Company for Just Cause. For purposes of this
Agreement "Just Cause" shall mean the following: (i) a conviction
of or a plea of guilty or nolo contendre by the Employee to a
felony or misdemeanor involving fraud, embezzlement, theft, or
dishonesty or other criminal conduct against the Company; (ii)
habitual neglect of the Employee's duties or failure by the
Employee to perform or observe any substantial lawful obligation
of such employment that is not remedied within thirty (30) days
after written notice thereof from the Company or its Board of
Directors; or (iii) any material breach of this Agreement by the
Employee. Should the Employee dispute whether he was terminated
for Just Cause, then the Company and the Employee shall enter
immediately into binding arbitration pursuant to the Commercial
Arbitration Rules of the American Arbitration Association, the
cost of which shall be borne by the non-prevailing party.
In the event of termination of this Agreement other than for
death, the Employee hereby agrees to resign from all positions
held in the Company, including without limitation any position as
a director, officer, agent, trustee, or consultant of the Company
or any affiliate of the Company. For the purposes of this
provision, the term "affiliate" has the same meaning as in Section
9.
13. Waiver. A party's failure to insist on compliance or
enforcement of any provision of this Agreement, shall not affect
the validity or enforceability or constitute a waiver of future
enforcement of that provision or of any other provision of this
Agreement by that party or any other party.
14. Governing Law. This Agreement shall in all respects be
subject to, and governed by, the laws of the State of Ohio.
15. Severability. The invalidity or unenforceability of any
provision in the Agreement shall not in any way affect the
validity or enforceability of any other provision and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision had never been in the Agreement.
16. Notice. Any and all notices required or permitted herein
shall be deemed delivered if delivered personally or if mailed by
registered or certified mail to the Company at its principal place
of business and to the Employee at the address hereinafter set
forth following the Employee's signature, or at such other address
or addresses as either party may hereafter designate in writing to
the other.
17. Assignment. This Agreement, together with any amendments
hereto, shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors, assigns, heirs
and personal representatives, except that the rights and benefits
of either of the parties under this Agreement may not be assigned
without the prior written consent of the other party.
18. Amendments. This Agreement may be amended at any time by
mutual consent of the parties, provided, however, that no such
amendment shall be valid or enforceable unless in a writing signed
by the Company and the Employee.
19. Applicability of Invention and Non-Disclosure Agreement.
This Employment Agreement is supplemented by that certain
Invention and Non-Disclosure Agreement of even date herewith
between the Company and the Employee, a copy of which is attached
hereto as Schedule A and made a part hereof. These two documents
contain the entire agreement and understanding by and between the
Employee and the Company with respect to the employment of the
Employee with the Company and supersedes and merges all prior
proposals, understandings and all other agreements, oral and
written between the parties. No representations, promises,
agreements, or understandings, written or oral, with respect to
such employment not contained in these two documents shall be of
any force or effect.
20. Headings. The various headings in this Agreement are
inserted for convenience only and are not part of the Agreement.
IN WITNESS WHEREOF, the Company and Employee have duly executed
this Agreement as of the day and year first above written.
MEDPLUS, INC., Company: Employee:
By:___________________ ____________________
Richard A. Mahoney, President Daniel A. Silber
Address for Notice Purposes: Address for Notice Purposes:
8805 Governors Hill Drive 924 Palomino Drive
Cincinnati, OH 45249 Villa Hills, KY 4101
SCHEDULE A
INVENTION AND NON-DISCLOSURE AGREEMENT
This Agreement made and entered into effective as of the 1st day
of February, 1999 by and between MedPlus, Inc., an Ohio
corporation (hereinafter called the "Company," which term includes
any parent or subsidiary corporation as defined in Section 425 of
the Internal Revenue Code), and Daniel A. Silber (hereinafter
called "Employee").
In consideration of the employment or continued employment of
Employee by the Company and for other good and valuable
consideration, the parties hereto agree as follows:
1. Disclosure of Inventions to Employer. For the purpose of this
Agreement, the word "invention" shall include, but not be limited
to, the following: any discovery, idea, device, process, design,
development, improvement, conception, concept, application,
technique, or invention whether patentable or not, and whether
reduced to practice or not; provided, however, that any invention
as so defined, conceived or made by Employee after termination of
employment with the Company, shall not be deemed to be within this
Agreement if it is not within the scope of the Company's business,
research, and investigations, or resulting from or suggested by
any of the work Employee has performed or may perform for the
Company. Employee will forthwith communicate to the President of
the Company (or such other individual as the President may
designate from time to time) a full and complete disclosure of
each and every invention conceived or made by Employee whether
solely or jointly with others (a) while in the employ of the
Company, whether or not while actually engaged in the Company's
affairs, and (b) within two years subsequent to termination of the
employment for any reason.
2. Assignment of Inventions. Employee agrees to assign and
transfer to the Company, without any separate remuneration or
compensation other than the wages or salary received or
compensation paid to Employee from time to time in the course of
his employment by the Company, his entire right, title, and
interest in and to all inventions conceived or made by Employee,
together with all United States and foreign patent rights and any
other legal protection in and with respect to any and all such
inventions, (a) while in the employ of the Company, whether or not
while Employee is actually engaged in the Company's affairs, or
(b) within two years subsequent thereto and as a direct or
indirect result of such employment. Upon request by the Company,
Employee agrees to execute, and deliver all appropriate patent
applications for securing all United States and foreign patents on
all such inventions, and to do, execute, and deliver any and all
acts and instruments that may be necessary or proper to vest all
such inventions and patents in the Company or its designee, and to
enable the Company or its designee to obtain all such letters
patent. Employee agrees to render to the Company or its designee
all such assistance as may be required in the prosecution of all
such patent applications and applications for the reissue of such
patents and in the prosecution or defense of all interferences
which may be declared involving any of said patent applications or
patents. Employee further agrees not to contest the validity of
any patent, United States or foreign, which is issued to the
Company or its designee, on which Employee made any contribution,
or in which Employee participated in any way, and not to assist
any other party in any way in contesting the validity of any such
patent. Employee further agrees that the obligations and
undertakings stated in this Section 2 shall continue beyond the
termination of his employment by the Company, but if Employee
shall be called upon to render such assistance after the
termination of his employment, Employee shall be entitled to a
fair and reasonable per diem fee in addition to reimbursement of
any expenses incurred at the request of the Company.
3. Prior Inventions. As a matter of record, Employee may include
a complete list of inventions made by him prior to the date of
employment by the Company as an appendix to this Agreement. Only
those inventions so listed shall be deemed to be excluded from the
terms and conditions of this Agreement.
4. Unauthorized Disclosure. Except in connection with regularly
assigned duties for the Company, Employee agrees that he will not,
without prior written approval of the President (or such other
person as the president may designate from time to time), divulge
or disclose to anyone outside of the Company, whether by private
communication or by public address or publication, or otherwise,
any invention or any specification, technical or engineering data,
or report, or any other information relating to the business or
affairs of the Company, and will not during his employment by the
Company or at any time thereafter disclose or use for his own
benefit such information or any trade secrets or confidential
information pertaining to any of the business of the Company or
any of its clients, customers, consultants, licensees, or
affiliates, whether or not such information or trade secrets were
acquired while Employee was engaged in the Company's affairs and
regardless of by whom such information or trade secrets were
generated, either by the Company or by the Employee or others in
the employ of the Company. All copies of any such information,
however and wherever produced, shall be and remain the sole
property of the Company and shall not be removed from the premises
or custody of the Company without prior written consent or
authorization of the President of the Company (or such other
person as the President may designate from time to time).
5. Remedies for Breach. Employee expressly recognizes that any
breach of this Agreement by him is likely to result in irreparable
injury to the Company and agrees that the Company shall be
entitled, if it so elects, to institute and prosecute proceedings
in any court of competent jurisdiction, either in law or in
equity, to obtain damages for any breach of this Agreement, or to
enforce the specific performance of this Agreement by Employee, or
to enjoin Employee from activities in violation of this Agreement.
6. Modification. This instrument contains the entire Agreement
of the parties with respect to the subject matter contained herein
and may be altered, amended, or superseded only by an agreement in
writing, signed by the party against whom enforcement of any
waiver, change, modification, extension, or discharge is sought.
No action or course of conduct shall constitute a waiver of any of
the terms and conditions of this Agreement, unless such waiver is
specified in writing, and then only to the extent so specified. A
waiver of any of the terms and conditions of this Agreement on one
occasion shall not constitute a waiver of the other terms and
conditions of this Agreement, or of such terms and conditions on
any other occasion.
7. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if mailed to
the party to whom such notice is given at the address of such
party hereinafter set forth or at such other address as such party
may provide in writing from time to time. Any such notice mailed
to such address shall be effective when deposited in the United
States mail, duly addressed and with first class postage prepaid.
Such notice may, but need not, be by certified mail, return
receipt requested.
8. Assignment. This Agreement shall be binding upon and shall
inure to the benefit of Employee, without regard for the duration
of his employment by the Company or the reasons for the cessation
of such employment, and upon the administrators, executors, heirs,
and assigns of Employee and shall be binding upon and shall inure
to the benefit of the successors and assigns of the Company, its
subsidiaries, and affiliates.
9. Governing Law. The validity, interpretation and performance
of this Agreement shall be governed and construed by the laws of
Ohio.
10. Severability. The invalidity or unenforceability of any
provision in this Agreement shall not in any way affect the
validity or enforceability of any other provision and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision had never been in the Agreement.
11. References to Gender and Number Terms. In construing this
Agreement, feminine or neuter pronouns shall be substituted for
those masculine in form and visa versa, and plural terms shall be
substituted for singular and singular for plural in any place in
which the context requires.
12. Headings. The section numbers and headings in this Agreement
are inserted for convenience only and are not part of the
Agreement.
IN WITNESS WHEREOF, the Company and the Employee have duly
executed this Agreement as of the date and year first above
written.
MEDPLUS, INC., Company: Employee:
8805 Governor's Hill Drive
Cincinnati, OH 45249
By:____________________ ____________________
Richard A. Mahoney, President Daniel A. Silber
Address: 924 Palomino Drive
Villa Hills, KY 41017
APPENDIX TO INVENTION AND NON-DISCLOSURE AGREEMENT
Employee's inventions excluded from this Agreement as authorized
by Section 3:
NONE
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
_______________________________________________________.
February 1, 1999
___________________________________
Daniel A. Silber
-7-
4
EMPLOYMENT AGREEMENT
THIS AGREEMENT made and entered into effective as of the 1st day
of February, 1999 by and between MedPlus, Inc., an Ohio
corporation (the "Company"), and Paul Albrecht (the "Employee").
WHEREAS, the Company desires to employ or continue to employ the
Employee on certain terms and conditions as set forth herein; and
WHEREAS, the Employee is willing to accept such employment;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants and promises hereinafter contained, do hereby agree as
follows:
1. Employment. The Company hereby employs or continues to employ
the Employee in the capacity of Vice President and Chief
Technology Officer, or in such other position as the Company may
direct or desire and Employee hereby accepts the employment, on
the terms and conditions hereinafter set forth.
2. Duties. The Employee's principal duties and responsibilities
shall include: planning and managing future product and
development activities of the Company; providing technical support
and training for the Company's sales force, assisting in the
promotion and sales of products through participation at national,
local, and regional trade shows and other appropriate forums;
participation in direct end-user sales presentations; and such
other duties which may be assigned to him from time to time by the
Company in connection with the conduct of its business. Nothing
herein shall preclude the Company from changing the Employee's
title and duties if the Company has concluded in its reasonable
judgement that such change is in the Company's best interests.
Employee agrees to well and faithfully perform and discharge such
services and duties and hold such offices as may be assigned to
him from time to time by the Company and to devote his full time,
energies, and best efforts to the performance thereof to the
exclusion of all other business activities. In the event the
Employee is elected a Director of the Company or any subsidiary
during the term of this Agreement, the Employee agrees to serve in
such capacity without further compensation.
3. Term. The term of employment shall begin on February 1, 1999
and shall continue for a period of twelve (12) months, unless
earlier terminated pursuant to the provisions of this Agreement.
4. Salary and Other Compensation. As compensation for the
services to be rendered by the Employee to the Company pursuant to
this Agreement, the Employee shall be paid the following
compensation and other benefits:
(a) Salary. During the first three months of the term of this
Agreement, Employee shall be paid at the rate of Nine Thousand One
Hundred Sixty-Six and 66/100 Dollars ($9,166.66) per month,
payable semi-monthly in arrears. During the remaining nine months
of the term of this Agreement, Employee shall be paid at the rate
of Ten Thousand Two Hundred Seventy-Seven and 78/100 Dollars
($10,277.78) per month, payable semi-monthly in arrears. Should
the employee become disabled, which for purposes of this
Subsection means the inability because of any physical or
emotional illness to perform his assigned duties under this
Agreement at least forty (40) hours per week, the Employee's
salary shall be adjusted in the proportion which the number of
hours the Employee is able to perform his assigned duties during a
week bears to forty (40). If the Employee, during any period of
disability, receives any periodic payments representing lost
compensation under any health and accident policy or under any
salary continuation insurance policy, the premiums for which have
been paid by the Company, the amount of salary that the Employee
would be entitled to receive from the Company during the
disability shall be decreased by the amounts of such payments.
(b) Incentive Compensation. For each ChartMaxxT system shipped
to a customer during the term of this Agreement, Employee shall be
paid (i) Two Thousand Five Hundred Dollars ($2,500) if the
ChartMaxx system has a value of $499,999 or less, (ii) Five
Thousand Dollars ($5,000) if the ChartMaxx system has a value of
$500,000 to $999,999 and (iii) Ten Thousand Dollars ($10,000) if
the ChartMaxx system has a value of $1,000,000 or more. For
purposes of this paragraph, the "value" of a ChartMaxx system
shall equal the amount to be paid by the customer to MedPlus for
all products and services associated with such system, excluding
support fees. Incentive compensation shall be paid when MedPlus
has shipped more than 50% of the dollar value of system hardware &
software to Customer.
(c) Automobile Allowance. During the term of this Agreement, the
Company shall pay Employee a $450.00 per month automobile
allowance in order to reimburse Employee for the expense of
owning, operating, maintaining and insuring a personal automobile
for use in performing Employee's duties hereunder.
(d) Employee Benefit Plans. Employee shall be eligible to
participate, to the extent he may be eligible to participate
pursuant to the terms of such plans, in any profit sharing,
retirement, insurance or other employee benefit plans maintained
by the Company.
(e) Cellular Phone Allowance. During the term of this Agreement,
the Company shall pay Employee a $50.00 per month cellular phone
allowance in order to reimburse Employee for the expense of
operating a cellular phone for use in performing Employee's duties
hereunder.
5. Key Man Life Insurance. The Company, in its discretion, may
apply for and procure in its own name and for its own benefit,
life insurance on the life of the Employee in any amount or
amounts considered advisable by the Company, and the Employee
shall submit to any medical or other examination, and shall
execute and deliver any application or other instrument in
writing, reasonably necessary to effectuate such insurance.
6. Expenses. The Company shall pay, or reimburse the Employee,
for all reasonable and necessary business expenses of the Employee
approved by the Company.
7. Vacation and Leave. The Employee shall be entitled to the
same vacation and leave time as the other executive level
employees of the Company. Unused vacation time may not be carried
from one calendar year to another calendar year.
8. Non-Disclosure of Confidential Information. The Employee
acknowledges that in and as a result of his employment by the
Company, he will be making use of, acquiring, and/or adding to
confidential information of a special and unique nature and value
relating to such matters as the Company's patents, copyrights,
proprietary information, trade secrets, systems, procedures,
manuals, confidential reports, and lists of customers (which are
deemed for all purposes confidential and proprietary), as well as
the nature and type of services rendered by the Company, the
equipment and methods used and preferred by the Company's
customers, and the fees paid by them. As a material inducement to
the Company to enter into this Agreement and to pay to Employee
the compensation stated in Section 4, Employee covenants and
agrees that he shall not, at any time during or following the term
of his employment, directly or indirectly divulge or disclose for
any purpose whatsoever any confidential information that has been
obtained by, or disclosed to, him as a result of his employment by
the Company. In the event of a breach or threatened breach by
Employee of any of the provisions of this Section 8, the Company,
in addition to, and not in limitation of, any other rights,
remedies, or damages available to the Company at law or in equity,
shall be entitled to a permanent injunction in order to prevent or
restrain any such breach by the Employee or by Employee's
partners, agents, representatives, servants, employers, employees,
family members, and/or any and all persons directly or indirectly
acting for or with him.
9. Covenants Against Competition. The Employee acknowledges that
the services he is to render are of a special and unusual
character with a unique value to the Company, the loss of which
cannot adequately be compensated by damages in an action at law.
In view of the unique value to the Company of the services of
Employee, because of the confidential information to be obtained
by or disclosed to Employee, as hereinabove set forth, and as a
material inducement to the Company to enter into this Agreement
and to pay to Employee the compensation stated in Section 4,
Employee covenants and agrees that during Employee's employment
and for a period of one (1) year after he ceases to be employed by
the Company for any reason, he will not, except as otherwise
authorized by this Agreement, compete with the Company or any
affiliate of the Company, solicit the Company's customers or the
customers of an affiliate, or directly or indirectly solicit for
employment any of the Company's employees. In the event the
Employee ceases to be employed by the Company because the
Employee's work location for the Company is moved more than 100
miles from its present location, the preceding sentence shall not
apply to the Employee, provided, however, that in the event the
Employee ceases to be employed by the Company because the
Employee's work location for the Company is moved more than 100
miles from its present location, the Employee does not take a
position or otherwise compete with the Company at a location which
is also more than 100 miles from the Employee's current work
location. For purposes of this Section 9:
(i) the term "compete" means engaging in the design, development
and/or sale of an electronic patient record system similar to the
Company's ChartMaxx product or engaging in the design, development
and/or sale of a document archival system similar to the Company's
OptiMaxx product (other than as a passive investor), including
without limitation, as a proprietor, partner, investor,
shareholder, director, officer, employee, consultant, independent
contractor, or otherwise, within a geographic areas served by the
Company or any of its affiliates;
(ii) the term "affiliate" means any legal entity that directly or
indirectly through one or more intermediaries controls, is
controlled by, or is under common control with the Company; and
(iii) the term "customers" means all persons to whom the Company
or any of its affiliates has sold any product or service, whether
or not for compensation, within a period of two (2) years prior to
the time the Employee ceases to be employed by the Company.
10. Reasonableness of Restrictions.
(a) The Employee has carefully read and considered the provisions
of Sections 8 and 9, and, having done so, agrees that the
restrictions set forth in said Sections, including, but not
limited to, the time period of restriction and geographical areas
of restriction are fair and reasonable and are reasonably required
for the protection of the interests of the Company and its parent
or subsidiary corporations, officers, directors, shareholders, and
other employees.
(b) In the event that, notwithstanding the foregoing, any of the
provisions of Sections 8 and 9 shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless
continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included therein. In the event
that any provision of Sections 8 or 9 relating to the time period
and/or the areas of restriction and/or related aspects shall be
declared by a court of competent jurisdiction to exceed the
maximum restrictiveness such court deems reasonable and
enforceable, the time period and/or areas of restriction and/or
related aspects deemed reasonable and enforceable by the court
shall become and thereafter be the maximum restriction in such
regard, and the restriction shall remain enforceable to the
fullest extent deemed reasonable by such court.
11. Remedies for Breach of Employee's Covenants of Non-Disclosure
and Non-Competition. In the event of a breach or threatened
breach of any of the covenants in Sections 8 and 9, the Company
shall have the right to seek monetary damages for any past breach
and equitable relief, including specific performance by means of
an injunction against the Employee or against the Employee's
partners, agents, employers, employees, and/or any and all persons
acting directly by or with him, to prevent or restrain any further
breach. In lieu thereof, or should a court refuse for any reason
to grant equitable relief to prevent continuing breaches of the
covenants in Sections 8 and 9, the Company shall be entitled to
liquidated damages equal to fifty percent (50%) of the gross
amount derived by the breaching party from all transactions in
breach of said covenants, it being agreed that such amount
represents the estimated amount of profit the Company could have
derived if it had transacted the business in question and is not a
penalty.
12. Termination. Employment of the Employee under this Agreement
will be terminated upon the occurrence of any one or more of the
following events:
(a) By the Employee's death.
(b) If the Employee is Totally Disabled. For the purposes of
this Agreement, the Employee will be Totally Disabled if he (1)
has been declared legally incompetent by a final court decree (the
date of such decree being deemed to be the date on which the
disability occurred), (2) receives disability insurance benefits
from any disability income insurance policy maintained by the
Company for a period of three (3) consecutive months, or (3) has
been found to be disabled pursuant to a Disability Determination.
A "Disability Determination" means a finding that the Employee,
because of a medically determinable disease, injury, or other
mental or physical disability, is unable to perform substantially
all of his regular duties to the Company and that such disability
is determined or reasonably expected to last at least three (3)
months. The Disability Determination shall be based on the
written opinion of the physician regularly attending the Employee.
If the Company disagrees with the opinion of this physician (the
"First Physician"), it may engage at its own expense another
physician (the "Second Physician") to examine the Employee. If
the First and Second Physicians agree in writing that the Employee
is or is not disabled, their written opinion shall, except as
otherwise set forth in this Subsection, be conclusive on the issue
of disability. If the First and Second Physicians disagree on the
disability of the Employee, they shall choose a third consulting
physician (whose expense shall be borne by the Company), and the
written opinion of a majority of these three physicians shall,
except as otherwise provided in this Subsection, be conclusive as
to the Employee's disability. The date of any written opinion
conclusively finding the Employee to be disabled is the date on
which the disability will be deemed to have occurred. If there is
a conclusive finding that the Employee is not Totally Disabled,
the Company shall have the right to request additional Disability
Determinations, provided it agrees to pay all the expenses of the
Disability Determinations and does not request an additional
Disability Determination more frequently than once every two (2)
months. In conjunction with a Disability Determination, the
Employee hereby consents to any required medical examination, and
agrees to furnish any medical information requested by any
examining physician and to waive any applicable physician-patient
privilege that may arise because of such examination. All
physicians except the First Physician must be board-certified in
the specialty most closely related to the nature of the disability
alleged to exist.
(c) At the election of either the Employee or the Company without
cause, upon ninety (90) days advance written notice to the other
party.
(d) By mutual agreement of the Employee and the Company.
(e) By the dissolution and liquidation of the Company (other than
as part of a reorganization, merger, consolidation, or sale of all
or substantially all of the assets of the Company whereby the
business of the Company is continued).
(f) By the Company for Just Cause. For purposes of this
Agreement "Just Cause" shall mean the following: (i) a conviction
of or a plea of guilty or nolo contendre by the Employee to a
felony or misdemeanor involving fraud, embezzlement, theft, or
dishonesty or other criminal conduct against the Company; (ii)
habitual neglect of the Employee's duties or failure by the
Employee to perform or observe any substantial lawful obligation
of such employment that is not remedied within thirty (30) days
after written notice thereof from the Company or it Board of
Directors; or (iii) any material breach of this Agreement by the
Employee. Should the Employee dispute whether he was terminated
for Just Cause, then the Company and the Employee shall enter
immediately into binding arbitration pursuant to the Commercial
Arbitration Rules of the American Arbitration Association, the
cost of which shall be borne by the non-prevailing party.
13. In the event of termination of this Agreement other than for
death, the Employee hereby agrees to resign from all positions
held in the Company, including without limitation any position as
a director, officer, agent, trustee, or consultant of the Company
or any affiliate of the Company. For the purposes of this
provision, the term "affiliate" has the same meaning as in Section
9.
14. Waiver. A party's failure to insist on compliance or
enforcement of any provision of this Agreement, shall not affect
the validity or enforceability or constitute a waiver of future
enforcement of that provision or of any other provision of this
Agreement by that party or any other party.
15. Governing Law. This Agreement shall in all respects be
subject to, and governed by, the laws of the State of Ohio.
16. Severability. The invalidity or unenforceability of any
provision in the Agreement shall not in any way affect the
validity or enforceability of any other provision and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision had never been in the Agreement.
17. Notice. Any and all notices required or permitted herein
shall be deemed delivered if delivered personally or if mailed by
registered or certified mail to the Company at its principal place
of business and to the Employee at the address hereinafter set
forth following the Employee's signature, or at such other address
or addresses as either party may hereafter designate in writing to
the other.
18. Assignment. This Agreement, together with any amendments
hereto, shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors, assigns, heirs
and personal representatives, except that the rights and benefits
of either of the parties under this Agreement may not be assigned
without the prior written consent of the other party.
19. Amendments. This Agreement may be amended at any time by
mutual consent of the parties, provided, however, that no such
amendment shall be valid or enforceable unless in a writing signed
by the Company and the Employee.
20. Applicability of Invention and Non-Disclosure Agreement.
This Employment Agreement is supplemented by that certain
Invention and Non-Disclosure Agreement of even date herewith
between the Company and the Employee, a copy of which is attached
hereto as Schedule A and made a part hereof. These two documents
contain the entire agreement and understanding by and between the
Employee and the Company with respect to the employment of the
Employee with the Company and supersedes and merges all prior
proposals, understandings and all other agreements, oral and
written between the parties. No representations, promises,
agreements, or understandings, written or oral, with respect to
such employment not contained in these two documents shall be of
any force or effect.
21. Headings. The various headings in this Agreement are
inserted for convenience only and are not part of the Agreement.
IN WITNESS WHEREOF, the Company and Employee have duly executed
this Agreement as of the day and year first above written.
MEDPLUS, INC., Company: Paul Albrecht, Employee:
By:____________________ ____________________
Richard A. Mahoney, President Paul Albrecht
Address for Notice Purposes: Address for Notice Purposes:
8805 Governors Hill Drive 722 Miamiheights Court
Cincinnati, OH 45249 Loveland, OH 45140
SCHEDULE A
INVENTION AND NON-DISCLOSURE AGREEMENT
This Agreement made and entered into effective as of the 1st day
of February, 1999 by and between MedPlus, Inc., an Ohio
corporation (hereinafter called the "Company," which term includes
any parent or subsidiary corporation as defined in Section 425 of
the Internal Revenue Code), and Paul Albrecht (hereinafter called
"Employee").
In consideration of the employment or continued employment of
Employee by the Company and for other good and valuable
consideration, the parties hereto agree as follows:
1. Disclosure of Inventions to Employer. For the purpose of this
Agreement, the word "invention" shall include, but not be limited
to, the following: any discovery, idea, device, process, design,
development, improvement, conception, concept, application,
technique, or invention whether patentable or not, and whether
reduced to practice or not; provided, however, that any invention
as so defined, conceived or made by Employee after termination of
employment with the Company, shall not be deemed to be within this
Agreement if it is not within the scope of the Company's business,
research, and investigations, or resulting from or suggested by
any of the work Employee has performed or may perform for the
Company. Employee will forthwith communicate to the President of
the Company (or such other individual as the President may
designate from time to time) a full and complete disclosure of
each and every invention conceived or made by Employee whether
solely or jointly with others (a) while in the employ of the
Company, whether or not while actually engaged in the Company's
affairs, and (b) within two years subsequent to termination of the
employment for any reason.
2. Assignment of Inventions. Employee agrees to assign and
transfer to the Company, without any separate remuneration or
compensation other than the wages or salary received or
compensation paid to Employee from time to time in the course of
his employment by the Company, his entire right, title, and
interest in and to all inventions conceived or made by Employee,
together with all United States and foreign patent rights and any
other legal protection in and with respect to any and all such
inventions, (a) while in the employ of the Company, whether or not
while Employee is actually engaged in the Company's affairs, or
(b) within two years subsequent thereto and as a direct or
indirect result of such employment. Upon request by the Company,
Employee agrees to execute, and deliver all appropriate patent
applications for securing all United States and foreign patents on
all such inventions, and to do, execute, and deliver any and all
acts and instruments that may be necessary or proper to vest all
such inventions and patents in the Company or its designee, and to
enable the Company or its designee to obtain all such letters
patent. Employee agrees to render to the Company or its designee
all such assistance as may be required in the prosecution of all
such patent applications and applications for the reissue of such
patents and in the prosecution or defense of all interferences
which may be declared involving any of said patent applications or
patents. Employee further agrees not to contest the validity of
any patent, United States or foreign, which is issued to the
Company or its designee, on which Employee made any contribution,
or in which Employee participated in any way, and not to assist
any other party in any way in contesting the validity of any such
patent. Employee further agrees that the obligations and
undertakings stated in this Section 2 shall continue beyond the
termination of his employment by the Company, but if Employee
shall be called upon to render such assistance after the
termination of his employment, Employee shall be entitled to a
fair and reasonable per diem fee in addition to reimbursement of
any expenses incurred at the request of the Company.
3. Prior Inventions. As a matter of record, Employee may include
a complete list of inventions made by him prior to the date of
employment by the Company as an appendix to this Agreement. Only
those inventions so listed shall be deemed to be excluded from the
terms and conditions of this Agreement.
4. Unauthorized Disclosure. Except in connection with regularly
assigned duties for the Company, Employee agrees that he will not,
without prior written approval of the President (or such other
person as the president may designate from time to time), divulge
or disclose to anyone outside of the Company, whether by private
communication or by public address or publication, or otherwise,
any invention or any specification, technical or engineering data,
or report, or any other information relating to the business or
affairs of the Company, and will not during his employment by the
Company or at any time thereafter disclose or use for his own
benefit such information or any trade secrets or confidential
information pertaining to any of the business of the Company or
any of its clients, customers, consultants, licensees, or
affiliates, whether or not such information or trade secrets were
acquired while Employee was engaged in the Company's affairs and
regardless of by whom such information or trade secrets were
generated, either by the Company or by the Employee or others in
the employ of the Company. All copies of any such information,
however and wherever produced, shall be and remain the sole
property of the Company and shall not be removed from the premises
or custody of the Company without prior written consent or
authorization of the President of the Company (or such other
person as the President may designate from time to time).
5. Remedies for Breach. Employee expressly recognizes that any
breach of this Agreement by him is likely to result in irreparable
injury to the Company and agrees that the Company shall be
entitled, if it so elects, to institute and prosecute proceedings
in any court of competent jurisdiction, either in law or in
equity, to obtain damages for any breach of this Agreement, or to
enforce the specific performance of this Agreement by Employee, or
to enjoin Employee from activities in violation of this Agreement.
6. Modification. This instrument contains the entire Agreement
of the parties with respect to the subject matter contained herein
and may be altered, amended, or superseded only by an agreement in
writing, signed by the party against whom enforcement of any
waiver, change, modification, extension, or discharge is sought.
No action or course of conduct shall constitute a waiver of any of
the terms and conditions of this Agreement, unless such waiver is
specified in writing, and then only to the extent so specified. A
waiver of any of the terms and conditions of this Agreement on one
occasion shall not constitute a waiver of the other terms and
conditions of this Agreement, or of such terms and conditions on
any other occasion.
7. Notices. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing and if mailed to
the party to whom such notice is given at the address of such
party hereinafter set forth or at such other address as such party
may provide in writing from time to time. Any such notice mailed
to such address shall be effective when deposited in the United
States mail, duly addressed and with first class postage prepaid.
Such notice may, but need not, be by certified mail, return
receipt requested.
8. Assignment. This Agreement shall be binding upon and shall
inure to the benefit of Employee, without regard for the duration
of his employment by the Company or the reasons for the cessation
of such employment, and upon the administrators, executors, heirs,
and assigns of Employee and shall be binding upon and shall inure
to the benefit of the successors and assigns of the Company, its
subsidiaries, and affiliates.
9. Governing Law. The validity, interpretation and performance
of this Agreement shall be governed and construed by the laws of
Ohio.
10. Severability. The invalidity or unenforceability of any
provision in this Agreement shall not in any way affect the
validity or enforceability of any other provision and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision had never been in the Agreement.
11. References to Gender and Number Terms. In construing this
Agreement, feminine or neuter pronouns shall be substituted for
those masculine in form and visa versa, and plural terms shall be
substituted for singular and singular for plural in any place in
which the context requires.
12. Headings. The section numbers and headings in this Agreement
are inserted for convenience only and are not part of the
Agreement.
IN WITNESS WHEREOF, the Company and the Employee have duly
executed this Agreement as of the date and year first above
written.
MEDPLUS, INC., Company: Employee:
8805 Governor's Hill Drive
Cincinnati, OH 45249
By:____________________ ____________________
Richard A. Mahoney, President Paul Albrecht
722 Miamiheights Court
Loveland, OH 45140
APPENDIX TO INVENTION AND NON-DISCLOSURE AGREEMENT
Employee's inventions excluded from this Agreement as authorized
by Section 3:
NONE
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
_____________.
February 1, 1999
_______________________________________
Paul Albrecht
11
SECURITIES PURCHASE AGREEMENT
among
MEDPLUS, INC.
and
THE SEVERAL PURCHASERS NAMED IN EXHIBIT 1.01
Dated as of April 30, 1999
TABLE OF CONTENTS
Page
ARTICLE I - PURCHASE, SALE AND TERMS OF NOTES AND WARRANTS 1
1.01 The Notes 1
1.02 The Preferred Shares 2
1.03 The Warrants 2
1.04 Purchase and Sale of Notes, Preferred Shares and Warrants 2
1.05 Payments and Endorsements 3
1.06 Redemptions 3
1.07 Payment on Non-Business Days 3
1.08 Registration, etc. 3
1.09 Transfer and Exchange of Notes 4
1.10 Replacement of Notes 4
1.11 Subordination 4
1.12 Acceleration 4
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY 5
2.01 Organization, Qualifications and Corporate Power 5
2.02 Authorization of Agreements, Etc. 6
2.03 Validity 6
2.04 Authorized Capital Stock 6
2.05 Company SEC Reports and Financial Statements 7
2.06 Events Subsequent to the Balance Sheet Date 8
2.07 Litigation; Compliance with Law 9
2.08 Proprietary Information of Third Parties 9
2.09 Patents, Trademarks, Etc. 9
2.10 Title to Properties 10
2.11 Leasehold Interests 10
2.12 [Reserved] 10
2.13 Taxes 10
2.14 Other Agreements 11
2.15 Loans and Advances 12
2.16 Assumptions, Guaranties, Etc. of Indebtedness of Other
Persons 13
2.17 Significant Customers and Suppliers 13
2.18 Governmental Approvals 13
2.19 Disclosure 13
2.20 Offering of the Notes, Preferred Shares and Warrants 13
2.21 Brokers 14
2.22 Transactions With Affiliates 14
2.23 Employees 14
2.24 U.S. Real Property Holding Corporation 14
2.25 Environmental Protection 14
2.26 ERISA 15
2.27 Foreign Corrupt Practices Act 16
2.28 Federal Reserve Regulations 16
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS 16
ARTICLE IV - CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS AND
THE COMPANY
4.01 Conditions to the Obligations of the Purchasers 17
4.02 Conditions to the Obligations of the Purchasers 17
ARTICLE V - COVENANTS OF THE COMPANY 20
5.01 Information 20
5.02 Reserve for Conversion Shares and Warrant Shares. 21
5.03 Restrictive Agreements Prohibited 22
5.04 Use of Proceeds 22
5.05 Activities of Subsidiaries 22
5.06 U.S. Real Property Interest Statement 22
5.07 International Investment Survey Act of 1976 23
5.08 Consolidation, Merger of Disposition of Assets 23
5.09 Election of Directors 23
5.10 No Merger, Consolidation, etc 24
5.11 Opinion Regarding Subsidiaries 24
5.12 Termination of Covenants 24
ARTICLE VI EVENTS OF DEFAULT 24
6.01. Events of Default 24
6.02. Annulment of Defaults 25
ARTICLE VII COVENANTS OF THE MANAGING SHAREHOLDER 26
7.01 Tag-Along Rights 27
7.02 Termination 28
ARTICLE VIII - MISCELLANEOUS 28
8.01 Expenses 28
8.02 Survival of Agreements 28
8.03 Brokerage 28
8.04 Parties in Interest 28
8.05 Notices 28
8.06 Governing Law 29
8.07 Entire Agreement 29
8.08 Counterparts 29
8.09 Amendments 29
8.10 Severability 29
8.11 Titles and Subtitles 29
8.12 Indemnification 30
8.13 Remedies Cumulative 30
8.14 Remedies Not Waived 30
INDEX TO EXHIBITS
EXHIBIT 1.01 Purchasers
EXHIBIT 1.01a Form of Subordinated Note
EXHIBIT 1.02 Charter and All Amendments thereto
EXHIBIT 1.03 Form of Warrant
EXHIBIT 2.01 Form of Registration Rights Agreement
EXHIBIT 2.23 Form of Employee Nondisclosure and
Developments
Agreement
EXHIBIT 4.02 Form of Company Counsel Opinion
EXHIBIT 4.02A Shareholders to Deliver Proxies
EXHIBIT 4.02B Form of Proxy
MedPlus, Inc.
8805 Governor's Hill Drive, Suite 100
Cincinnati, OH 45249
As of April 30, 1999
To: The Persons listed on Exhibit 1.01 hereto
Re: Subordinated Notes due 2004, Series A Preferred Stock
and
Series A Preferred Stock Purchase Warrants
Ladies and Gentlemen:
MedPlus, Inc., an Ohio corporation (the "Company"), hereby agrees
with the Persons listed on Exhibit 1.01 hereto (each, a
"Purchaser" and collectively, the "Purchasers") as follows:
ARTICLE I
PURCHASE, SALE AND TERMS OF NOTES AND WARRANTS
1.01 The Notes. The Company has authorized the issuance and sale
of the Company's Subordinated Notes, due 2004, in the original
aggregate principal amount of $2,000,000 to the Purchasers in the
respective amounts set forth in Exhibit 1.01 hereto. The
Subordinated Notes shall be substantially in the form set forth in
Exhibit 1.01A hereto and are herein referred to individually as a
"Note" and collectively as the "Notes", which terms shall also
include any notes delivered in exchange or replacement therefor.
The Notes shall provide that if the Preferred Share and Warrant
Closing (as defined below) has not occurred prior to July 30,
1999, then (i) the entire amount of principal and interest which
remains unpaid shall become due and payable as of November 28,
1999, (ii) the Company shall immediately issue, for no additional
consideration, to the holders of the Notes that number of shares
of the Company's Common Stock, no par value (the "Common Stock"),
as is equal in the aggregate to ten percent (10%) of the aggregate
number of issued and outstanding shares of Common Stock, on a
fully diluted basis, as of such date and (iii) on December 31,
1999 and on the last day of each calendar month thereafter, if any
amount of principal or interest under the Notes remains
outstanding on such date, the Company shall issue, for no
additional consideration, to the holders of the Notes that number
of shares of the Common Stock as is equal to two percent (2%) of
the aggregate number of issued and outstanding shares of Common
Stock on a Fully Diluted basis, as of such date, up to a maximum
of 19.9% of the Common Stock on a Fully Diluted basis. The Notes
will provide that that Company will issue, and the Company
covenants to issue, on the Preferred Share and Warrant Closing
Date (as defined below) to the Purchasers warrants in the form
attached thereto as Exhibit A to purchase shares of Series A
Convertible Preferred Stock (as defined below), unless the
Preferred Share and Warrant Closing Date does not occur prior to
July 30, 1999, in which event the Company will issue on July 30,
1999 to the Purchasers warrants in the form attached thereto as
Exhibit B to purchase shares of Common Stock. Any warrants issued
or issuable pursuant to the Notes are referred to herein as the
"Note Warrants", any shares of Common Stock issued or issuable
upon exercise of any Note Warrants are referred to herein as the
"Note Warrant Common Shares", and any shares of Series A
Convertible Preferred Stock issued or issuable upon exercise of
any Note Warrants are referred to herein as the "Note Warrant
Preferred Shares".
1.02 The Preferred Shares. Subject to shareholder
approval, the Company has also authorized the issuance and sale of
an aggregate of 2,371,815 shares (the "Preferred Shares") of a
Series A Convertible Preferred Stock, $.01 per share (the "Series
A Convertible Preferred Stock") at a purchase price of $1.729 per
share to the Purchasers in the respective amounts set forth in
Exhibit 1.01 hereto. The designation, rights, preferences and
other terms and conditions relating to the Series A Convertible
Preferred Stock shall be as set forth on Exhibit 1.02 hereto.
1.03 The Warrants. Subject to shareholder approval, the Company
has also authorized the issuance and sale of the Company's
Series A Convertible Preferred Stock Purchase Warrants (the
"Purchase Warrants") for the purchase (subject to adjustment as
provided therein) of 759,562 shares (the "Purchase Warrant Shares"
and together with the Note Warrant Preferred Shares, the "Warrant
Shares") of the Company's Series A Convertible Preferred Stock to
the Purchasers in the respective amounts set forth in Exhibit 1.01
hereto. The Purchase Warrants shall be substantially in the form
set forth in Exhibit 1.03 hereto and are herein referred to,
together with the Note Warrants, individually as a "Warrant" and
collectively as the "Warrants", which terms shall also include any
warrants delivered in exchange or replacement therefor.
1.04 Purchase and Sale of Notes, Preferred Shares and Warrants.
(a) The Note Closing. The Company agrees to issue and sell to
the Purchasers, and, subject to and in reliance upon the
representations, warranties, terms and conditions of this
Agreement, the Purchasers, severally but not jointly, agree to
purchase, the Notes in the original principal amount set forth
opposite their respective names on Exhibit 1.01. Such purchase
and sale shall take place at a closing (the "Note Closing") to be
held at the offices of Testa, Hurwitz & Thibeault, LLP, 125 High
Street, Boston, Massachusetts, on April 30, 1999 at 10:00 A.M., or
on such other date and at such time as may be mutually agreed upon
(such date and time being called the "Note Closing Date"). At the
Note Closing, the Company will issue and deliver a Note payable to
the order of each Purchaser against payment of the full purchase
price therefor (indicated on Exhibit 1.01 under the column headed
"Amount of Subordinated Notes to be Purchased" opposite such
Purchaser's name) by (i) wire transfer of immediately available
funds to an account designated by the Company, (ii) a check
payable to the order of the Company or its assignees, or (iii) any
combination of (i) and (ii) above.
(b) The Preferred Share and Warrant Closing. Provided that the
shareholders of the Company approve the transactions contemplated
by this Agreement prior to July 30, 1999, and subject to the terms
and conditions contained herein, the Company agrees to issue and
sell to the Purchasers, and, subject to and in reliance upon the
representations, warranties, terms and conditions of this
Agreement, the Purchasers, severally but not jointly, agree to
purchase the number of Preferred Shares and Purchase Warrants set
forth opposite the name of such Purchaser under the headings
"Number of Preferred Shares to be Purchased" and "Number of
Purchase Warrants to be Purchased", respectively, on Exhibit 1.01
hereto. Such purchase and sale shall take place at a closing (the
"Preferred Share and Warrant Closing") at the offices of Testa,
Hurwitz & Thibeault, LLP, 125 High Street, Boston, Massachusetts
at 10:00 a.m. on the later of June 18, 1999 (assuming satisfaction
of the conditions in Article IV by such date) or on the date that
is five business days after satisfaction of the conditions in
Article IV but before July 30, 1999 or at such other time or place
as the Company and the Purchasers may agree in writing (such date
and time being called the "Preferred Share and Warrant Closing
Date"). If the Preferred Share and Warrant Closing has not
occurred prior to July 30, 1999, this Agreement may be terminated
by the Purchasers upon notice to the Company. At the Preferred
Share and Warrant Closing, the Company shall issue and deliver to
each Purchaser a stock certificate or certificates, registered in
the name of such Purchaser, representing the Preferred Shares
being purchased by it at the Closing, and a Purchase Warrant or
Purchase Warrants, registered in the name of such Purchaser,
representing the number of Purchase Warrant Shares covered by the
Purchase Warrants being purchased by it at the Preferred Share and
Warrant Closing. At the Preferred Share and Warrant Closing the
Company will issue and deliver the stock certificate or
certificates and Purchase Warrants as aforesaid against payment by
each Purchaser of the full purchase price therefor (equal to the
amount set forth opposite the name of such Purchaser under the
heading "Aggregate Purchase Price for Preferred Shares and
Purchase Warrants" on Exhibit 1.01) by (i) wire transfer of
immediately available funds to an account designated by the
Company, (ii) check payable to the order of the Company or its
designees, or (iii) any combination of (i) and (ii) above.
(c) Allocation of Purchase Price. The Company and the
Purchasers, having adverse interests and as a result of arm's
length bargaining, agree that (i) neither the Purchasers nor any
of their respective affiliates or associates have rendered or
agreed to render any services to the Company in connection with
this Agreement or the issuance of the Notes, Preferred Shares and
Warrants; (ii) the Warrants are not being issued as compensation;
and (iii) for federal income tax purposes, the fair market value
of the Notes and the Note Warrants is $1,895,000 and $105,000,
respectively. Upon the issuance of the Preferred Shares and the
Purchase Warrants, the parties agree to work in good faith to
allocate the purchase price with respect to the Preferred Shares
and the Purchase Warrants.
1.05 Payments and Endorsements. Payments of principal, interest
and premium, if any, on the Notes, shall be made directly by check
duly mailed or delivered to the Purchaser at its address referred
to in Exhibit 1.01 hereof, without any presentment or notation of
payment, provided that prior to any transfer of any Note, the
holder of record shall endorse on such Note a record of the date
to which interest has been paid and all payments made on account
of principal of such Note.
1.06 Redemptions.
(a) Optional Redemptions Without Premium. Subject to Section
1.12, the Company may redeem, without premium, the Notes in whole
together with interest due.
(b) Notice of Redemptions; Pro rata Redemptions.
Notice of any optional redemptions pursuant to subsection 1.06(a)
shall be given to all registered holders of the Notes at least ten
(10) business days prior to the date of such redemption. Each
redemption of Notes pursuant to subsection 1.06(a) shall be made
so that the Notes then held by each holder shall be redeemed in a
principal amount which shall bear the same ratio to the total
principal amount of Notes being redeemed as the principal amount
of Notes then held by such holder bears to the aggregate principal
amount of the Notes then outstanding.
1.07 Payment on Non-Business Days. Whenever any payment to be
made shall be due on a Saturday, Sunday or a public holiday under
the laws of the State of Ohio, such payment may be made on the
next succeeding business day, and such extension of time shall in
such case be included in the computation of payment of interest
due.
1.08 Registration, etc.. The Company shall maintain at its
principal office a register of the Notes and shall record therein
the names and addresses of the registered holders of the Notes,
the address to which notices are to be sent and the address to
which payments are to be made as designated by the registered
holder if other than the address of the holder, and the
particulars of all transfers, exchanges and replacements of Notes.
No transfer of a Note shall be valid unless made on such register
for the registered holder or his executors or administrators or
his or their duly appointed attorney, upon surrender therefor for
exchange as hereinafter provided, accompanied by an instrument in
writing, in form and execution reasonably satisfactory to the
Company. Each Note issued hereunder, whether originally or upon
transfer, exchange or replacement of a Note or Notes, shall be
registered on the date of execution thereof by the Company and
shall be dated the date to which interest has been paid on such
Notes or Note. The registered holder of a Note shall be that
Person in whose name the Note has been so registered by the
Company. A registered holder shall be deemed the owner of a Note
for all purposes of this Agreement and, subject to the provisions
hereof, shall be entitled to the principal, premium, if any, and
interest evidenced by such Note free from all equities or rights
of setoff or counterclaim between the Company and the transferor
of such registered holder or any previous registered holder of
such Note.
1.09 Transfer and Exchange of Notes. The registered holder of
any Note or Notes may, prior to maturity or prepayment thereof,
surrender such Note or Notes at the principal office of the
Company for transfer or exchange. Within a reasonable time after
notice to the Company from a registered holder of its intention to
make such exchange and without expense (other than transfer taxes,
if any) to such registered holder, the Company shall issue in
exchange therefor another Note or Notes, in such denominations as
requested by the registered holder, for the same aggregate
principal amount as the unpaid principal amount of the Note or
Notes so surrendered and having the same maturity and rate of
interest, containing the same provisions and subject to the same
terms and conditions as the Note or Notes so surrendered. Each
new Note shall be made payable to such Person or Persons, or
registered assigns, as the registered holder of such surrendered
Note or Notes may designate, and such transfer or exchange shall
be made in such a manner that no gain or loss of principal or
interest shall result therefrom.
1.10 Replacement of Notes. Upon receipt of evidence satisfactory
to the Company of the loss, theft, destruction or mutilation of
any Note and, if requested in the case of any such loss, theft or
destruction, upon delivery of an indemnity bond or other agreement
or security reasonably satisfactory to the Company, or, in the
case of any such mutilation, upon surrender and cancellation of
such Note, the Company will issue a new Note, of like tenor and
amount and dated the date to which interest has been paid, in lieu
of such lost, stolen, destroyed or mutilated Note; provided,
however, if any Note of which a Purchaser is the registered holder
is lost, stolen or destroyed, the affidavit of the registered
holder setting forth the circumstances with respect to such loss,
theft or destruction shall be accepted as satisfactory evidence
thereof, and no indemnification bond or other security shall be
required as a condition to the execution and delivery by the
Company of a new Note in replacement of such lost, stolen or
destroyed Note other than the registered holder's written
agreement to indemnify the Company.
1.11 Subordination. The indebtedness evidenced by the
Notes and the rights and remedies of the Purchasers under this
Agreement shall be subordinate and junior to (i) certain
indebtedness of the Company to Provident Bank (the "Bank") in the
manner and to the extent provided in the Subordination Agreement
of even date herewith by and among the Bank, the Company and the
Purchasers purchasing Notes hereunder, and (ii) Senior Debt.
1.12 Acceleration. If, prior to July 30, 1999, the shareholders
of the Company have not approved (i) the adoption of this
Agreement and the transactions contemplated hereby as required by
the Ohio Control Share Acquisition Act, the Articles of
Incorporation and Code of Regulations of the Company and the rules
of the Nasdaq National Market, and (ii) the amendment of the
Company's Articles of Incorporation so that such Articles of
Incorporation shall read as set forth in Exhibit 1.02 hereto, then
(A) the entire amount of principal and interest which remains
unpaid under the Notes shall become due and payable as of November
28, 1999, (B) the Company shall immediately issue, for no
additional consideration, to the holders of the Notes that number
of shares of the Common Stock as is equal in the aggregate to ten
percent (10%) of the aggregate number of issued and outstanding
shares of Common Stock, on a fully diluted basis, as of such date,
and (C) on December 31, 1999 and on the last day of each calendar
month, if any amount of principal or interest under the Notes
remains outstanding on such date, the Company shall issue, for no
additional consideration, to the holders of the Notes that number
of shares of the Common Stock as is equal to two percent (2%) of
the aggregate number of issued and outstanding shares of Common
Stock on a Fully Diluted basis, as of such date, up to a maximum
of 19.9% of the Common Stock on a Fully Diluted basis.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers
that, except as set forth in the Disclosure Schedule attached
hereto (which Disclosure Schedule makes explicit reference to the
particular representation or warranty as to which exception is
taken, which in each case shall constitute the sole representation
and warranty as to which such exception shall apply, unless it is
reasonably evident to the Purchasers that an exception applies to
one or more other representations or warranties) or as set forth
in the Company SEC Reports (as defined below):
2.01 Organization, Qualifications and Corporate Power.
(a) The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State
of Ohio and is duly licensed or qualified to transact business as
a foreign corporation and is in good standing in each jurisdiction
in which the nature of the business transacted by it or the
character of the properties owned or leased by it requires such
licensing or qualification. The Company has the corporate power
and authority to own and hold its properties and to carry on its
business as now conducted and as proposed to be conducted, and
subject to the approval of the shareholders of the Company as
described herein, to execute, deliver and perform this Agreement,
the Registration Rights Agreement with the Purchasers in the form
attached as Exhibit 2.01 (the "Registration Rights Agreement" and
together with this Agreement and any documents or agreements
ancillary to this Agreement, the "Transaction Documents"), to
issue, sell and deliver the Notes, the Preferred Shares, the
Warrants, the Note Warrant Common Shares and the Warrant Shares,
to perform the terms of the Notes and the Warrants and to issue
and deliver the Note Warrant Common Shares and the shares of
Common Stock issuable upon conversion of the Preferred Shares and
Warrant Shares (the "Conversion Shares").
(b) Schedule 2.01 to the Disclosure Schedule contains a
list of all subsidiaries of the Company. Except for such
subsidiaries, the Company does not (i) own of record or
beneficially, directly or indirectly, (A) any shares of capital
stock or securities convertible into capital stock of any other
corporation or (B) any participating interest in any partnership,
joint venture or other non-corporate business enterprise or (ii)
control, directly or indirectly, any other entity. Each of the
subsidiaries is a corporation duly incorporated, validly existing
and in good standing under the laws of its respective jurisdiction
of incorporation and is duly licensed or qualified to transact
business as a foreign corporation and is in good standing in each
jurisdiction in which the nature of the business transacted by it
or the character of the properties owned or leased by it requires
such licensing or qualification. Each of the subsidiaries has the
corporate power and authority to own and hold its properties and
to carry on its business as now conducted and as proposed to be
conducted. Except as set forth on Schedule 2.01(b) to the
Disclosure Schedule, all of the outstanding shares of capital
stock of each of the subsidiaries are owned beneficially and of
record by the Company, one of its other subsidiaries, or any
combination of the Company and/or one or more of its other
subsidiaries, in each case free and clear of any liens, charges,
restrictions, claims or encumbrances of any nature whatsoever; and
there are no outstanding subscriptions, warrants, options,
convertible securities, or other rights (contingent or other)
pursuant to which any of the subsidiaries is or may become
obligated to issue any shares of its capital stock to any person
other than the Company or one of the other subsidiaries. As used
in Sections 2.06 through 2.09, 2.11 through 2.17, 2.21 and 2.22
through 2.28 inclusive, the term "Company" shall mean the Company
and each of the subsidiaries.
2.02 Authorization of Agreements, Etc.
(a) Subject to the approval of the shareholders of the
Company as described herein, the execution and delivery by the
Company of the Transaction Documents, the performance by the
Company of its obligations thereunder, the issuance, sale and
delivery of the Notes, the Preferred Shares, the Warrants, the
Note Warrant Common Shares and the Warrant Shares, the performance
by the Company of its obligations under the Notes and the
Warrants, and the issuance and delivery of the Conversion Shares
have been duly authorized by all requisite corporate action and
will not violate any provision of law, any order of any court or
other agency of government, the Articles of Incorporation of the
Company, as amended (the "Charter") or the Code of Regulations of
the Company, as amended, or any provision of any indenture,
agreement or other instrument to which the Company, any of its
subsidiaries or any of their respective properties or assets is
bound, or conflict with, result in a breach of or constitute (with
due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument, or result in the
creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever upon any of the properties or
assets of the Company or any of its subsidiaries.
(b) The Note Warrant Common Shares and, subject to the
approval of the shareholders of the Company as described herein,
the Preferred Shares and Warrant Shares have been duly authorized
and, when issued in accordance with this Agreement or the
Warrants, as appropriate, will be validly issued, fully paid and
nonassessable shares of Common Stock or Series A Convertible
Preferred Stock, as the case may be, with no personal liability
attaching to the ownership thereof and will be free and clear of
all liens, charges, restrictions, claims and encumbrances imposed
by or through the Company except as set forth in the Registration
Rights Agreement. The Warrants, when issued in accordance with
this Agreement, will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the
Company except as set forth in the Warrants. The Note Warrant
Common Shares have been and the Warrant Shares will have been duly
reserved for issuance upon exercise of the Warrants. The
Conversion Shares will have been duly reserved for issuance upon
conversion of the Notes, Preferred Shares and Warrant Shares and,
when so issued, will be duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock with no personal
liability attaching to the ownership thereof and will be free and
clear of all liens, charges, restrictions, claims and encumbrances
imposed by or through the Company except as set forth in the
Registration Rights Agreement. Neither the issuance, sale or
delivery of the Notes, Preferred Shares, Warrants, Note Warrant
Common Shares or Warrant Shares nor the issuance or delivery of
the Conversion Shares is subject to any preemptive right of
shareholders of the Company or to any right of first refusal or
other right in favor of any person.
2.03 Validity. Subject to the approval of the
shareholders of the Company as described herein, this Agreement
has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms. The Notes,
Warrants and the remaining Transaction Documents, when executed
and delivered in accordance with this Agreement, will constitute
the legal, valid and binding obligations of the Company,
enforceable in accordance with their respective terms.
2.04 Authorized Capital Stock. Subject to the approval
of the shareholders of the Company as described herein, the
authorized capital stock of the Company as of the Preferred Share
and Warrant Closing Date shall consist of (i) 5,000,000 shares of
Preferred Stock, $.01 par value (the "Preferred Stock"), all of
which shares have been designated Series A Convertible Preferred
Stock, and (ii) 15,000,000 shares of Common Stock. As of
April 27, 1999, 6,055,269 shares of Common Stock will be validly
issued and outstanding, fully paid and nonassessable with no
personal liability attaching to the ownership thereof and no
shares of Preferred Stock will have been issued. Immediately
prior to the Preferred Share and Warrant Closing, no shares of
Preferred Stock will have been issued. As of the date hereof,
200,000 shares of Common Stock are held in treasury. As of the
date hereof, the holders of subscriptions, warrants, options,
convertible securities, and other rights (contingent or other) to
purchase or otherwise acquire equity securities of the Company,
and the number of shares of Common Stock and the number of such
subscriptions, warrants, options, convertible securities, and
other such rights held by each, are as set forth in Schedule 2.04
of the Disclosure Schedule. The designations, powers,
preferences, rights, qualifications, limitations and restrictions
in respect of each class and series of authorized capital stock of
the Company are as set forth in the Charter, a copy of which is
attached as Exhibit 1.02, and all such designations, powers,
preferences, rights, qualifications, limitations and restrictions
are valid, binding and enforceable and in accordance with all
applicable laws. Except as set forth in the Schedule 2.04 of the
Disclosure Schedule, (i) no subscription, warrant, option,
convertible security, or other right (contingent or other) to
purchase or otherwise acquire equity securities of the Company is
authorized or outstanding and (ii) there is no commitment by the
Company to issue shares, subscriptions, warrants, options,
convertible securities, or other such rights or to distribute to
holders of any of its equity securities any evidence of
indebtedness or asset. Except as provided for in the Charter or
as set forth in Schedule 2.04 of the Disclosure Schedule, the
Company has no obligation (contingent or other) to purchase,
redeem or otherwise acquire any of its equity securities or any
interest therein or to pay any dividend or make any other
distribution in respect thereof. Except as set forth on Schedule
2.04 of the Disclosure Schedule to the best of the Company's
knowledge there are no voting trusts or agreements, shareholders'
agreements, pledge agreements, buy-sell agreements, rights of
first refusal, preemptive rights or proxies relating to any
securities of the Company or any of its subsidiaries (whether or
not the Company or any of its subsidiaries is a party thereto).
All of the outstanding securities of the Company were issued in
compliance with all applicable Federal and state securities laws.
2.05 Company SEC Reports and Financial Statements.
(a) The Company has made available to
Purchasers true and complete copies of all periodic reports,
statements and other documents that the Company has filed with the
SEC under the Exchange Act since January 31, 1995, and the Form S-
B2 Registration Statement (File 33-77896C) and the Form S-1
Registration Statement (File 33-98696) (the "Registration
Statements") filed under the Securities Act (collectively, the
"Company SEC Reports"), each in the form (including exhibits and
any amendments thereto) required to be filed with the SEC. As of
their respective dates, each of the Company's SEC Reports (i)
complied in all respects with all applicable requirements of the
Securities Act and the Exchange Act, and the rules and regulations
promulgated thereunder, respectively, (ii) were filed in a timely
manner, and (iii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made,
not misleading. None of the subsidiaries is required to file any
forms, reports or other documents with the SEC.
(b) Each of the audited
consolidated financial statements of the Company (including any
related notes and schedules thereto) included (or incorporated by
reference) in its Quarterly Report on Form 10-QSB for the quarter
ended October 31, 1998, its Annual Report on Form 10-KSB for the
fiscal year ended January 31, 1999 (when filed) or the
Registration Statement, is accurate and complete and fairly
presents, in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the
periods involved (except as may be noted therein), and in
conformity with the SEC's regulations, the consolidated financial
position of the Company and its consolidated subsidiaries as of
its date and the consolidated results of operations and changes in
financial position for the period then ended.
(c) Except as and to the extent set
forth (or incorporated by reference) in any Registration Statement
or the Company's Quarterly Report on Form 10-QSB for the quarter
ended October 31, 1998 (the "Balance Sheet Date"), none of the
Company or any of its subsidiaries has incurred any liability or
obligation of any nature whatsoever (whether due or to become due,
accrued, fixed, contingent, liquidated, unliquidated or otherwise)
that would be required by GAAP to be accrued on, reflected on, or
reserved against it, on a consolidated balance sheet (the "Balance
Sheet") (or in the applicable notes thereto) of the Company or any
of its subsidiaries prepared in accordance with GAAP consistently
applied as of the date and for the period required.
2.06 Events Subsequent to the Balance Sheet Date.
Except as set forth on Schedule 2.06 of the Disclosure Schedule,
since January 31, 1999, the Company has not (i) issued any stock,
bond or other corporate security, (ii) borrowed any amount or
incurred or become subject to any liability (absolute, accrued or
contingent), except current liabilities incurred and liabilities
under contracts entered into in the ordinary course of business,
(iii) discharged or satisfied any lien or encumbrance or incurred
or paid any obligation or liability (absolute, accrued or
contingent) other than current liabilities shown on the Balance
Sheet and current liabilities incurred since the Balance Sheet
Date in the ordinary course of business, (iv) declared or made any
payment or distribution to shareholders or purchased or redeemed
any share of its capital stock or other security, (v) mortgaged,
pledged, encumbered or subjected to lien any of its assets,
tangible or intangible, other than liens of current real property
taxes not yet due and payable, (vi) sold, assigned or transferred
any of its tangible assets except in the ordinary course of
business, or cancelled any debt or claim, (vii) sold, assigned,
transferred or granted any exclusive license with respect to any
patent, trademark, trade name, service mark, copyright, trade
secret or other intangible asset, (viii) suffered any loss of
property or waived any right of substantial value whether or not
in the ordinary course of business, (ix) made any change in
officer compensation except in the ordinary course of business and
consistent with past practice, (x) made any material change in the
manner of business or operations of the Company, (xi) entered into
any transaction except in the ordinary course of business or as
otherwise contemplated hereby or (xii) entered into any commitment
(contingent or otherwise) to do any of the foregoing.
2.07 Litigation; Compliance with Law. Except as set
forth on Schedule 2.07 of the Disclosure Schedule, there is no
(i) action, suit, claim, proceeding or investigation pending or,
to the best of the Company's knowledge, threatened against or
affecting the Company, at law or in equity, or before or by any
Federal, state, municipal or other governmental department, com-
mission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) arbitration proceeding relating to the Company
pending under collective bargaining agreements or otherwise or
(iii) governmental inquiry pending or, to the best of the Com-
pany's knowledge, threatened against or affecting the Company
(including without limitation any inquiry as to the qualification
of the Company to hold or receive any license or permit), and
there is no basis for any of the foregoing. The Company has not
received any opinion or memorandum or legal advice from legal
counsel to the effect that it is exposed, from a legal standpoint,
to any liability or disadvantage which may be material to its
business, prospects, financial condition, operations, property or
affairs. The Company is not in default with respect to any order,
writ, injunction or decree known to or served upon the Company of
any court or of any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign. Except as set forth on
Schedule 2.07 of the Disclosure Schedule, there is no action or
suit by the Company pending, threatened or contemplated against
others. The Company has complied with all laws, rules,
regulations and orders applicable to its business, operations,
properties, assets, products and services, the Company has all
necessary permits, licenses and other authorizations required to
conduct its business as conducted and as proposed to be conducted,
and the Company has been operating its business pursuant to and in
compliance with the terms of all such permits, licenses and other
authorizations. There is no existing law, rule, regulation or
order, and the Company after due inquiry is not aware of any
proposed law, rule, regulation or order, whether Federal, state,
county or local, which would prohibit or restrict the Company
from, or otherwise materially adversely affect the Company in,
conducting its business in any jurisdiction in which it is now
conducting business or in which it proposes to conduct business.
2.08 Proprietary Information of Third Parties. Except
as set forth on Schedule 2.08 of the Disclosure Schedule, to the
best of the Company's knowledge, no third party has claimed or has
reason to claim that any person employed by or affiliated with the
Company has (a) violated or may be violating any of the terms or
conditions of his employment, non-competition or non-disclosure
agreement with such third party, (b) disclosed or may be
disclosing or utilized or may be utilizing any trade secret or
proprietary information or documentation of such third party or
(c) interfered or may be interfering in the employment relation-
ship between such third party and any of its present or former
employees. No third party has requested information from the
Company which suggests that such a claim might be contemplated.
To the best of the Company's knowledge, no person employed by or
affiliated with the Company has employed or proposes to employ any
trade secret or any information or documentation proprietary to
any former employer, and to the best of the Company's knowledge,
no person employed by or affiliated with the Company has violated
any confidential relationship which such person may have had with
any third party, in connection with the development, manufacture
or sale of any product or proposed product or the development or
sale of any service or proposed service of the Company, and the
Company has no reason to believe there will be any such employment
or violation. To the best of the Company's knowledge, none of the
execution or delivery of this Agreement, or the carrying on of the
business of the Company as officers, employees or agents by any
officer, director or key employee of the Company, or the conduct
or proposed conduct of the business of the Company, will conflict
with or result in a breach of the terms, conditions or provisions
of or constitute a default under any contract, covenant or
instrument under which any such person is obligated.
2.09 Patents, Trademarks, Etc. Set forth in Schedule
2.09 of the Disclosure Schedule is a list and brief description of
all domestic and foreign patents, patent rights, patent
applications, trademarks, trademark applications, service marks,
service mark applications, trade names and copyrights, and all
applications for such which are in the process of being prepared,
owned by or registered in the name of the Company, or of which the
Company is a licensor or licensee or in which the Company has any
right, and in each case a brief description of the nature of such
right. The Company owns or possesses adequate licenses or other
rights to use all patents, patent applications, trademarks,
trademark applications, service marks, service mark applications,
trade names, copyrights, manufacturing processes, formulae, trade
secrets, customer lists and know how (collectively, "Intellectual
Property") necessary or desirable to the conduct of its business
as conducted and as proposed to be conducted, and no claim is
pending or, to the best of the Company's knowledge, threatened to
the effect that the operations of the Company infringe upon or
conflict with the asserted rights of any other person under any
Intellectual Property, and there is no basis for any such claim
(whether or not pending or threatened). No claim is pending or
threatened to the effect that any such Intellectual Property owned
or licensed by the Company, or which the Company otherwise has the
right to use, is invalid or unenforceable by the Company, and
there is no basis for any such claim (whether or not pending or
threatened). All prior art known to the Company which may be or
may have been pertinent to the examination of any United States
patent or patent application listed in Schedule 2.09 of the
Disclosure Schedule has been cited to the United States Patent and
Trademark Office. To the best of the Company's knowledge, all
technical information developed by and belonging to the Company
which has not been patented has been kept confidential. The
Company has not granted or assigned to any other person or entity
any right to manufacture, have manufactured, assemble or sell the
products or proposed products or to provide the services or
proposed services of the Company. The Company is not aware that
any other Person is using any of the Company's Intellectual
Property without Company authorization.
2.10 Title to Properties. The Company and its sub-
sidiaries have good, clear and marketable title to their
respective properties and assets reflected on the Balance Sheet or
acquired by them since the Balance Sheet Date (other than
properties and assets disposed of in the ordinary course of
business since the Balance Sheet Date), and all such properties
and assets are free and clear of mortgages, pledges, security
interests, liens, charges, claims, restrictions and other
encumbrances (including without limitation, easements and
licenses), except for liens for or current taxes not yet due and
payable and minor imperfections of title, if any, not material in
nature or amount and not materially detracting from the value or
impairing the use of the property subject thereto or impairing the
operations or proposed operations of the Company and its
subsidiaries, including without limitation, the ability of the
Company and its subsidiaries to secure financing using such
properties and assets as collateral. To the best of the Company's
knowledge after due inquiry, there are no condemnation,
environmental, zoning or other land use regulation proceedings,
either instituted or planned to be instituted, which would
adversely affect the use or operation of the Company's and its
subsidiaries' properties and assets for their respective intended
uses and purposes, or the value of such properties, and neither
the Company nor any subsidiary has received notice of any special
assessment proceedings which would affect such properties and
assets.
2.11 Leasehold Interests. Each lease or agreement to
which the Company is a party under which it is a lessee of
any property, real or personal, is a valid and subsisting
agreement, duly authorized and entered into, without any default
of the Company thereunder and, to the best of the Company's
knowledge, without any default thereunder of any other party
thereto. No event has occurred and is continuing which, with due
notice or lapse of time or both, would constitute a default or
event of default by the Company under any such lease or agreement
or, to the best of the Company's knowledge, by any other party
thereto. The Company's possession of such property has not been
disturbed and, to the best of the Company's knowledge after due
inquiry, no claim has been asserted against the Company adverse to
its rights in such leasehold interests.
2.12 [Reserved]
2.13 Taxes. The Company has filed all tax returns,
Federal, state, county and local, required to be filed by it, and
the Company has paid all taxes shown to be due by such returns as
well as all other taxes, assessments and governmental charges
which have become due or payable, including without limitation all
taxes which the Company is obligated to withhold from amounts
owing to employees, creditors and third parties. The Company has
established adequate reserves for all taxes accrued but not yet
payable. All material tax elections of any type which the Company
has made as of the date hereof are set forth in the financial
statements referred to in Section 2.05. The Federal income tax
returns of the Company have never been audited by the Internal
Revenue Service. No deficiency assessment with respect to or
proposed adjustment of the Company's Federal, state, county or
local taxes is pending or, to the best of the Company's knowledge,
threatened. There is no tax lien (other than for current taxes
not yet due and payable), whether imposed by any Federal, state,
county or local taxing authority, outstanding against the assets,
properties or business of the Company. Neither the Company nor
any of its present or former shareholders has ever filed an
election pursuant to Section 1362 of the Internal Revenue Code of
1986, as amended (the "Code"), that the Company be taxed as an S
corporation. As of the Note Closing Date and except as otherwise
provided on Schedule 2.13 to the Disclosure Schedule, the
Company's net operating losses for Federal income tax purposes, as
set forth in the financial statements referred to in Section 2.05,
are not subject to any limitations imposed by Section 382 of the
Code and the full amount of such net operating losses are
available to offset the taxable income of the Company for the
current fiscal year and, to the extent not so used, succeeding
fiscal years. Consummation of the transactions contemplated by
this Agreement or by any other agreement, understanding or
commitment (contingent or otherwise) to which the Company is a
party or by which it is otherwise bound will not have the effect
of limiting the Company's ability to use such net operating losses
in full to offset such taxable income, except to the extent that
such use is limited as a result of any anti-dilution adjustments
pursuant to the terms of the Series A Convertible Preferred Stock.
2.14 Other Agreements. The Company is not a party to
or otherwise bound by any written or oral agreement, instrument,
commitment or restriction which individually or, taking any
related agreements, instruments, commitments or restrictions
together, in the aggregate is material to or could materially
adversely affect the business, prospects, financial condition,
operations, property or affairs of the Company or any of the
following which is material to or could materially adversely
affect the business, prospects, financial condition, operations,
property or affairs of the Company, whether written or oral:
(a) distributor, dealer, manufacturer's representative
or sales agency agreement which is not terminable on less than
ninety (90) days' notice without cost or other liability to the
Company (except for agreements which, in the aggregate, are not
material to the business of the Company);
(b) sales agreement which entitles any customer to a
rebate or right of set-off, to return any product to the Company
after acceptance thereof or to delay the acceptance thereof, or
which varies in any material respect from the Company's standard
form agreements;
(c) agreement with any labor union (and, to the knowl-
edge of the Company, no organizational effort is being made with
respect to any of its employees);
(d) agreement with any supplier containing any
provision permitting any party other than the Company to
renegotiate the price or other terms, or containing any pay-back
or other similar provision, upon the occurrence of a failure by
the Company to meet its obligations under the agreement when due
or the occurrence of any other event;
(e) agreement for the future purchase of fixed assets
or for the future purchase of materials, supplies or equipment in
excess of its normal operating requirements;
(f) agreement for the employment of any officer,
employee or other person (whether of a legally binding nature or
in the nature of informal understandings) on a full-time or
consulting basis which is not terminable on notice without cost or
other liability to the Company, except normal severance
arrangements and accrued vacation pay;
(g) bonus, pension, profit-sharing, retirement, hospi-
talization, insurance, stock purchase, stock option or other plan,
agreement or understanding pursuant to which benefits are provided
to any employee of the Company (other than an Employee Plan or
group insurance plans which are not self-insured and are
applicable to employees generally);
(h) agreement relating to the borrowing of money or to
the mortgaging or pledging of, or otherwise placing a lien or
security interest on, any asset of the Company;
(i) guaranty of any obligation for borrowed money or
otherwise;
(j) voting trust or agreement, shareholders' agreement,
pledge agreement, buy-sell agreement or first refusal or pre-
emptive rights agreement relating to any securities of the
Company;
(k) agreement, or group of related agreements with the
same party or any group of affiliated parties, under which the
Company has advanced or agreed to advance money or has agreed to
lease any property as lessee or lessor;
(l) agreement or obligation (contingent or otherwise)
to issue, sell or otherwise distribute or to repurchase or
otherwise acquire or retire any share of its capital stock or any
of its other equity securities;
(m) assignment, license or other agreement with respect
to any form of intangible property;
(n) agreement under which it has granted any person any
registration rights, other than the Registration Rights Agreement;
(o) agreement under which it has limited or restricted
its right to compete with any person in any respect;
(p) other agreement or group of related agreements with
the same party involving more than $50,000 or continuing over a
period of more than six months from the date or dates thereof
(including renewals or extensions optional with another party),
which agreement or group of agreements is not terminable by the
Company without penalty upon notice of thirty (30) days or less,
but excluding any agreement or group of agreements with a customer
of the Company for the sale, lease or rental of the Company's
products or services if such agreement or group of agreements was
entered into by the Company in the ordinary course of business; or
(q) other agreement, instrument, commitment, plan or
arrangement, a copy of which would be required to be filed with
the Securities and Exchange Commission (the "Commission") as an
exhibit to a registration statement on Form S-1 if the Company
were registering securities under the Securities Act of 1933, as
amended (the "Securities Act").
The Company, and to the best of the Company's knowledge after due
inquiry, each other party thereto have in all material respects
performed all the obligations required to be performed by them to
date (or each non-performing party has received a valid,
enforceable and irrevocable written waiver with respect to its
non-performance), have received no notice of default and are not
in default (with due notice or lapse of time or both) under any
agreement, instrument, commitment, plan or arrangement to which
the Company is a party or by which it or its property may be
bound. The Company has no present expectation or intention of not
fully performing all its obligations under each such agreement,
instrument, commitment, plan or arrangement, and the Company has
no knowledge of any breach or anticipated breach by the other
party to any agreement, instrument, commitment, plan or
arrangement to which the Company is a party. The Company is in
full compliance with all of the terms and provisions of its
Charter and Code of Regulations, as amended.
2.15 Loans and Advances. The Company does not have any
outstanding loans or advances to any person and is not obligated
to make any such loans or advances, except, in each case, for
advances to employees of the Company in respect of reimbursable
business expenses anticipated to be incurred by them in connection
with their performance of services for the Company.
2.16 Assumptions, Guaranties, Etc. of Indebtedness of
Other Persons. The Company has not assumed, guaranteed, endorsed
or otherwise become directly or contingently liable on any
indebtedness of any other person (including, without limitation,
liability by way of agreement, contingent or otherwise, to
purchase, to provide funds for payment, to supply funds to or
otherwise invest in the debtor, or otherwise to assure the credi-
tor against loss), except for guaranties by endorsement of nego-
tiable instruments for deposit or collection in the ordinary
course of business.
2.17 Significant Customers and Suppliers. No customer
or supplier which was significant to the Company during the period
covered by the financial statements referred to in Section 2.05 or
which has been significant to the Company thereafter, has
terminated, materially reduced or threatened to terminate or
materially reduce its purchases from or provision of products or
services to the Company, as the case may be.
2.18 Governmental Approvals. Except for the filing of
a Form 10b-17 with the Nasdaq Stock Market, subject to the accu-
racy of the representations and warranties of the Purchasers set
forth in Article III, no registration or filing with, or consent
or approval of or other action by, any Federal, state or other
governmental agency or instrumentality is or will be necessary for
the valid execution, delivery and performance by the Company of
the Transaction Documents, the issuance, sale and delivery of the
Notes, Preferred Shares, the Warrants, the Note Warrant Common
Shares and the Warrant Shares, the performance by the Company of
its obligations under the Notes, Warrants or, upon conversion of
the Preferred Shares and the Warrant Shares, the issuance and
delivery of the Conversion Shares, other than (i) filings pursuant
to state securities laws (all of which filings have been made by
the Company, other than those which are required to be made after
the Preferred Share and Warrant Closing and which will be duly
made on a timely basis) in connection with the sale of the Notes,
Preferred Shares, the Warrants, the Note Warrant Common Shares and
the Warrant Shares and (ii) with respect to the Registration
Rights Agreement, the registration of the shares covered thereby
with the Commission and filings pursuant to state securities laws.
2.19 Disclosure. Neither this Agreement, nor any
Schedule or Exhibit to this Agreement, nor any document furnished
or made available to the Purchasers relating to this Agreement
contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained herein or
therein not misleading. None of the statements, documents,
certificates or other items prepared or supplied by the Company
with respect to the transactions contemplated hereby contains an
untrue statement of a material fact or omits a material fact
necessary to make the statements contained therein not misleading.
There is no fact which the Company has not disclosed to the
Purchasers and their counsel in writing and of which the Company
is aware which materially and adversely affects or could
materially and adversely affect the business, prospects, financial
condition, operations, property or affairs of the Company or any
of its subsidiaries. The financial projections and other
estimates contained in any documents furnished to the Purchasers
were prepared by the Company based on the Company's experience in
the industry and on assumptions of fact and opinion as to future
events which the Company believed to be reasonable, but which the
Company cannot and does not assure or guarantee the attainment of
in any manner. As of the date hereof no facts have come to the
attention of the Company which would, in its opinion, require the
Company to revise or amplify the assumptions underlying such
projections and other estimates or the conclusions derived
therefrom.
2.20 Offering of the Notes, Preferred Shares and
Warrants. Neither the Company nor any person authorized or
employed by the Company as agent, broker, dealer or otherwise in
connection with the offering or sale of the Notes, Preferred
Shares and Warrants or any security of the Company similar to the
Notes, Preferred Shares or Warrants has offered the Notes,
Preferred Shares, Warrants or any such similar security for sale
to, or solicited any offer to buy the Notes, Preferred Shares,
Warrants or any such similar security from, or otherwise
approached or negotiated with respect thereto with, any person or
persons, and neither the Company nor any person acting on its
behalf has taken or will take any other action (including, without
limitation, any offer, issuance or sale of any security of the
Company under circumstances which might require the integration of
such security with the Notes, Preferred Shares or Warrants under
the Securities Act or the rules and regulations of the Commission
thereunder), in either case so as to subject the offering,
issuance or sale of the Notes, Preferred Shares or Warrants to the
registration provisions of the Securities Act.
2.21 Brokers. Except for NatCity Investments, Inc.,
the fees of which are set forth on Schedule 2.21 to the Disclosure
Schedule, the Company has no contract, arrangement or
understanding with any broker, finder or similar agent with
respect to the transactions contemplated by this Agreement.
2.22 Transactions With Affiliates. Except as set forth
on Schedule 2.22 of the Disclosure Schedule, no director, officer,
employee or shareholder of the Company, or member of the family of
any such person, or any corporation, partnership, trust or other
entity in which any such person, or any member of the family of
any such person, has a substantial interest or is an officer,
director, trustee, partner or holder of more than 5% of the
outstanding capital stock thereof, is a party to any transaction
with the Company, including any contract, agreement or other
arrangement providing for the employment of, furnishing of ser-
vices by, rental of real or personal property from or otherwise
requiring payments to any such person or firm, other than
employment-at-will arrangements in the ordinary course of business
and for the payment by the Company of an amount in excess of
$50,000 per annum.
2.23 Employees. Each of the officers of the Company,
each key employee and each other employee now employed by the
Company who has access to confidential information of the Company
has executed an Employee Nondisclosure and Developments Agreement
substantially in the form of Exhibit 2.23A and Exhibit 2.23B
(collectively, the "Employee Nondisclosure and Developments
Agreements"), and such agreements are in full force and effect.
No officer or key employee of the Company has advised the Company
(orally or in writing) that he intends to terminate employment
with the Company. The Company has complied in all material
respects with all applicable laws relating to the employment of
labor, including provisions relating to wages, hours, equal
opportunity, collective bargaining and the payment of Social
Security and other taxes.
2.24 U.S. Real Property Holding Corporation. The
Company is not now and has never been a "United States real prop-
erty holding corporation", as defined in Section 897(c)(2) of the
Code and Section 1.897-2(b) of the Regulations promulgated by the
Internal Revenue Service, and the Company has filed with the
Internal Revenue Service all statements, if any, with its United
States income tax returns which are required under Section 1.897-
2(h) of such Regulations.
2.25 Environmental Protection. The Company has not
caused or allowed, or contracted with any party for, the
generation, use, transportation, treatment, storage or disposal of
any Hazardous Substances (as defined below) in connection with the
operation of its business or otherwise. The Company, the
operation of its business, and any real property that the Company
owns, leases or otherwise occupies or uses (the "Premises") are in
compliance with all applicable Environmental Laws (as defined
below) and orders or directives of any governmental authorities
having jurisdiction under such Environmental Laws, including,
without limitation, any Environmental Laws or orders or directives
with respect to any cleanup or remediation of any release or
threat of release of Hazardous Substances. The Company has not
received any citation, directive, letter or other communication,
written or oral, or any notice of any proceeding, claim or
lawsuit, from any person arising out of the ownership or
occupation of the Premises, or the conduct of its operations, and
the Company is not aware of any basis therefor. The Company has
obtained and is maintaining in full force and effect all necessary
permits, licenses and approvals required by all Environmental Laws
applicable to the Premises and the business operations conducted
thereon (including operations conducted by tenants on the
Premises), and is in compliance with all such permits, licenses
and approvals. The Company has not caused or allowed a release,
or a threat of release, of any Hazardous Substance unto, at or
near the Premises, and, to the best of the Company's knowledge,
neither the Premises nor any property at or near the Premises has
ever been subject to a release, or a threat of release, of any
Hazardous Substance. For the purposes of this Agreement, the term
"Environmental Laws" shall mean any Federal, state or local law or
ordinance or regulation pertaining to the protection of human
health or the environment, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. Sections 9601, et seq., the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. Sections 11001, et seq.,
and the Resource Conservation and Recovery Act, 42 U.S.C.
Sections 6901, et seq. For purposes of this Agreement, the term
"Hazardous Substances" shall include oil and petroleum products,
asbestos, polychlorinated biphenyls, urea formaldehyde and any
other materials classified as hazardous or toxic under any
Environmental Laws.
2.26 ERISA.
(a) Schedule 2.26 to the Disclosure Schedule lists and
describes each Employee Plan that covers any employee of the
Company.
(b) Schedule 2.26 to the Disclosure Schedule also
includes a list of each Benefit Arrangement of the Company.
(c) No Employee Plan is a Multiemployer Plan and no
Employee Plan is subject to Title IV of ERISA. The Company and
its Affiliates have not incurred, nor do they expect to incur, any
liability under Title IV of ERISA arising in connection with the
termination of any plan covered or previously covered by Title IV
of ERISA.
(d) Except as set forth on Schedule 2.26 to the
Disclosure Schedule, none of the Employee Plans or other
arrangements listed on Schedule 2.26 to the Disclosure Schedule
covers any non-United States employee or former employee of the
Company.
(e) No "prohibited transaction," as defined in
Section 406 of ERISA or Section 4975 of the Code, has occurred
with respect to any Employee Plan.
(f) Except as set forth on Schedule 2.26 to the
Disclosure Schedule, each Employee Plan which is intended to be
qualified under Section 401(a) of the Code is so qualified and has
been so qualified during the period from its adoption to date, and
each trust forming a part thereof is exempt from tax pursuant to
Section 501(a) of the Code. Each Employee Plan has been
maintained in compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations,
including but not limited to ERISA and the Code, which are
applicable to such plan.
(g) Each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations
which are applicable to such Employee Plan and Benefit
Arrangement.
(h) All contributions and payments accrued under each
Employee Plan and Benefit Arrangement, determined in accordance
with prior funding and accrual practices, as adjusted to include
proportional accruals for the period ending on the Note Closing
Date and the period ending on the Preferred Share and Warrant
Closing Date, will be discharged and paid on or prior to such date
except to the extent reflected on the Balance Sheet. Except as
disclosed in writing to the Purchasers prior to the date hereof,
there has been no amendment to, written interpretation of or
announcement (whether or not written) by the Company or any of its
ERISA Affiliates relating to, or change in employee participation
or coverage under, any Employee Plan or Benefit Arrangement that
would increase materially the expense of maintaining such Employee
Plan or Benefit Arrangement above the level of the expense
incurred in respect thereof for the fiscal year ended prior to the
date hereof.
(i) There is no contract, agreement, plan or
arrangement covering any employee or former employee of the
Company that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to the
terms of Section 280G of the Code.
(j) No tax under Section 4980B of the Code has been
incurred in respect of any Employee Plan that is a group health
plan, as defined in Section 5000(b)(1) of the Code.
(k) With respect to the employees and former employees
of the Company, there are no employee post-retirement medical or
health plans in effect, except as required by Section 4980B of the
Code.
(l) No employee of the Company will become entitled to
any bonus, retirement, severance or similar benefit or enhanced
benefit solely as a result of the transactions contemplated
hereby.
2.27 Foreign Corrupt Practices Act. The Company has
not taken any action which would cause it to be in violation of
the Foreign Corrupt Practices Act of 1977, as amended, or any
rules and regulations thereunder. To the best of the Company's
knowledge after due inquiry, there is not now, and there has never
been, any employment by the Company of, or beneficial ownership in
the Company by, any governmental or political official in any
country in the world.
2.28 Federal Reserve Regulations. The Company is not
engaged in the business of extending credit for the purpose of
purchasing or carrying margin securities (within the meaning of
Regulation G of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of the Preferred Shares,
Warrants, Note Warrant Common Shares or Warrant Shares will be
used to purchase or carry any margin security or to extend credit
to others for the purpose of purchasing or carrying any margin
security or in any other manner which would involve a violation of
any of the regulations of the Board of Governors of the Federal
Reserve System.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants to the
Company that:
(a) it is an "accredited investor" within the meaning
of Rule 501 under the Securities Act and was not organized for the
specific purpose of acquiring the Notes, Preferred Shares or
Warrants;
(b) it has sufficient knowledge and experience in
investing in companies similar to the Company in terms of the
Company's stage of development so as to be able to evaluate the
risks and merits of its investment in the Company and it is able
financially to bear the risks thereof;
(c) it has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's
management and to review certain documents related to the Company;
(d) the Notes, Preferred Shares and Warrants being
purchased by it are being acquired for its own account for the
purpose of investment and not with a view to or for sale in
connection with any distribution thereof; and
(e) it understands that (i) the Notes, Preferred
Shares, Warrants, Warrant Shares and Conversion Shares have not
been registered under the Securities Act by reason of their
issuance in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2)
thereof or Rule 505 or 506 promulgated under the Securities Act,
(ii) the Notes, Preferred Shares, Warrants, the Note Warrant
Common Shares, Warrant Shares and Conversion Shares must be held
indefinitely unless a subsequent disposition thereof is registered
under the Securities Act or is exempt from such registration,
(iii) the Notes, Preferred Shares, Warrants, the Note Warrant
Common Shares, Warrant Shares and Conversion Shares will bear a
legend to such effect and (iv) the Company will make a notation on
its transfer books to such effect.
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS AND THE
COMPANY
4.01 Conditions to the Obligations of the
Purchasers and the Company. The obligation of each Purchaser to
purchase and pay for the Preferred Shares and Warrants to be
purchased by it at the Preferred Share and Warrant Closing, and
the obligation of the Company to sell the Preferred Shares and
Warrants at the Preferred Share and Warrant Closing, are subject
to the satisfaction, on or before the Preferred Share and Warrant
Closing Date, of the following condition:
(a) Shareholder Approvals. The
Shareholders of the Company shall have approved (i) the adoption
of this Agreement and the transactions contemplated hereby as
required by the Ohio Control Share Acquisition Act, the Articles
of Incorporation and Code of Regulations of the Company and the
rules of the Nasdaq National Market, and (ii) the amendment of the
Company's Articles of Incorporation so that such Articles of
Incorporation shall read as set forth in Exhibit 1.02 hereto.
4.02 Conditions to the Obligations of the Purchasers.
The obligation of each Purchaser to purchase and pay for the Notes
to be purchased by it at the Note Closing, and the obligation of
each Purchaser to purchase and pay for the Preferred Shares and
Purchase Warrants to be purchased by it at the Preferred Share and
Warrant Closing, is in each case subject to the following
conditions, any or all of which may be waived by the Purchasers:
(a) Representations and Warranties to be True and Cor-
rect. The representations and warranties of the Company contained
in Article II shall be true, complete and correct on and as of the
Note Closing Date and the Preferred Share and Warrant Closing Date
with the same effect as though such representations and warranties
had been made on and as of such date, except to the extent such
representations and warranties are by their express provisions
made as of the date of this Agreement or another specified date,
and the President and Treasurer of the Company shall have
certified to such effect to the Purchasers in writing, on and as
of each of the Note Closing Date and the Preferred Share and
Warrant Closing Date.
(b) Performance. The Company shall have performed and
complied with all agreements contained herein required to be
performed or complied with by it prior to or at the Note Closing
Date and the Preferred Share and Warrant Closing Date, and the
President and Treasurer of the Company shall have certified to the
Purchasers in writing to such effect, on and as of each of the
Note Closing Date and the Preferred Share and Warrant Purchase
Date, and to the further effect that all of the conditions set
forth in this Article IV have been satisfied as of such date.
(c) All Proceedings to be Satisfactory. As of the Note
Closing Date and the Preferred Share and Warrant Closing Date, all
corporate and other proceedings to be taken by the Company in
connection with the transactions contemplated hereby and all docu-
ments incident thereto shall be satisfactory in form and substance
to the Purchasers and their counsel, and the Purchasers and their
counsel shall have received all such counterpart originals or
certified or other copies of such documents as they reasonably may
request.
(d) Documentation at the Closings. The Purchasers
shall have received prior to or at (i) the Note Closing, and (ii)
the Preferred Share and Warrant Closing, all of the following
documents or instruments, or evidence of completion thereof, each
in form and substance satisfactory to the Purchasers and their
special counsel:
(i) At the Note Closing, an opinion of Dinsmore &
Shohl LLP, counsel to the Company, dated the Note Closing Date, in
form and scope satisfactory to the Purchasers and their counsel,
substantially in the form attached hereto as Exhibit 4.02, and at
the Preferred Share and Warrant Closing, an opinion of Dinsmore &
Shohl LLP, counsel to the Company, dated the Preferred Share and
Warrant Closing Date, in form and scope satisfactory to the
Purchasers and their counsel.
(ii) (A) the Charter, certified as of a recent date
by the Secretary of State of the State of Ohio, (B) a certificate
of said Secretary dated as of a recent date as to the due
incorporation and good standing of the Company, the payment of all
excise taxes by the Company and listing all documents of the
Company on file with said Secretary and (C) a certificate of the
Secretary of State of the jurisdiction of incorporation of each of
the Company's subsidiaries dated as of a recent date as to the due
incorporation and good standing of such subsidiary;
(iii) a certificate of the Secretary or an Assistant
Secretary of the Company dated, with respect to the Note Closing,
the Note Closing Date, and with respect to the Preferred Share and
Warrant Closing, the Preferred Share and Warrant Closing Date, and
certifying: (A) that attached thereto is a true and complete copy
of the Code of Regulations of the Company as in effect on the date
of such certification; (B) that attached thereto is a true and
complete copy of all resolutions adopted by the Board of Directors
or the shareholders of the Company authorizing the execution,
delivery and performance of the Transaction Documents, the
issuance, sale and delivery of the Notes, Preferred Shares and the
Warrants, the performance of the Notes and Warrants, the
reservation, issuance, sale and delivery of the Note Warrant
Common Shares and the Warrant Shares and the reservation, issuance
and delivery of the Conversion Shares, and that all such
resolutions are in full force and effect and are all the
resolutions adopted in connection with the transactions
contemplated by the Transaction Documents; (C) that the Charter
has not been amended since the date of the last amendment referred
to in the certificate delivered pursuant to clause (i)(B) above;
and (D) to the incumbency and specimen signature of each officer
of the Company executing any of the Transaction Documents, the
Notes, the Warrants or any of the stock certificates representing
the Preferred Shares and any certificate or instrument furnished
pursuant hereto, and a certification by another officer of the
Company as to the incumbency and signature of the officer signing
the certificate referred to in this clause (ii); and
(iiii) such additional supporting documents and other
information with respect to the operations and affairs of the
Company as the Purchasers or their counsel reasonably may request.
(e) Warrants. With respect to the Preferred Share and
Warrant Closing only, the Company shall have executed and
delivered the Warrants.
(f) Registration Rights Agreement. With respect to the
Note Closing only, the Company shall have executed and delivered
the Registration Rights Agreement.
(g) Charter. With respect to the Preferred Share and
Warrant Closing only, the Charter shall read in its entirety as
set forth in Exhibit 1.02.
(h) Election of Directors. With respect to the
Preferred Share and Warrant Closing only, Edward L. Cahill and the
second Purchaser Director, if designated as of such date, shall
have been elected as Purchaser Directors pursuant to Section 5.09
hereof and shall hold such positions as of the Preferred Share and
Warrant Closing Date.
(i) Preemptive Rights. With respect to the Note
Closing only, all shareholders of the Company having any
preemptive, first refusal or other rights with respect to the
issuance of the Notes shall have irrevocably waived the same in
writing. With respect to the Preferred Share and Warrant Closing
only, all shareholders of the Company having any preemptive, first
refusal or other rights with respect to the issuance of the
Preferred Shares, the Warrants, the Note Warrant Common Shares,
the Warrant Shares or the Conversion Shares shall have irrevocably
waived the same in writing.
(j) Fees of Purchasers' Counsel. The Company shall
have paid in accordance with Section 8.01 the fees and
disbursements of Purchasers' counsel invoiced at each of the Note
Closing and the Preferred Share and Warrant Closing.
(k) Consents. The Company shall have received the
written consent of the Bank to the transactions contemplated
hereby.
(l) Proxies. With respect to the Note Closing only,
each shareholder listed on Exhibit 4.02A shall have validly
executed and delivered a proxy in the form attached hereto as
Exhibit 4.02B.
(m) Bank Agreement. The Company shall have entered
into a, and there shall be no event of default existing with
respect to such, definitive term loan agreement with a financial
institution providing for the conversion of the Company's current
indebtedness to the Bank of approximately $3.1 million into a
revolving credit facility to the Company of no less than
$2.25 million maturing no earlier than February 1, 2000.
(n) No Event of Default. With respect to the Preferred
Share and Warrant Closing only, there shall be no Event of Default
existing.
(o) Shareholder Approvals. With respect to the
Preferred Share and Warrant Closing only, the shareholders of the
Company shall have approved (i) the adoption of this Agreement and
the transactions contemplated hereby as required by the Ohio
Control Share Acquisition Act, the Articles of Incorporation and
Code of Regulations of the Company and the rules of the Nasdaq
National Market, and (ii) the amendment of the Company's Articles
of Incorporation so that such Articles of Incorporation shall read
as set forth in Exhibit 1.02 hereto.
All such documents shall be satisfactory in form and substance to
the Purchasers and their counsel.
ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with each of the
Purchasers that:
5.01 Information. Commencing on the Note Closing Date and
continuing so long as any Notes, Preferred Shares, Warrant Shares,
Note Warrant Common Shares or Conversion Shares remain outstanding
(or such earlier time as provided below), the Company shall
deliver to the Purchasers the information specified in this
Section 5.01 unless (i) any such Purchaser at any time
specifically requests that such information not be delivered to
it, or (ii) any such Purchaser has assigned its interest in any
Notes, Preferred Shares, Warrant Shares or Conversion Shares to a
third party, in which case the Company shall deliver to such
assignee the information specified in this Section 5.01 so long as
such assignee, if not an Affiliate of a Purchaser, has executed a
mutually acceptable agreement to maintain the confidentiality of
the information so long as such information is not, or has not
been, made available to the general public:
(a) Annual Financial Statements. As soon as available, but in
any event within one hundred twenty (120) days after the end of
each fiscal year of the Company, a copy of the audited
consolidated balance sheets of the Company and its subsidiaries as
at the end of such fiscal year and the related audited
consolidated statements of operations, shareholders' equity and
cash flows of the Company and its subsidiaries for such fiscal
year, all in reasonable detail and stating in comparative form the
figures as at the end of and for the immediately preceding fiscal
year, accompanied (in the case of the audited consolidated
financial statements) by an opinion of an accounting firm of
recognized national standing selected by the Company, which
opinion shall state that such accounting firm's audit was
conducted in accordance with generally accepted auditing
standards. All such financial statements shall be prepared in
accordance with GAAP applied on a consistent basis throughout the
periods reflected therein except as stated therein.
(b) Quarterly Financial Statements. As soon as available, but
in any event not later than forty-five (45) days after the end of
each quarterly fiscal period (other than the last quarterly fiscal
period in any fiscal year of the Company), the unaudited
consolidated balance sheet of the Company and its subsidiaries as
at the end of each such period and the related unaudited
consolidated statements of income and cash flows of the Company
and its subsidiaries for such period and for the elapsed period in
such fiscal year, all in reasonable detail and stating in
comparative form (i) the figures as of the end of and for the
comparable periods of the preceding fiscal year and (ii) the
figures reflected in the operating budget (if any) for such period
as specified in the financial plan of the Company. All such
financial statements shall be prepared in accordance with GAAP
applied on a consistent basis throughout the periods reflected
therein except as stated therein.
(c) Monthly Financial Statements. Within thirty (30) days after
the end of each month in each fiscal year (other than the last
month in each fiscal year) a consolidated balance sheet of the
Company and its subsidiaries, if any, and the related consolidated
statements of income, shareholders' equity and cash flows,
unaudited but prepared in accordance with generally accepted
accounting principles and certified by the Chief Financial Officer
of the Company, such consolidated balance sheet to be as of the
end of such month and such consolidated statements of income,
shareholders' equity and cash flows to be for such month and for
the period from the beginning of the fiscal year to the end of
such month, in each case with comparative statements for the prior
fiscal year.
(d) Material Litigation. Within twenty (20) days after the
Company learns of the commencement or written threat of
commencement of any litigation or proceeding against the Company
or any of its subsidiaries or any of their respective assets that
could reasonably be expected to have a material effect, written
notice of the nature and extent of such litigation or proceeding.
(e) Material Agreements. Within five (5) days after the
expiration of the applicable cure period, if any, or if no such
cure period exists within five (5) days after the receipt by the
Company of written notice of a default by the Company or any of
its subsidiaries under any material contract, agreement or
document to which it is a party or by which it is bound, written
notice of the nature and extent of such default.
(f) Other Reports and Statements. Promptly upon any
distribution to its shareholders generally, to its directors or to
the financial community of an annual report, quarterly report,
proxy statement, registration statement or other similar report or
communication, a copy of each such annual report, quarterly
report, proxy statement, registration statement or other similar
report or communication and promptly upon filing by the Company
with the SEC or with The Nasdaq Stock Market, the National
Association of Securities Dealers, Inc. or any national securities
exchange or other market system of all regular and other reports
or applications, a copy of each such report or application; and a
copy of such report or statement and copies of all press releases
and other statements made available generally by the Company to
the public concerning material developments in the Company.
(g) Accountants' Management Letters, Etc. Promptly after
receipt by the Company, copies of all accountants' management
letters and all management and board responses to such letters,
and copies of all certificates as to compliance, defaults,
material adverse changes, material litigation or similar matters
relating to the Company and its subsidiaries, which shall be
prepared by the Company or its officers and delivered to the third
parties.
(h) Annual Budget. Not later than the beginning of each fiscal
year of the Company, a copy of a consolidated operating budget of
the Company and its subsidiaries prepared by the Company for such
fiscal year, which shall include at minimum a projected balance
sheet and a projected statement of operations and cash flows for
each month in such fiscal year.
(i) Notices to Senior Lenders. Copies of all notices, reports,
certificates and other information furnished to the holders of
Senior Debt or to any agent or representative to such holders, in
each case promptly after the same are so furnished.
(j) Other. Promptly, from time to time, such other information
regarding the business, prospects, financial condition, oper-
ations, property or affairs of the Company and its subsidiaries as
such Purchaser reasonably may request.
5.02 Reserve for Conversion Shares and Warrant Shares.
The Company shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock, for the
purpose of effecting the exercise of the Note Warrants and the
conversion of the Preferred Shares and Warrant Shares and
otherwise complying with the terms of this Agreement, such number
of its duly authorized shares of Common Stock as shall be
sufficient to effect the exercise of the Note Warrants and the
conversion of the Preferred Shares from time to time outstanding
and the Warrant Shares from time to time outstanding and issuable
upon exercise of the Warrants, or otherwise to comply with the
terms of this Agreement. The Company shall at all times reserve
and keep available out of its authorized but unissued shares of
Series A Convertible Preferred Stock, for the purpose of effecting
the exercise of the Warrants and otherwise complying with the
terms of this Agreement, such number of its duly authorized shares
of Series A Convertible Preferred Stock as shall be sufficient to
effect the exercise of the Warrants from time to time outstanding,
or otherwise to comply with the terms of this Agreement. If at
any time the number of authorized but unissued shares of Common
Stock or Series A Convertible Preferred Stock shall not be
sufficient to effect the exercise of the Note Warrants and the
conversion of the Preferred Shares and Warrant Shares (assuming
the exercise of all outstanding Warrants) or the exercise of the
Warrants, as the case may be, or otherwise to comply with the
terms of this Agreement, the Company will forthwith take such
corporate action as may be necessary to increase its authorized
but unissued shares of Common Stock or Series A Convertible
Preferred Stock, as the case may be, to such number of shares as
shall be sufficient for such purposes. The Company will obtain
any authorization, consent, approval or other action by or make
any filing with any court or administrative body that may be
required under applicable state securities laws in connection with
the issuance of shares of Common Stock upon conversion of the
Preferred Shares and Warrant Shares and shares of Series A
Convertible Preferred Stock or Common Stock upon exercise of the
Warrants.
5.03 Restrictive Agreements Prohibited. Neither the
Company nor any of its subsidiaries shall become a party to any
agreement which by its terms restricts the Company's performance
of any of the Transaction Documents, the Notes, the Warrants or
the Charter.
5.04 Use of Proceeds. The Company shall use the
proceeds from the sale of the Notes, Preferred Shares and Warrants
solely to fund the continued market penetration of ChartMaxx and
OptiMaxx and for working capital. Without the prior written
consent of the Purchasers, the Company shall not use more than an
aggregate of $750,000 of the proceeds from the sale of the Notes,
Preferred Shares and Warrants to finance the operations of any
subsidiary of the Company.
5.05 Activities of Subsidiaries. The Company will not
organize or acquire any entity that is a subsidiary unless such
subsidiary is wholly-owned (directly or indirectly) by the
Company. The Company shall not permit any subsidiary to
consolidate or merge into or with or sell or transfer all or
substantially all its assets, except that any subsidiary may
(i) consolidate or merge into or with or sell or transfer assets
to any other subsidiary, or (ii) merge into or sell or transfer
assets to the Company. Without the prior written consent of the
Purchasers, the Company shall not sell or otherwise transfer any
shares of capital stock of any subsidiary, except to the Company
or another subsidiary, or permit any subsidiary to issue, sell or
otherwise transfer any shares of its capital stock or the capital
stock of any subsidiary, except to the Company or another
subsidiary, provided that DiaLogos Incorporated may issue and sell
shares of its capital stock to existing shareholders of DiaLogos
Incorporated and pursuant to the DiaLogos Incorporated 1999 Long
Term Stock Incentive Plan so long as the ownership interest of the
Company in DiaLogos Incorporated does not go below 58.5% on a
fully diluted basis. The Company shall not permit any subsidiary
to purchase or set aside any sums for the purchase of, or pay any
dividend or make any distribution on, any shares of its stock,
except for dividends or other distributions payable to the Company
or another subsidiary.
5.06 U.S. Real Property Interest Statement. The
Company shall provide prompt written notice to each Purchaser
following any "determination date" (as defined in Treasury
Regulation Section 1.897-2(c)(i)) on which the Company becomes a
United States real property holding corporation. In addition,
upon a written request by any Purchaser, the Company shall provide
such Purchaser with a written statement informing the Purchaser
whether such Purchaser's interest in the Company constitutes a
U.S. real property interest. The Company's determination shall
comply with the requirements of Treasury Regulation Section 1.897-
2(h)(1) or any successor regulation, and the Company shall provide
timely notice to the Internal Revenue Service, in accordance with
and to the extent required by Treasury Regulation Section 1.897-
2(h)(2) or any successor regulation, that such statement has been
made. The Company's written statement to any Purchaser shall be
delivered to such Purchaser within ten (10) days of such
Purchaser's written request therefor. The Company's obligation to
furnish a written statement pursuant to this Section 5.06 shall
continue notwithstanding the fact that a class of the Company's
stock may be regularly traded on an established securities market.
5.07 International Investment Survey Act of 1976. The
Company shall use its best efforts to file on a timely basis all
reports required of it under 22 U.S.C. Section 3104, or any
similar statute, relating to a foreign person's direct or indirect
investment in the Company.
5.08 Consolidation, Merger of Disposition of Assets.
The Company will not consolidate with or merge with any other
person or convey, transfer or lease substantially all of its
assets in a single transaction or series of transactions to any
person unless the Company shall have paid all outstanding
principal and interest on the Notes and all interest that would
have been due and payable on the Note had they been held to
maturity. The Company shall provide each holder of a Notes with
written notice of such payment at least 30 business days in
advance of any proposed transaction.
5.09 Election of Directors
(a) Board of Directors. The Company shall be governed by a
Board of Directors consisting, as of the date hereof, of six
members (each a "Director"). Without the consent of the Purchaser
Directors (as hereinafter defined), the number of Directors
constituting the full Board of Directors shall not be increased
beyond nine; without the consent of the Company Directors (as
hereinafter defined), the number of Directors constituting the
full Board of Directors shall not be reduced below five. Regular
meetings of the Board shall be held at least four times per year,
on a quarterly basis.
(b) Nomination and Election of Directors.
(i) The Purchasers shall have the right to nominate two
Directors (each, a "Purchaser Director").
(ii) The Company agrees that it shall cause the Board of
Directors in office immediately prior to the Preferred Share and
Warrant Closing to increase the size of the Board of Directors by
two, and to elect the nominees designated by the Purchasers as
Directors, to serve as Directors until their respective successors
are elected and qualified. The Board of Directors (other than the
Purchaser Directors) shall have the right to nominate the
directors other than the Purchaser Directors (each a "Company
Director"), to serve until their respective successors are elected
and qualified. The initial Company Directors shall be the
incumbent Board of Directors as of the date of the Preferred Share
and Warrant Closing. The initial Purchaser Directors shall be
Edward L. Cahill and an individual to be designated after the date
hereof by the Purchasers, subject to the approval of the Company,
which approval shall not be unreasonably withheld or delayed.
(c) Vacancy. If any vacancy occurs in the Board of Directors
because of the death, disability, resignation, retirement or
removal of a Purchaser Director, then the Purchasers shall
nominate a successor, and the Board of Directors shall vote to
elect such successor to the Board, or if a vote of the
shareholders of the Company is held, the Board of Directors shall
recommend to the shareholders that such successor be elected to
the Board of Directors. If any vacancy occurs in the Board of
Directors because of the death, disability, resignation,
retirement or removal of a Company Director, then the Company
Directors shall either (i) nominate a successor, and the Board of
Directors shall vote to elect such successor to the board, or if a
vote of the shareholders of the Company is held, the Board of
Directors shall recommend to the shareholders that such successor
be elected to the Board of Directors, or (ii) decide expressly not
to fill such vacancy at such time.
5.10 No Merger, Consolidation, etc. The Company hereby
agrees that between the date hereof and the Preferred Share and
Warrant Closing Date, it shall not, and it shall not enter into a
binding obligation or definitive agreement to, merge or
consolidate the Company with another person, or sell, transfer or
convey all or substantially all of the assets of the Company to
another person.
5.11 Opinion Regarding Subsidiaries. The Company
hereby agrees that it shall cause an opinion of Dinsmore & Shohl
LLP, counsel to the Company, to be delivered to the Purchasers to
the effect that all the outstanding shares of capital stock of
each of the Company's subsidiaries have been duly authorized and
are validly issued.
5.12 Termination of Covenants. The covenants set forth
in Sections 5.06 and 5.07 shall terminate and be of no further
force or effect as to each of the Purchasers when such Purchaser
no longer holds any shares of capital stock or rights to acquire
capital stock of the Company. The covenant set forth in Section
5.10 shall terminate and be of no further force or effect on the
Preferred Share and Warrant Closing Date. All of the other
covenants set forth in this Article V shall terminate and be of no
further force or effect as to each of the Purchasers when such
Purchaser owns (i) no Notes, and (ii) less than 10% of the
Preferred Shares which (A) such Purchaser purchased at the
Preferred Share and Warrant Closing and (B) had the right to
purchase pursuant to the Warrants (in each case, appropriately
adjusted to reflect stock splits, stock dividends, combinations of
shares and the like with respect to the Series A Convertible
Preferred Stock).
ARTICLE VI
EVENTS OF DEFAULT
6.01. Events of Default. If any of the following
events ("Events of Default") shall occur and be continuing:
(a) The Company shall fail to pay
any installment of principal of any of the Notes when due; or
(b) The Company shall fail to pay
any interest or premium on any of the Notes when due and such
failure shall continue for five (5) business days; or
(c) Any representation or warranty
made by the Company in this Agreement or by the Company (or any
officers of the Company) in any certificate, instrument or written
statement contemplated by or made or delivered pursuant to or in
connection with this Agreement, shall prove to have been incorrect
when made in any material respect; or
(d) The Company, or any subsidiary
shall fail to perform or observe any other term, covenant or
agreement contained in this Agreement, the Notes, the Preferred
Shares or the Warrants on its part to be performed or observed and
any such failure remains unremedied for ten (10) business days
after written notice thereof shall have been given to the Company
by any registered holder thereof; or
(e) The Company or any subsidiary
shall fail to pay any Indebtedness for borrowed money (other than
as evidenced by the Notes) owing by the Company or such subsidiary
(as the case may be), or any interest or premium thereon, when due
(or, if permitted by the terms of the relevant document, within
any applicable grace period), whether such Indebtedness shall
become due by scheduled maturity, by required prepayment, by
acceleration, by demand or otherwise, or shall fail to perform any
term, covenant or agreement on its part to be performed under any
agreement or instrument (other than this Agreement or the Notes)
evidencing or securing or relating to any Indebtedness owing by
the Company or any subsidiary, as the case may be, when required
to be performed (or, if permitted by the terms of the relevant
document, within any applicable grace period), if the effect of
such failure to pay or perform is to accelerate, or to permit the
holder or holders of such Indebtedness, or the trustee or trustees
under any such agreement or instrument to accelerate, the maturity
of such Indebtedness, unless such failure to pay or perform shall
be waived by the holder or holders of such Indebtedness or such
trustee or trustees; or
(f) The Company or any subsidiary
shall be involved in financial difficulties as evidenced (i) by
its admitting in writing its inability to pay its debts generally
as they become due; (ii) by its commencement of a voluntary case
under Title 11 of the United States Code as from time to time in
effect, or by its authorizing, by appropriate proceedings of its
Board of Directors or other governing body, the commencement of
such a voluntary case; (iii) by its filing an answer or other
pleading admitting or failing to deny the material allegations of
a petition filed against it commencing an involuntary case under
said Title 11, or seeking, consenting to or acquiescing in the
relief therein provided, or by its failing to controvert timely
the material allegations of any such petition; (iv) by the entry
of an order for relief in any involuntary case commenced under
said Title 11; (v) by its seeking relief as a debtor under any
applicable law, other than said Title 11, of any jurisdiction
relating to the liquidation or reorganization of debtors or to the
modification or alteration of the rights of creditors, or by its
consenting to or acquiescing in such relief; (vi) by the entry of
an order by a court of competent jurisdiction (a) finding it to be
bankrupt or insolvent, (b) ordering or approving its liquidation,
reorganization or any modification or alteration of the rights of
its creditors, or (c) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its
property; or (vii) by its making an assignment for the benefit of,
or entering into a composition with, its creditors, or appointing
or consenting to the appointment of a receiver or other custodian
for all or a substantial part of its property; or
(g) Any judgment, writ, warrant of
attachment or execution or similar process shall be issued or
levied against a substantial part of the property of the Company
or any subsidiary and such judgment, writ, or similar process
shall not be released, vacated or fully bonded within sixty (60)
days after its issue or levy;
then, and in any such event, the Purchaser or any other holder of
the Notes may, by notice to the Company, declare the entire unpaid
principal amount of the Notes, all interest accrued and unpaid
thereon and all other amounts payable under this Agreement to be
forthwith due and payable, whereupon the Notes, all such accrued
interest and all such amounts shall become and be forthwith due
and payable (unless there shall have occurred an Event of Default
under subsection 6.01(g) in which case all such amounts shall
automatically become due and payable), without presentment,
demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Company.
6.02. Annulment of Defaults. Section 6.01 is subject
to the condition that, if at any time after the principal of any
of the Notes shall have become due and payable, and before any
judgment or decree for the payment of the moneys so due, or any
thereof, shall have been entered, all arrears of interest upon all
the Notes and all other sums payable under the Notes and under
this Agreement (except the principal of the Notes which by such
declaration shall have become payable) shall have been duly paid,
and every other default and Event of Default shall have been made
good or cured, then and in every such case the holders of seventy-
five percent (75%) or more in principal amount of all Notes then
outstanding may, by written instrument filed with the Company,
rescind and annul such declaration and its consequences; but no
such rescission or annulment shall extend to or affect any
subsequent default or Event of Default or impair any right
consequent thereon.
ARTICLE VII
COVENANTS OF THE MANAGING SHAREHOLDER
7.01 Tag-Along Rights. For the purposes of this
Section 7.01 only, the term "Shares" shall mean and include all
voting securities of the Company now owned or hereafter acquired
by either (i) the Managing Shareholder or (ii) the Purchasers
prior to the termination of this Article VII.
(a) The Managing Shareholder agrees
that if he (a "Selling Shareholder") proposes to sell or transfer
any of his Shares (the "Tag-Along Securities"), and the amount of
such Tag-Along Securities together with all other Shares sold by
Managing Shareholder after the date hereof exceeds 597,201, then
such Selling Shareholder shall provide written notice (the "Tag-
Along Offer Notice") of such intent to the Purchasers in the
manner set forth in this Section 7.01 (the date of receipt of such
notice being the "Tag-Along Notice Date"). The Tag-Along Offer
Notice shall identify the proposed transferee(s) (the "Tag-Along
Purchaser"), the number of Tag-Along Securities proposed to be
purchased by the Tag-Along Purchaser, the Tag-Along Ratio (as
defined in Section 7.01(b)(i)), the consideration offered per Tag-
Along Security (the "Tag-Along Offer Price") and any other
material terms and conditions of the proposed transfer (the
"Tag-Along Offer") and, in the case of a Tag-Along Offer in which
the Tag-Along Offer Price consists in part or in whole of
consideration other than cash, such information relating to such
consideration as the Purchasers may reasonably request in order to
evaluate such non-cash consideration. The Purchasers shall have
the right, exercisable as set forth below, to accept the Tag-Along
Offer to sell for up to the number of Shares determined pursuant
to Section 7.01(b). The Tag-Along Offer Price paid to any
Purchaser shall be not less than the highest price paid per Tag-
Along Security to any Selling Shareholder, which shall include any
payments to such Selling Shareholder for an agreement not to
compete or any consulting or other similar fees payable to such
Selling Shareholder (other than fees for actually anticipated
future services). Any Purchaser that wishes to accept the
Tag-Along Offer shall, within 30 days after the Tag-Along Notice
Date (the "Tag-Along Notice Period"), provide the Selling
Shareholder with written notice (a "Tag-Along Acceptance Notice")
specifying the number of Shares that the Purchaser wishes to sell,
and shall simultaneously provide a copy of such Tag-Along
Acceptance Notice to the Company.
Not less than ten days prior to the proposed date of any
sale pursuant to a Tag-Along Offer (the "Transfer Date"), which
date may not be earlier than 20 days after the termination of the
Tag-Along Notice Period, the Selling Shareholder shall notify the
Company and the Purchasers of the Transfer Date. Not less than
three days prior to the Transfer Date, the participating
Purchasers shall deliver to the Company in escrow (pending the
consummation of the sale pursuant to the Tag-Along Offer) their
duly endorsed certificates representing the Shares to be
transferred by the participating Purchasers pursuant to the
Tag-Along Offer, together with all other documents reasonably
required by the Company and/or the Tag-Along Purchaser to be
executed in connection with the sale of such Tag-Along Securities
pursuant to the terms of the Tag-Along Offer; provided, that each
participating Purchaser shall, as a condition to the sale of the
Tag-Along Securities, have the right to receive all documentation
(the "Transfer Documentation") from the Selling Shareholder
relating to the sale of the Tag-Along Securities at least ten days
prior to the consummation of such sale. Any material change in
the terms of the Tag-Along Offer (whether or not reflected in the
Transfer Documentation) will require the submission of a new Tag-
Along Offer Notice and the recommencement of compliance with all
of the other applicable provisions of this Section 7.01.
(b) (i) The Purchasers
shall have the right to sell (and the Selling Shareholder shall
reduce the number of its shares to be sold by a corresponding
amount), pursuant to the Tag-Along Offer, a number of shares equal
to the product of the total number of Tag-Along Securities offered
to be purchased by the Tag-Along Purchaser as set forth in such
Tag-Along Offer multiplied by a fraction (the "Tag-Along Ratio"),
the numerator of which shall be the aggregate number of Shares
owned by such Purchaser and the denominator of which shall be the
aggregate number of Shares owned at that time by the Selling
Shareholder and the participating Purchasers.
(ii) In no event may
the Purchasers sell more than the total number of Shares specified
in such Purchasers' Tag-Along Notice applicable to the relevant
Tag-Along Offer. If, at the termination of the Tag-Along Notice
Period, any Purchaser shall not have accepted the Tag-Along Offer,
the Purchaser will be deemed to have waived any and all of its
rights under this Section 7.01 with respect to the sale of any of
its Shares pursuant to such Tag-Along Offer.
(c) The Selling Shareholder shall
have 60 days from the conclusion of the Tag-Along Notice Period in
which to consummate the sale contemplated by the Tag-Along Offer
to the Tag-Along Purchaser at the price and on the terms contained
in the Tag-Along Offer Notice. If, at the end of such 60-day
period, the Selling Shareholder has not completed the sale
contemplated by the Tag-Along Offer Notice, the right of the
Selling Shareholder to effect such sale shall terminate, and the
Tag-Along Securities subject to such proposed sale shall again be
subject to all the restrictions on sale or other disposition and
other provisions contained in this Agreement.
(d) Immediately after the
consummation of the sale of the Tag-Along Securities pursuant to
the Tag-Along Offer, the Selling Shareholder shall notify the
participating Purchasers and the Company thereof, shall remit to
each of the participating Purchasers their portion of the total
sales price specified in the Tag-Along Offer Notice, and shall
furnish such other evidence of such sale (including the time of
completion) and the terms thereof as may be reasonably requested
by the Purchasers. The Company shall, upon being notified of the
consummation of such sale, return to each participating Purchaser
a new stock certificate, as the case may be, for the balance of
the Shares not sold as part of the Tag-Along Securities, in
accordance with each Purchasers instructions.
(e) Notwithstanding anything
contained in this Section 7.01, there shall be no liability on the
part of a Selling Shareholder to any Purchaser if the sale of the
Tag-Along Securities is not consummated for whatever reason.
(f) No Purchaser shall be required
to make any representation or warranty in connection with the Tag-
Along Offer other than as to such Purchaser's ownership and
authority to sell, free of liens, claims and encumbrances, the
Shares proposed to be sold by it.
7.02 Termination. The covenants set forth in this
Article VII shall terminate and be of no further force or effect
as to each Purchaser when such Purchaser no longer holds at least
10% of the aggregate principal amount of the Notes, 10% of the
Preferred Shares, 10% of the Warrant Shares or 10% of the
Conversion Shares issuable thereon, purchased hereby.
ARTICLE VIII
MISCELLANEOUS
8.01 Expenses. Each party hereto will pay its own
expenses in connection with the transactions contemplated hereby,
whether or not such transactions shall be consummated, provided,
however, that the Company shall pay the fees and disbursements of
the Purchasers' special counsel, Testa, Hurwitz & Thibeault, LLP,
up to a maximum of $75,000, in connection with such transactions
and any subsequent amendment, waiver, consent or enforcement
thereof.
8.02 Survival of Agreements. All covenants, agree-
ments, representations and warranties made in any of the
Transaction Documents or in the Notes or the Warrants or any
certificate or instrument delivered to the Purchasers pursuant to
or in connection with any of the Transaction Documents or the
Notes or the Warrants, shall survive the execution and delivery of
all of the Transaction Documents, the Notes and the Warrants, the
issuance, sale and delivery of the Notes, Preferred Shares, the
Warrants and the Warrant Shares, and the issuance and delivery of
the Conversion Shares, and all statements contained in any
certificate or other instrument delivered by the Company hereunder
or thereunder or in connection herewith or therewith shall be
deemed to constitute representations and warranties made by the
Company.
8.03 Brokerage. Each party hereto will indemnify and
hold harmless the others against and in respect of any claim for
brokerage or other commissions relative to this Agreement or to
the transactions contemplated hereby, based in any way on
agreements, arrangements or understandings made or claimed to have
been made by such party with any third party.
8.04 Parties in Interest. All representations,
covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the
benefit of the respective successors and assigns of the parties
hereto whether so expressed or not. Without limiting the gener-
ality of the foregoing, all representations, covenants and agree-
ments benefiting the Purchasers shall inure to the benefit of any
and all subsequent holders from time to time of Preferred Shares,
Warrants, Warrant Shares or Conversion Shares.
8.05 Notices. All notices, requests, consents and
other communications hereunder shall be in writing and shall be
delivered in person, mailed by certified or registered mail,
return receipt requested, or sent by telecopier or telex,
addressed as follows:
(a) if to the Company, at 8805 Governors Hill Drive,
Suite 100, Cincinnati, Ohio 45249, Attention: General Counsel,
with a copy to Dinsmore & Shohl LLP, 255 Fifth Street, Suite 1900,
Cincinnati, Ohio 45202, Attention: Charles F. Hertlein, Jr.,
Esq.; and
(b) if to any Purchaser, at the address of such Pur-
chaser set forth in Exhibit 1.01, with a copy to Testa, Hurwitz &
Thibeault, LLP, 125 High Street, Boston, Massachusetts 02110,
Attention: Leslie E. Davis, Esq.; and
(c) if to the Managing Shareholder, at 8805 Governors
Hill Drive, Suite 100, Cincinnati, Ohio 45249, with a copy to
Dinsmore & Shohl LLP, 255 Fifth Street, Suite 1900, Cincinnati,
Ohio 45202, Attention: Charles F. Hertlein, Jr., Esq.;
or, in any such case, at such other address or addresses as shall
have been furnished in writing by such party to the others.
8.06 Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of Ohio.
8.07 Entire Agreement. This Agreement, including the
Schedules and Exhibits hereto, constitutes the sole and entire
agreement of the parties with respect to the subject matter
hereof. All Schedules and Exhibits hereto are hereby incorporated
herein by reference.
8.08 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.
8.09 Amendments. This Agreement may not be amended or
modified, and no provisions hereof may be waived, without the
written consent of the Company and the holders of at least two-
thirds of the outstanding shares of Common Stock issued or issu-
able upon conversion of the Preferred Shares and Warrant Shares,
taken as a group, and, with respect to Article VII only, with the
consent of the Managing Shareholder.
8.10 Severability. If any provision of this Agreement
shall be declared void or unenforceable by any judicial or
administrative authority, the validity of any other provision and
of the entire Agreement shall not be affected thereby.
8.11 Titles and Subtitles. The titles and subtitles
used in this Agreement are for convenience only and are not to be
considered in construing or interpreting any term or provision of
this Agreement.
8.12 Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Purchasers and their affiliates, and their respective partners,
co-investors, officers, directors, employees, agents, consultants,
attorneys and advisers (each, an "Indemnified Party"), from and
against any and all actual losses, claims, damages, liabilities,
costs and expenses (including, without limitation, environmental
liabilities, costs and expenses and all reasonable fees, expenses
and disbursements of counsel), joint or several (hereinafter
collectively referred to as a "Loss"), which may be incurred by or
asserted or awarded against any Indemnified Party in connection
with or in any manner arising out of or relating to any
investigation, litigation or proceeding or the preparation of any
defense with respect thereto, arising out of or in connection with
or relating to this Agreement, the other Transaction Documents or
the transactions contemplated hereby or thereby or any use made by
the Company or proposal to be made by the Company with the
proceeds of the Purchasers' purchase of the Notes, Preferred
Shares, Warrant Shares and Conversion Shares pursuant to this
Agreement, whether or not such investigation, litigation or
proceeding is brought by the Company, any of its subsidiaries,
shareholders or creditors, an Indemnified Party or any other
person, whether or not any of the transactions contemplated by
this Agreement or the other Transaction Documents are consummated,
except to the extent such Loss is found in a final judgment by a
court of competent jurisdiction to have resulted from such
Indemnified Party's gross negligence or willful misconduct. The
Company agrees that no Indemnified Party shall have any liability
(whether direct or indirect, in contract, tort or otherwise) to
the Company or any of its subsidiaries, shareholders or creditors
for or in connection with the transactions contemplated hereby,
except to the extent such liability is found in a final judgment
by a court of competent jurisdiction to have resulted from such
Indemnified Party's gross negligence or willful misconduct but in
no event shall an Indemnified Party be liable for punitive,
exemplary or consequential damages.
(b) An Indemnified Party shall give written notice to the
Company of any claim with respect to which it seeks
indemnification promptly (but in no event later than within thirty
(30) days) after the discovery by such parties of any matters
giving arise to a claim for indemnification pursuant to Section
8.12(a); provided that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Company of
its obligations under this Section 8.12, except to the extent that
the Company is actually prejudiced by such failure to give notice.
In case any such action or claim is brought against any
Indemnified Party, the Company shall be entitled to participate in
and, unless in the judgment of the Indemnified Party a conflict of
interest between such Indemnified Party and the Company may exist
in respect of such action or claim, to assume the defense thereof,
with counsel reasonably satisfactory to the Indemnified Party and
after notice from the Company to the Indemnified Party of its
election so to assume the defense thereof. If the Company elects
in writing to assume the defense of such action or claim, and does
so assume the defense of any such action or claim, the Company
shall not be liable to such Indemnified Party for any legal or
other expenses subsequently incurred by the latter in connection
with the defense thereof other than reasonable costs of
investigation. In any event, unless and until the Company elects
in writing to assume and does so assume the defense of any such
action or claim the Indemnified Party's reasonable costs and
expenses arising out of the defense, settlement or compromise of
any such action or claim shall be Losses subject to
indemnification hereunder. If the Company elects to defend any
such action or claim, then the Indemnified Party shall be entitled
to participate in such defense with counsel of its choice at its
sole cost and expense. The Company shall not be liable for any
settlement of any action or claim effected without its written
consent. Anything in this Section 8.12 to the contrary
notwithstanding, the Company shall not, without the Indemnified
Party's prior written consent, settle or compromise any claim or
consent to entry of any judgment in respect thereof that imposes
any future obligation on the Indemnified Party or that does not
include, as an unconditional term thereof, the giving by the
claimant or the plaintiff to the Indemnified Party, a release from
all liability in respect of such claim.
8.13 Remedies Cumulative. No remedy conferred in this Agreement
or the other Transaction Documents is intended to be exclusive of
any other remedy and each and every such remedy shall be
cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or
otherwise.
8.14 Remedies Not Waived. No course of dealing between the
Company and any Purchaser and no delay or failure in exercising
any rights hereunder or under any other Transaction Document shall
operate as a waiver of any of the rights of any Purchaser.
8.15 Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural
forms of the terms defined):
(a) "Affiliate" shall mean, with respect to any person,
(i) any person directly or indirectly controlling, controlled by,
or under common control with such person, (ii) if such person is a
partnership, any limited or general partner of such person, or any
limited or general partner of a partner of such person, (iii) if
such person is a limited liability company, any manager or member
of such limited liability company, and (iv) any combination of any
of the foregoing.
(b) "Benefit Arrangement" means each employment,
severance or other similar contract, arrangement or policy
(written or oral) and each plan or arrangement (written or oral)
providing for severance benefits, insurance coverage (including
any self-insured arrangements), workers' compensation, disability
benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits or for deferred compensation, profit-sharing,
bonuses, stock options, stock appreciation rights or other forms
of incentive compensation or post-retirement insurance,
compensation or benefits which (i) is not an Employee Plan and
(ii) covers any employee or former employee of the Company.
(c) "Employee Plan" means each "employee benefit plan,"
as such term is defined in Section 3(3) of ERISA, that (A)(i) is
subject to any provision of ERISA and (ii) is maintained or
contributed to by the Company, or (B)(i) is subject to any
provision of Title IV of ERISA and (ii) is maintained or
contributed to by any of the Company's ERISA Affiliates.
(d) "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
(e) "ERISA Affiliate" of any entity means any other
entity that, together with such entity, would be treated as a
single employer under Section 414 of the Code.
(f) "Fully Diluted" shall mean including all
outstanding options, warrants and securities exchangeable for or
convertible into shares of Common Stock, and all commitments of
the Company to issue any of the foregoing.
(g) "Lien" means mortgage, deed of trust, pledge, lien,
security interest or other charge or encumbrance (including the
lien or retained security title of a conditional vendor) of any
nature.
(h) "Managing Shareholder" shall mean Richard A.
Mahoney.
(i) "Multiemployer Plan" means each Employee Plan that
is a multiemployer plan, as defined in Section 3(37) of ERISA.
(j) "person" shall mean an individual, corporation,
trust, partnership, joint venture, unincorporated organization,
government agency or any agency or political subdivision thereof,
or other entity.
(k) "Senior Debt" means (i) all indebtedness of the
Company for money borrowed from banks or institutional lenders,
including any extensions, renewals, replacements or refinancings
thereof, whether outstanding on the date hereof or hereafter
created or incurred, which is not by its terms subordinate and
junior to the Notes and which is disclosed in the Company SEC
Reports or is permitted by this Agreement at the time it is
created or incurred and (ii) all indebtedness of the Company for
money borrowed and incurred to replace or refinance any of the
indebtedness referred to in item (i) above, where the security
securing such indebtedness is substantially the same security as
that securing the indebtedness being refinanced.
(l) "subsidiary" shall mean, as to the Company, any
corporation of which more than 50% of the outstanding stock having
ordinary voting power to elect a majority of the Board of
Directors of such corporation (irrespective of whether or not at
the time stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening
of any contingency) is at the time directly or indirectly owned by
the Company, or by one or more of its subsidiaries, or by the
Company and one or more of its subsidiaries.
IN WITNESS WHEREOF, the Company and the Purchasers have
executed this Agreement as of the day and year first above
written.
MEDPLUS, INC.
By:__________________
[Corporate Seal] Title:_______________
Attest:
___________________
General Counsel
PURCHASERS:
CAHILL, WARNOCK STRATEGIC PARTNERS
FUND, L.P.
By: CAHILL, WARNOCK STRATEGIC PARTNERS, L.P.,
its General Partner
By:_____________________
Title:__________________
STRATEGIC ASSOCIATES, L.P.
By: CAHILL, WARNOCK & COMPANY, LLC,
its General Partner
By:______________________
Title:___________________
DOUBLE BLACK DIAMOND II, LLC
By:_______________________
Title:____________________
MANAGING SHAREHOLDER:
(For the purposes of Articles VII and VIII only)
_____________________
Richard A. Mahoney
EXHIBIT 1.01
Purchasers
<TABLE><CAPTION>
Aggregate
Purchase Price
for Preferred
Amount of Number of Number of Shares and
Name and Address Notes Preferred Shares Preferred Shares Purchase
of Purchaser to be Purchased to be Purchased to be Purchased Warrants
__________________________ ________________ _________________ ____________________ _______________
<S> <C> <C> <C> <C>
Cahill Warnock $ 1,895,000 2,192,494 703,995 $3,790,019.63
Strategic Partners, L.P.
c/o Cahill, Warnock
& Company, LLC
One South Street,
Suite 2150
Baltimore, MD 21202
Attn: Edward L. Cahill
Strategic Associates, L.P. 105,000 121,484 39,008 210,001.37
c/o Cahill, Warnock
& Company, LLC
One South Street,
Suite 2150
Baltimore, MD 21202
Attn: Edward L. Cahill
Double Black Diamond, II LLC 0 57,837 16,559 99,979.00
50 California
Street, Suite 3200
San Francisco, CA 94111
Attn: Thomas G.McKinley
________________ _________________ ____________________ _______________
Total $ 2,000,000 2,371,815 759,562 $4,100,000.00
</TABLE>
Exhibit 21
Subsidiaries of MedPlus, Inc.
ChartMaxx, Inc.: an Ohio corporation wholly owned by MedPlus, Inc.
DiaLogos Incorporated: a Delaware corporation partially owned by MedPlus, Inc.
FutureCORE, Inc.: an Ohio corporation wholly owned by MedPlus, Inc.
Synergis Acquisition, Inc.: an Ohio corporation wholly owned by MedPlus, Inc.
Universal Document Management Systems, Inc.: an Ohio corporation wholly owned by
MedPlus, Inc.
Exhibit 23
Consent Independent Auditors'
The Board of Directors
MedPlus, Inc.:
We consent to the incorporation by reference in the registration
statements of MedPlus, Inc. and subsidiaries on Form S-8 (No. 33-
94426) and Form S-3 (No. 333-20547) of our report dated April 30,
1999, relating to the consolidated balance sheets of MedPlus, Inc.
and subsidiaries as of January 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for the years ended January
31, 1999 and 1998, the one month period ended January 31, 1997 and
for the year ended December 31, 1996, which report appears in the
January 31, 1999 annual report on Form 10-KSB of MedPlus, Inc. and
subsidiaries.
/s/ KPMG LLP
Cincinnati, Ohio
April 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF MEDPLUS, INC. AND SUBSIDIARIES OF AND FOR THE YEAR ENDED
JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 13,794,473
<SECURITIES> 0
<RECEIVABLES> 4,635,333
<ALLOWANCES> 115,000
<INVENTORY> 757,471
<CURRENT-ASSETS> 20,041,271
<PP&E> 2,172,727
<DEPRECIATION> 687,852
<TOTAL-ASSETS> 24,656,291
<CURRENT-LIABILITIES> 9,476,778
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,476,985
<TOTAL-LIABILITY-AND-EQUITY> 24,656,291
<SALES> 7,912,158
<TOTAL-REVENUES> 10,201,152
<CGS> 5,171,635
<TOTAL-COSTS> 7,226,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 346,315
<INCOME-PRETAX> (11,487,176)
<INCOME-TAX> (3,475,777)
<INCOME-CONTINUING> (8,011,399)
<DISCONTINUED> 11,116,488
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,105,089
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF MEDPLUS, INC. AND SUBSIDIARIES OF AND FOR THE YEAR ENDED
JANUARY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 1,148,099
<SECURITIES> 0
<RECEIVABLES> 5,750,273
<ALLOWANCES> 155,000
<INVENTORY> 442,312
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0
0
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</TABLE>
