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ACCESSION NUMBER: 0000912057-00-020475
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 11
CONFORMED PERIOD OF REPORT: 20000131
FILED AS OF DATE: 20000428
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: QAD INC
CENTRAL INDEX KEY: 0001036188
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 770105228
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0131
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-22823
FILM NUMBER: 614072
BUSINESS ADDRESS:
STREET 1: 6450 VIA REAL
CITY: CARPINTERIA
STATE: CA
ZIP: 93013
BUSINESS PHONE: 8056846614
MAIL ADDRESS:
STREET 1: 6450 VIA REAL
CITY: CARPINTERIA
STATE: CA
ZIP: 93013
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-22823
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QAD INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0105228
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
</TABLE>
6450 VIA REAL
CARPINTERIA, CALIFORNIA 93013
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (805) 684-6614
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or an amendment to this
Form 10-K. /X/
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant, based on the closing price for the
registrant's common stock in the Nasdaq National Market on April 10, 2000, was
approximately $270,205,772. This calculation does not reflect a determination
that certain persons are affiliates of the registrant for any other purposes.
The number of outstanding shares of the registrant's common stock as of the
close of business on April 10, 2000 was 33,256,095.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III incorporate information by reference
from the definitive proxy statement for the registrant's Annual Meeting of
Stockholders to be held on June 8, 2000.
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<PAGE>
QAD INC.
FISCAL YEAR 2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 15
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share
data)..................................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS..................................................... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 27
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 27
ITEM 11. EXECUTIVE COMPENSATION...................................... 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K....................................................... 28
</TABLE>
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FORWARD LOOKING STATEMENT
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements. These statements typically are preceded or
accompanied by words like "believe," "anticipate," "expect" and words of similar
meaning. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the sections
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Factors That May Affect Future Results and Market
Price of Stock." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. QAD undertakes no obligation to revise or update or publicly
release the results of any revision or update to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents QAD files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in
fiscal year 2001.
PART I
ITEM 1. BUSINESS
Historically, QAD has been recognized as a provider of supply chain enabled
ERP (enterprise resource planning) software. However, with the advent of
e-business, we are expanding our products and services to meet the demands of
today's market. Our e-business solutions build on our core competency in
multisite operations by addressing order flow management requirements of the
Internet age. Our products have the flexibility and scalability that companies
need to quickly and successfully adapt to growth, organizational change,
technological advances, market shifts and other challenges. Our service practice
also provides a mix of expertise and resources to help our customers make a
successful transformation to e-business.
Our applications address both internally and externally focused business
processes required to conduct business. Our MFG/PRO software is a suite of
enterprise applications--including manufacturing, distribution, finance and
customer service--specifically designed for deployment at the plant/site level.
QAD APS (advanced planning and scheduling) software, formerly a part of the QAD
On/Q suite of applications, enables companies to improve planning processes and
asset utilization through supply chain optimization. QAD eQ software, also
formerly a part of QAD On/Q, allows businesses to effectively manage B2B
(business-to-business) collaborative relationships with customers, suppliers,
and digital communities using the most advanced Internet technologies.
Our services comprise a set of consulting practices focused on bringing
value-added services to our customers by a common set of policies and processes
within a global infrastructure. Our practices include:
- support services, which deliver solution-centered online support
- learning services, which empower our customers through training and
education
- technical services, which offer technical expertise and performance tuning
- implementation services, which provide project management, application
consulting and quality assurance
In addition, our customers enjoy the benefit of an extensive network of
QAD-certified alliances designed to extend our reach.
Our targeted industries include the automotive, consumer products,
electronics/industrial, food and beverage and medical sectors. As of January 31,
2000, QAD software was licensed at more than 4,800 sites in more than 80
countries.
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Our customers include:
AT&T Wireless
Colgate-Palmolive
Eaton/Aeroquip
Firmenich
Ford Motor Company
Framatome Connectors
International
Genzyme
Johnson Controls
Johnson & Johnson
Kraft
Lear Seating
Lucent Technologies
Matsushita
Nestle
Philips Electronics
St. Jude Medical
Schlumberger
Stryker
TaylorMade Golf
Unilever
"QAD," "QAD APS" and "QAD eQ" are trademarks and "MFG/PRO" is a registered
trademark of QAD Inc. This Annual Report on Form 10-K also contains trademarks
and registered trademarks of persons and companies other than QAD.
INDUSTRY BACKGROUND
In recent years, businesses have been subject to increasing global
competition, resulting in pressure to lower production costs, improve product
performance and quality, increase responsiveness to customers and shorten
product development and delivery cycles. In addition, globalization has greatly
increased the scope and complexity of multinational manufacturing organizations.
The Internet is impacting competition and the structure of supply chains,
driving costs further down and increasing the demand for customer-focused ways
of doing business. In order to respond, companies need to rethink their business
models and implement solutions that can keep up with the increased rate of
change. In our view, e-business goes beyond the Internet and includes all
electronic buying, selling and collaboration, supported by a foundation of
enterprise applications. We believe e-business impacts each segment of the
enterprise software market--corporate, plant/operations and supply chain.
Traditional ERP software enables the integration and management of critical
data within an enterprise and supports internal business processes such as sales
order management, procurement, inventory management, manufacturing control,
project management, distribution and finance. Complementary to that, traditional
supply chain management software, such as APS, enables companies to make
decisions related to the optimization of supply chains by using data from
traditional ERP systems.
Today, companies are looking for e-business solutions that help manage the
supply chain by enhancing the flow of information to and from customers,
suppliers and other business partners outside the enterprise. These solutions
rely on the Internet as a vehicle for achieving collaboration. In addition,
companies need to replace legacy plant/operations-level solutions, including
those in place because of corporate mandated Y2K lockdowns.
CORPORATE ENTERPRISE SOLUTIONS. Corporate enterprise solutions are
primarily focused on the consolidated information needs of Fortune 1000
companies. Leading vendors include Oracle, SAP and Peoplesoft. The broad scope,
significant cost of ownership, and limited flexibility of traditional corporate
enterprise solutions limits their effectiveness in addressing the needs of
individual plants or divisions. The rollout of corporate ERP solutions into the
plant/operations level of organizations has proven to be difficult, primarily
because of the cost of ownership and the need for flexibility and control at the
level of the individual plants.
PLANT/OPERATIONS-LEVEL SOLUTIONS. Plant/operations-level solutions are
primarily focused on the specific needs of midrange manufacturing plants and
distribution sites or the operations level of global companies. Leading vendors
of these solutions include QAD, SAP, J.D. Edwards and Symix Systems. Users of
plant-level solutions are looking for highly flexible, full-featured,
industry-specific solutions that can be implemented globally, rapidly and
cost-effectively and that easily can be made part of the company's
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overall e-business infrastructure. Because of the complexity of manufacturing
environments, e-business startups often are unable to deliver
plant/operations-level solutions.
SUPPLY CHAIN MANAGEMENT SOLUTIONS. Supply chain management applications
have expanded to include collaborative functions. Traditional providers of
supply chain optimization software typically offer decision support applications
that rely on transaction systems such as ERP to hold transaction information.
The challenge these vendors face is twofold: a decision support application is
not designed for high volume transaction processing and it is not collaborative.
New Internet-based collaborative applications reach outside the four walls of
the enterprise to enable supply chain partners to interact directly with the
manufacturer's transaction system. This new level of supply chain integration
results in significant reduction in the cost of operations.
THE QAD STRATEGY
Our objective is to become the leading provider of e-business solutions for
midrange and multinational manufacturing and distribution companies within our
targeted markets. Our strategy is to expand our leadership position at the plant
and operations level by providing Internet-based applications that not only run
internal processes but extend beyond the walls of the enterprise to manage
relationships with customers, suppliers and other business partners. The key
elements of our strategy for achieving our objective include the following:
LEVERAGE BEST-IN-CLASS MANUFACTURING APPLICATIONS. As of January 31, 2000,
MFG/PRO software was licensed at more than 4,800 sites in over 80 countries. We
believe that this is a substantial customer base from which we can leverage
future e-business sales. Our plan is to migrate our current installed base of
MFG/PRO software customers to our new Internet-based version, MFG/PRO eB and
further penetrate the market by gaining new customers within our targeted
verticals. In addition, we plan to accelerate the adoption cycle for our QAD eQ,
B2B collaborative solution, not only to our existing customers, but to new
customers as well.
BECOME THE B2B COLLABORATIVE APPLICATIONS LEADER. We believe that supply
chain management within and outside of the enterprise represents one of the
greatest current opportunities for companies to reduce costs and enhance
customer relationships. We further believe that, in the age of the Internet,
supply chains are becoming more complex and collaborative and are rapidly
evolving into vast global value networks that will require a new class of
software. Internet-based QAD eQ provides intelligent unattended B2B transaction
processing across multi-enterprise supply chains and is designed to help
businesses effectively collaborate across their supply chains.
LEVERAGE GLOBAL NETWORK OF ALLIANCES. We leverage the expertise of
distribution, services and technology partners to meet the diverse needs of our
customers. We augment our direct sales organization with a global network of
approximately 30 distributors and numerous services organizations that offer
consulting and implementation services to expand our reach. We plan to leverage
our network of distributors and services alliances to further penetrate our
vertical markets. In addition, we have entered into a number of joint
development agreements with third-party software developers who provide
functionality that has been embedded into or integrated with our software to
deliver a more comprehensive solution for our targeted vertical markets.
MAINTAIN TECHNOLOGY LEADERSHIP. Our technology strategy is focused on
delivering collaboration through open applications that comply with Internet
security standards. We believe that interoperability with real-time messaging
will remain an important requirement of software applications as organizations
seek integrated front-end and back-office solutions comprised of best-in-class
applications. We also are committed to delivering quality Internet-based
applications that utilize the most advanced technologies such as Java and XML to
meet the demand of today's economy.
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THE QAD SOLUTION
In the Internet-driven economy, manufacturing and distribution companies are
becoming increasingly customer focused. New customer-driven business models
require comprehensive end-to-end e-business solutions that manage all areas of
the enterprise--including corporate, plant/operations and collaborative supply
chain. Our unique approach to e-business provides companies with an e-business
framework built on our established enterprise backbone and integrated with
collaborative applications. Because of our open systems architecture, our
applications interoperate with legacy systems and other leading applications to
give companies best-in-class functionality. The result is a powerful e-business
solution that leverages a company's existing IT (information technology)
investment, supports their current business model and quickly adapts to new
market conditions. We meet customer requirements for e-business in our vertical
markets by delivering:
GLOBAL OPERATIONS FOR MIDRANGE AND MULTINATIONAL COMPANIES. Our reputation
for best-in-class manufacturing is supported by a proven track record for
successfully deploying comprehensive enterprise solutions in more than 80
countries. Our applications are available in more than 20 languages, incorporate
multicurrency capabilities and are tailored to local financial practices and
requirements in many of our major markets. Working in concert with our
alliances, our services ensure that customers receive the right combination of
software and services--including our award-winning customer support available
through traditional call centers or through our solution-centered online support
site accessible 24 hours a day, seven days a week.
EXPERTISE AND FUNCTIONALITY FOR KEY VERTICAL MARKETS. Our focus on key
vertical markets helped us to achieve leadership positions in the automotive,
consumer products, electronics/industrial, food and beverage and medical
industries. Our substantial expertise in these markets, together with our
strategy of developing Internet-based applications that address
industry-specific needs, provide our customers with a competitive advantage. For
example, our solutions include features that facilitate:
- US FDA (Food and Drug Administration) compliance and validation for the
medical industry
- advanced pricing and promotion management for the consumer products
industry
- customer/supplier scheduling via electronic data interchange (EDI) for the
automotive industry
- a product change control module for the electronics /industrial industry
FLEXIBLE, ADAPTABLE AND EASY TO USE. Our industry-specific e-business
solutions give manufacturing and distribution companies the flexibility to
modify their software and the ability to adapt their business models to meet
dynamic market changes. Because we develop industry-specific features, many
through customer-driven development groups, customization of the software is
minimized, which means our customers are able to access the functionality they
need the day their system goes live. The architecture of our software, together
with our focus and expertise in our key vertical markets, enables a rapid
time-to-benefit.
CONNECTIVITY FOR COLLABORATION. We understand that businesses want to
connect their people, products, partners, suppliers, and customers to create a
highly collaborative business model that helps them leverage relationships and
define the rules of their marketplace. Because of our open system approach, we
work closely with the OAGIS (Open Applications Group Integration Specification)
consortium and use the most advanced Internet technologies, such as XML and
Java, to deliver truly open, interoperable e-business solutions. We believe that
a collaborative supply chain model improves a company's ability to manage and
service a large volume of personalized and organizational relationships and
gives them the power to conduct intelligent unattended B2B order management.
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INTERNET EXCHANGES. Internet exchanges match up supply and demand
transactions as they come in. QAD eQ collaborative applications are based on the
concept of Internet exchanges and give businesses the ability to monitor
customer/supplier transactions and optimize their supply chains dynamically.
GLOBAL SERVICE AND SUPPORT. We believe that a high level of global service
and support is a critical component of our e-business solutions. Last year we
responded to customer requests for more direct involvement in their system
solutions by establishing QAD services. Working in concert with a global network
of QAD-certified service alliance partners, QAD services ensure that QAD
customers receive the right combination of software and services. QAD services
include:
- support services, which deliver solution-centered online support
- learning services, which empower our customers through training and
education
- technical services, which offer technical expertise and performance tuning
- implementation services, which provide project management, application
consulting and quality assurance
PRODUCTS AND SERVICES
We target our products and services to manufacturing and distribution
companies within the automotive, consumer products, electronics/industrial, food
and beverage and medical industries. Our products and services address the needs
of midrange and large multinational companies.
- Our MFG/PRO software provides companies with an integrated enterprise
solution within an open systems environment.
- QAD Advanced Planning and Scheduling (APS) software enables companies to
optimize their supply chains.
- QAD eQ software is designed to give companies an Internet-based B2B
(business-to-business) order management solution that extends the
company's enterprise application to its business partners to enable
collaboration on the execution of transactions.
MFG/PRO
A foundation for e-business, as well as a best-in-class manufacturing
solution, MFG/PRO software includes an integrated set of manufacturing,
distribution, financial and customer service applications designed to
address the needs of customers in our targeted vertical markets. Some of
these applications include unique, industry-specific features that were
developed through our customer development groups. Because of our open
systems approach, MFG/PRO interoperates with legacy systems and other
leading enterprise applications to give companies best-in-class
functionality.
MFG/PRO software supports multiple currencies and global tax management
and is tailored to financial practices and requirements in many of our major
geographic markets. MFG/PRO software supports more than 20 languages,
including most major European languages, Japanese, Chinese and Korean.
MFG/PRO software operates in both host and distributed, client/server
and browser-based computing environments and supports single or multiple
sites, as well as multiple production and operational processes. These
capabilities enable midrange and large multinational manufacturers to manage
multiple hybrid production methods within a single organization or a single
production site and they also provide the flexibility to adapt to additional
sites and processes as an organization's business evolves.
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Accessible through a Web browser, MFG/PRO includes an easily deployable
Java platform interface that minimizes internal system traffic and provides
low-cost system access over a WAN (wide area network).
MFG/PRO software includes several applications that enable our customers
to open up their business system infrastructures for e-business. These
applications, including Q/LinQ and EDI eCommerce, provide interoperability
with other applications both inside and outside the enterprise. These
software applications are often delivered in conjunction with QAD services.
Our sales have generally consisted of MFG/PRO software, services and related
maintenance.
QAD ADVANCED PLANNING AND SCHEDULING (APS)
QAD APS products include Supply Chain Optimizer, Factory Optimizer and
Demand Planner. In 1999, we developed integrations to these software
products to extend and leverage the capabilities of our enterprise
application, MFG/PRO. QAD Advanced Planning and Scheduling (APS) was
formerly a part of QAD On/Q.
Our Supply Chain Optimizer enables the enterprise to synchronize global
purchasing, manufacturing, product flow and distribution while adhering to
the strategic corporate planning objectives. It is designed to achieve
company objectives through dynamic and simultaneous consideration of
material and capacity cost constraints.
Our Factory Optimizer enables manufacturing managers and planners to
optimize manufacturing plans, simultaneously considering capacity, material
and customer constraints.
Our Demand Planner enables planners to collaborate on producing both
demand and supply plans based on historical demand patterns, causal factors,
marketing plans and other enterprise knowledge. Through a thin-client Java
UI (user interface), it supports collaborative planning within the
enterprise and with external suppliers and customers.
We have developed application programming interfaces (APIs) between
MFG/PRO and QAD APS product lines. As a result we provide our customers a
single source for an integrated solution of best-in-class manufacturing and
supply chain optimization.
QAD EQ
QAD eQ, formerly a part of QAD On/Q, is a B2B (business-to-business),
Internet order management application. QAD eQ supports a manufacturer's
e-business transformation through an innovative combination of customer and
supplier relationship management functions and Internet order management
capabilities. Unlike traditional ERP systems, QAD eQ is externally focused
and built for the Internet. QAD eQ can integrate with enterprise systems
(including MFG/PRO) through an open message-based architecture using the
OAGIS (Open Applications Group Integration Specification) model. QAD eQ is
built in Java using XML and designed to meet the security requirements of
Internet transactions.
QAD eQ allows a company to model its supply chains and the rules and
relationships that describe the preferences of its trading partners. QAD eQ
uses this relationship model to decide how a particular incoming order
should be handled. Supply chains change frequently, so the relationship
management function is flexible and easily adaptable to handle dynamic
environments.
We believe that QAD eQ is currently unique in the industry due to the
following:
- relationship management
- internet exchanges
- integration with enterprise solutions, including MFG/PRO
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These characteristics give manufacturers the ability to take an
order--unattended, at a single place, using one of many electronic
conduits--and deliver the order intelligently to suppliers inside and
outside of the enterprise.
We believe that the combination of QAD eQ, MFG/PRO and QAD APS is a well
positioned, end-to-end e-business solution that gives our customers a
competitive advantage.
NEW PRODUCT INITIATIVES
INTRODUCE PREPACKAGED E-BUSINESS SOLUTIONS FOR THE MIDMARKET. PowerSystem
is a prepackaged solution jointly offered with IBM and Cisco Systems, that
combines QAD's industry-specific enterprise software with IBM Nefinity and
RS/6000 servers and Cisco networking. The result is a complete manufacturing and
distribution system well suited to the needs of midrange companies. Because it
is pre-configured and pre-tested, PowerSystem, can be implemented very quickly
and at low cost. To support e-business requirements, a new release of the
product, PowerSystem eBusiness, will integrate QAD and IBM technology to provide
a browser-based storefront shopping cart to support B2B and B2C
(business-to-consumer) transactions.
CREATE AND ADOPT NEW SOLUTION PRICING MODELS. QAD intends to develop
alternative pricing models to reflect the changes in the way companies purchase
enterprise systems. To better serve companies looking to outsource their IT
systems, most notably small to mid-size companies, we are developing plans to
offer our Internet-based applications through application service providers
(ASPs), whose transaction-based fees offer an attractive alternative for
companies not wanting to invest heavily in an IT infrastructure. In addition, we
are developing plans to make our Internet-based applications available for
trading exchanges.
QAD PRODUCT ALLIANCES
We have a number of ongoing business alliances to extend the functionality
of QAD software through the addition of integrated best-in-class applications.
We also have entered into a number of joint development agreements with
third-party software developers who provide functionality that has been embedded
into or integrated with QAD software to deliver more complete solutions for our
targeted vertical markets. Our partners include Adexa, Inc. and Progress
Software Corporation.
QAD SERVICES
Twenty-two percent of our revenue in fiscal 2000 was derived from services.
Our service business combines the efforts of our various practices with the
extended service capabilities we gained through distributor acquisitions. In
1999, QAD services added a broad range of practices to support and enhance our
product lines and to help our customers make a smooth transition to e-business.
These services include:
- support services, which deliver solution-centered online support
- learning services, which empower our customers through training and
education
- technical services, which offer technical expertise and performance tuning
- implementation services, which provide project management, application
consulting and quality assurance
TECHNOLOGY
We have developed MFG/PRO software with a commercially available,
fourth-generation language and tool set marketed by Progress Software that works
with relational databases provided by Oracle and Progress. MFG/PRO software is
now taking advantage of advances in Progress software that open up this
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fourth-generation language to access by Sun's Java language. MFG/PRO 9.0
features an Internet-enabled Java user interface and an open architecture called
QAD/Connects. This provides the following customer benefits:
- improved connectivity with existing software applications
- ability to deploy and integrate new best-of-class software applications
across the enterprise
- important connectivity with the Internet
- secure e-business transactions with trading partners
In addition to supporting the MFG/PRO traditional user, who works inside the
manufacturing enterprise, MFG/PRO 9.0 supports secure access by trading
partners, casual Internet shoppers and mobile users through alliance partner
products.
We are continuing to convert our MFG/PRO software modules to Java-interfaced
Progress components. We believe this conversion effort will provide value to
customers by making MFG/PRO accessible to new types of users and applications.
MFG/PRO software also operates under the Windows NT and major Unix operating
systems.
QAD eQ is based on technology supplied by Enterprise Engines, Inc., EEI,
(acquired by QAD in late 1999) and from Gemstone Systems, Inc. Currently IBM is
providing technology and assistance to port QAD eQ to some of IBM's technology
platforms, including IBM's SanFrancisco platform.
RESEARCH AND DEVELOPMENT
MFG/PRO was first introduced in 1986, and we have subsequently released a
number of product versions and enhancements. In fiscal 2001, we plan to release
MFG/PRO eB. Our principal research and development staff, which is augmented by
third-party development resources, is focused on continuing updates and
enhancements to our MFG/PRO software, as well as the continual migration of
MFG/PRO software to Java-interfaced Progress components and to a Java user
interface. We believe that Internet capability for our products will be
important to the future success of our ERP and supply chain products.
Accordingly, we have developed and will continue to develop Internet-enabled
versions of our products through in-house and third-party development.
We also maintain a separate advanced technology development organization
specifically focused on developing our QAD eQ (formerly a part of On/Q)
e-business solutions. In late 1999, we acquired the remaining equity in
Enterprise Engines, Inc., a firm that had been assisting in the development of
logistics software and whose technologies are used in QAD eQ. During fiscal year
ended 2000, we delivered the initial release of QAD eQ, which is integrated with
Internet-enabled MFG/PRO, also introduced last year.
As of January 31, 2000, approximately 200 research and development personnel
were involved in the development of MFG/PRO, QAD eQ and related third-party
product APIs. Our research and development expenses totaled $34.1 million, $48.3
million and $29.3 million in fiscal 2000, 1999 and 1998, respectively.
SALES AND MARKETING
We sell and support our products and services through direct and indirect
sales organizations located throughout the world.
Our indirect sales channel consists of approximately 30 distributors
worldwide. We do not grant exclusive rights to any of our distributors. Our
distributors primarily sell independently to companies within their geographic
territory but may also work in conjunction with our direct sales organization.
In
8
<PAGE>
addition, we leverage our relationships with implementation providers, hardware
vendors and other third parties to identify sales opportunities on a global
basis.
In fiscal 2000, we realigned our sales force to strengthen the focus on our
regions and our ability to deliver industry-specific solutions with
localizations within those regions. The distributor acquisitions we completed in
fiscal years 1999 and 2000 gave us significant local presence in many countries
that previously were handled on a global vertical basis. We leveraged the
strength of the experienced management of these acquisitions by decentralizing
the approach to sales and integrating them with our existing vertical sales
management. Within each territory, a focus on our vertical industries is
maintained through marketing, local product development and sales training. To
reassert our focus on profitability, the new sales operations assumed profit and
loss responsibility for most functions in their territory.
Our sales and marketing strategy includes developing demand for our products
by creating visibility for QAD and awareness of our software. We participate in
major computer and vertical market industry trade shows, sponsor regional and
worldwide user conferences and regional alliance conferences, and advertise in
leading business and targeted industry publications.
THIRD-PARTY IMPLEMENTATION PROVIDERS
QAD has historically followed a strategy of utilizing third parties to
provide the majority of implementation and customization services to our
customers. In addition to providing consulting, implementation and training
services, these third parties also generate sales leads for QAD and participate
in the selling process. Strategic implementation and system integration partners
include Deloitte & Touche, Origin and TRW. In most cases, our distributors also
deliver consulting and integration services. QAD has put in place a
certification program for both third-party software partners and services
partners assuring the delivery of quality solutions to QAD customers.
All third-party service partners have separate, non-exclusive agreements
with QAD. These agreements typically cover a defined territory for a specific
period of time and are renewed (subject to review) upon the expiration of the
defined time period. Partners generally are permitted to set their own rates for
their services, and QAD does not typically collect a royalty fee from these
partners for the services they perform.
We also enter into similar agreements with our distributor partners that
grant these partners the nonexclusive right, within a specified territory, to
market, license, deliver and support QAD products. In exchange for granting
distributors these rights, we receive a negotiated royalty fee for each license
of our software products. We also rely on third parties, primarily distributors,
for the development of localizations or interfaces appropriate for the territory
in which the distributors operate.
CUSTOMERS
We target the automotive, consumer products, electronics/industrial, food
and beverage and medical sectors worldwide. As of January 31, 2000, QAD software
was licensed at more than 4,800 sites in more than 80 countries. No one customer
accounted for more than 10 percent of total revenue during any of our last three
fiscal years. The following are among companies and/or subsidiaries of those
companies that have each generated more than $400,000 in software license and
maintenance revenue over the last three fiscal years:
AUTOMOTIVE
Caterpillar, Daewoo, Delphi, Eaton/Aeroquip, Ford Motor Company, Johnson
Controls, Lear Corporation, Lucas Varity, Tower Automotive, Webasto
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CONSUMER PRODUCTS
Avery Dennison, Avon, Colgate-Palmolive, Firmenich, Gillette, Hunt
Corporation, Sherwin-Williams, TaylorMade Golf, Unilever
ELECTRONICS/INDUSTRIAL
AT&T Wireless, Black and Decker, Framatone Connectors International (FCI),
Ingersoll-Rand, Philips, Sauer Sundstrand, Schlumberger, Sun Microsystems,
Synnex, Xerox
FOOD AND BEVERAGE
Chef America, Coca-Cola, Gorton's, H.J. Heinz Company, Kraft-Jacob Suchard,
Quaker Oats, Sun Maid, Rich Foods, United Biscuits, U.S. Sugar
MEDICAL
Alza, Arterial Vascular, C.R. Bard, Datexo, Genzyme, Johnson & Johnson,
Maxxim Medical, Rexall Sundown, St. Jude Medical, Stryker, VISX
CUSTOMER SERVICE AND SUPPORT
In the age of e-business, high levels of customer care are essential to
success. Working in concert with a global network of alliance partners, QAD
provides superior customer care worldwide. Our services business combines:
- support service, which deliver solution-centered online support
- learning services, which empower our customers through training and
education
- technical services, which offer technical expertise and performance tuning
- implementation services, which provide project management, application
consulting and quality assurance
Our solution-centered support provides online access to information and
customer support seven days a week, 24 hours a day. Our solution-centered
support databases contain a wide variety of product information, customer
support functionality, answers to frequently asked questions and a
search-enabled online knowledge base.
On a fee basis, we also offer a comprehensive education and training program
to our customers, end-users and implementation providers. Classes are offered
through in-house facilities at QAD offices in various locations, as well as
through on-site training services at customer locations. We also assist
implementation providers and customers in developing their own in-house support
centers.
COMPETITION
The enterprise software market is highly competitive, rapidly changing and
affected by new product introductions and other market activities of industry
participants, including consolidations among industry participants and entry of
new participants.
In the market for corporate enterprise and plant/operations level enterprise
applications, QAD MFG/PRO currently competes with:
- vendors, such as Baan, J.D. Edwards and Symix, that market software
focused on the specific needs of manufacturing plants and distribution
sites of multinational manufacturing companies
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- other large companies like Oracle and SAP, as well as other business
application software vendors, targeting the market for
plant/operations-level ERP solutions
- internal development efforts by corporate information technology
departments
- companies offering standardized or customized products on mainframe and/or
midrange computer systems
In the supply chain optimization market, we compete primarily with companies
such as Manugistics, i2 Technologies and Webplan that have developed or are
attempting to develop supply chain optimization software based on Advanced
Planning and Scheduling technology that complements ERP solutions.
In the collaborative segment, various vendors from different backgrounds are
attempting to stake out their territory. Segment borders move very rapidly and
vendors are aggressively acquiring supporting applications to broaden their
overall e-business offerings. Vendors are moving into the collaborative
e-business space from the following backgrounds:
- traditional ERP vendors expanding their offerings into e-business
- traditional supply chain optimization vendors repositioning themselves
- startup companies in any of the following categories: electronic
storefronts, online-procurement, auctions/reverse auctions, business
intelligence
Because of their heritage and the relative immaturity of the market, each of
the above categories of vendors is challenged to deliver an end-to-end solution
for e-business.
QAD believes QAD eQ is well positioned to succeed in the collaborative
segment for the following reasons:
- we have developed and delivered an integrated application suite, QAD eQ,
based on a new and proven technology
- QAD eQ functionality is enriched by the depth of our experience with our
vertical markets
- QAD eQ is backed by our global delivery capabilities
As the e-business solution market continues to develop, companies with
significantly greater resources could attempt to increase their presence in
these markets by acquiring or forming strategic alliances with our competitors
or with our current or potential partners. The dynamic nature of the emerging
e-business market space leads us to believe that numerous smaller but
well-capitalized vendors are certain to emerge as strong competitors.
Increased competition in these markets is likely to result in price
reductions, reduced operating margins and loss of market share, any one of which
could adversely affect us. Many of our present or future competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition, and a larger installed base of
customers than we do. As a result, they may be able to respond more quickly to
new or emerging technologies and to changes in customer requirements. They may
also be able to devote greater resources to the development, promotion and sale
of their products. Although we believe we offer and will continue to offer
products that are competitive, we can make no assurance that we will be able to
compete successfully with existing or new competitors or that competition will
not adversely affect us.
PROPRIETARY RIGHTS AND LICENSING
OUR SUCCESS IS DEPENDENT UPON OUR PROPRIETARY TECHNOLOGY AND OTHER
INTELLECTUAL PROPERTY. We rely primarily on a combination of the protections
provided by applicable copyright, trademark and trade secret laws, as well as on
confidentiality procedures and licensing arrangements, to establish and protect
our
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<PAGE>
rights in our software and related materials and information. We enter into
license agreements with each of our customers. Each of these license agreements
provides for the non-exclusive license of QAD software. These licenses generally
are perpetual and contain strict confidentiality and non-disclosure provisions,
a limited warranty covering the QAD software and indemnification for the
customer from infringement actions related to the QAD software.
The pricing policy under each license is based on a standard price list and
may vary based on parameters such as the number of end-users, number of sites,
number of modules, number of languages, the country in which the license is
granted and level of ongoing support, training and services to be provided by
QAD. We have no patents or pending patent applications.
To facilitate the customization required by most of our customers, we
generally license our MFG/PRO software to end-users in both object code
(machine-readable) and source code (human-readable) format. While this practice
facilitates customization, making software available in source code also makes
it easier for third parties to copy or modify our software for non-permitted
purposes. Distributors or other persons may independently develop a modified
version of our software. Our license agreements generally allow the use of our
software solely by the customer for internal purposes without the right to
sublicense or transfer the software to third parties.
We believe that these measures afford only limited protection. Despite our
efforts, it may be possible for third parties to copy portions of our products
or reverse engineer or obtain and use information that we regard as proprietary.
In addition, the laws of certain countries do not protect our proprietary rights
to the same extent as the laws of the United States. Accordingly, there can be
no assurance that we will be able to protect our proprietary software against
unauthorized copying or use, which could adversely affect our competitive
position. Furthermore, there can be no assurance that our competitors will not
independently develop technology similar to ours.
WE MAY BE FACED WITH OR NEED TO BRING INFRINGEMENT CLAIMS TO PROTECT OUR
RIGHTS. We have in the past been subject to claims of intellectual property
infringement and may increasingly be subject to these types of claims as the
number of products and competitors in our targeted vertical markets grows and
the functionality of products in other industry segments overlaps. Although we
do not believe that any of our products infringe upon the proprietary rights of
third parties, there can be no assurance that third parties will not claim
infringement by us with respect to current or future products. In addition, we
periodically acquire intellectual property from third parties. In some instances
this intellectual property is prepared on a work-for-hire or similar basis, and
in some instances we license the intellectual property. We have in the past and
expect to in the future to be party to disputes about ownership, license scope
and royalty or fee terms with respect to intellectual property. Any claims, with
or without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements, any of which could have an adverse effect upon us. We may also
initiate claims or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights, which
could result in significant expense to us and divert the efforts of our
technical and management personnel from productive tasks, whether or not such
litigation were determined in our favor.
OUR INTELLECTUAL PROPERTY RIGHTS MAY BE SIGNIFICANTLY AFFECTED BY
THIRD-PARTY RELATIONSHIPS AND ACTIONS. We have in the past and may in the
future resell certain software, which we license from third parties. In
addition, we have in the past and may in the future jointly develop software in
which we will have co-ownership or cross-licensing rights. There can be no
assurance that these third-party software arrangements and licenses will
continue to be available to us on terms that: 1) provide us with the third-party
software we require, 2) provide adequate functionality in our products, on terms
that adequately protect QAD's proprietary rights, or 3) are commercially
favorable to us. The loss of or inability to maintain or obtain any of these
software licenses, including a loss as a result of a third-party infringement
claim, could result in delays or reductions in product shipments until
equivalent software, if any, could be identified, licensed and integrated.
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<PAGE>
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS. While our license agreements
with our customers typically contain provisions designed to limit our exposure
to potential product liability claims, it is possible that the limitation of
liability provisions may not be effective under the laws of some jurisdictions.
Although we have not experienced any product liability claims to date, we may be
subject to claims in the future. We have an errors and omissions insurance
policy with a sublimit for Y2K related claims. However, this insurance may not
continue to be available to us on commercially reasonable terms, or at all. A
successful product liability or errors or omissions claim brought against us
could have an adverse effect us. Moreover, defending a suit, regardless of its
merits, could entail substantial expense and require the time and attention of
key management personnel, either of which could have an adverse effect on us.
EMPLOYEES
As of January 31, 2000, we had approximately 1,550 full-time employees of
which approximately 200 were in research and development, 700 were in support
and services, 400 were in sales and marketing, and 250 were in administration.
Most of our employees are not represented by collective bargaining agreements,
with the exception of certain employees of our Netherlands and France
subsidiaries who are represented by statutory Works Councils as required under
the local laws. In addition, employees of our Brazilian subsidiary are
represented by a collective bargaining agreement with the Data Processing Union.
We believe that our employee relations are good.
Our success depends to a significant extent upon a limited number of key
employees and other members of our senior management and we are experiencing
attrition due to recruiting by Internet and other companies. We may not be
successful in attracting and retaining these personnel, and the failure to
attract and retain personnel could adversely effect us.
SEGMENT REPORTING
Segment financial information for fiscal years 2000, 1999 and 1998 is
included in footnote 10 of our financial statements included in this Annual
Report under Item 14.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning our executive officers.
All ages are as of March 31, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- -------- ----------------------------------------------------
<S> <C> <C>
Pamela M. Lopker..................... 45 Chairman of the Board and President
Karl F. Lopker....................... 48 Chief Executive Officer
Kathleen M. Fisher................... 45 Executive Vice President and Chief Financial Officer
Vincent P. Niedzielski............... 45 Executive Vice President, Research and Development
Barry R. Anderson.................... 48 Executive Vice President, Administration and General
Counsel
Donald F. Armagnac................... 53 Executive Vice President, Global Field Operations
Cheryl M. Slomann.................... 35 Vice President, Corporate Controller and Chief
Accounting Officer
</TABLE>
PAMELA M. LOPKER founded QAD in 1979 and has been our Chairman of the Board
and President since incorporation. Prior to founding QAD, Ms. Lopker served as
Senior Systems Analyst for Comtek Research from 1977 to 1979. Ms. Lopker is
certified in Production and Inventory Management by the American Production and
Inventory Control Society. Ms. Lopker earned a Bachelor of Arts degree in
Mathematics from the University of California at Santa Barbara. Ms. Lopker is
married to Karl F. Lopker.
KARL F. LOPKER has served as Director and Chief Executive Officer since
joining QAD in 1981. Mr. Lopker also serves as QAD's Assistant Treasurer.
Mr. Lopker was founder and President of Deckers
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Outdoor Corporation from 1973 to 1981, where he currently serves as a Director.
Mr. Lopker is certified in Production and Inventory Management at the Fellow
level by the American Production and Inventory Control Society. Mr. Lopker
studied Electrical Engineering and Computer Science at the University of
California at Santa Barbara. Mr. Lopker is married to Pamela M. Lopker.
KATHLEEN M. FISHER is Executive Vice President and Chief Financial Officer,
(CFO). She joined QAD in March 2000. Prior to joining QAD, Ms. Fisher served as
the financial executive of Adept Technology, an automation software and hardware
manufacturer, in San Jose, California. She has also served as CFO for Inprise
Corporation and Softbank, Inc. Ms. Fisher received a Bachelor of Science degree
in Business Administration from the University of Redlands and a Master of
Business Administration degree from the University of Southern California in Los
Angeles.
VINCENT P. NIEDZIELSKI is Executive Vice President, Development. He joined
QAD in April 1996. Prior to joining QAD, Mr. Niedzielski served as Vice
President, Production and Development at Candle Corporation from 1984 to 1996.
Mr. Niedzielski holds a Bachelor of Science degree in Mathematics and Computer
Science from the University of Scranton.
BARRY R. ANDERSON is Executive Vice President, Administration and General
Counsel. He joined QAD in April 1997 as Executive Vice President, Administration
and was named General Counsel in April 2000. Prior to joining QAD, Mr. Anderson
was Chief Administrative Officer at the Bank South in Atlanta, Georgia. His
previous experience also includes 10 years with Lanier Worldwide as Vice
President, Human Resources, plus experience with ARAMCO (Arabian American Oil
Company), Lockheed and Pan Am. Mr. Anderson received a Bachelor of Science
degree in Business Management from Florida State University and a Juris Doctor
degree from Atlanta Law School.
DONALD F. ARMAGNAC is Executive Vice President, Global Field Operations. As
Executive Vice President of Global Field Operations, Mr. Armagnac is responsible
for Global Services, Marketing Communications, Alliances, Systems Integration,
Sales Services, Order Processing and Fulfillment. He joined QAD in October 1997
as Vice President of Sales Operations. Prior to joining QAD, he focused on the
manufacturing market as International Vice President for Digital Equipment's
manufacturing and ERP systems integration practices. Mr. Armagnac was previously
Digital's Western Region Sales Vice President supporting their largest clients
in 11 western states. He is a graduate of St. Francis College and holds a
master's degree from Weslyan University.
CHERYL M. SLOMANN joined QAD in May 1998 as Vice President, Corporate
Controller and Chief Accounting Officer. Prior to joining QAD, Ms. Slomann
served nine years with Allergan, a specialty pharmaceutical company, in various
financial positions, including Director, Corporate Financial Planning and
Manager, Corporate Reporting. She began her career at the public accounting firm
of Ernst & Young. Ms. Slomann is a Certified Public Accountant and received her
Bachelor of Science degree in Business Administration/Accounting from the
University of Southern California.
ITEM 2. PROPERTIES
Our headquarters are located in Carpinteria, California in approximately
112,500 square feet of leased space in three facilities, 16,500 square feet of
which are currently sublet to third parties. The master leases have expiration
dates ranging from 2000 to 2005. We also own approximately 28 acres and 54,000
square feet of office space, which supports our operations, in a neighboring
community, Summerland. This property carries an entitlement from Santa Barbara
County for the construction of a company headquarters. We also own a 34-acre
parcel in Carpinteria, California, which was acquired for development as an
additional facility, but there are no immediate plans to develop the property.
Other major offices are located in Mount Laurel, New Jersey; Sao Paulo,
Brazil; Birmingham, United Kingdom; Nieuwegein, Netherlands; Hoofddorp,
Netherlands; Hong Kong, China; Tokyo, Japan; and
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Sydney, Australia, in space aggregating approximately 143,000 square feet and
subject to leases expiring on dates ranging from 2001 to 2011.
Our global presence is supported by satellite offices located in the United
States, Mexico, Ireland, France, Germany, Poland, Turkey, South Africa,
Singapore, Malaysia, Thailand, Korea, India, Australia and China. These offices
occupy aggregate space of approximately 145,000 square feet and are subject to
leases expiring on dates ranging from 2001 to 2005.
Although we have from time to time sought and may in the future seek new or
expanded facilities for existing or additional offices, we expect that our
current domestic and international facilities will be sufficient to meet our
needs for at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any material legal proceedings. We may from time to time
be party, either as plaintiff or defendant, to various legal proceedings and
claims, which arise, in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have an adverse effect on
our consolidated results of operations or consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
QAD common stock has been traded on the Nasdaq National Market since our
initial public offering in August 1997. According to records of our transfer
agent, we had approximately 386 stockholders of record as of April 10, 2000. The
following table sets forth the high and low closing prices for QAD's common
stock as reported by Nasdaq for the last two fiscal years.
<TABLE>
<CAPTION>
LOW SALE PRICE HIGH SALE PRICE
-------------- ---------------
<S> <C> <C>
Fiscal 2000:
Fourth Quarter............................................ $ 3.06 $13.94
Third Quarter............................................. 2.94 4.25
Second Quarter............................................ 3.06 3.91
First Quarter............................................. 2.91 4.38
Fiscal 1999:
Fourth Quarter............................................ $ 3.50 $ 7.00
Third Quarter............................................. 2.87 8.75
Second Quarter............................................ 7.44 15.00
First Quarter............................................. 13.00 17.38
</TABLE>
Our policy has been to reinvest earnings to fund future growth. Accordingly,
we have not paid dividends and we do not anticipate declaring dividends on our
common stock in the foreseeable future.
On December 23, 1999, we issued, under a private placement, 2,333,333 shares
of our common stock for net consideration of $9.6 million to Recovery Equity
Investors II, L.P. This private placement was effected under the exemption from
registration provided by Section 4 (2) of the Securities Act of 1933 (SEC Act).
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On December 15 1999, we issued 120,000 shares of our common stock in
connection with the purchase of the remaining equity in Enterprise
Engines, Inc. and these shares have been registered under the SEC Act on Form
S-3. Some of these shares are subject to forfeiture if certain specified
performance milestones are not achieved by the former majority shareholder. The
value of the common stock shares has been shown net of the shares subject to
forfeiture.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
Effective February 1, 1996, we changed our financial reporting year-end from
December 31 to January 31.
<TABLE>
<CAPTION>
YEAR ENDED
YEARS ENDED JANUARY 31, DECEMBER 31,
----------------------------------------- -------------
2000 1999 1998 1997 1995
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenue........................... $239,262 $193,344 $170,770 $126,444 $89,949
Operating income (loss)................. (9,780) (34,806) 14,695 2,720 (2,646)
Basic net income (loss) per share....... (0.54) (1.22) 0.38 0.05 (0.03)
Diluted net income (loss) per share..... (0.54) (1.22) 0.38 0.04 (0.03)
BALANCE SHEET DATA:
Total assets............................ 214,371 200,055 190,506 77,250 68,466
Long-term debt, less current portion.... 21,890 6,526 39 5,036 7,341
</TABLE>
We have made seven acquisitions since the third quarter of fiscal 1999.
Results of operations have been included in the financial statements since the
respective dates of acquisition. These acquisitions are described in greater
detail in footnote 2 to our financial statements included in Item 14.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with our financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K. Effective February 1, 1996, we changed our financial reporting year-end
from December 31 to January 31.
OVERVIEW
Founded in 1979, QAD has historically been recognized as a provider of
supply chain enabled ERP software. In 1986, we commercially released our open
systems ERP application, MFG/PRO software. Since that time, we have introduced
several new generations of our open systems MFG/PRO software, and have
significantly expanded our operations. With the advent of e-business, we are
expanding our products and services offerings to meet the demands of today's
market. As of January 31, 2000, we had approximately 1550 full-time employees,
direct sales and support offices in 20 countries, approximately 30 distributors
worldwide and more than 4,800 licensed sites in more than 80 countries.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenue represented by certain items reflected in our statements of
operations:
<TABLE>
<CAPTION>
YEARS ENDED
JANUARY 31,
------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
License fees.............................................. 40% 55% 66%
Maintenance and other..................................... 38 37 31
Services.................................................. 22 8 3
--- --- ---
Total revenue........................................... 100 100 100
Costs and expenses:
Cost of license fees...................................... 9 9 7
Other cost of revenue..................................... 36 22 17
Sales and marketing....................................... 34 47 39
Research and development.................................. 14 25 17
General and administrative................................ 11 13 11
Restructuring charge...................................... -- 2 --
--- --- ---
Total costs and expenses................................ 104 118 91
--- --- ---
Operating income (loss)..................................... (4) (18) 9
Other (income) expense...................................... 1 -- (1)
--- --- ---
Income (loss) before income taxes........................... (5) (18) 10
Income tax expense.......................................... 2 1 4
--- --- ---
Net income (loss)........................................... (7)% (19)% 6%
=== === ===
</TABLE>
Total revenue for fiscal year 2000 was $239.3 million, which was an increase
of $45.9 million or 24% over fiscal year 1999. Total revenue for fiscal year
1999 was $193.3 million, which was an increase of $22.5 million or 13% over
fiscal year 1998. These increases were primarily due to growth in maintenance
revenue from expansion of the installed base and increased services revenue due
to the acquisition of six distributors since September 1998 and the launch of
our Global Services business late in fiscal year 1999. This growth was partially
offset by declines in license revenue primarily stemming from our customers'
decisions to delay capital spending due to concerns over Y2K readiness.
As a result of these factors, revenue mix has shifted significantly away
from higher margin license revenue, from 66% of total revenue in fiscal year
1998 to 55% and 40% in fiscal years 1999 and 2000, respectively. Lower margin
services revenue had the largest proportional gains, from 3% of total revenue in
fiscal year 1998 to 8% and 22% in fiscal years 1999 and 2000, respectively.
No single customer has accounted for more than 10 percent of our total
revenue in any of the last three fiscal years. However, it is not uncommon to
obtain a multi-million dollar contract with a single customer.
TOTAL COST OF REVENUE. Total cost of revenue (combined cost of license fees
and other cost of revenue) as a percentage of total revenue increased from 24%
in fiscal year 1998 to 31% and 45% in fiscal years 1999 and 2000, respectively.
This increase was primarily due to the significant shift in revenue mix away
from the higher margin license business and toward lower margin services. In
addition, license margin has decreased from 90% in fiscal year 1998 to 77% in
fiscal year 2000 due to a higher mix of third-party products included in our
license fees.
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SALES AND MARKETING. Sales and marketing expense decreased 12% to $80.1
million in fiscal year 2000 from $91.1 million in fiscal year 1999, due
primarily to lower personnel costs resulting from the restructuring program
initiated late in fiscal 1999. Sales and marketing expense increased 39% in
fiscal year 1999 from $65.8 million in fiscal year 1998, due to the expansion of
our global sales force, opening and supporting global sales offices and
increased marketing expense to promote the QAD name and products.
RESEARCH AND DEVELOPMENT. Research and development expense declined 29% to
$34.1 million in fiscal 2000 from $48.3 million in fiscal 1999, due to the
restructuring program initiated late in fiscal 1999. In addition to reducing
costs, this program realigned internal resources, including the transfer of
research and development personnel into revenue-generating positions within the
QAD services organization. Research and development expense increased 65% in
fiscal year 1999 from $29.3 million in fiscal year 1998, due to enhancements to
MFG/PRO software, including the ongoing migration of MFG/PRO software to
object-oriented technology. In addition, the growth was due to increased
staffing and associated support related to development of QAD eQ software.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased 5%
to $26.5 million in fiscal year 2000 from $25.4 million in fiscal year 1999 and
increased 31% in fiscal year 1999 from $19.4 million in fiscal year 1998. The
fiscal year 2000 increase was due to the amortization of intangible assets
related to the seven acquisitions consummated since September 1998, partially
offset by cost controls related to the restructuring program initiated late in
fiscal 1999. The more significant increase in fiscal 1999 was primarily the
result of costs associated with the expansion of our administrative
infrastructure to support the growing operations, as well as the partial year
amortization of intangible assets related to the fiscal year 1999 acquisitions.
RESTRUCTURING CHARGE. In response to changes in manufacturing capital
software spending patterns during fiscal year 1999, we undertook a restructuring
and realignment program that, among other things, more closely aligned costs
with sales expectations. As part of the realignment, we reduced spending on
research and development, including the transfer of research and development
personnel into revenue-generating positions within our service organization. In
all, we reduced our workforce (excluding staff added from the acquisitions) by
approximately 15%, adjusted administration and marketing costs and narrowed our
facilities expansion plans.
We recorded a restructuring charge of $4.3 million in fiscal year 1999 and
concluded the program in fiscal year 2000 with an additional $1.2 million
charge. The total $5.5 million charge consisted of costs associated with the
consolidation of certain facilities ($3.6 million) and a reduction of
approximately 230 positions across a broad cross-section of our operations ($1.9
million).
TOTAL OTHER (INCOME) EXPENSE. Total other (income) expense was $1,455,000,
$(23,000) and $(2,320,000) in fiscal years 2000, 1999 and 1998, respectively.
The increase in expense from fiscal year 1999 to 2000 was due to higher interest
expense related to the debt incurred late in fiscal year 1999 and during fiscal
year 2000, lower interest income on decreased cash, equivalents and short-term
investment balances and a fiscal year 1999 write-down to adjust an equity
investment to the current estimated fair market value. The decrease in income
from fiscal year 1998 to 1999 was primarily the result of the fiscal year 1999
write-down of the equity investment, as well as an unfavorable change in foreign
currency transaction and remeasurement (gains) and losses.
INCOME TAX EXPENSE. We recorded income tax expense of $5.1 million, $1.1
million and $7.2 million in the years ended January 31, 2000, 1999 and 1998,
respectively. Our effective income tax rates were (45)%, (3)% and 42% in the
years ended January 31, 2000, 1999 and 1998, respectively. QAD's effective
income tax rate historically has benefited from the United States research and
development tax credit and tax benefits generated from export sales made from
the United States. We have available tax benefits associated with net operating
loss carryforwards aggregating $79.4 million at January 31, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations and met our capital expenditure
requirements through cash flows from operations, sales of equity securities and
borrowings. We had working capital of $31.7 million and $20.7 million as of
January 31, 2000 and 1999, respectively. Cash and cash equivalents and short-
term investments were $35.9 million and $19.1 million at January 31, 2000 and
1999, respectively. The increases were primarily due to net cash provided by
operations, net proceeds from borrowings and issuance of common stock, partially
offset by capital expenditures.
Accounts receivable, net of the allowance for doubtful accounts and sales
adjustments, increased to $98.6 million at January 31, 2000 from $95.3 million
at January 31, 1999. Accounts receivable days' sales outstanding decreased to
125 days at January 31, 2000 from 131 days at January 31, 1999. We are
continuing our focus on sales terms and collection processes to further improve
cash flows and working capital.
Net cash provided by (used in) operating activities was $9.6 million,
($17.0) million and $11.9 million in fiscal years 2000, 1999 and 1998,
respectively. The increase from fiscal year 1999 to 2000 relates primarily to
the decreased net loss, as well as increased depreciation and amortization. The
decrease from fiscal year 1998 to 1999 primarily stems from the variance between
the fiscal year 1998 net income and the fiscal year 1999 net loss, partially
offset by a decline in the rate of accounts receivable growth.
Net cash used in investing activities primarily relates to the purchase of
property and equipment and the fiscal year 1999 acquisition of businesses and
aggregated $7.4 million, $37.7 million and $18.8 million in fiscal years 2000,
1999 and 1998, respectively. At January 31, 2000, we did not have any material
commitments for capital expenditures.
Net cash provided by financing activities primarily relates to proceeds from
the fiscal year 1998 initial public offering and the fiscal year 2000 common
stock private placement, as well as proceeds and payments of borrowings. The net
cash flows from financing activities totaled $20.2 million, $1.0 million and
$76.8 million in fiscal years 2000, 1999 and 1998, respectively.
As of January 31, 2000, we did not meet one of our bank covenants, but
obtained a waiver from the lender, Bank One.
We believe that the cash on hand, net cash provided by operating activities
and the available borrowings under our existing credit facility will provide us
with sufficient resources to meet our current and long-term working capital
requirements, debt service and other cash needs.
YEAR 2000 COMPLIANCE
Our business operations are significantly dependent upon the same
proprietary software products we license to customers. Our management believes
we successfully addressed Y2K readiness in our proprietary software products and
in third-party software, computer and other equipment used internally. To date,
we have not experienced any business interruptions associated with Y2K
compliance issues. However, some uncertainty still exists in the software
industry concerning the potential effects associated with Y2K readiness.
Although we currently offer software products that are designed and have
been tested for Year 2000 compliance, there can be no assurance that our
software products contain all necessary date code changes. To date, we have not
been made aware of any Year 2000 compliance failures involving our customers or
suppliers. Litigation may still arise surrounding business interruptions
associated with Y2K issues. It is uncertain whether, or to what extent, this
type of litigation may affect us.
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FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
HISTORICAL FLUCTUATIONS IN QUARTERLY RESULTS AND POTENTIAL FUTURE
SIGNIFICANT FLUCTUATIONS
Our quarterly revenue, expenses and operating results have varied
significantly in the past, and we anticipate that such fluctuations will
continue in the future as a result of a number of factors, many of which are
outside our control. The factors affecting these fluctuations include demand for
our products and services, the size, timing and structure of significant
licenses by customers, market acceptance of new or enhanced versions of our
software products and products that operate with our products, the publication
of opinions about us, our products and technology by industry analysts, the
entry of new competitors and technological advances by competitors, delays in
localizing our products for new markets, delays in sales as a result of lengthy
sales cycles, changes in operating expenses, foreign currency exchange rate
fluctuations, changes in pricing policies by us or our competitors, customer
order deferrals in anticipation of product enhancements or new product offerings
by us or our competitors, the timing of the release of new or enhanced versions
of our software products and products that operate with our products, changes in
the method of product distribution and licensing (including the mix of direct
and indirect channels), product life cycles, changes in the mix of products and
services licensed or sold by us, customer cancellation of major planned software
development programs and general economic factors.
We have also historically recognized a substantial portion of our revenue
from sales booked and shipped in the last month of a quarter. As a result, the
magnitude of quarterly fluctuations in license fees may not become evident until
late in, or at the end of, a particular quarter. If sales forecasted from a
specific customer for a particular quarter are not realized in that quarter, we
are unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. As a result, a lost or delayed sale could have an
adverse effect on our quarterly operating results. To the extent that
significant sales occur earlier than expected, operating results for subsequent
quarters may be adversely affected. We have also historically operated with
little backlog for licenses because our products are generally shipped as orders
are received. As a result, revenue from license fees in any quarter is
substantially dependent on orders booked and shipped in that quarter and on
sales by our distributors and other resellers. Sales derived through indirect
channels are more difficult to predict and may have lower profit margins than
direct sales.
A SIGNIFICANT PORTION OF OUR REVENUE IN ANY QUARTER MAY BE DERIVED FROM A
LIMITED NUMBER OF LARGE, NON-RECURRING LICENSE SALES. We expect to continue to
experience from time to time large, individual license sales, which may cause
significant variations in quarterly license fees. We also believe that the
purchase of our products is relatively discretionary and generally involves a
significant commitment of a customer's capital resources. Therefore, a downturn
in any potential customer's business could result in order cancellations that
could have a significant adverse impact on our revenue and quarterly results.
Moreover, declines in general economic conditions could precipitate significant
reductions in corporate spending for information technology, which could result
in delays or cancellations of orders for our products.
OUR RECENT ACQUISITIONS OF SERVICE-RELATED REVENUE MAY NOT REDUCE THE
QUARTERLY FLUCTUATIONS IN OUR REVENUE. During fiscal 2000, customer demand for
QAD services was exceptional and services revenue became a substantial part of
our business. As the percentage of revenue derived from maintenance and services
increases and the less predictable license fees become a smaller proportion of
our overall revenues, our overall quarterly revenue fluctuations may diminish.
While the expenses associated with services operations are relatively
predictable, the revenues are dependent upon the timing and size of customer
orders to provide the services. To the extent that these services operations
fail to secure orders from customers to provide services on a regular basis, our
results may be negatively affected.
OUR EXPENSE LEVEL IS RELATIVELY FIXED AND IS BASED, IN SIGNIFICANT PART, ON
EXPECTATIONS OF FUTURE REVENUE. Because our expense level is relatively fixed,
if revenue levels are below expectations, expense levels could
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be disproportionately high as a percentage of total revenue, and operating
results would be immediately and adversely affected and losses could occur.
BECAUSE OF THE SIGNIFICANT FLUCTUATIONS IN OUR REVENUE, PERIOD-TO-PERIOD
COMPARISONS MAY NOT BE MEANINGFUL. Based upon the factors described above, we
believe that our quarterly revenue, expenses and operating results are likely to
vary significantly in the future, that period-to-period comparisons of our
results of operations are not necessarily meaningful and that, as a result,
these comparisons should not be relied upon as indications of future
performance. Moreover, although our revenue has generally increased in recent
periods, there can be no assurance that our revenue will grow in future periods,
at past rates or at all, or that we will be profitable on a quarterly or annual
basis. We have in the past experienced and may in the future experience
quarterly losses.
RISKS ASSOCIATED WITH SALES CYCLE
OUR PRODUCTS INVOLVE A VERY LONG SALES CYCLE AND THE TIMING OF SALES IS
DIFFICULT TO PREDICT. Because the licensing of our products generally involves
a significant commitment of capital (which ranges from approximately $50,000 to
several million dollars), the sales cycle associated with a customer's purchase
of our products is generally lengthy (with a typical duration of 4 to 15
months), varies from customer to customer and is subject to a number of
significant risks over which we have little or no control. These risks include
customers' budgetary constraints, timing of budget cycle, concerns about the
introduction of new products by us or our competitors and general economic
downturns that can result in delays or cancellations of information systems
investments. Due in part to the strategic nature of our products, potential
customers are typically cautious in making product acquisition decisions. The
decision to license our products generally requires us to provide a significant
level of education to prospective customers regarding the uses and benefits of
our products, and we must frequently commit substantial presales support
resources. We have historically relied on third parties for implementation and
systems support services, which in the past caused sales cycles to be lengthened
and may have resulted in the loss of sales. In fiscal 2000, we committed
ourselves to make services a substantial part of our business and, we no longer
rely exclusively on third parties for implementation and systems integration
services, which should significantly mitigate these risks. However, uncertain
outcome of our sales efforts and the length of our sales cycles could still
result in substantial fluctuations in operating results. If sales forecasted
from a specific customer for a particular quarter are not realized in that
quarter, then we are unlikely to be able to generate revenue from alternative
sources in time to compensate for the shortfall. As a result, and due to the
relatively large size of some orders, a lost or delayed sale could have an
adverse effect on our quarterly operating results.
DEPENDENCE ON THIRD-PARTY PRODUCTS
WE ARE DEPENDENT ON THIRD-PARTY PRODUCTS, PARTICULARLY PROGRESS
SOFTWARE. Our MFG/PRO software is written in a programming language that is
proprietary to Progress Software Corporation. We have entered into a license
agreement with Progress that provides us and each of our subsidiaries, among
other things, with the perpetual, worldwide, royalty-free right to use the
Progress programming language to develop, market, distribute and license our
software products. The agreement also provides for continued software support
from Progress through June 2002 without charge to us. Progress may only
terminate the agreement upon our adjudication as bankrupt, liquidation or other
similar event, or if we have ceased business operations in full. Our success is
dependent upon Progress continuing to develop, support and enhance this
programming language, its tool set and database, as well as the continued market
acceptance of Progress as a standard database program. We have in the past and
may in the future experience product release delays because of delays in the
release of Progress products or product enhancements. Any of these delays could
have an adverse effect on our business, operating results and financial
condition. MFG/PRO software employs Progress programming interfaces that allow
MFG/PRO software to operate with Oracle Corporation database software. However,
our MFG/PRO software does not run within programming environments
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other than Progress and our customers must acquire rights to Progress Software
in order to use MFG/PRO software. Our QAD Advanced Planning and Scheduling (APS)
Products and QAD eQ software products are not dependent on Progress technology.
The commercially available QAD APS products are primarily based upon products
from Paragon Management Systems, Inc. The QAD eQ software, which recently went
into production use at AT&T Wireless, is dependent on Gemstone technology.
We also maintain a number of development and product alliances with other
third parties. These alliances include software developed to be sold in
conjunction with QAD software products, technology developed to be included in
or encapsulated within QAD software products and numerous third-party software
programs that generally are not sold with QAD software but interoperate directly
with QAD software through application program interfaces. We generally enter
into joint development agreements with our third-party software development
partners that govern ownership of the technology collectively developed. Each of
our partner agreements and third-party development or re-seller agreements
contain strict confidentiality and non-disclosure provisions for the service
provider, end-user and third-party developer. Our third-party development
agreements contain restrictions on the use of QAD technology outside of the
development process. Any failure to establish or maintain successful
relationships with these third-party software providers or third-party
installation, implementation and development partners or failure of these
third-party software providers to develop and support their software could have
an adverse effect on us.
RAPID TECHNOLOGICAL CHANGE
THE MARKET FOR OUR SOFTWARE PRODUCTS IS CHARACTERIZED BY RAPID TECHNOLOGICAL
ADVANCES, EVOLVING INDUSTRY STANDARDS IN COMPUTER HARDWARE AND SOFTWARE
TECHNOLOGY, CHANGES IN CUSTOMER REQUIREMENTS AND FREQUENT NEW PRODUCT
INTRODUCTIONS AND ENHANCEMENTS. Customer requirements for products can change
rapidly as a result of innovations or changes within the computer hardware and
software industries, the introduction of new products and technologies
(including new hardware platforms and programming languages) and the emergence,
evolution or widespread adoption of industry standards. For example, increasing
commercial use of the Internet is giving rise to new customer requirements and
new industry standards. Our future success will depend upon our ability to
continue to enhance our current product line and to develop and introduce new
products that keep pace with technological developments, satisfy increasingly
sophisticated customer requirements and achieve market acceptance. In
particular, we believe our future success will depend on our ability to convert
our products to object-oriented technology, as well as our ability to develop
products that will operate across the Internet. We can not ensure that we will
be successful in developing and marketing, on a timely and cost-effective basis,
product enhancements or new products that respond to technological advances by
others. Our products may also not achieve market acceptance. Our failure to
successfully develop and market product enhancements or new products could have
an adverse effect on us.
NEW SOFTWARE RELEASES AND ENHANCEMENTS MAY ADVERSELY AFFECT OUR SOFTWARE
SALES. While we generally take steps to avoid interruptions of sales due to the
pending availability of new products, customers may delay their purchasing
decisions in anticipation of the general availability of new or enhanced QAD
software, which could have a adverse effect on us. The actual or anticipated
introduction of new products, technologies and industry standards can also
render existing products obsolete or unmarketable or result in delays in the
purchase of those products. As a result, the life cycles of our products are
difficult to estimate. We must respond to developments rapidly and incur
substantial product development expenses. Any failure by QAD to anticipate or
respond adequately to technology developments or customer requirements, or any
significant delays in introduction of new products, could result in a loss of
revenue. Moreover, significant delays in the general availability of new
releases, significant problems in the installation or implementation of new
releases, or customer dissatisfaction with new releases could adversely affect
us.
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EQ AND SUPPLY CHAIN SOLUTIONS UNDER DEVELOPMENT AND UNDERLYING TECHNOLOGY
OUR EQ AND SUPPLY CHAIN SOLUTIONS ARE STILL UNDER DEVELOPMENT. A
significant element of our strategy is the development of QAD eQ and QAD APS
software, a series of new products targeted at the e-business needs of
manufacturing companies. Over the past three fiscal years, we have devoted
substantial resources to developing our QAD eQ software and working with third
parties to develop software components that may be included as part of or
encapsulated within QAD APS software and QAD eQ software. The QAD APS product
was released in September 1998. We have successfully performed preliminary tests
on our first QAD eQ software release, an innovative business-to-business (B2B)
Internet order management and exchange applications suite. We have completed our
first beta test and the software is in production use at AT&T Wireless. However,
we can not ensure that the QAD APS software, the initial release of QAD eQ
software or our other planned releases for these software products, whether
developed by us or third parties, will achieve the performance standards
required for commercialization. In addition, these products may not achieve
market acceptance or be profitable. If QAD APS software, QAD eQ software or our
other planned supply chain management software products do not achieve such
performance standards or do not achieve market acceptance, we would be adversely
affected.
THE UNDERLYING TECHNOLOGY FOR OUR NEW APPLICATIONS IS NEW AND DEPENDENT ON
SPECIFIC TECHNOLOGIES. QAD eQ software is being designed and built using the
object-oriented technology of Sun Microsystems--Enterprise Java Beans. QAD eQ
software depends on the commercial success of platforms that support Enterprise
Java Beans in Application Server environments such as the Gemstone/J Application
Server supplied by Gemstone of Beaverton, Oregon. Similar to the way our MFG/PRO
software is dependent upon Progress language and database technology, our new
QAD eQ software is dependent on Java, Enterprise Java Beans, and technology
supplied by Gemstone. We are in the process of porting our eQ software to the
IBM SanFrancisco platform software to reduce our dependency on Gemstone.
Object-oriented applications, such as QAD eQ software, are characterized by
technology development style and programming languages that differ from those
used in traditional software applications, including our MFG/PRO 9.0 software.
We believe that the flexibility inherent in object-based functionality will play
a key role in the competitive manufacturing, distribution, financial, planning
and service/support management information technology strategies of customers in
our targeted industry segments. We can not ensure that we will be successful in
developing our e-business software on a timely basis, if at all, or that if
developed this software will achieve market acceptance.
We also are reliant on the Java programming language in developing and
supporting our Java user interface for MFG/PRO software products. The failure to
successfully incorporate Java in new products, to convert MFG/PRO software to
Java-interfaced Progress Software components, to extend the MFG/PRO Java user
interfaces, or of Java or Enterprise Java Beans to achieve market acceptance
could have a adverse effect on us.
MARKET CONCENTRATION
OUR TARGET MARKETS ARE CONCENTRATED AND, AS A RESULT, WE ARE DEPENDENT UPON
ACHIEVING SUCCESS IN THOSE MARKETS. We have made a strategic decision to
concentrate our product development and sales and marketing in certain primary
vertical industry segments--automotive, consumer products,
electronics/industrial, food and beverage and medical. An important element of
our strategy is to achieve technological and market leadership recognition for
our software products in these segments. The failure of our products to achieve
or maintain substantial market acceptance in one or more of these segments could
have an adverse effect on us. If any of these targeted industry segments
experiences a material slowdown in expansion or in prospects for future growth,
that downturn would adversely affect the demand for our products. See discussion
of concentration of credit risk in footnote 1 of our financial statements
included in this Annual Report under Item 14.
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DEPENDENCE UPON KEY PERSONNEL
WE ARE DEPENDENT UPON KEY PERSONNEL, AND NEED TO HIRE ADDITIONAL PERSONNEL
IN ALL AREAS. Our future operating results depend in significant part upon the
continued service of a relatively small number of key technical and senior
management personnel, including Founder, Chairman of the Board and President,
Pamela M. Lopker, and Chief Executive Officer, Karl F. Lopker, neither of whom
is bound by an employment agreement. Pamela and Karl Lopker are married to each
other and jointly own approximately 55 percent of QAD's outstanding common
stock. The loss of one or more of these or other key individuals could have an
adverse effect on QAD. We do not currently have key-person insurance.
Our future success also depends on our continuing ability to attract and
retain other highly qualified technical and managerial personnel. Competition
for these personnel is intense, and we have at times experienced difficulty in
recruiting and retaining qualified personnel. We may be unable to retain our key
technical and managerial employees and we may not be successful in attracting,
assimilating and retaining other highly qualified technical and managerial
personnel in the future. The loss of any member of our key technical and senior
management personnel or the inability to attract and retain additional qualified
personnel would have an adverse effect on us.
DEPENDENCE UPON DEVELOPMENT AND MAINTENANCE OF SALES AND MARKETING CHANNELS
WE ARE DEPENDENT UPON THE DEVELOPMENT AND MAINTENANCE OF SALES AND MARKETING
CHANNELS. We sell and support our products through direct and indirect sales
organizations throughout the world. We have made significant expenditures in
recent years in the expansion of our sales and marketing force, primarily
outside the United States, and we plan to continue to expand our sales and
marketing force. Our future success will depend in part upon the productivity of
our sales and marketing force and our ability to continue to attract, integrate,
train, motivate and retain new sales and marketing personnel. Competition for
sales and marketing personnel in the software industry is intense. We can not
ensure that we will be successful in hiring these personnel in accordance with
our plans. Neither can there be assurance that our recent and planned expenses
in sales and marketing will ultimately prove to be successful or that the
incremental revenue generated will exceed the significant incremental costs
associated with these efforts. In addition, our sales and marketing organization
may not be able to compete successfully against the significantly more extensive
and better funded sales and marketing operations of many of our current and
potential competitors. If we are unable to develop and manage our sales and
marketing force expansion effectively, we would be adversely affected.
Our indirect sales channel consists of approximately 30 distributors
worldwide. We do not grant exclusive distribution rights to any of our
distributors. Our distributors primarily sell independently to companies within
their geographic territory but may also work in conjunction with our direct
sales organization. We will need to maintain and expand our relationships with
our existing distributors and enter into relationships with additional
distributors to expand the distribution of our products. Current or future
distributors may not provide the level and quality of expertise and service
required to successfully license QAD software products. We also may not be able
to maintain effective, long-term relationships with distributors. In addition,
the distributors we select may not continue to meet our sales needs. Further,
these distributors may market software products in competition with us in the
future or otherwise reduce or discontinue their relationships with or support of
us and our products. This may become more likely as we compete with some of our
distributors through our own acquisition of distributors. Any failure to
successfully maintain our existing distributor relationships or to establish new
relationships in the future would have an adverse effect on us. In addition, if
any of our distributors exclusively adopts a product other than QAD software
products, or if any distributor reduces its sales efforts relating to QAD
software products or increases support for competitive products, we could be
adversely affected.
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RELIANCE ON AND NEED TO DEVELOP ADDITIONAL RELATIONSHIPS WITH THIRD PARTIES
WE ARE RELIANT ON AND NEED TO DEVELOP ADDITIONAL RELATIONSHIPS WITH THIRD
PARTIES. We have established strategic relationships with a number of
consulting and systems integration organizations that we believe are important
to our worldwide sales, marketing, service and support activities and the
implementation of our products. We are aware that these third-party providers do
not provide system integration services exclusively for our products and in many
instances these firms have similar, and often more established, relationships
with our principal competitors. We expect to continue to utilize third-party
system integrators.
During fiscal 2000, we developed QAD services into a significant part of our
business to offer implementation and integration services to our customers. We
have designed our service organization so that we can subcontract our services
to partners for specific technical needs and also subcontract services from our
partners to meet our capacity requirements. We believe this method allows for
additional flexibility in ensuring our customers' needs for implementation and
installation services are met. These relationships also assist us in keeping
pace with the technological and marketing developments of major software
vendors, and, in certain instances, provide us with technical assistance for our
product development efforts.
Organizations providing consulting and system integration and implementation
services in connection with QAD software products include Deloitte & Touche,
Origin and TRW. These and other third parties may not provide the level and
quality of service required to meet the needs of our customers, we may not be
able to maintain an effective, long-term relationship with these third parties,
or these third parties may not continue to meet the needs of our customers.
Further, we can not ensure that these third-party implementation providers, many
of which have significantly greater financial, technical, personnel and
marketing resources than QAD, will not market software products in competition
with us in the future or will not otherwise reduce or discontinue their
relationships with or support of us and our products. Any failure to maintain
our existing relationships or to establish new relationships in the future, or
the failure of these third parties to meet the needs of our customers, could
have an adverse effect on us. In addition, if these third parties exclusively
adopt a product or technology other than QAD software products or technology, or
if these third parties reduce their support of QAD software products and
technology or increase such support for competitive products or technology, we
could be adversely affected.
We typically enter into separate agreements with each of our installation
and implementation partners that provide these partners with the non-exclusive
right to promote and market QAD software products, and to provide training,
installation, implementation and other services for QAD software products,
within a defined territory for a specified period of time (generally two years).
Our installation and implementation partners generally do not receive fees for
the sale of QAD software products unless they participate actively in a sale as
a sales agent. However, they generally are permitted to set their own rates for
their installation and implementation services, and we typically do not collect
a royalty or percentage fee from these partners on services performed. We also
enter into similar agreements with our distribution partners that grant these
partners the non-exclusive right, within a specified territory, to market,
license, deliver and support QAD software products. In exchange for these
distributors' services, we grant a discount to the distributor for the license
of our software products.
We also rely on third parties for the development or interoperation of key
components of our software so that users of QAD software products will obtain
the functionality demanded. These research and product alliances develop
software to be sold in conjunction with QAD software products, technology to be
included in or encapsulated within QAD software products and numerous
third-party software programs that generally are not sold with QAD software
products, but interoperate directly with QAD software through application
program interfaces. We generally enter into reseller or joint development
agreements with our third-party software development partners that govern
ownership of the technology collectively
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developed. Each of our partner agreements and third-party development agreements
contains strict confidentiality and non-disclosure provisions for the service
provider, end-user and third-party developer. Our third-party development
agreements contain restrictions on the use of our technology outside of the
development process. Any failure to establish or maintain successful
relationships with these third-party software providers or these third-party
installation, implementation and development partners or the failure of these
third-party software providers to develop and support their software could have
an adverse effect on us.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
OUR OPERATIONS ARE INTERNATIONAL IN SCOPE, WHICH EXPOSES US TO ADDITIONAL
RISK, INCLUDING CURRENCY-RELATED RISK. We derived approximately 59%, 48% and
39% of our total revenue from sales outside the United States in fiscal years
2000, 1999 and 1998, respectively. Of our more than 4,800 licensed sites in more
than 80 countries as of January 31, 2000, over 70% are outside the United
States. See the Foreign Exchange section in Item 7A.
CONTROL BY PRINCIPAL STOCKHOLDERS
OUR PRINCIPAL STOCKHOLDERS MAY CONTROL OUR MANAGEMENT DECISIONS. Pamela and
Karl Lopker jointly and beneficially own approximately 55% of our outstanding
common stock. Recovery Equity Investors II, L.P. owns approximately 9% of our
outstanding common stock. Current directors and executive officers as a group
beneficially own approximately 65% of the common stock. The Lopkers currently
constitute two of the six members of the board and therefore have significant
influence in directing the actions of the board of directors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE. Historically, our revenue from international operations
has primarily been denominated in United States dollars. However, due to the
recent acquisitions of several international distributors and the launch of QAD
services, a higher percentage of our business is now conducted in currencies
other than the Untied States dollar. In fiscal 2000, approximately 65% of our
revenue was denominated in United States dollars compared to over 90% in fiscal
years 1999 and 1998. The remainder was denominated in approximately ten
different currencies. We also incur a significant portion of our expenses in
currencies other than the United States dollar. As a result, fluctuations in the
values of the respective currencies relative to the other currencies in which we
generate revenue could adversely affect us.
Fluctuations in currencies relative to the United States dollar have
affected and will continue to affect period-to-period comparisons of our
reported results of operations. In fiscal years 2000, 1999 and 1998, foreign
currency transaction (gains) and losses totaled $552,000, $61,000 and
$(879,000), respectively. Due to constantly changing currency exposures and the
volatility of currency exchange rates, we may experience currency losses in the
future, and we can not predict the effect of exchange rate fluctuations upon
future operating results. Although we do not currently undertake hedging
transactions, we may choose to hedge a portion of our currency exposure in the
future, as we deem appropriate.
INTEREST RATES. QAD invests its surplus cash in a variety of financial
instruments, consisting principally of bank time deposits and short-term
marketable securities with maturities of less than one year. QAD's investment
securities are held for purposes other than trading. Cash balances held by
subsidiaries are invested in short-term time deposits with the local operating
banks. Additionally, our short and long-term debt bears interest at variable
rates.
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We prepared sensitivity analyses of our interest rate exposure and our
exposure from anticipated investment and borrowing levels for fiscal 2001 to
assess the impact of hypothetical changes in interest rates. Based upon the
results of these analyses, a 10% adverse change in interest rates from the 2000
fiscal year-end rates would not have a material adverse effect on the fair value
of investments and would not materially impact our results of operations or
financial condition for the next fiscal year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in Item 14 of this Annual Report on
Form 10-K.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors is incorporated by reference to the
section entitled "Election of Directors" appearing in our Definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission, within 120 days after the end of our fiscal year 2000.
Certain information with respect to persons who are or may be deemed to be
executive officers of the Registrant is set forth under the caption "Executive
Officers of the Registrant" in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to
the information set forth under the caption "Executive Compensation" in our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed
with the Commission within 120 days after the end of our fiscal year 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption "Director and Executive Officers Stock Ownership" in our Definitive
Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our fiscal year 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions are
incorporated by reference to the information set forth under the caption
"Certain Transactions" in our Definitive Proxy Statement for the Annual Meeting
of Stockholders to be filed with the Commission within 120 days after the end of
our fiscal year 2000.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this Annual Report
on Form 10-K:
QAD INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ 29
Consolidated Balance Sheets as of January 31, 2000 and
1999...................................................... 30
Consolidated Statements of Operations for the years ended
January 31, 2000, 1999 and 1998........................... 31
Consolidated Statement of Stockholders' Equity for the years
ended January 31, 2000, 1999 and 1998..................... 32
Consolidated Statements of Cash Flows for the years ended
January 31, 2000, 1999 and 1998........................... 33
Notes to Consolidated Financial Statements.................. 34
</TABLE>
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this Annual
Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
II. VALUATION AND QUALIFYING ACCOUNTS.................... 48
</TABLE>
All other schedules are omitted because they are not required or the
required information is presented in the financial statements or notes thereto.
(A) 3. EXHIBITS
See the Index of Exhibits on page 50.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January 31, 2000.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
QAD Inc.:
We have audited the accompanying consolidated balance sheets of QAD Inc. and
subsidiaries as of January 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended January 31, 2000. These consolidated
financial statements are the responsibility of QAD'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 QAD Inc. and
subsidiaries at January 31, 2000 and 1999 and the results of their operations
and their cash flows for each of the years in the three-year period ended
January 31, 2000 in conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
March 3, 2000, except for the last paragraph
of note 6, which is as of April 19, 2000
29
<PAGE>
QAD INC.
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 35,936 $ 16,078
Short-term cash investments............................... -- 3,000
Accounts receivable, net.................................. 98,567 95,344
Other current assets...................................... 15,523 19,680
-------- --------
Total current assets.................................... 150,026 134,102
Property and equipment, net................................. 32,729 36,835
Capitalized software development costs, net................. 8,233 8,646
Other assets, net........................................... 23,383 20,472
-------- --------
Total assets............................................ $214,371 $200,055
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and capital lease obligations............... $ 1,240 $ 7,166
Accounts payable.......................................... 17,671 16,314
Accrued expenses.......................................... 34,647 29,933
Deferred revenue and deposits............................. 64,731 59,946
-------- --------
Total current liabilities............................... 118,289 113,359
Notes payable and capital lease obligations, less current
portion................................................. 21,890 6,526
Other deferred liabilities................................ 200 581
Minority interest......................................... 563 160
Stockholders' equity:
Preferred stock, $0.001 par value. Authorized 5,000,000
shares; none issued and outstanding..................... -- --
Common stock, $0.001 par value. Authorized 150,000,000
shares; issued and outstanding 33,012,210 shares and
29,703,500 shares at January 31, 2000 and 1999,
respectively............................................ 33 30
Additional paid-in-capital................................ 111,558 99,566
Accumulated deficit....................................... (34,876) (18,526)
Receivable from stockholders.............................. (5) (54)
Unearned compensation--restricted stock................... (146) (970)
Accumulated other comprehensive loss...................... (3,135) (617)
-------- --------
Total stockholders' equity.............................. 73,429 79,429
-------- --------
Total liabilities and stockholders' equity.............. $214,371 $200,055
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
QAD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
License fees.............................................. $ 95,120 $105,928 $113,447
Maintenance and other..................................... 90,579 72,070 51,696
Services.................................................. 53,563 15,346 5,627
-------- -------- --------
Total revenue........................................... 239,262 193,344 170,770
Costs and expenses:
Cost of license fees...................................... 21,427 17,674 11,503
Other cost of revenue..................................... 85,812 41,341 30,048
Sales and marketing....................................... 80,057 91,128 65,785
Research and development.................................. 34,084 48,332 29,317
General and administrative................................ 26,510 25,361 19,422
Restructuring charge...................................... 1,152 4,314 --
-------- -------- --------
Total costs and expenses................................ 249,042 228,150 156,075
Operating income (loss)..................................... (9,780) (34,806) 14,695
Other (income) expense:
Interest income........................................... (736) (2,152) (1,785)
Interest expense.......................................... 1,972 602 1,064
Other (income) expense.................................... 219 1,527 (1,599)
-------- -------- --------
Total other (income) expense............................ 1,455 (23) (2,320)
-------- -------- --------
Income (loss) before income taxes........................... (11,235) (34,783) 17,015
Income tax expense.......................................... 5,101 1,138 7,159
-------- -------- --------
Net income (loss)........................................... $(16,336) $(35,921) $ 9,856
======== ======== ========
Basic net income (loss) per share........................... $ (0.54) $ (1.22) $ 0.38
Diluted net income (loss) per share......................... $ (0.54) $ (1.22) $ 0.38
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
QAD INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL RETAINED ACCUMULATED
PAID-IN-CAPITAL EARNINGS RECEIVABLE RESTRICTED STOCK OTHER
------------------- (ACCUMULATED FROM ------------------- COMPREHENSIVE
SHARES AMOUNT DEFICIT) STOCKHOLDERS SHARES AMOUNT LOSS
-------- -------- ------------- ------------ -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 31,
1997.................... 22,219 $ 5,942 $ 7,539 $(197) (409) $(2,129) $ (351)
Comprehensive income:
Net income.............. -- -- 9,856 -- -- -- --
Translation
adjustments........... -- -- -- -- -- -- --
Total comprehensive
income..............
Common stock activity:
Under initial public
offering (net of offer
costs)................ 6,612 90,516 -- -- -- -- --
Under stock purchase
plan and incentive
plan.................. 251 2,413 -- -- -- -- --
Under stock options..... 299 709 -- -- -- -- --
Under performance
awards................ 50 431 -- -- -- -- --
Under restricted stock
awards................ 20 194 -- -- (20) (194) --
Common stock earned
under restricted stock
awards................ 2 -- -- -- 208 663 --
Tax benefit associated
with stock option
exercises............. -- 523 -- -- -- -- --
Common stock
repurchases........... (335) (3,340) -- -- -- -- --
Restricted stock awards
cancelled............. (22) (150) -- -- 22 150 --
Receivable from
stockholders............ -- -- -- (200) -- -- --
------ -------- -------- ----- ---- ------- -------
BALANCE JANUARY 31,
1998.................... 29,096 97,238 17,395 (397) (199) (1,510) (351)
------ -------- -------- ----- ---- ------- -------
Comprehensive loss:
Net loss................ -- -- (35,921) -- -- -- --
Translation
adjustments........... -- -- -- -- -- -- (266)
Total comprehensive
loss................
Common stock activity:
Under stock purchase
plan and incentive
plan.................. 372 1,804 -- -- -- -- --
Under stock options..... 282 38 -- -- -- -- --
Under restricted stock
awards................ -- 305 -- -- -- (305) --
Common stock earned
under restricted stock
awards................ 7 -- -- -- 62 447 --
Tax benefit associated
with stock option
exercises............. -- 1,553 -- -- -- -- --
Common stock
repurchases........... (6) (944) -- -- -- -- --
Restricted stock awards
cancelled............. (47) (398) -- -- 49 398 --
Receivable from
stockholders.......... -- -- -- 343 -- -- --
------ -------- -------- ----- ---- ------- -------
BALANCE JANUARY 31,
1999.................... 29,704 99,596 (18,526) (54) (88) (970) (617)
------ -------- -------- ----- ---- ------- -------
Comprehensive loss:
Net loss................ -- -- (16,336) -- -- -- --
Translation
adjustments........... -- -- -- -- -- -- (2,518)
Total comprehensive
loss................
Common stock activity:
Under stock purchase
plan and incentive
plan.................. 474 1,404 -- -- -- -- --
Under stock options..... 433 505 -- -- -- -- --
Common stock earned
under restricted stock
awards................ 10 -- -- -- 10 151 --
Tax benefit associated
with stock option
exercises............. -- 656 -- -- -- -- --
Under business
acquisition, net...... 120 506 -- -- -- -- --
Restricted stock awards
cancelled............. (60) (673) -- -- 60 673 --
Under private
placement............. 2,333 9,600 -- -- -- -- --
Other................... (2) (3) (14) 49 -- -- --
------ -------- -------- ----- ---- ------- -------
BALANCE JANUARY 31,
2000.................... 33,012 $111,591 $(34,876) $ (5) (18) $ (146) $(3,135)
====== ======== ======== ===== ==== ======= =======
<CAPTION>
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY INCOME (LOSS)
------------- --------------
<S> <C> <C>
BALANCE JANUARY 31,
1997.................... $ 10,804
Comprehensive income:
Net income.............. 9,856 $ 9,856
Translation
adjustments........... -- --
--------
Total comprehensive
income.............. $ 9,856
========
Common stock activity:
Under initial public
offering (net of offer
costs)................ 90,516
Under stock purchase
plan and incentive
plan.................. 2,413
Under stock options..... 709
Under performance
awards................ 431
Under restricted stock
awards................ --
Common stock earned
under restricted stock
awards................ 663
Tax benefit associated
with stock option
exercises............. 523
Common stock
repurchases........... (3,340)
Restricted stock awards
cancelled............. --
Receivable from
stockholders............ (200)
--------
BALANCE JANUARY 31,
1998.................... 112,375
--------
Comprehensive loss:
Net loss................ (35,921) $(35,921)
Translation
adjustments........... (266) (266)
--------
Total comprehensive
loss................ $(36,187)
========
Common stock activity:
Under stock purchase
plan and incentive
plan.................. 1,804
Under stock options..... 38
Under restricted stock
awards................ --
Common stock earned
under restricted stock
awards................ 447
Tax benefit associated
with stock option
exercises............. 1,553
Common stock
repurchases........... (944)
Restricted stock awards
cancelled............. --
Receivable from
stockholders.......... 343
--------
BALANCE JANUARY 31,
1999.................... 79,429
--------
Comprehensive loss:
Net loss................ (16,336) $(16,336)
Translation
adjustments........... (2,518) (2,518)
--------
Total comprehensive
loss................ $(18,854)
========
Common stock activity:
Under stock purchase
plan and incentive
plan.................. 1,404
Under stock options..... 505
Common stock earned
under restricted stock
awards................ 151
Tax benefit associated
with stock option
exercises............. 656
Under business
acquisition, net...... 506
Restricted stock awards
cancelled............. --
Under private
placement............. 9,600
Other................... 32
--------
BALANCE JANUARY 31,
2000.................... $ 73,429
========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
QAD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(16,336) $(35,921) $ 9,856
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 17,829 11,055 6,921
Provision for doubtful accounts and sales adjustments... (261) 3,627 4,370
Loss on disposal of equipment........................... 9 698 82
Asset write-off......................................... -- 3,060 --
Compensation under stock awards......................... (80) 320 1,361
Other, net.............................................. 90 (45) (79)
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable..................................... (3,316) (8,420) (33,508)
Other assets............................................ 1,932 (9,237) (490)
Accounts payable........................................ 974 2,629 3,375
Accrued expenses........................................ 4,500 4,739 5,577
Deferred revenue and deposits........................... 4,257 10,451 14,467
-------- -------- --------
Net cash provided by (used in) operating activities... 9,598 (17,044) 11,932
Cash flows from investing activities:
Purchase of property and equipment...................... (6,863) (17,670) (13,561)
Investment in software development...................... (2,720) (4,072) (2,044)
Acquisitions of businesses, net of cash acquired........ (439) (12,813) --
Investment in equity securities......................... (500) -- (3,000)
Purchase of short-term cash investment.................. -- (3,000) --
Proceeds from sale of short-term cash investment........ 3,000 -- --
Other, net.............................................. 93 (179) (209)
-------- -------- --------
Net cash used in investing activities................. (7,429) (37,734) (18,814)
Cash flows from financing activities:
Proceeds from notes payable............................. 21,901 -- 9,648
Reduction of notes payable.............................. (13,171) (252) (22,967)
Proceeds from initial public offering................... -- -- 90,516
Issuance of common stock for cash....................... 11,509 1,842 3,122
Repurchase of common stock.............................. (67) (944) (3,340)
Receivable from stockholders............................ 49 343 (200)
Other, net.............................................. (14) -- --
-------- -------- --------
Net cash provided by financing activities............. 20,207 989 76,779
Effect of exchange rates on cash and equivalents............ (2,518) (215) (116)
-------- -------- --------
Net increase (decrease) in cash and equivalents........... 19,858 (54,004) 69,781
Cash and equivalents at beginning of period................. 16,078 70,082 301
-------- -------- --------
Cash and equivalents at end of period..................... $ 35,936 $ 16,078 $ 70,082
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1,845 $ 335 $ 892
Income taxes............................................ 1,137 4,390 1,179
Supplemental schedule of noncash investing and financing
activities:
Issuance of note payable for acquisition of business.... 500 12,363 --
Issuance of common stock for acquisition of business.... 506 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of QAD Inc. and
all of our subsidiaries. All significant transactions among the consolidated
entities have been eliminated from the financial statements.
USE OF ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materiality.
Actual results could differ from those estimates.
CASH AND EQUIVALENTS AND SHORT-TERM CASH INVESTMENTS
We consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Short-term cash
investments include those investments with original maturities in excess of
three months.
REVENUE RECOGNITION
We derive revenue from license fees, maintenance and other, and services.
License fees are primarily obtained from the licensing of our software products
and also include revenue from third-party software sold in conjunction with QAD
software. Maintenance and other revenue is derived primarily from the
performance of maintenance contracts. Services revenue consists of
implementation, technical and training services. Revenue is recognized in
accordance with Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition," as modified by SOP No. 98-9, "Modification of SOP No. 97-2,
Software Revenue Recognition with respect to Certain Transactions."
Revenue from software license agreements, including licenses sold through
distributors, is recognized at the time of shipment, net of any applicable
distributor discount, provided there are no remaining significant obligations to
be fulfilled by us and collectibility is probable. Typically, our software
licenses do not include significant vendor obligations. Where license contracts
call for payment terms in excess of 12 months from date of shipment, revenue is
recognized as payments become due. Maintenance revenue for ongoing customer
support and product updates is recognized ratably over the term of the
maintenance period, which is generally 12 months. Services revenue, consisting
of training and consulting services, is recognized as the services are
performed. Allowances are estimated and provided for in the period of sale.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
We capitalize software development costs incurred in connection with the
localization and translation of our products once technological feasibility has
been achieved. Capitalized development costs are amortized on a straight-line
basis over three years and charged to cost of revenue. All other development
costs are expensed to research and development as incurred.
INCOME TAXES
We recognize deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of our assets and
liabilities and expected benefits of utilizing net operating loss and credit
carryforwards. The impact on deferred taxes of changes in tax rates and laws, if
any, are
34
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
applied to the years during which temporary differences are expected to be
settled and reflected in the financial statements in the period of enactment. No
provision is made for taxes on unremitted earnings of certain non-U.S.
subsidiaries, which are or will be reinvested indefinitely in such operations.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)........................................... $(16,336) $(35,921) $ 9,856
======== ======== =======
Weighted average shares of common stock outstanding used in
basic income (loss) per share calculation................. 30,509 29,356 25,701
Weighted average shares of common stock equivalents issued
using the treasury stock method........................... -- -- 582
-------- -------- -------
Weighted average shares of common stock and common stock
equivalents outstanding used in diluted income (loss) per
share calculation......................................... 30,509 29,356 26,283
======== ======== =======
Basic net income (loss) per share........................... $ (0.54) $ (1.22) $ 0.38
Diluted net income (loss) per share......................... $ (0.54) $ (1.22) $ 0.38
</TABLE>
Common stock equivalent shares consist of the shares issuable upon the
exercise of stock options using the treasury stock method. Shares of common
stock equivalents of approximately 454,000 and 1,172,000 for fiscal years 2000
and 1999 were not included in the diluted calculation because they were
anti-dilutive. Due to the net loss for the fiscal years 2000 and 1999, basic and
diluted per share amounts are the same.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of our foreign subsidiaries
are generally determined using the U.S. dollar as the functional currency. Gains
and losses resulting from foreign currency transactions and remeasurement
adjustments for those foreign entities whose books of record are not maintained
in the functional currency are included in earnings. Foreign currency
transaction and remeasurement (gains) and losses for the fiscal years 2000, 1999
and 1998 totaled $552,000, $61,000 and $(879,000), respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and equivalents, short-term cash investments,
accounts receivable and accounts payable approximate fair value due to the
short-term maturities of these instruments.
Concentration of credit risk with respect to trade receivables is limited
due to the large number of customers comprising our customer base, and their
dispersion across many different industries and locations throughout the world.
No single customer accounted for ten percent or more of revenue for fiscal 2000,
1999 or 1998. At January 31, 2000, one customer represented approximately 15% of
trade receivables. As of March 31, 2000, a significant portion of this
receivable was collected such that this customer
35
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
represented 1% of trade receivables. There was no concentration of trade
receivables with any one customer at January 31, 1999.
Our debt instruments bear variable market interest rates. Therefore, the
carrying value of these notes approximates fair value.
LONG-LIVED ASSETS
Property and equipment are stated at cost. Additions, major renewals and
improvements are capitalized, while maintenance and repairs are expensed. Upon
disposition, the net book value of assets is relieved and resulting gains or
losses are reflected in earnings. For financial reporting purposes, depreciation
is generally provided on the straight-line method over the useful life of the
related asset. Asset lives range from 3 to 39 years.
Goodwill represents the excess of acquisition costs over the fair value of
net assets of purchased businesses and is amortized on a straight-line basis
over periods of 10 to 15 years. Other intangible assets include capitalized
software development costs, employment agreements, covenants not to compete and
customer contracts. These assets are amortized on a straight-line basis over
their estimated useful lives of 2 to 5 years. Amortization expense for fiscal
years 2000, 1999 and 1998 was $6.7 million, $1.7 million and $1.1 million,
respectively.
Long-lived assets are reviewed for impairment in value based upon
undiscounted future operating cash flows, and appropriate losses are recognized,
whenever the carrying amount of an asset may not be recovered.
ACCOUNTING FOR STOCK OPTIONS
Prior to January 1, 1996, we accounted for our stock option grants in
accordance with the provisions of Accounting Principles Board, or APB, Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense was recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, we adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in the year
ended December 31, 1995 and future years as if the fair value-based method
defined in SFAS No. 123 had been applied. We have elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current
year presentation.
2. ACQUISITIONS
During fiscal years 2000 and 1999, we acquired controlling interest in seven
businesses:
- Distributor operations and assets of Computer Systems for Business
International S.A., a distributor in Poland, in September 1998.
- Iris-Ifec Co., Ltd., a Thailand-based distributor and systems integrator,
in October 1998.
36
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- QAD Sistemas Integrados Casa de Software, S.A. de C.V. and QAD Sistemas
Integrados Servicios de Consultoria, S.A. de C.V., a Mexico-based
distributor, in October 1998.
- United Kingdom and Netherlands software distributor operations and assets
of TRW Integrated Supply Chain Solutions, in November 1998.
- OpenPro (Pty.) Limited, a South Africa-based distributor, in
February 1999.
- ATOS Integration SA, a France-based distributor, in June 1999.
- Enterprise Engines, Inc. (EEI), a California-based software technology
development company, in December 1999.
The cost of the fiscal year 2000 acquisitions totaled $3.0 million, while
the cost of the fiscal year 1999 acquisitions totaled $25.9 million, including
$0.4 million in earnout payments made during fiscal year 2000. All of the
acquisitions were accounted for using the purchase method. Goodwill related to
the acquisitions of $3.3 million in fiscal year 2000 and $10.7 million in fiscal
year 1999 is being amortized over periods of 10 to 15 years. Results of
operations have been included in the financial statements since the respective
dates of acquisition.
Prior shareholders of these businesses have future remaining earnouts of up
to $5.4 million, and 27,000 shares of QAD common stock, which may be added to
the purchase price over the next four years.
The historical operations of the companies acquired are not material,
individually, or in aggregate to our consolidated operations or financial
position, and therefore, supplemental pro forma information has not been
presented.
3. RESTRUCTURING CHARGE
In response to changes in customers' manufacturing capital software spending
patterns during fiscal year 1999, we undertook a restructuring program that,
among other things, more closely aligned costs with sales expectations. The
program included the consolidation of certain facilities and an approximate
reduction of 230 positions across a broad cross-section of QAD.
The restructuring plan, which resulted in a fiscal year 1999 charge of $4.3
million was continued in fiscal year 2000 with an additional $1.2 million charge
in the quarter ended July 31, 1999. The fiscal 2000 charge was comprised of $0.9
million in employee reduction costs and $0.3 million of facility consolidation
costs, while the fiscal 1999 charge was comprised of $1.0 million in employee
reduction costs and $3.3 million of facility consolidation costs. As of
January 31, 2000, $4.8 million of the total $5.5 million restructuring charge
was utilized and we expect to pay the remaining balance by January 31, 2002. The
liability was increased by $0.1 million during the year ended January 31, 2000
to reflect changes in estimates used in determining the January 31, 1999
balance.
37
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net
Accounts receivable....................................... $104,857 $103,368
Less allowance for doubtful accounts and sales
adjustments........................................... (6,290) (8,024)
-------- --------
$ 98,567 $ 95,344
======== ========
Other current assets
Prepaid expenses.......................................... $ 3,244 $ 5,896
Deferred income taxes..................................... 2,837 3,772
Other..................................................... 9,442 10,012
-------- --------
$ 15,523 $ 19,680
======== ========
Property and equipment, net
Land and buildings........................................ $ 8,420 $ 8,208
Automobiles............................................... 490 138
Computer equipment and software........................... 41,781 36,687
Furniture and office equipment............................ 13,548 12,948
Leasehold improvements.................................... 4,770 4,323
Equipment under capital lease............................. 984 1,879
-------- --------
69,993 64,183
Less accumulated depreciation and amortization.......... (37,264) (27,348)
-------- --------
$ 32,729 $ 36,835
======== ========
Capitalized software development costs, net
Capitalized software development cost..................... $ 15,595 $ 12,533
Less accumulated amortization........................... (7,362) (3,887)
-------- --------
$ 8,233 $ 8,646
======== ========
Other assets, net
Goodwill.................................................. $ 14,369 $ 9,929
Other intangible assets................................... 8,607 7,840
Less accumulated amortization........................... (4,365) (1,263)
-------- --------
18,611 16,506
Deferred income taxes..................................... 1,991 1,073
Other assets.............................................. 2,781 2,893
-------- --------
$ 23,383 $ 20,472
======== ========
Accrued expenses
Accrued payroll........................................... $ 16,811 $ 12,595
Accrued royalties......................................... 6,035 2,057
Accrued other............................................. 11,801 15,281
-------- --------
$ 34,647 $ 29,933
======== ========
</TABLE>
38
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes changes in the balances of items that are
reported directly in a separate component of stockholders' equity on the
Consolidated Balance Sheets. Accumulated other comprehensive loss consists of
the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency translation adjustments
Beginning balance......................................... $ (617) $(351) $(351)
Current year change....................................... (2,518) (266) --
------- ----- -----
Total accumulated other comprehensive loss.................. $(3,135) $(617) $(351)
======= ===== =====
</TABLE>
6. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Line of credit.............................................. $16,980 $ --
Subordinated notes.......................................... -- 12,362
Promissory note............................................. 4,940 --
Capitalized leases.......................................... 527 1,102
Other....................................................... 683 228
------- -------
23,130 13,692
Less current maturities................................... 1,240 7,166
------- -------
$21,890 $ 6,526
======= =======
</TABLE>
In April 1999, we entered into a secured credit agreement with Bank One,
which expires on April 18, 2002. The maximum borrowings under this credit
agreement is subject to the monthly borrowing base, up to $25 million as of
January 31, 2000, of which $8 million dollars was available and unutilized. This
credit agreement is secured by certain QAD assets and can be terminated
voluntarily by us. Interest is equal to the LIBOR plus 2.50% or ABR plus 1.00%.
ABR is the higher of the corporate base rate or the Federal Funds Effective Rate
plus 0.50%. As of January 31, 2000, the rate was 9.5% based on an ABR of 8.5%
plus 1.0%. We pay an annual commitment fee of 0.625% calculated on the average
unused portion of the $25 million maximum.
In April 1999, we repaid the subordinated notes, which were originally
issued on November 30, 1998, totaling $12.4 million in principal amount from the
Bank One line of credit borrowings.
On November 8, 1999, we raised an additional $5.0 million of long-term debt
from First Credit Bank, a California Banking Corporation, secured by our real
property located on Ortega Hill Road, Summerland, California. The note has a
5-year maturity, with a variable interest rate based on the prime rate plus
2.5%. The initial rate was set at 10.75% and the rate as of January 31, 2000 was
11.0%. The principal amortizes at a rate of $20,000 per month, with the balance
due on November 8, 2004. The outstanding balance as of January 31, 2000 was
$4.9 million. Concurrently with this financing, the commitment under our
revolving credit facility with Bank One was reduced by $5 million to $25
million.
39
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of January 31, 2000, we did not meet one of our covenants on the Bank One
line of credit, but obtained a waiver subsequent to fiscal year-end. Pursuant to
obtaining the bank waiver, Bank One amended the financial covenants of the
secured credit agreement.
7. INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................. $2,601 $ 3,080 $1,675
State.................................................... 154 (775) 197
Foreign.................................................. 1,521 (361) 2,421
------ ------- ------
Total.................................................. 4,276 1,944 4,293
------ ------- ------
Deferred:
Federal.................................................. (542) (1,914) 2,449
State.................................................... -- 881 (573)
Foreign.................................................. 1,367 227 990
------ ------- ------
Total.................................................. 825 (806) 2,866
------ ------- ------
$5,101 $ 1,138 $7,159
====== ======= ======
</TABLE>
Actual income tax expense differs from that obtained by applying the
statutory Federal income tax rate of 34% (35% in fiscal 1998) to income (loss)
before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory Federal income tax rate....................... 34% 34% 35%
Computed expected tax expense (benefit)................. $(3,820) $(11,827) $ 5,968
State income taxes, net of Federal income tax benefit... 102 (806) 815
Incremental tax expense from foreign operations......... (507) 415 203
Foreign withholding taxes............................... 768 -- --
Net change in valuation allowance....................... 11,407 13,401 (267)
Meals and entertainment................................. 426 407 325
Research, AMT and foreign tax credits................... (5,155) (408) (1,135)
Foreign dividends....................................... -- -- 541
Reduction of research and development credits and
foreign tax credits previously recorded............... -- -- 600
Tax expense related to prior years...................... 1,599 -- --
Other................................................... 281 (44) 109
------- -------- -------
$ 5,101 $ 1,138 $ 7,159
======= ======== =======
</TABLE>
40
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments..... $ 1,013 $ 2,231
Accrued vacation.......................................... 1,064 661
Accrued commission........................................ 128 369
Alternative minimum tax................................... 296 91
Research and development credits.......................... 6,387 1,232
Foreign tax credits....................................... 2,265 1,594
Depreciation and amortization............................. 215 269
Net operating loss carryforwards.......................... 18,716 14,937
Other..................................................... 3,972 2,292
-------- --------
34,056 23,676
-------- --------
Less valuation allowance.................................. (26,622) (15,215)
-------- --------
Net deferred tax assets................................... $ 7,434 $ 8,461
======== ========
Deferred tax liabilities:
Capitalized software development costs.................... $ 1,737 $ 2,142
State income taxes........................................ 154 87
Other..................................................... 715 983
Mark to market............................................ -- 404
-------- --------
2,606 3,616
-------- --------
Total net deferred tax asset............................ $ 4,828 $ 4,845
======== ========
</TABLE>
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.
We have net operating loss carryforwards, with various expiration dates, of
$79.4 million as of January 31, 2000. At January 31, 2000 and 1999, the
valuation allowance attributable to deferred tax assets was $26.6 million and
$15.2 million, respectively, an overall increase of $11.4 million. The increase
in the valuation allowance relates primarily to benefits associated with net
operating losses and tax credit carryforwards.
8. 401(k) PLAN
We have a defined contribution 401(k) plan, which is available to U.S.
employees after 30 days of employment. Employees may contribute up to the
maximum allowable by the Internal Revenue Code. We match 75 percent of the
employees' contributions up to the first four percent. We may make additional
contributions at the discretion of the board of directors. Participants are
immediately vested in their employee contributions. Employer contributions vest
over a five-year period. The employer contributions for fiscal years 2000, 1999
and 1998 were $1,073,000, $1,430,000 and $371,000, respectively.
41
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
We lease certain office facilities, office equipment and automobiles under
operating lease agreements. Total rent expense for fiscal years 2000, 1999 and
1998 was $9.0 million, $7.7 million and $6.5 million, respectively. Future
minimum rental payments under non-cancelable operating lease commitments with a
term of more than one year as of January 31, 2000 are as follows: $7.3 million
in 2001; $5.0 million in 2002; $2.9 million in 2003; $1.8 million in 2004; $1.4
million in 2005 and $5.2 million thereafter.
We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that the outcome of any of these legal matters will have a material adverse
effect on our consolidated results of operations or financial position.
10. BUSINESS SEGMENT INFORMATION
QAD operates in geographic regions. The North America region includes the
United States and Canada. The EMEA region includes Europe, the Middle East and
Africa. The Asia Pacific region includes Asia and Australia. The Latin America
region includes South America, Central America and Mexico.
Operating income attributable to each business segment is based upon the
management assignment of revenue and costs. Regional cost of revenue includes
the cost of goods produced by QAD's manufacturing operations at the transfer
price charged to the distribution operation. Income from manufacturing
operations is included in the Corporate operating segment. Research and
development costs are also included in the Corporate operating segment.
Identifiable assets are assigned by region based upon the location of each legal
entity.
During fiscal year 2000, management changed the composition of its
reportable segments for operating income (loss), as well as for depreciation and
amortization, in order to disclose components related to the corporate segment.
Prior period segment information has not been restated to separately disclose
corporate segment information, as it is impracticable to do so.
42
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BUSINESS SEGMENT INFORMATION
YEARS ENDED JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
North America............................................. $100,701 $103,708 $105,886
EMEA...................................................... 92,679 57,511 42,918
Asia Pacific.............................................. 32,600 26,534 18,168
Latin America............................................. 13,282 5,591 3,798
-------- -------- --------
$239,262 $193,344 $170,770
======== ======== ========
Operating income (loss):
North America............................................. $ 1,255 $ (8,539) $ 24,569
EMEA...................................................... 905 (7,591) 1,190
Asia Pacific.............................................. (4,779) (10,800) (10,484)
Latin America............................................. (2,211) (3,562) (580)
Corporate................................................. (3,798) -- --
Restructuring charge...................................... (1,152) (4,314) --
-------- -------- --------
$ (9,780) $(34,806) $ 14,695
======== ======== ========
Depreciation and amortization:
North America............................................. $ 1,594 $ 7,892 $ 5,446
EMEA...................................................... 4,216 1,885 560
Asia Pacific.............................................. 1,436 867 829
Latin America............................................. 1,053 411 86
Corporate................................................. 9,530 -- --
-------- -------- --------
$ 17,829 $ 11,055 $ 6,921
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Identifiable assets:
North America............................................. $ 96,853 $ 88,934
EMEA...................................................... 84,233 83,850
Asia Pacific.............................................. 24,575 17,811
Latin America............................................. 8,710 9,460
-------- --------
$214,371 $200,055
======== ========
</TABLE>
11. EMPLOYEE STOCK OPTION, PURCHASE PLANS AND RESTRICTED STOCK AWARDS
EMPLOYEE STOCK OPTION AGREEMENTS
We have stock option agreements with certain key employees. As of
January 31, 2000 and 1999, options to purchase 4,326,000 and 3,676,000 shares of
common stock were outstanding. Outstanding
43
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options generally vest over a four-year period and have contractual lives of 8
years. Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OPTIONS
SHARES EXERCISE PRICE EXERCISABLE
--------- ---------------- -----------
<S> <C> <C> <C>
Outstanding options at January 31, 1997......... 1,121,000 $ 0.18 1,121,000
Options issued.................................. 2,040,000 13.61
Options exercised............................... (299,000) 0.21
Options expired and terminated.................. (138,000) 11.01
--------- ------ ---------
Outstanding options at January 31, 1998......... 2,724,000 9.68 822,000
Options issued.................................. 1,917,000 5.62
Options exercised............................... (282,000) 0.16
Options expired and terminated.................. (683,000) 10.74
--------- ------ ---------
Outstanding options at January 31, 1999......... 3,676,000 5.45 642,000
Options issued.................................. 1,857,000 3.87
Options exercised............................... (433,000) 1.39
Options expired and terminated.................. (774,000) 4.99
--------- ------ ---------
Outstanding options at January 31, 2000......... 4,326,000 $ 5.22 1,045,000
========= ------ ---------
</TABLE>
In August 1998, our board agreed to reprice outstanding options to align the
option exercise prices more closely with the fair market value of the underlying
common stock. A program allowing option holders under the 1997 Stock Incentive
Program to exchange higher priced options for the same number of lower priced
options was adopted. The new options were issued on August 14, 1998 at $5.1875
per share. The repricing excluded our officers and directors and prohibited
employees from exercising these new options for twelve months. Certain QAD
officers and directors were issued additional grants under the same plan.
The weighted average remaining contractual life of stock options outstanding
as of January 31, 2000 is as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
------------------------------
NUMBER WEIGHTED WEIGHTED
RANGE OF OF OPTIONS AVERAGE REMAINING WEIGHTED AVERAGE NUMBER AVERAGE EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
- --------------------- ----------- ------------------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.12 - $0.19 195,000 0.19 $ 0.16 195,000 $ 0.16
3.00 - 4.99 2,539,000 7.36 3.85 199,000 4.23
5.00 - 9.99 1,111,000 5.98 5.30 464,000 5.20
10.00 - 22.50 481,000 5.85 14.31 187,000 14.35
--------- ---- ------ --------- ------
Total 4,326,000 6.52 $ 5.22 1,045,000 $ 5.73
========= ---- ------ ========= ------
</TABLE>
44
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We apply APB Opinion No. 25 in accounting for QAD's option plans and,
accordingly, no compensation cost was recognized as the exercise price of the
stock options equaled the fair value at the grant date. The fair value of the
options at date of grant was estimated using the Black-Scholes model with the
following assumptions:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Expected life (years)....................................... 6.50 6.50 6.00
Interest rate............................................... 6.30% 5.50% 5.95%
Volatility.................................................. 0.79 0.75 0.41
Dividend yield.............................................. $0.00 $0.00 $0.00
</TABLE>
No compensation expense has been recognized for stock-based incentive
compensation plans other than for restricted stock awards. If we had recognized
compensation expense for stock-based employee compensation based upon the fair
value of options granted, our net income (loss) for the fiscal years 2000, 1999
and 1998 would have been impacted as follows:
<TABLE>
<CAPTION>
2000 AS REPORTED PRO FORMA
- ---- ----------- ---------
<S> <C> <C>
Net loss.................................................... $(16,336) $(23,454)
Basic loss per share........................................ (0.54) (0.77)
Diluted loss per share...................................... (0.54) (0.77)
</TABLE>
<TABLE>
<CAPTION>
1999 AS REPORTED PRO FORMA
- ---- ----------- ---------
<S> <C> <C>
Net loss.................................................... $(35,921) $(42,756)
Basic loss per share........................................ (1.22) (1.46)
Diluted loss per share...................................... (1.22) (1.46)
</TABLE>
<TABLE>
<CAPTION>
1998 AS REPORTED PRO FORMA
- ---- ----------- ---------
<S> <C> <C>
Net income.................................................. $9,856 $8,201
Basic earnings per share.................................... 0.38 0.32
Diluted earnings per share.................................. 0.38 0.31
</TABLE>
1994 STOCK OWNERSHIP PROGRAM
We established the QAD Inc. 1994 Stock Ownership Program (the "Plan")
covering 4,800,000 shares of our common stock. The Plan allows eligible
employees to purchase shares of common stock at the fair market value of the
common stock by direct cash payment or at 95% of the fair market value through
payroll deduction. The Plan also allows for the granting of shares to employees.
We have the right, but not the obligation, to repurchase shares at fair value
upon the termination of employment. During fiscal year 1998, 215,160 shares were
issued under the Plan at an average price of $9.42. No shares were issued under
the Plan during fiscal years 2000 or 1999.
45
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal year 1998, 20,400 restricted shares of common stock were
granted. The fair market value of the shares awarded was $194,000. This amount
was recorded as unearned compensation-restricted stock, as a separate component
of stockholders' equity. Unearned compensation is amortized to expense over the
periods that the restrictions lapse, generally one to three years from date of
award. Such expense amounted to $1,263,000 for fiscal year 1998, $600,000 of
which is included in accrued expense and $663,000 was amortization of
compensation-restricted stock as the restricted shares are issued to employees.
During fiscal year 1998, 50,060 shares were granted. The fair value of
$431,000 at the grant date was recognized as compensation expense.
1997 STOCK INCENTIVE PROGRAM
We have adopted the 1997 Stock Incentive Program, or Program. The Program
consists of seven parts: The first part is the Incentive Stock Option Plan under
which incentive stock options may be granted. The second part is the
Nonqualified Stock Option Plan under which nonqualified stock options may be
granted. The third part is the Restricted Share Plan under which restricted
shares of common stock may be granted. During fiscal year 1999, we awarded
20,000 restricted shares under the Plan, of which 6,666 shares vested and 13,334
remained unvested at January 31, 2000. No additional shares were issued under
this part of the Plan during fiscal years 2000 or 1998. The fourth part is the
Employee Stock Purchase Plan. The Plan allows participating employees to
purchase shares of common stock through payroll deductions at 85% of the lower
of the beginning or the ending calendar quarter share price. The fifth part is
the Non-Employee Director Stock Option Plan under which grants of options to
purchase shares of common stock may be made to non-employee directors of QAD.
The sixth part is the Stock Appreciation Rights Plan under which SARs (as
defined in the plan) may be granted. The seventh part is the Other Stock Rights
Plan under which (1) units representing the equivalent shares of common stock
may be granted; (2) payments of compensation in the form of shares of common
stock may be granted; and (3) rights to receive cash or shares of common stock
based on the value of dividends paid with respect to a share of common stock may
be granted. The maximum aggregate number of shares of common stock subject to
the Program is 8,000,000 shares. The Program lasts 10 years from the date of
adoption.
TOTAL COMPENSATION COST RECOGNIZED FOR STOCK-BASED COMPENSATION PLANS
Total compensation cost recognized for stock-based employee compensation
awards was as follows:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Under performance awards.............................. $ -- $ -- $ 431
Under restricted stock grants, net of cancellations... (240) 329 930
----- ---- ------
Total............................................... $(240) $329 $1,361
===== ==== ======
</TABLE>
RECEIVABLE FROM STOCKHOLDERS
In connection with the 1994 Stock Ownership Program, we have guaranteed
indebtedness incurred by certain stockholders to purchase shares with cash
deposited with a lending institution. These amounts are classified as
"Receivable from Stockholders" in the equity section of the Consolidated Balance
Sheets.
46
<PAGE>
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------
APRIL 30 JULY 31 OCT. 31 JAN. 31
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
2000
Total revenue.......................... $53,338 $58,314 $ 56,728 $70,882
Gross profit........................... 27,989 31,896 31,894 40,244
Net income (loss)...................... (9,943) (3,969) (4,509) 2,085
Basic net income (loss) per share...... (0.33) (0.13) (0.15) 0.07
Diluted net income (loss) per share.... (0.33) (0.13) (0.15) 0.06
1999
Total revenue.......................... 44,270 47,279 36,435 65,360
Gross profit........................... 32,483 36,540 25,076 40,230
Net loss............................... (2,287) (4,431) (24,340) (4,863)
Basic net loss per share............... (0.08) (0.15) (0.83) (0.16)
Diluted net loss per share............. $ (0.08) $ (0.15) $ (0.83) $ (0.16)
</TABLE>
13. STOCKHOLDERS' EQUITY
On December 23, 1999, we issued, under a private placement, 2,333,333 shares
of our common stock to Recovery Equity Investors II, L.P. for net consideration
of $9.6 million. Pursuant to this placement, Jeffrey A. Lipkin, General Partner
of Recovery Equity Investors II, L.P., was elected to our board of directors.
In conjunction with this placement, we issued a warrant to purchase 225,000
shares of common stock with an exercise price of $7.50, which are each
immediately exercisable for one share of our common stock.
47
<PAGE>
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED
BALANCE AT (CREDITED) BALANCE AT
BEGINNING OF TO COSTS AND (1) END OF
DESCRIPTION PERIOD EXPENSES DELETIONS PERIOD
- ----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts and sales
adjustments
Years ended:
January 31, 2000................................ $8,024 $ (261) $(1,473) $6,290
January 31, 1999................................ 5,510 3,627 (1,113) 8,024
January 31, 1998................................ 3,694 4,370 (2,554) 5,510
</TABLE>
- ------------------------
(1) Actual write-offs and sales adjustments.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
our behalf by the undersigned, thereunto duly authorized, on April 28, 2000.
<TABLE>
<S> <C> <C>
QAD INC.
By: /s/ KATHLEEN M. FISHER
-----------------------------------------
Kathleen M. Fisher
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PAMELA M. LOPKER Chairman of the Board and
------------------------------------------- President (Principal April 28, 2000
Pamela M. Lopker Executive Officer)
/s/ KARL F. LOPKER
------------------------------------------- Director, Chief Executive April 28, 2000
Karl F. Lopker Officer
Executive Vice President,
/s/ KATHLEEN M. FISHER Chief Financial Officer
------------------------------------------- (Principal Financial April 28, 2000
Kathleen M. Fisher Officer)
Vice President, Corporate
/s/ CHERYL M. SLOMANN Controller, Chief
------------------------------------------- Accounting Officer April 28, 2000
Cheryl M. Slomann (Principal Accounting
Officer)
/s/ A. J. MOYER
------------------------------------------- Director April 28, 2000
A. J. Moyer
/s/ KOH BOON HWEE
------------------------------------------- Director April 28, 2000
Koh Boon Hwee
/s/ PETER R. VAN CUYLENBURG
------------------------------------------- Director April 28, 2000
Peter R. van Cuylenburg
/s/ JEFFREY A. LIPKIN
------------------------------------------- Director April 28, 2000
Jeffrey A. Lipkin
</TABLE>
49
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <S>
3.1 Certificate of Incorporation of the Registrant, filed with
the Delaware Secretary of State on May 15, 1997(1)
3.2 Certificate of Amendment of Certificate of Incorporation of
the Registrant, filed with the Delaware Secretary of State
on June 19, 1997(1)
3.9 Bylaws of the Registrant(1)
4.1 Specimen Stock Certificate(1)
10.1 QAD Inc. 1994 Stock Ownership Program(1)
10.2 QAD Inc. 1997 Stock Incentive Program(1)
10.3 Form of Indemnification Agreement with Directors and
Executive Officers(1)
10.4 Loan and Security Agreement between Greyrock Business
Credit, a Division of Nations Credit Commercial
Corporation ("GBC") and the Registrant dated July 3,
1996(1)
10.5 Schedule to Loan Agreement between GBC and the Registrant
dated July 3, 1996(1)
10.6 Letter Agreement between the Registrant and GBC dated
July 3, 1996(1)
10.7 Letter Agreement between the Registrant and GBC dated
July 5, 1996(1)
10.8 Letter Agreement between the Registrant and GBC dated
July 5, 1996(1)
10.9 Secured Promissory Note in the original principal amount of
$4,000,000 made by the Registrant to the order of GBC
dated July 3, 1996(1)
10.10 Trademark Security Agreement between GBC and the Registrant
dated July 3, 1996(1)
10.11 Security Agreement in Copyrighted Works executed by the
Registrant in favor of GBC dated July 3, 1996(1)
10.12 Deed of Trust with respect to real property located in Santa
Barbara County, California executed by the Registrant in
favor of GBC dated July 3, 1996(1)
10.13 Master License Agreement between the Registrant and Progress
Software Corporation dated June 30, 1995(1)+(10.14)
10.14 Lease Agreement between the Registrant and Matco
Enterprises, Inc. for Suites I, K and L located at 5464
Carpinteria Ave., Carpinteria, California dated
November 30, 1992(1)(10.15)
10.15 First Amendment to Office Lease between the Registrant and
Matco Enterprises, Inc. for Suites C and H located at 5464
Carpinteria Ave., Carpinteria, California dated
September 9, 1993(1)(10.16)
10.16 Second Amendment to Office Lease between the Registrant and
Matco Enterprises, Inc. for Suite J located at 5464
Carpinteria Ave., Carpinteria, California dated
January 14, 1994(1)(10.17)
10.17 Third Amendment to Office Lease between the Registrant and
Matco Enterprises, Inc. for Suites B and C located at 5464
Carpinteria Ave., Carpinteria, California dated
January 14, 1994(1)(10.18)
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <S>
10.18 Fourth Amendment to Office Lease between the Registrant and
Matco Enterprises, Inc. for Suite H located at 5464
Carpinteria Ave., Carpinteria, California dated
February 15, 1994(1)(10.19)
10.19 Fifth Amendment to Office Lease between the Registrant and
Matco Enterprises, Inc. or Suites G and E located at 5464
Carpinteria Ave., Carpinteria, California dated
September 12, 1994(1)(10.20)
10.20 Sixth Amendment to Office Lease between the Registrant and
Matco Enterprises, Inc. for Suites A, B, D, F and H, and
Room A located at 5464 Carpinteria Ave., Carpinteria,
California dated October 30, 1996(1)(10.21)
10.21 Lease Agreement between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for Suites 3
through 8 located at 6430 Via Real, Carpinteria,
California dated November 30, 1993(1)(10.22)
10.22 Addendum to Lease between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for Suites 3
through 8 located at 6430 Via Real, Carpinteria,
California dated November 30, 1993(1)(10.23)
10.23 Lease Agreement between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for 6450 Via
Real, Carpinteria, California dated November 30,
1993(1)(10.24)
10.24 Addendum to Lease between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for 6450 Via
Real, Carpinteria, California dated November 30,
1993(1)(10.25)
10.25 Lease Agreement between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for Suites 1
through 5 located at 6460 Via Real, Carpinteria,
California dated November 30, 1993(1)(10.26)
10.26 Addendum to Lease between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for Suites 1
through 5 located at 6460 Via Real, Carpinteria,
California dated November 30, 1993(1)(10.27)
10.27 Lease Agreement between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for Suites 7
and 8 located at 6440 Via Real, Carpinteria, California
dated September 8, 1995(1)(10.28)
10.28 Addendum to Lease between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for Suites 7
and 8 located at 6440 Via Real, Carpinteria, California
dated September 8, 1995(1)(10.29)
10.29 Lease Agreement between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for Suites 9
and 10 located at 6440 Via Real, Carpinteria, California
dated September 8, 1995(1)(10.30)
10.30 Addendum to Lease between the Registrant and William D. and
Edna J. Wright dba South Coast Business Park for Suites 9
and 10 located at 6440 Via Real, Carpinteria, California
dated September 8, 1995(1)(10.31)
10.31 Multi-Tenant Office Lease Agreement between the Registrant
and EDB Property Partners, LP III, successor to Laurel
Larchmont Office, Inc. located at 10,000 Midlantic Drive,
Mt. Laurel, New Jersey dated December 29, 1993(1)(10.32)
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <S>
10.32 Amendment to Multi-Tenant Office Lease Agreement between the
Registrant and EDB Property Partners, LP III, successor to
Laurel Larchmont Office, Inc. located at 10,000 Midlantic
Drive, Mt. Laurel, New Jersey dated April 26,
1994(1)(10.33)
10.33 Second Amendment to Multi-Tenant Lease Agreement between the
Registrant and EDB Property Partners, LP III, dated
May 30, 1995(1)(10.34)
10.34 Third Amendment to Multi-Tenant Lease Agreement between the
Registrant and EDB Property Partners L.P. I dated
November 30, 1995(1)(10.35)
10.35 Agreement and Plan of Merger between QAD California and the
Registrant dated July 8, 1997(1)(10.36)
10.36 Credit Agreement dated as of August 4, 1997 between the
Registrant and Bank of America National Trust and Savings
Association(2)(10.41)
10.37 Standard Industrial Commercial Multi-Tenant Lease--Modified
Net dated as of December 29, 1997 between the Registrant
and CITO Corp.(2)(10.42)
10.38 Value Added Reseller Agreement dated as of April 13, 1998
between the Registrant and Paragon Management
Systems, Inc.(2)(10.43)
10.39 Lease Agreement between the Registrant and Goodaston Limited
for Unit 1 Phase 8 Business Park, The Waterfront Merry
Hill, West Midlands, United Kingdom, dated April 30,
1996(2)(10.44)
10.40 Credit Agreement between the Registrant and the First
National Bank of Chicago dated April 18, 1999(3)(10.44)
10.41 Related Facility Credit Agreement between the Registrant and
The First National Bank of Chicago dated April 8,
1999(3)(10.45)
10.42 Borrower Security Agreement between the Registrant and The
First National Bank of Chicago dated April 18,
1999(3)(10.46)
10.43 Second Amendment to Credit Agreement between QAD Inc. and
The First National Bank of Chicago (incorporated by
reference to exhibit 10.1 to QAD Inc.'s Current Report on
Form 8-K filed June 25, 1999)(4)(10.1)
10.44 Eighth Amendment to Office Lease between the Registrant and
Matco Enterprises, Inc. for Suites I, K, L, C, J and
Basement Room B located at 5464 Carpinteria Avenue,
Carpinteria, California dated February 18, 1999(4)(10.2)
10.45 Related Facility Credit Agreement between the Registrant and
The First National Bank of Chicago(4)(10.45)
10.46 Stock Purchase Agreement between the Registrant and Recovery
Equity Investors II, L.P. dated December 23, 1999
10.47 Registration Rights Agreement between the Registrant and
Recovery Equity Investors II, L.P. dated December 23, 1999
10.48 Stock Purchase Agreement between the Registrant and
Enterprise Engines, Inc. dated December 15, 1999
10.49 Non-Competition Agreement between the Registrant and David
A. Taylor and Enterprise Engines, Inc. dated December 15,
1999
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- -------------
<C> <S>
10.50 Promissory Note between the Registrant and First Credit Bank
dated November 8, 1999
10.51 Deed of Trust between the Registrant and First Credit Bank
dated November 8, 1999
10.52 Ninth Amendment to office lease between the Registrant and
Matco Enterprises, Inc. for Suites G an E located at 5464
Carpinteria Avenue, Carpinteria, California dated
August 23, 1999
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Commission File No. 333-28441).
(2) Incorporated by reference to the Registrant's Annual Report on 10-K for the
year ended January 31, 1999 filed April 30, 1999 (Commission File No.
0-22823).
(3) Incorporated by reference to the Registrant's Quarterly Report for the
quarter ended April 30, 1999 filed June 14, 1999 (Commission No. 0-22823).
(4) Incorporated by reference to the Registrant's Quarterly Report for the
quarter ended July 31, 1999 filed September 14, 1999 (Commission No.
0-22823).
(+) Certain portions of exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately filed with
the Securities and Exchange Commission.
53
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.46
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 10.46
<TEXT>
<PAGE>
STOCK PURCHASE AGREEMENT
DATED AS OF DECEMBER 23, 1999
AMONG
QAD INC.
PAMELA M. LOPKER
KARL F. LOPKER
THE LOPKER LIVING TRUST DATED MARCH 23, 1993
AND
RECOVERY EQUITY INVESTORS II, L.P.
<PAGE>
STOCK PURCHASE AGREEMENT dated as of December 23, 1999, among
RECOVERY EQUITY INVESTORS II, L.P., a Delaware limited partnership (the
"PURCHASER"), PAMELA M. LOPKER, KARL F. LOPKER, THE LOPKER LIVING TRUST DATED
MARCH 23, 1993, a trust organized under the laws of California (the "TRUST");
Pamela M. Lopker, Karl F. Lopker and the Trust being hereinafter collectively
referred to as the "SELLING STOCKHOLDERS"), and QAD INC., a Delaware corporation
(the "COMPANY"; the Selling Stockholders and the Company being hereinafter
collectively referred to as the "SELLER PARTIES").
WHEREAS, the Purchaser desires to purchase from the Company,
and the Company desires to issue and sell to the Purchaser, the number of shares
of Common Stock set forth opposite the Company's name in SCHEDULE I (the "ISSUED
SHARES");
WHEREAS, the Purchaser desires to purchase from the Trust, and
the Trust desires to sell to the Purchaser, the number of shares of Common Stock
set forth opposite the Trust's name in SCHEDULE I (hereinafter collectively
referred to as the "SELLING STOCKHOLDERS' SHARES");
WHEREAS, Pamela M. Lopker and Karl F. Lopker are the sole
beneficiaries and the sole trustees of the Trust;
WHEREAS, in connection with the closing of the purchase and
sale of the Issued Shares hereunder, the Company desires to issue to the
Purchaser, and the Purchaser desires to accept from the Company, the Warrant;
and
WHEREAS, the capitalized terms used and not otherwise defined
in the foregoing recitals have the respective meanings set forth in Section 1.1.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
I.1 DEFINITIONS. As used in this Agreement, the following
terms shall have the respective meanings set forth below:
"ACTIONS OR PROCEEDINGS" means any action, suit, proceeding,
arbitration or Governmental or Regulatory Authority investigation or audit.
<PAGE>
"AFFILIATE" means, as applied to any Person, (i) any other
Person directly or indirectly controlling, controlled by or under common control
with that Person, (ii) any other Person that owns or controls 5% or more of any
class of equity securities (including any equity securities issuable upon the
exercise of any Option) of that Person or any of its Affiliates, or (iii) any
member, director, partner, officer, agent, employee or relative of that Person.
For the purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling", "controlled by", and "under common control
with"), as applied to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
that Person, whether through ownership of voting securities or by Contract or
otherwise.
"AGREEMENT" means this Stock Purchase Agreement and the
Schedules and Exhibits hereto and the certificates delivered in connection
herewith, as the same may be amended, supplemented or otherwise modified from
time to time in accordance with the provisions hereof.
"ASSETS AND PROPERTIES" of any Person means all assets and
properties of every kind, nature, character and description (whether real,
personal or mixed, whether tangible or intangible, whether absolute, accrued,
contingent, fixed or otherwise and wherever situated), including the goodwill
related thereto, operated, owned or leased by such Person, including cash, cash
equivalents, accounts and notes receivable, chattel paper, documents,
instruments, general intangibles, real estate, equipment, inventory, goods and
Intellectual Property.
"BUSINESS DAY" means a day other than Saturday, Sunday or any
day on which banks located in the State of New York or California are authorized
or obligated to close.
"BUSINESS OR CONDITION OF THE COMPANY" means the business,
condition (financial or otherwise), results of operations, prospects, or Assets
and Properties of the Company and the Subsidiaries, taken as a whole.
"CLAIM NOTICE" has the meaning ascribed to it in Section
10.2(a).
"CLOSING" means the closing of the transactions contemplated
by Section 2.1.
"CLOSING DATE" means the date on which the Closing actually
occurs.
"COMMON STOCK" means the common stock, par value $.001 per
share, of the Company.
"COMPANY" has the meaning ascribed to it in the introductory
paragraph hereto.
"CONTRACT" means any agreement, lease, debenture, note,
evidence of Indebtedness, mortgage, indenture, security agreement or other
contract or commitment (whether written or oral).
-2-
<PAGE>
"DISPUTE NOTICE" means any written notice by an Indemnifying
Party pursuant to Section 10.2(c) of a dispute with respect to an Indemnity
Notice specifying the nature of and basis for such a dispute.
"DISPUTE PERIOD" means the period ending 30 calendar days
following receipt by an Indemnifying Party of an Indemnity Notice.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated by the SEC thereunder.
"FINANCIAL STATEMENT DATE" means October 31, 1999.
"GAAP" means United States generally accepted accounting
principles, consistently applied throughout the specified period and all prior
comparable periods.
"HOLDBACK AGREEMENT" means the Holdback Agreement, to be dated
as of the Closing Date, between the Purchaser and the Selling Stockholders
substantially in the form of EXHIBIT A, as the same may be amended, supplemented
or otherwise modified from time to time.
"GOVERNMENTAL OR REGULATORY AUTHORITY" means any court,
tribunal, authority, agency, commission, official or other instrumentality of
the United States, any foreign country or any domestic or foreign state, county,
city or other political subdivision, any arbitrator or panel of arbitrators, any
stock exchange or quotation service, and the NASD.
"INDEBTEDNESS" of any Person means all obligations of such
Person (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or
similar instruments, (iii) for the deferred purchase price of goods or services
(other than trade payables or accruals incurred in the ordinary course of
business), (iv) under capital leases, (v) as an account party in respect of
letters of credit and similar instruments and (vi) in the nature of guarantees
of any obligation described in clauses (i) through (v) above of any other
Person.
"INDEMNIFIED PARTY" means any Person claiming indemnification
under any provision of Article X.
"INDEMNIFYING PARTY" means any Person against whom a claim for
indemnification is being asserted under any provision of Article X.
"INDEMNITY NOTICE" has the meaning ascribed to it in Section
10.2(c).
"INTELLECTUAL PROPERTY" means all patents and patent rights,
trademarks and trademark rights, trade names and trade name rights, service
marks and service mark rights, service names and service name rights, brand
names, inventions, processes, formulae, copyrights and copyright rights, trade
dress, business and product names, logos, slogans, trade secrets, industrial
models, designs,
-3-
<PAGE>
methodologies, computer programs (including all source codes) and related
documentation, technical information, manufacturing, engineering and
technical drawings, know-how and all pending applications for and
registrations of patents, trademarks, service marks and copyrights.
"ISSUED SECURITIES" means, collectively, the Issued Shares and
the Warrant.
"ISSUED SHARES" has the meaning ascribed to it in the recitals
hereto.
"LAWS" means all laws, statutes, rules, regulations,
ordinances and other pronouncements having the effect of law of the United
States, any foreign country or any domestic or foreign state, county, city or
other political subdivision or of any Governmental or Regulatory Authority.
"LIABILITIES" means any and all Indebtedness, liabilities and
obligations, whether accrued, fixed, absolute, contingent, matured or unmatured,
known or unknown or otherwise, including those arising under any Law, Order,
Actions or Proceedings of any Governmental or Regulatory Authority and those
arising under any Contract, license, arrangement, undertaking or otherwise.
"LIENS" means any mortgage, pledge, assessment, security
interest, lease, lien, adverse claim, levy, charge or other encumbrance of any
kind, whether voluntary or involuntary (including any conditional sale Contract,
title retention Contract or Contract committing to grant any of the foregoing).
"LOSS" means any and all damages, fines, fees, penalties,
deficiencies, losses and expenses, including interest, reasonable expenses of
investigation, court costs, reasonable fees and expenses of attorneys,
accountants and other experts and other expenses associated with litigation or
other proceedings or with any claim, default or assessment (such fees and
expenses to include all fees and expenses, including the reasonable fees and
expenses of attorneys, incurred in connection with (i) the investigation or
defense of any Third Party Claims or (ii) asserting or disputing any rights
under this Agreement or any Transaction Document against any party hereto or
otherwise). As applied to the Purchaser, "Loss" shall also be deemed to include
any diminution in the value of the Issued Securities or Selling Stockholders'
Shares being acquired by the Purchaser hereunder (or any successor securities).
"NASD" means the National Association of Securities Dealers,
Inc.
"OPTION" with respect to any Person means any security, right,
subscription, warrant, option, "phantom" stock right or other Contract that
gives the right to (i) purchase or otherwise receive or be issued any shares of
capital stock of, or other equity interests in, such Person or any security of
any kind convertible into or exchangeable or exercisable for any shares of
capital stock of, or other equity interests in, such Person or (ii) receive any
benefits or rights similar to any rights
-4-
<PAGE>
enjoyed by or accruing to the holder of shares of capital stock of, or other
equity interests in, such Person, including any rights to participate in the
equity, income or election of directors, management committee members or
officers of such Person.
"ORDER" means any writ, judgment, decree, injunction or
similar order of any Governmental or Regulatory Authority (in each case whether
preliminary or final).
"PERSON" or "PERSON" means any individual, corporation, joint
stock corporation, limited liability company or partnership, general
partnership, limited partnership, proprietorship, joint venture, other business
organization, trust, union, association, Governmental or Regulatory Authority or
other entity of any kind.
"PROGRESS" means Progress Software Corporation, a
Massachusetts corporation.
"PURCHASE PRICE" means (a) with respect to the Company, the
dollar amount set forth opposite the Company's name in SCHEDULE I, and (b) with
respect to the Trust, the dollar amount set forth opposite the Trust's name in
SCHEDULE I.
"PURCHASED SHARES" means the Issued Shares and the Selling
Stockholders' Shares.
"PURCHASER" has the meaning ascribed to it in the introductory
paragraph hereto.
"RESOLUTION PERIOD" means the period ending 30 calendar days
following receipt by an Indemnified Party of a Dispute Notice.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, to be dated as of the Closing Date, between the Purchaser and the
Company substantially in the form of EXHIBIT B, as the same may be amended,
supplemented or otherwise modified from time to time in accordance with the
provisions thereof.
"SEC" means the Securities and Exchange Commission.
"SEC DOCUMENT" has the meaning ascribed to it in Section 3.7.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"SELLER PARTIES" has the meaning ascribed to it in the
introductory paragraph hereto.
"SELLING STOCKHOLDERS" has the meaning ascribed to it in the
introductory paragraph hereto.
-5-
<PAGE>
"SELLING STOCKHOLDERS' SHARES" has the meaning ascribed to it
in the recitals hereto.
"STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement,
to be dated as of the Closing Date, among the Purchaser and the Seller Parties
substantially in the form of EXHIBIT C, as the same may be amended, supplemented
or otherwise modified from time to time in accordance with the provisions
thereof.
"SUBSIDIARY" means any Person in which the Company, directly
or indirectly through one or more Subsidiaries or otherwise, beneficially owns
or otherwise holds more than 50% of either the equity interests in, or the
voting control of, such Person.
"THIRD PARTY CLAIM" has the meaning ascribed to it in Section
10.2(a).
"THIRD PARTY SOFTWARE" means all computer software used by or
on behalf of the Company or its Subsidiaries, as applicable, developed by a
third party that was not developed by or on behalf of the Company or its
Subsidiaries, as applicable (including source code, object code, comments, user
interfaces, menus, buttons and icons and all files, data, manuals, design notes
and other items and documentation related thereto), but excluding commercially
available shrink-wrapped software.
"TRANSACTION DOCUMENTS" means the Holdback Agreement, the
Stockholders' Agreement, the Registration Rights Agreement, the Warrant and any
support or other agreements to be entered into by the Purchaser and one or more
of the other parties hereto in connection with the transactions contemplated by
this Agreement.
"TRUST" has the meaning ascribed to it in the introductory
paragraph hereto.
"VCOC" has the meaning ascribed to it in Section 6.3.
"WARRANT" means the Warrant, to be dated as of the Closing
Date, to be issued from the Company to the Purchaser, substantially in the form
of EXHIBIT D, as the same may be amended, supplemented or otherwise modified
from time to time in accordance with the provisions thereof.
"WARRANT SHARES" means, as of any time of determination, the
shares of Common Stock (or any successor securities) which are then issuable
under the Warrant upon the exercise thereof in full.
"YEAR 2000 COMPLIANT" means, with respect to any of the
services, products, operations or businesses of the Company or its Subsidiaries
as demonstrated through appropriate testing of the same, design and performance
capabilities (including the ability of services and products distributed by the
Company or its Subsidiaries to recognize the century and to manage and
manipulate data involving dates, including single century and multi-century
formulas and date
-6-
<PAGE>
values, without resulting in the generation of incorrect values involving
such dates or causing any abnormal endings) such that prior to, during, and
after the calendar year 2000, none of the assets, services, products or
operations of the Company or its Subsidiaries will malfunction, produce
errors, cause or suffer premature cancellation or expiration of contractual
rights, cause or suffer deletion of data or invalid or incorrect results, or
abnormally cease to function or exhibit any other problems in connection with
(i) the year 2000 (and all subsequent years) as distinct from 1900s years,
(ii) the date February 29, 2000, and all subsequent leap years, (iii) the
date September 9, 1999, or (iv) any other calendar date (such failures and
other problems, the "YEAR 2000 PROBLEM").
"YEAR 2000 PLAN" has the meaning ascribed to it in Section
3.16.
"YEAR 2000 PROBLEM" has the meaning ascribed to it in this
Section 1.1.
I.2 CERTAIN CONVENTIONS. Unless the context of this Agreement
otherwise requires, (i) words of any gender include each other gender, (ii)
words using the singular or plural number also include the plural or singular
number, respectively, (iii) the terms "hereof," "herein," "hereby" and
derivative or similar words refer to this entire Agreement, (iv) the terms
"Article", "Section", "Schedule" and "Exhibit" refer to the specified Article or
Section of, or the specified Schedule or Exhibit to, this Agreement, (v) the
words "include", "includes" and "including" are deemed to be followed by the
phrase "without limitation", and (vi) the phrases "ordinary course of business"
and "ordinary course of business consistent with past practice" refer to the
business and practice of the Company or a Subsidiary. All accounting terms used
herein and not expressly defined herein shall have the respective meanings given
to them under GAAP.
ARTICLE II
SALE OF SHARES; CLOSING
II.1 PURCHASE AND SALE.
(a) At the Closing, on the terms and subject to the conditions
of this Agreement, the Company shall issue and sell to the Purchaser, and the
Purchaser shall purchase from the Company, the Issued Shares, free and clear of
all Liens, for an aggregate purchase price (payable in cash in the manner
provided in Section 2.2) equal to the Purchase Price with respect to the
Company.
(b) At the Closing, on the terms and subject to the conditions
of this Agreement, the Trust shall sell to the Purchaser, and the Purchaser
shall purchase from the Trust, the Selling Stockholders' Shares, free and clear
of all Liens, for an aggregate purchase price (payable in cash in the manner
provided in Section 2.2) equal to the Purchase Price with respect to the Trust.
-7-
<PAGE>
II.2 CLOSING. The Closing will take place at such location as
the Purchaser and the Seller Parties mutually agree on the first Business Day as
of which each of the conditions precedent set forth in Article VII and Article
VIII shall have been satisfied or waived as provided therein, or on such other
date as the Purchaser and the Seller Parties shall mutually agree. At the
Closing, the Purchaser shall pay the Purchase Price with respect to the Company
or the Trust (as applicable) by wire transfer of immediately available funds to
the account specified by the Company or the Trust (as applicable) by written
notice delivered to the Purchaser at least two Business Days before the Closing
Date. Simultaneously, (a) the Company shall deliver to the Purchaser (i) one or
more stock certificates, registered in the name of the Purchaser, representing
the Issued Shares and (ii) the Warrant, issued in the name of the Purchaser, and
(b) the Trust shall deliver, or cause to be delivered, to the Purchaser one or
more stock certificates representing the Selling Stockholders' Shares, together
with all necessary instruments of transfer, all in form and substance reasonably
satisfactory to the Purchaser. At the Closing, there shall also be delivered to
the Seller Parties and the Purchaser the opinions, certificates and other
Contracts, documents and instruments to be delivered under Articles VII and
VIII.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser
that the statements contained in this Article III are true and correct as of the
date of this Agreement and will be true and correct as of the Closing Date
(except to the extent any such statement is expressly made as of a specific
date, in which case such statement will be true and correct as of such date):
III.1 ORGANIZATION OF THE COMPANY. The Company is a
corporation duly organized, validly existing and in good standing under the Laws
of the State of Delaware, and is duly qualified, licensed or admitted to do
business and in good standing in those jurisdictions in which the ownership, use
or leasing of its Assets and Properties or the conduct or nature of its business
makes such qualification, licensing or admission necessary, except for such
failures to be so qualified, licensed, admitted or in good standing which will
not, individually or in the aggregate, have a material adverse effect on the
Business or Condition of the Company.
III.2 POWER AND AUTHORITY. The Company has the requisite power
and authority to execute and deliver this Agreement and the Transaction
Documents to which it is a party, to perform its obligations hereunder and
thereunder, and to consummate the transactions contemplated hereby and thereby.
The execution and delivery by the Company of this Agreement and the Transaction
Documents to which it is a party, the performance by the Company of its
obligations hereunder and thereunder, and the consummation of the transactions
contemplated hereby and thereby, have been duly and validly authorized by all
necessary action on the part of the board of directors of the Company, which
action is the only action necessary to authorize the execution,
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delivery and performance by the Company of this Agreement and the Transaction
Documents to which it is a party. This Agreement has been duly and validly
executed and delivered by the Company and (assuming the due and valid
authorization, execution and delivery hereof by the Selling Stockholders and
the Purchaser) constitutes, and upon the execution and delivery by the
Company of each Transaction Document to which it is a party (assuming the due
and valid authorization, execution and delivery thereof by the other parties
thereto, if any) each such Transaction Document will constitute, a legal,
valid and binding obligation of the Company enforceable against the Company
in accordance with its terms, except, in each case, as the enforceability
thereof may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws relating to the enforcement
of creditors' rights generally and by general principles of equity.
III.3 CAPITAL STOCK. As of the date hereof and as of the
Closing Date immediately before giving effect to the Closing, the authorized
capital stock of the Company consists of 150,000,000 shares of Common Stock and
5,000,000 shares of preferred stock, par value $.001 per share. As of the date
hereof and as of the Closing Date, immediately before giving effect to the
Closing, 30,223,361 shares of Common Stock are outstanding, all of which shares
are duly authorized, fully paid and nonassessable and have been validly issued
in compliance with all applicable federal and, to the knowledge of the Company,
state securities laws. No shares of Common Stock are held as treasury stock. No
other shares of capital stock of the Company have been issued or are
outstanding. Except for the Warrant or as disclosed in SCHEDULE 3.3(a) , there
are no outstanding Options or agreements, arrangements or understandings to
issue Options with respect to the Company, and there are no preemptive rights or
agreements, arrangements or understandings to issue preemptive rights with
respect to the issuance or sale of shares of capital stock or other equity
interests in the Company. On the date hereof, the Company has delivered to the
Purchaser, in writing, a true and complete description of the nature, holder,
exercise price and other material terms of each outstanding Option of the
Company, in each case as of the date hereof. On the Closing Date, the delivery
to the Purchaser of the certificate or certificates representing the Issued
Shares will vest in the Purchaser good and valid title to the Issued Shares,
free and clear of all Liens, and the Issued Shares will have been duly
authorized, validly issued, fully paid and nonassessable. On the Closing Date,
the delivery to the Purchaser of the Warrant will vest in the Purchaser good and
valid title to the Warrant, free and clear of all Liens. The Company and its
board of directors and stockholders have taken all actions necessary to reserve
the full number of shares of Common Stock issuable upon exercise of the Warrant.
The shares of Common Stock issuable upon exercise of the Warrant, when issued
upon any exercise thereof, will be duly authorized, validly issued, fully paid
and nonassessable. Except as set forth herein or in SCHEDULE 3.3(b), none of the
execution, delivery or performance by the Company of this Agreement or the
Transaction Documents to which it is a party, the issuance of the Issued
Securities as contemplated hereby, the sale of the Selling Stockholders' Shares
as contemplated hereby, the issuance of shares of Common Stock upon any exercise
of the Warrant, the performance by the Company of its obligations under the
Transaction Documents to which it is a party or the exercise by any holder of
Issued Securities of the rights granted to such holder under the Transaction
Documents to which the Company is a party, will give
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rise to or result in (with or without notice, lapse of time or both) any
antidilution adjustment, acceleration of vesting or other change under or to
any Option. Other than the Transaction Documents, the Company is not a party
or subject to any agreement or understanding and, to the knowledge of the
Company, there is no agreement or understanding between or among Persons
which relates to the voting or giving of written consents or nominating
directors, with respect to the Company, any of its Subsidiaries or any of its
or their respective securities.
III.4 SUBSIDIARIES. Each Subsidiary is a corporation duly
organized, validly existing and in good standing under the Laws of its
jurisdiction of incorporation and has full corporate power and authority to
conduct its business as and to the extent now conducted and to own, use and
lease its Assets and Properties. Each Subsidiary is duly qualified, licensed or
admitted to do business and in good standing in those jurisdictions in which the
ownership, use or leasing of such Subsidiary's Assets and Properties, or the
conduct or nature of its business, makes such qualification, licensing or
admission necessary, except for such failures to be so qualified, licensed,
admitted or in good standing which will not, individually or in the aggregate,
have a material adverse effect on the Business or Condition of the Company. All
of the outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
disclosed in SCHEDULE 3.4(a), all of the outstanding shares of capital stock of
each Subsidiary are owned, beneficially and of record, by the Company or a
Subsidiary that is wholly owned by the Company, free and clear of all Liens.
There are no outstanding Options with respect to any Subsidiary and no
agreements, arrangements or understandings to issue Options with respect to any
Subsidiary, and there are no preemptive rights or agreements, arrangements or
understandings to issue preemptive rights with respect to the issuance or sale
of capital stock of or other equity interests in any Company. Except for the
capital stock of the Subsidiaries, or as disclosed in SCHEDULE 3.4(b), neither
the Company nor any Subsidiary holds any equity, partnership, limited liability
company, joint venture or other interest in any Person.
III.5 NO CONFLICTS. The execution and delivery by the Company
of this Agreement and the Transaction Documents to which it is a party, the
performance by the Company of its obligations hereunder and thereunder, and the
consummation of the transactions contemplated hereby and thereby, does not and
will not: (a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the Company's certificate of incorporation or
by-laws; (b) conflict with or result in a violation or breach of any term or
provision of any Law or Order applicable to the Company or any Subsidiary or any
of their respective Assets and Properties; or (c) except as set forth in
SCHEDULE 3.5, (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default under,
(iii) require the Company or any Subsidiary to obtain any consent, approval or
action of, make any filing with or give any notice to any Person as a result or
under the terms of, (iv) result in any termination, cancellation, acceleration
or modification of, or give to any Person any right of termination,
cancellation, acceleration or modification in or with respect to, (v) result in
or give to any Person any additional rights or entitlement to increased,
additional, accelerated or guaranteed payments under, (vi) result in the
creation of any new, additional or increased liability of the Company or any
Subsidiary under, or
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(vii) result in the creation or imposition of any Lien upon the Company or
any Subsidiary or any of their respective Assets and Properties under, any
Contract to which the Company or any Subsidiary is a party or by which any of
their respective Assets and Properties is bound.
III.6 GOVERNMENTAL APPROVALS AND FILINGS. Except as set forth
in SCHEDULE 3.6, no consent, approval or action of, filing with or notice to any
Governmental or Regulatory Authority on the part of the Company is required in
connection with the execution, delivery and performance of this Agreement or the
Transaction Documents to which it is a party or the consummation of the
transactions contemplated hereby or thereby.
III.7 SEC DOCUMENTS; FINANCIAL STATEMENTS; PROJECTIONS.
(a) Each report, schedule, form, statement and other document
required to be filed by the Company with the SEC (each an "SEC DOCUMENT", and
collectively, the "SEC DOCUMENTS") has been so filed. As of its filing date,
each SEC Document, and any SEC Documents that will be filed prior to or after
the Closing, complied or will comply in all material respects with the
applicable requirements of the Securities Act and the Exchange Act. None of the
SEC Documents, except to the extent that information contained therein has been
revised or superseded by an SEC Document subsequently filed with the SEC,
contains or will contain any untrue statement of a material fact or omits,
omitted or will omit to state a material fact (x) necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading or (y) required to be stated therein or necessary to make the
statements therein not misleading. The financial statements of the Company and
its Subsidiaries included in the SEC Documents comply in all material respects
with the applicable requirements under the Securities Act and the Exchange Act
and any other published rules and regulations of the SEC with respect to
accounting requirements, have been prepared in accordance with GAAP (except as
may be indicated in the notes thereto) and fairly present the consolidated
financial position of the Company and its Subsidiaries as of the respective
dates thereof and the consolidated results of their operations and cash flows
for the respective periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments which will not have or reflect
a material adverse effect on the Business or Condition of the Company).
(b) The Confidential Offering Memorandum submitted to the
Purchaser and the Company's one-year projections delivered to the Purchaser and
dated December 10, 1999 set forth (i) the Company's business plan and (ii) the
most recently prepared five-year and one-year financial internal projections for
the Company and its Subsidiaries. Such Memorandum and projections set forth the
Company's present intentions regarding its business plan and financial
strategies. The assumptions upon which such projections are based are, in the
Company's opinion, reasonable, and to the best of the Company's knowledge, are
mathematically correct based upon those assumptions.
III.8 ABSENCE OF CHANGES. Since the Financial Statement Date,
except as set forth in SCHEDULE 3.8 or as disclosed in the SEC Documents filed
prior to the date hereof, there has not
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been any event or development which, individually or together with other such
events, did have or could reasonably be expected to have a material adverse
effect on the Business or Condition of the Company. None of the other
representations or warranties in this Agreement shall be deemed to limit the
foregoing.
III.9 LEGAL PROCEEDINGS. Except as set forth in SCHEDULE 3.9,
there are no Actions or Proceedings pending or, to the knowledge of the Company
threatened overtly against, relating to or affecting any of the Company or any
Subsidiary or any of their respective Assets and Properties, which (i) could
reasonably be expected to result in the issuance of an Order restraining,
enjoining or otherwise prohibiting or making illegal the consummation of any of
the transactions contemplated by this Agreement or the Transaction Documents to
which the Company is a party, (ii) have been brought by end users of products or
services provided by the Company or any Subsidiary in connection with the
performance of such products or services, or (iii) if determined adversely to
the Company or such Subsidiary, could reasonably be expected to, individually or
in the aggregate with other such Actions or Proceedings, have a material adverse
effect on the Business or Condition of the Company.
III.10 COMPLIANCE WITH LAWS; ANTI-TAKEOVER PLANS.
(a) Neither the Company nor any Subsidiary is in violation of
any Laws or any Orders of any Governmental or Regulatory Authority applicable to
the Company or such Subsidiary, or by which it is bound, except for violations
the existence of which would not, individually or in the aggregate, have a
material adverse effect on the Business or Condition of the Company.
(b) Except as expressly set forth in the Company's certificate
of incorporation and by-laws (true and correct copies of which are incorporated
by reference in the Company's Form 10-K for the fiscal year ended January 31,
1999, as filed with the SEC), there are no rights plans, "poison pill" plans,
voting trusts or similar arrangements, "golden parachute" or similar plans or
provisions, or other arrangements or Contracts relating to the Company or its
capital stock that are intended to increase the cost or difficulty of effecting
a change of control of the Company (collectively, "ANTI-TAKEOVER PLANS").
Neither the Company nor its board of directors has any present intention of
adopting any Anti-Takeover Plan. Notwithstanding the foregoing, the Company
intends to enter into employee retention agreements with certain key executives.
III.11 OTHER NEGOTIATIONS; BROKERS. None of the Company, any
Subsidiary or any of their respective Affiliates (nor any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of the Company, any Subsidiary or any such Affiliate) (i) has
entered into any Contract that conflicts with any of the transactions
contemplated by this Agreement or the Transaction Documents to which the Company
is a party or (ii) has entered into any Contract or had any discussions with any
third party regarding any transaction involving the Company or any Subsidiary
which could result in the Purchaser, any of its general or limited partners, or
any officer, director, employee, partner, agent or Affiliate of the Purchaser or
any such
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partner being subject to any claim for liability to said third party in
connection with this Agreement or the Transaction Documents to which the
Company is a party or the consummation of any of the transactions
contemplated hereby or thereby. Except for Houlihan Lokey Howard & Zukin
Capital, whose fees and expenses are being paid by the Company, no agent,
broker, finder, investment banker, financial advisor or other similar Person
will be entitled to any fee, commission or other compensation in connection
with any of the transactions contemplated by this Agreement or the
Transaction Documents to which the Company is a party on the basis of any act
or statement made or alleged to have been made by the Company, any
Subsidiary, any of their respective Affiliates, or any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of the Company, any Subsidiary, or any such Affiliate.
III.12 EXEMPTION FROM REGISTRATION; RESTRICTIONS ON OFFER AND
SALE OF SAME OR SIMILAR SECURITIES. Assuming the representations and warranties
of the Purchaser set forth in Section 5.3 are true and correct in all material
respects, the offer and sale of the Issued Shares made to the Purchaser pursuant
to this Agreement and the issuance of the Warrant to the Purchaser pursuant to
this Agreement are in each case exempt from the registration requirements of the
Securities Act. Neither the Company nor any Person authorized to act on its
behalf has, in connection with the offering of the Issued Shares or the issuance
of the Warrant, engaged in (i) any form of general solicitation or general
advertising (as those terms are used within the meaning of Rule 502(c) under the
Securities Act), (ii) any action involving a public offering within the meaning
of Section 4(2) of the Securities Act, or (iii) any action that would require
the registration under the Securities Act of the (x) offering and sale of any
Issued Shares pursuant to this Agreement or (y) the issuance of the Warrant
pursuant to this Agreement, or that would violate applicable state securities or
"blue sky" laws. Neither the Company nor any Person authorized to act on its
behalf has made, directly or indirectly, any offer or sale of any Issued
Securities or of securities of the same or a similar class as any Issued
Securities that could cause any offer, sale or issuance of any Issued Securities
contemplated hereby to fail to be entitled to exemption from the registration
requirements of the Securities Act. As used herein, the terms "offer" and "sale"
have the meanings specified in Section 2(3) of the Securities Act.
III.13 NO UNDISCLOSED LIABILITIES. Except as reflected or
reserved against in the Company's unaudited consolidated balance sheet as set
forth in the Company's Quarterly Report, for the quarter ended October 31, 1999,
filed with the SEC on Form 10-Q (or in the notes thereto) or as disclosed in
SCHEDULE 3.13, there are no Liabilities of, relating to or affecting the Company
or any of its Subsidiaries or any of their respective Assets and Properties,
other than Liabilities incurred in the ordinary course of business consistent
with past practice since the Financial Statement Date in accordance with the
provisions of this Agreement and which (a) in the aggregate, could not
reasonably be expected to have a material adverse effect on the Business or
Condition of the Company and (b) to the knowledge of the Company or any
Subsidiary, are not for tort or for breach of contract.
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III.14 AFFILIATE TRANSACTIONS. Except as disclosed in SCHEDULE
3.14 and except as between Company and the Subsidiaries, (i) there are no
Liabilities owed to the Company or any Subsidiary by any Selling Stockholder,
any Affiliate of the Company or any Affiliate of any Selling Stockholder, (ii)
there are no Liabilities owed by the Company or any Subsidiary to any Selling
Stockholder, any Affiliate of the Company or any Affiliate of any Selling
Stockholder, (iii) none of the Selling Stockholders nor any of their respective
Affiliates, nor any other Affiliate of the Company, provides or causes to be
provided any Assets and Properties, services or facilities to the Company or any
Subsidiary, and (iv) neither the Company nor any Subsidiary provides, or causes
to be provided, any Assets and Properties, services or facilities to any Selling
Stockholder or any Affiliate thereof or to any other Affiliate of the Company.
III.15 SUBSTANTIAL CUSTOMERS AND SUPPLIERS; RELATED MATTERS.
(a) Prior to the date hereof, the Company has delivered to the
Purchaser a true and complete list of the ten (10) largest customers of the
Company and its Subsidiaries, collectively, on the basis of revenues for goods
sold or services provided for the twelve months ended October 31, 1999. Such
customers, in the aggregate, accounted for less than 15% of the consolidated
gross revenues of the Company and the Subsidiaries for such twelve-month period.
To the knowledge of the Company or any Subsidiary, no such customer is
threatened with bankruptcy or insolvency. To the knowledge of the Company or any
Subsidiary, no customer of the Company or any Subsidiary, as of the date hereof,
intends to discontinue or alter the prices or terms of, or substantially
diminish, its relationship with the Company or any Subsidiary except where such
discontinuation, alteration or diminution has not had, and is not reasonably
likely to have, individually or in the aggregate, a material adverse effect on
the Business or Condition of the Company. To the knowledge of the Company, there
is no reason to believe that the Company's historical reserves with respect to
sales allowances are inadequate to cover such allowances.
(b) Other than Progress, there is no material supplier of
goods or services to the Company which the Company would be unable to replace on
a timely basis with a comparable supplier on comparable terms. Progress has not
ceased or materially reduced its provision of products and services to the
Company or any of its Subsidiaries since the Financial Statement Date nor, to
the knowledge of the Company or any Subsidiary, has threatened to cease or
materially reduce such provision of products and services after the date hereof.
To the knowledge of the Company or any Subsidiary, Progress is not threatened
with bankruptcy or insolvency.
(c) The Company and it Subsidiaries enjoy normal commercial
relationships with their selling partners and distributors taken as a whole.
(d) The Company has delivered to the Purchaser a current
version of its sales prospect report, which sets forth an estimate of the
weighted probability of sales by the Company or a Subsidiary to the extent that
likely specific prospects have been identified. The Company believes that the
assumptions upon which such report has been prepared are reasonable.
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III.16 YEAR 2000. The Company and its Subsidiaries have (i)
initiated a review and assessment of the business operations of Company and its
Subsidiaries (including recommended products and services provided to customers
and those areas affected by suppliers and vendors) that could reasonably be
affected by the Year 2000 Problem, (ii) developed a comprehensive plan, as
disclosed in the SEC Documents (the "YEAR 2000 PLAN"), to address the Year 2000
Problem, and (iii) implemented and complied with (including dates by which steps
and actions are to be taken and performed by) the Year 2000 Plan in accordance
with the terms thereof. The Year 2000 Plan includes all appropriate, necessary
and timely steps, actions and plans to make the Company and its Subsidiaries
(including all recommended products and services provided to customers) Year
2000 Compliant in all material respects in accordance with the methods and the
time frames set forth therein. As of the date hereof, there are no material
issues or events that prevent the Company and its Subsidiaries from fully
addressing the Year 2000 Problem consistent with the terms of the Year 2000
Plan. All Third Party Software and all hardware used by the Company or its
Subsidiaries has been represented by the providers thereof to be Year 2000
Compliant for the intended uses and purposes of such Third Party Software and
such hardware. Provided that the relevant customer uses a recommended version of
the Company's or a Subsidiary's product and complies with the applicable
software product description concerning date management functionality, each of
the products furnished by the Company or a Subsidiary to any customer thereof
(whether before or after the date hereof) will be Year 2000 Compliant in all
material respects.
III.17 HOLDING COMPANY ACT AND INVESTMENT COMPANY ACT STATUS.
Neither the Company nor any Subsidiary is a "holding company" or a "public
utility company", as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended. Neither the Company nor any Subsidiary is an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
III.18 NASD MATTERS. The Common Stock is listed on the NASDAQ
National Market, and the listing agreement between the NASD and the Company with
respect thereto is in full force and effect. The Purchased Shares will be
approved for listing on the NASDAQ National Market upon the approval by the NASD
of the Company's listing application for additional shares filed pursuant to the
terms of Section 6.4.
III.19 INTELLECTUAL PROPERTY.
(a) To the knowledge of the Company, the Company and the
Subsidiaries either own or have a valid and bending license to use each item of
Intellectual Property that is material to the conduct of their business, taken
as a whole.
(b) The Company has shipped a beta version of its eQ software
to two customers, and each customer continues its participation in the beta
tests.
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III.20 BANK ONE CREDIT FACILITIES. Neither the Company nor any
Subsidiary is or has received any notice that it is currently in violation or
breach of or default under any covenant or other provision of any Contract
relating to the Company's credit facilities with Banc One. The Company has no
presently active request from Banc One with respect to the availability formula
or total amount of such facilities.
III.21 DISCLOSURE. No representation or warranty on the part
of the Company contained in this Agreement, and no statement contained in any
schedule or in any certificate, list or other writing furnished to the Purchaser
pursuant to any provision of this Agreement, including pursuant to Article VII,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein, in the light
of the circumstances under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS
The Selling Stockholders hereby jointly and severally
represent and warrant to the Purchaser that the statements contained in this
Article IV are true and correct as of the date of this Agreement and will be
true and correct as of the Closing Date (except to the extent any such statement
is expressly made as of a specific date, in which case such statement will be
true and correct as of such date):
IV.1 POWER AND AUTHORITY. The Trust has been duly formed and
is validly existing under the laws of the State of California. Each Selling
Stockholder has the requisite power and authority and legal capacity to execute
and deliver this Agreement and the Transaction Documents to which it is a party,
to perform its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby. The execution and delivery by the
Trust of this Agreement and the Transaction Documents to which it is a party,
the performance by the Trust of its obligations hereunder and thereunder, and
the consummation of the transactions contemplated hereby and thereby, have been
duly and validly authorized by all necessary action on the part of the trustees
and beneficiaries of the Trust, which action is the only action necessary to
authorize the execution, delivery and performance by the Trust of this Agreement
and the Transaction Documents to which it is a party. This Agreement has been
duly and validly executed and delivered by each Selling Stockholder and
(assuming the due and valid authorization, execution and delivery hereof by the
Company and the Purchaser) constitutes, and upon the execution and delivery by
each Selling Stockholder of the Transaction Documents to which it is a party
(assuming the due and valid authorization, execution and delivery thereof by the
Company (of the Transaction Documents to which it is a party) and the
Purchaser), each such Transaction Document will constitute, a legal, valid and
binding obligation of such Selling Stockholder enforceable against such Selling
Stockholder in accordance with its terms, except, in each case, as the
enforceability thereof may be limited by
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bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws relating to the enforcement of creditors' rights generally
and by general principles of equity.
IV.2 OWNERSHIP OF THE SELLING STOCKHOLDERS' SHARES.
(a) The Trust owns, beneficially and of record and free and
clear of all Liens, the Selling Stockholders' Shares. Other than the Transaction
Documents to which he or she is a party, none of the Selling Stockholders is a
party or subject to any agreement or understanding with respect to the Selling
Stockholders' Shares and, to the knowledge of the Selling Stockholders, there is
no agreement or understanding between or among any Persons which relates to the
voting or giving of written consents or nominating directors with respect to the
Company, any of its Subsidiaries or any of their respective securities.
(b) At the Closing, the delivery to the Purchaser of the
certificate or certificates representing the Selling Stockholders' Shares will
vest in the Purchaser good and valid title to the Selling Stockholders' Shares,
free and clear of all Liens.
(c) As of the date hereof, the Trust owns, beneficially and of
record, 18,181,706 shares of Common Stock. As of the Closing Date, after giving
effect to the Closing, the Trust will own, beneficially and of record,
17,737,261 shares of Common Stock.
IV.3 NO CONFLICTS. The execution and delivery by each of the
Selling Stockholders of this Agreement and the Transaction Documents to which it
is a party, the performance by each of the Selling Stockholders of its
respective obligations hereunder and thereunder, and the consummation of the
transactions contemplated hereby and thereby, does not and will not: (a)
conflict with or result in a violation or breach of any of the terms, provisions
or conditions of the constitutive documents of the Trust; (b) conflict with or
result in a violation or breach of any term or provision of any Law or Order
applicable to any of the Selling Stockholders or any of their respective Assets
and Properties; or (c) except as set forth in SCHEDULE 4.3, (i) conflict with or
result in a violation or breach of, (ii) constitute (with or without notice or
lapse of time or both) a default under, (iii) require any of the Selling
Stockholders to obtain any consent, approval or action of, make any filing with
or give any notice to any Person as a result or under the terms of, (iv) result
in any termination, cancellation, acceleration or modification of, or give to
any Person any right of termination, cancellation, acceleration or modification
in or with respect to, (v) result in or give to any Person any additional rights
or entitlement to increased, additional, accelerated or guaranteed payments
under, (vi) result in the creation of any new, additional or increased liability
of any of the Selling Stockholders under, or (vii) result in the creation or
imposition of any Lien upon the Selling Stockholders' Shares or any other assets
of any Selling Stockholder under, any Contract to which any of the Selling
Stockholders is a party or by which any of their respective Assets and
Properties is bound.
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IV.4 GOVERNMENTAL APPROVALS AND FILINGS. No consent, approval
or action of, filing with or notice to any Governmental or Regulatory Authority
on the part of any Selling Stockholder is required in connection with the
execution, delivery and performance of this Agreement or the Transaction
Documents to which any Selling Stockholder is a party or the consummation of the
transactions contemplated hereby or thereby.
IV.5 OTHER NEGOTIATIONS; BROKERS. None of the Selling
Stockholders or any of their respective Affiliates (nor any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of any of the Selling Stockholders or any such Affiliate) (i)
has entered into any Contract that conflicts with any of the transactions
contemplated by this Agreement or the Transaction Documents to which any Selling
Stockholder is a party or (ii) has entered into any Contract or had any
discussions with any third party regarding any transaction involving the
Company, any Subsidiary or any of the Selling Stockholders which could result in
the Purchaser, any of its general or limited partners, or any officer, director,
employee, partner, agent or Affiliate of the Purchaser or any such partner being
subject to any claim for liability to said third party in connection with this
Agreement or the Transaction Documents to which any Selling Stockholder is a
party or the consummation of any of the transactions contemplated hereby or
thereby. No agent, broker, finder, investment banker, financial advisor or other
similar Person will be entitled to any fee, commission or other compensation in
connection with any of the transactions contemplated by this Agreement or the
Transaction Documents to which any Selling Stockholder is a party on the basis
of any act or statement made or alleged to have been made by any of the Selling
Stockholders, any of their respective Affiliates, or any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of any of the Selling Stockholders or any such Affiliate.
IV.6 EXEMPTION FROM REGISTRATION; RESTRICTIONS ON OFFER AND
SALE OF SAME OR SIMILAR SECURITIES. Assuming the representations and warranties
of the Purchaser set forth in Section 5.3 are true and correct in all material
respects, the offer and sale of the Selling Stockholders' Shares made to the
Purchaser pursuant to this Agreement is exempt from the registration
requirements of the Securities Act. None of the Selling Stockholders nor any
Person authorized to act on behalf of any of them has, in connection with the
offering of the Selling Stockholders' Shares, engaged in (i) any form of general
solicitation or general advertising (as those terms are used within the meaning
of Rule 502(c) under the Securities Act), or (ii) any other action that would
require the registration under the Securities Act of the sale of any Selling
Stockholders' Shares pursuant to this Agreement or that would violate applicable
state securities or "blue sky" laws. None of the Selling Stockholders nor any
Person authorized to act on their behalf has made, directly or indirectly, any
offer or sale of any Selling Stockholders' Shares or of securities of the same
or a similar class as any Selling Stockholders' Shares that could cause any
offer or sale of any Selling Stockholders' Shares contemplated hereby to fail to
be entitled to exemption from the registration requirements of the Securities
Act. As used herein, the terms "offer" and "sale" have the meanings specified in
Section 2(3) of the Securities Act.
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IV.7 LEGAL PROCEEDINGS. There are no Actions or Proceedings
pending or, to the knowledge of the Purchaser, overtly threatened against,
relating to or affecting the Purchaser which could reasonably be expected to
result in the issuance of an Order restraining, enjoining or otherwise
prohibiting or making illegal the consummation by the Purchaser of any of the
transactions contemplated by this Agreement or any of the Transaction Documents
to which the Purchaser is a party.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller
Parties that the statements contained in this Article V are true and correct as
of the date of this Agreement and will be true and correct as of the Closing
Date (except to the extent any such statement is expressly made as of a specific
date, in which case such statement will be true and correct as of such date):
V.1 ORGANIZATION; POWER AND AUTHORITY. The Purchaser is a
limited partnership duly organized, validly existing and in good standing under
the Laws of the State of Delaware. The Purchaser has the requisite partnership
power and authority to execute and deliver this Agreement and the Transaction
Documents to which it is a party, to perform its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and thereby.
The execution and delivery by the Purchaser of this Agreement and the
Transaction Documents to which it is a party, the performance by the Purchaser
of its obligations hereunder and thereunder, have been duly and validly
authorized by all requisite partnership action on the part of the Purchaser.
This Agreement has been duly and validly executed and delivered by the Purchaser
and (assuming the due and valid authorization, execution and delivery hereof by
each of the Seller Parties) constitutes, and upon the execution and delivery by
the Purchaser of the Transaction Documents to which it is a party (assuming the
due and valid authorization, execution and delivery thereof by each of the
Seller Parties that is a party thereto) each such Transaction Document will
constitute, a legal, valid and binding obligation of the Purchaser enforceable
against the Purchaser in accordance with its terms, except in each case as the
enforceability thereof may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar laws relating to the
enforcement of creditors' rights generally and by general principles of equity.
V.2 NO CONFLICTS. The execution, delivery and performance by
the Purchaser of this Agreement, and the consummation by the Purchaser of the
transactions contemplated hereby, will not conflict with, or constitute a
default under, any agreement, indenture or instrument to which the Purchaser is
a party, or result in a violation of (a) the Purchaser's constitutive documents
(and the purchase of the Purchased Shares is permitted under such constitutive
documents) or (b) any Order of any Governmental or Regulatory Authority having
jurisdiction over the Purchaser or any of its properties. Except for such
filings as may be required by the Exchange Act, no consent,
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approval or action of, or filing or registration with, any Governmental or
Regulatory Authority is required on the part of the Purchaser for its
execution, delivery and performance of this Agreement.
V.3 ACQUISITION FOR INVESTMENT. The Purchased Shares and the
Warrant will be acquired by the Purchaser for its own account for the purpose of
investment and not with a view to the resale or distribution of all or any part
of the Purchased Shares or the Warrant in violation of the Securities Act, it
being understood that the right to dispose of the Purchased Shares and the
Warrant shall be entirely within the discretion of the Purchaser. The Purchaser
is an "accredited investor" (as such term is defined in Rule 501(a) of
Regulation D under the Securities Act). The Purchaser has such knowledge and
experience in financial and business matters as to be able to evaluate the
merits and risks of its acquisition of the Purchased Shares and the Warrant
pursuant to this Agreement and is able to bear the economic risk of such
acquisition (including a complete loss of its investment). The Purchaser
understands that the Purchased Shares and the Warrant being acquired by it
hereunder have not been registered under the Securities Act or any state
securities laws in reliance on exemptions from the registration requirements of
the Securities Act and such state securities laws, which depend upon, among
other things, the accuracy of the representations of the Purchaser set forth in
this Section 5.3.
V.4 BROKERS. No agent, broker, finder, investment banker,
financial advisor or other similar Person will be entitled to any fee,
commission or other compensation in connection with any of the transactions
contemplated by this Agreement on the basis of any act or statement made by the
Purchaser.
ARTICLE VI
COVENANTS OF THE SELLER PARTIES
Each of the Seller Parties covenants and agrees with the
Purchaser that, at all times from and after the date hereof and until the
Closing and, with respect to any covenant or agreement by its terms to be
performed in whole or in part after the Closing, for the period specified herein
or, if no period is specified herein, indefinitely, such Seller Party will
comply with all the covenants and provisions contained in this Article VI that
are applicable to it, except to the extent that the Purchaser may otherwise
consent in writing.
VI.1 REGULATORY AND OTHER APPROVALS. Each of the Seller
Parties shall, and the Company shall cause each of the Company's Subsidiaries
to, (a) take all necessary or desirable steps and proceed diligently and in good
faith and use its best efforts, as promptly as practicable, to obtain all
consents, approvals or actions of, to make all filings with and to give all
notices to, Governmental or Regulatory Authorities and other Persons required on
its part to consummate the transactions contemplated by this Agreement and the
Transaction Documents, and (b) provide such other information and communications
to such Governmental or Regulatory Authority or other Persons
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as the Purchaser or any such Governmental or Regulatory Authority or other
Person may reasonably request and (c) cooperate with the Purchaser as
promptly as practicable in obtaining all consents, approvals or actions of,
making all filings with and giving all notices to, Governmental or Regulatory
Authorities and other Persons required on the part of the Purchaser to
consummate the transactions contemplated by this Agreement and the
Transaction Documents. Each of the Seller Parties shall provide prompt
notification to the Purchaser when any such consent, approval, action, filing
or notice on its part (and, in the case of the Company, on a Subsidiary's
part) referred to in clause (a) above is (or is caused to be) obtained,
taken, made or given, as applicable, and will advise the Purchaser of any
communications (and, unless precluded by Law, provide the Purchaser with
copies of any such communications that are in writing) with any Governmental
or Regulatory Authority regarding any of the transactions contemplated by
this Agreement or the Transaction Documents.
VI.2 USE OF PROCEEDS. The Company shall use the proceeds from
the sale of the Issued Shares for general corporate purposes.
VI.3 VENTURE CAPITAL OPERATING COMPANY STATUS. Without
limiting any other right contained herein, the Purchaser shall have the right to
consult with and advise the management of the Company and to receive all
materials provided to members of the board of directors of the Company so long
as may be required to enable the Purchaser to qualify as a "venture capital
operating company" within the meaning of Section 2510.3-101 of the plan asset
regulations promulgated by the United States Department of Labor (a "VCOC"). In
addition, in the event that (i) at any time there is no person designated by the
Purchaser on the Company's board of directors, or (ii) the United States
Department of Labor through formal or informal rules, regulations or
interpretations provides, or it is otherwise established through governmental or
court action, that such representation does not constitute the exercise of
management rights of the kind necessary to enable the Purchaser to continue to
qualify as a VCOC, then the Seller Parties and the Purchaser shall in good faith
negotiate provisions to enable the Purchaser to exercise the minimum amount of
such management rights necessary in order for the Purchaser to continue to
qualify as a VCOC.
VI.4 NASDAQ NATIONAL MARKET. Prior to the Closing, the Seller
Parties shall cause the Purchased Shares to be approved for listing, subject to
notice of issuance, by the NASDAQ National Market.
VI.5 NOTICE OF DEFAULTS. Each of the Seller Parties shall
notify the Purchaser promptly in writing of, and contemporaneously shall provide
the Purchaser with true and complete copies of any and all information or
documents relating to, any event, transaction or circumstance that causes or
will cause any covenant or agreement of such Seller Party under this Agreement
to be materially breached (if not qualified by materiality) or breached (if
qualified by materiality) or that renders or shall render materially untrue (if
not qualified by materiality) or untrue (if qualified by materiality) any
representation or warranty of such Seller Party contained in this Agreement as
if the same were made on or as of the date of such event, transaction or
circumstance. Each of the
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Seller Parties also shall notify the Purchaser promptly in writing of any
material violation or material breach (in each case, if not qualified by
materiality) or any violation or breach (in each case, if qualified by
materiality) of any representation, warranty, covenant or agreement made by
such Seller Party in this Agreement, whether occurring or arising before, on
or after the date of this Agreement. No notice given pursuant to this Section
6.5, and no representation made by the Purchaser contained in Section 5.3,
shall have any effect on the representations, warranties, covenants and
agreements contained in this Agreement for purposes of determining
satisfaction of any condition contained herein or shall in any way limit the
Purchaser's right to seek indemnity under Article IX.
VI.6 RESERVATION OF SHARES. At all times that all or any
portion of the Warrant is outstanding, the Company shall keep reserved the full
number of shares of Common Stock (or any successor security) then issuable upon
exercise in full of the Warrant.
VI.7 MANAGEMENT SERVICES; MANAGEMENT FEE.
(a) The Company hereby engages the Purchaser for the Term,
upon the terms set forth in this Section 6.7, to provide consulting and
management advisory services to the Company. These services will be in the field
of financial and strategic corporate planning and such other management areas as
the Purchaser and the Company shall mutually agree. In consideration of the
compensation specified in this Section 6.7, the Purchaser accepts such
engagement and agrees to perform the services specified herein, in each case
upon the term set forth in this Section 6.7.
(b) The engagement of the Purchaser under this Section 6.7
shall be for a term (the "TERM") commencing on the Closing Date and ending on
the earlier of (i) the fifth anniversary of the Closing Date and (ii) the first
date as of which the Purchaser ceases to own Subject Securities (as defined in
the Stockholders' Agreement) representing (on a fully-diluted basis) at least 1%
of the Purchaser's Original Ownership Level (as defined in the Stockholders'
Agreement).
(c) The Purchaser shall devote such time and efforts to the
performance of the consulting and management advisory services contemplated in
this Section 6.6 as the Purchaser deems necessary or appropriate to the
performance of such services. However, no precise number of hours is to be
devoted by the Purchaser on a weekly, monthly or annual basis. The Purchaser may
perform services under this Agreement directly, through its employees or agents
or, with the approval of the Company, with such outside consultants as the
Purchaser may engage for such purpose. The Company acknowledges that the
Purchaser's services to it are not exclusive and that the Purchaser, its
Affiliates and their respective partners, members, officers, directors,
employees, representatives or agents will render similar services to other
Persons.
(d) In consideration of the Purchaser's provision of
management and advisory services to the Company pursuant to the Section 6.6, the
Company shall pay the Purchaser an annual fee of $312,500, which shall be paid
quarterly in arrears (and prorated on a daily basis in the case of any partial
calender quarter) on the last day of each calendar quarter during the Term and
on the
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last day of the Term; PROVIDED, HOWEVER, that if on any quarterly (or other)
payment date, the Purchaser owns Subject Securities (on a fully-diluted
basis) constituting less than 50% of the Purchaser's Original Ownership
Level, the fee payable on such date shall equal the product of (i) $312,500
(prorated for any fractions of a quarter) MULTIPLIED BY (ii) the fraction of
the Purchaser's Original Ownership Level represented by the Subject
Securities (on a fully-diluted basis) then owned by the Purchaser.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE PURCHASER
The obligations of the Purchaser hereunder are subject to the
fulfillment, at or before the Closing, of each of the following conditions (all
or any of which may be waived in whole or in part by the Purchaser in its sole
discretion):
VII.1 REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by the Seller Parties in this Agreement
shall be true and correct in all material respects (if not qualified by
materiality) and in all respects (if qualified by materiality) on and as of the
Closing Date as though such representation or warranty was made on and as of the
Closing Date.
VII.2 PERFORMANCE. Each of the Seller Parties shall have
performed and complied with each agreement, covenant and obligation required by
this Agreement to be performed or complied with by such Seller Party at or
before the Closing.
VII.3 CERTIFICATES. The Company shall have delivered to the
Purchaser a certificate, dated the Closing Date and executed by the President or
any Vice President of the Company, substantially in the form and to the effect
of EXHIBIT E-1 hereto, and a certificate, dated the Closing Date and executed by
the Secretary or any Assistant Secretary of the Company, substantially in the
form and to the effect of EXHIBIT E-2 hereto. The Selling Stockholders shall
have delivered to the Purchaser a certificate, dated the Closing Date, executed
by each of the Selling Stockholders, substantially in the form and to the effect
of EXHIBIT E-3 hereto.
VII.4 ORDERS AND LAWS. There shall not be in effect on the
Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or
making illegal the consummation of any of the transactions contemplated by this
Agreement or the Transaction Documents.
VII.5 REGULATORY CONSENTS AND APPROVALS. All consents,
approvals and actions of, filings with and notices to any Governmental or
Regulatory Authority necessary to permit the Purchaser and the Seller Parties to
perform their respective obligations under this Agreement and the Transaction
Documents and to consummate the transactions contemplated by this Agreement and
the Transaction Documents (i) shall have been duly obtained, made or given, (ii)
shall be in form
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and substance reasonably satisfactory to the Purchaser, (iii) shall not be
subject to the satisfaction of any condition that has not been satisfied or
waived and (iv) shall be in full force and effect, and all terminations or
expirations of waiting periods imposed by any Governmental or Regulatory
Authority necessary for the consummation of the transactions contemplated by
this Agreement and the Transaction Documents shall have occurred.
VII.6 THIRD PARTY CONSENTS. All consents (or in lieu thereof
waivers) to the performance by the Purchaser and the Seller Parties of their
respective obligations under this Agreement and the Transaction Documents or to
the consummation of the transactions contemplated by this Agreement or the
Transaction Documents, as are required under any Contract to which the
Purchaser, the Seller Parties or any Subsidiary is a party or by which any of
their respective Assets and Properties are bound and where the failure to obtain
any such consent (or in lieu thereof waiver) could reasonably be expected,
individually or in the aggregate with other such failures, to materially
adversely affect the Purchaser or the Business or Condition of the Company or
otherwise result in a material diminution of the benefits of the transactions
contemplated by this Agreement or the Transaction Documents to the Purchaser in
its sole discretion, (i) shall have been obtained, (ii) shall be in form and
substance reasonably satisfactory to the Purchaser in its sole discretion, (iii)
shall not be subject to the satisfaction of any condition that has not been
satisfied or waived and (iv) shall be in full force and effect.
VII.7 OPINION OF COUNSEL. The Purchaser shall have received
the opinions of Nida & Maloney LLP, counsel to the Seller Parties, dated the
Closing Date, in substantially the form of EXHIBIT F.
VII.8 TRANSACTION DOCUMENTS. The Warrant shall have been duly
executed and issued to the Purchaser, and each of the other Transaction
Documents shall have been duly executed and delivered by the respective parties
thereto (other than the Purchaser) and shall be in full force and effect.
VII.9 CLOSING FEE. In addition to the Warrant, the Purchaser
shall have received from the Company, by wire transfer of immediately available
funds to an account designated by the Purchaser, a closing fee in the amount of
$300,000.
VII.10 DELIVERY OF CERTIFICATES. Duly executed stock
certificates representing the Issued Shares, and stock certificates representing
the Selling Stockholders' Shares, together with all necessary instruments of
transfer, in form and substance reasonably satisfactory to the Purchaser, shall
have been delivered to the Purchaser.
VII.11 NASDAQ NATIONAL MARKET. The Purchased Shares shall have
been approved for listing, subject to notice of issuance, by the NASDAQ National
Market.
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VII.12 PROCEEDINGS. All proceedings to be taken on the part of
the Seller Parties in connection with the transactions contemplated by this
Agreement and all documents incident thereto shall be reasonably satisfactory in
form and substance to the Purchaser, in its sole discretion, and its legal
counsel, and the Purchaser shall have received copies of all such documents and
other evidence as the Purchaser may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE SELLER PARTIES
The obligations of the Seller Parties hereunder are subject to
the fulfillment, at or before the Closing, of each of the following conditions
(all or any of which may be waived in whole or in part (as to any Seller Party)
by such Seller Party in its sole discretion):
VIII.1 REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by the Purchaser in this Agreement shall be
true and correct in all material respects on and as of the Closing Date as
though such representation or warranty was made on and as of the Closing Date.
VIII.2 PERFORMANCE. The Purchaser shall have performed and
complied with, in all material respects, each agreement, covenant and obligation
required by this Agreement to be so performed or complied with by the Purchaser
at or before the Closing.
VIII.3 CERTIFICATE. The Purchaser shall have delivered to the
Seller Parties a certificate, dated the Closing Date and executed by a duly
authorized representative of the Purchaser, substantially in the form and to the
effect of EXHIBIT G attached hereto.
VIII.4 ORDERS AND LAWS. There shall not be in effect on the
Closing Date any Orders or Laws that became effective after the date of this
Agreement restraining, enjoining or otherwise prohibiting or making illegal the
consummation of any of the transactions contemplated by this Agreement or the
Transaction Documents.
VIII.5 TRANSACTION DOCUMENTS. Each of the Transaction
Documents shall have been duly executed and delivered by the respective parties
thereto other than the Seller Parties, and shall be in full force and effect.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
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Notwithstanding any right of the Purchaser (whether or not
exercised) to investigate the affairs of any of Seller Parties or any right of
any party (whether or not exercised) to investigate the accuracy of the
representations and warranties of another party contained in this Agreement or
the waiver of any condition to Closing, each of the Seller Parties and the
Purchaser has the right to rely fully upon the representations, warranties,
covenants and agreements of the others contained in this Agreement. The
representations, warranties, covenants and agreements of each of the Seller
Parties and the Purchaser contained in this Agreement will survive the Closing
(a) indefinitely with respect to the covenants and agreements contained herein
and the representations and warranties contained in Sections 3.1, 3.2, 3.3, 3.4,
3.11, 4.1, 4.2, 4.5, 5.1 and 5.4 and (b) until the third anniversary of the
Closing Date with respect to all other representations and warranties, except
that any representation or warranty that would otherwise terminate in accordance
with clause (b) above will continue to survive if a Claim Notice or Indemnity
Notice (as applicable) shall have been timely given under Article X on or prior
to such termination date, until the related claim for indemnification has been
satisfied or otherwise resolved as provided in Article X, but only with respect
to matters described in such Claim Notice or Indemnity Notice.
ARTICLE X
INDEMNIFICATION
X.1 INDEMNIFICATION.
(a) Whether or not the transactions contemplated by this
Agreement are consummated, the Company shall indemnify the Purchaser and its
Affiliates, and each of their respective officers, directors, managers,
partners, employees, agents, members, authorized representatives and
stockholders (collectively, the "PURCHASER INDEMNIFIED PARTIES", and each, a
"PURCHASER INDEMNIFIED PARTY"), in respect of, and hold each of them harmless
from and against, any and all Losses suffered, incurred or sustained by any of
them or to which any of them becomes subject, resulting from, arising out of or
relating to (i) any breach of any representation or warranty on the part of the
Company contained in this Agreement, (ii) any nonfulfillment of or failure to
perform any covenant or agreement on the part of the Company contained in this
Agreement, (iii) the assertion by any Person not a party to this Agreement of
any claim against a Purchaser Indemnified Party in connection with the matters
or transactions that are the subject of or contemplated by this Agreement or any
of the Transaction Documents to which the Company is a party (including any
claim asserted in any actual or threatened Action or Proceeding with respect to
any use made or proposed to be made of the proceeds from the issuance or sale of
any Issued Shares), or (iv) violations of applicable securities laws by the
Company in connection with the offering of any Issued Shares. Notwithstanding
the immediately preceding sentence, (x) the Company shall not have any
obligations hereunder to a Purchaser Indemnified Party in respect of clause
(iii) of this Section 10.1(a) to the extent that a Loss claimed by such
Purchaser Indemnified
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Party thereunder is finally adjudicated by a court of competent jurisdiction
to have resulted primarily from the gross negligence or wilful misconduct of
such Purchaser Indemnified Party and (y) the Company shall not have any
obligations to a Purchaser Indemnified Party in respect of a claim for
indemnification relating to this Section 10.1(a) unless and until the
aggregate amount of the Purchaser Indemnified Parties' Losses in respect of
all such claims then exceeds $105,000, after which the Purchaser shall be
obligated for all such aggregate Losses of the Purchaser Indemnified Parties
in respect of such claims only in excess of such amount. If and to the extent
that the indemnification set forth herein is finally determined by a court of
competent jurisdiction to be unenforceable, the Company shall make the
maximum contribution to the payment and satisfaction of the indemnified
Losses as shall be permissible under applicable laws.
(b) Whether or not the transactions contemplated by this
Agreement are consummated, the Selling Stockholders, jointly and severally,
shall indemnify the Purchaser Indemnified Parties, in respect of, and hold each
of them harmless from and against, any and all Losses suffered, incurred or
sustained by any of them or to which any of them becomes subject, resulting
from, arising out of or relating to (i) any breach of any representation or
warranty on the part of any Selling Stockholder contained in this Agreement,
(ii) any nonfulfillment of or failure to perform any covenant or agreement on
the part of any Selling Stockholder contained in this Agreement, (iii) the
assertion by any Person not a party to this Agreement of any claim against a
Purchaser Indemnified Party in connection with the matters or transactions that
are the subject of or contemplated by this Agreement or the Transaction
Documents to which any Selling Stockholder is a party (including any claim
asserted in any actual or threatened Action or Proceeding with respect to any
use made or proposed to be made of the proceeds from the sale of any Selling
Stockholders' Shares) and (iv) violations of applicable securities laws by the
Selling Stockholders in connection with the sale of any Selling Stockholders'
Shares. Notwithstanding the immediately preceding sentence, (x) the Selling
Stockholders shall not have any obligations hereunder to a Purchaser Indemnified
Party in respect of clause (iii) of this Section 10.1(b) to the extent that a
Loss claimed by such Purchaser Indemnified Party thereunder is finally
adjudicated by a court of competent jurisdiction to have resulted primarily from
the gross negligence or wilful misconduct of such Purchaser Indemnified Party
and (y) the Selling Stockholders shall not have any obligations to a Purchaser
Indemnified Party in respect of a claim for indemnification relating to this
Section 10.1(b) unless and until the aggregate amount of the Purchaser
Indemnified Parties' Losses in respect of all such claims exceeds $20,000, after
which the Selling Stockholders shall be obligated for all such aggregate Losses
of the Purchaser Indemnified Parties in respect of such claims only in excess of
such amount. If and to the extent that the indemnification set forth herein is
finally determined by a court of competent jurisdiction to be unenforceable, the
Selling Stockholders shall jointly and severally make the maximum contribution
to the payment and satisfaction of the indemnified Losses as shall be
permissible under applicable laws.
(c) The Purchaser shall indemnify the Company and the Selling
Stockholders and their respective directors, officers, employees, trustees,
beneficiaries, successors and assigns (collectively, the "SELLER INDEMNIFIED
PARTIES") in respect of, and hold each of them harmless from
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and against, any and all Losses suffered, incurred or sustained by any of
them or to which any of them becomes subject, resulting from, arising out of
or relating to (i) any breach of any representation or warranty on the part
of the Purchaser contained in this Agreement, (ii) any nonfulfillment of or
failure to perform any covenant or agreement on the part of the Purchaser
contained in this Agreement or (iii) violations of applicable securities laws
by the Purchaser in connection with any resale of the Purchased Shares or the
Warrant (other than in connection with a resale pursuant to the Registration
Rights Agreement). Notwithstanding the immediately preceding sentence, the
Purchaser shall not have any obligations to a Seller Indemnified Party in
respect of a claim for indemnification relating to this Section 10.1(c)
unless and until the aggregate amount of the Seller Indemnified Parties'
Losses in respect of all such claims exceeds $125,000, after which the
Purchaser shall be obligated for all such aggregate Losses of the Seller
Indemnified Parties in respect of such claims in excess of such amount.
X.2 METHOD OF ASSERTING CLAIMS. All claims for indemnification
by any Indemnified Party under Section 10.1 will be asserted and resolved as
follows:
(a) In order for an Indemnified Party to be entitled to any
indemnification provided for under Section 10.1 in respect of, arising out of or
involving a claim or demand made by any Person not a party to this Agreement
against the Indemnified Party (a "THIRD PARTY CLAIM"), the Indemnified Party
must deliver a claim notice (a "CLAIM NOTICE") to the Indemnifying Party within
30 Business Days after receipt by such Indemnified Party of written notice of
the Third Party Claim; PROVIDED, HOWEVER, that failure to give such Claim Notice
shall not affect the indemnification provided hereunder except to the extent
that the Indemnifying Party shall have been actually prejudiced as a result of
such failure.
(b) If a Third Party Claim is made against an Indemnified
Party, the Indemnifying Party shall be entitled to participate in the defense
thereof and, if it so chooses, to assume the defense thereof with counsel
selected by the Indemnifying Party, which counsel must be reasonably
satisfactory to the Indemnified Party. Subject to the next succeeding sentence,
should the Indemnifying Party so elect to assume the defense of a Third Party
Claim, the Indemnifying Party shall not be liable to the Indemnified Party for
legal expenses subsequently incurred by the Indemnified Party in connection with
the defense thereof, but shall continue to pay for any Loss suffered, including
expenses of investigations; and if the Indemnifying Party assumes such defense,
the Indemnified Party shall have the right to participate in such defense and to
employ counsel, at its own expense, separate from the counsel employed by the
Indemnifying Party. If (i) the Indemnifying Party shall not assume the defense
of a Third Party Claim with counsel reasonably satisfactory to the Indemnified
Party within 20 Business Days after the delivery to the Indemnifying Party of
the related Claim Notice, or (ii) legal counsel for the Indemnified Party
notifies the Indemnifying Party in writing that there are or may be legal
defenses available to the Indemnified Party or to other Indemnified Parties
which are different from or additional to those available to the Indemnifying
Party, which, if the Indemnified Party and the Indemnifying Party were to be
represented by the same counsel, would constitute a conflict of interest for
such counsel or prejudice
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prosecution of the defenses available to such Indemnified Party, or (iii) the
Indemnifying Party shall assume the defense of a Third Party Claim and fail
to diligently prosecute such defense, then in each such case the Indemnified
Party, by notice to the Indemnifying Party, may employ its own counsel and
control the defense of the Third Party Claim and the Indemnifying Party shall
be liable for the reasonable fees, charges and disbursements of counsel
employed by the Indemnified Party; and the Indemnified Party shall be
promptly reimbursed for any such fees, charges and disbursements, as and when
incurred. Whether the Indemnifying Party or the Indemnified Party controls
the defense of any Third Party Claim, the parties hereto shall cooperate in
the defense thereof. Such cooperation shall include the retention and
provision to the counsel of the controlling party of records and information
which are reasonably relevant to such Third Party Claim, and making employees
available on a mutually convenient basis to provide additional information
and explanation of any material provided hereunder. The Indemnifying Party
shall have the right to settle, compromise or discharge a Third Party Claim
(other than any such Third Party Claim in which criminal conduct is alleged)
without the Indemnified Party's consent if such settlement, compromise or
discharge (i) constitutes a complete and unconditional discharge and release
of the Indemnified Party, and (ii) provides for no relief other than the
payment of monetary damages and such monetary damages are paid in full by the
Indemnifying Party. Any amounts reimbursed to any Indemnified Party hereunder
with respect to a particular Third Party Claim shall be repaid to the
Indemnifying Party in the event that it is finally adjudicated by a court of
competent jurisdiction that such Indemnified Party is not entitled to
indemnification by the Indemnifying Party with respect to such Third Party
Claim.
(c) In the event any Indemnified Party shall have a claim
under Section 10.1 against the Indemnifying Party that does not involve a Third
Party Claim, the Indemnified Party shall deliver an indemnity notice (an
"INDEMNITY NOTICE") with reasonable promptness to the Indemnifying Party. The
failure by any Indemnified Party to give the Indemnity Notice shall not impair
such party's rights hereunder except to the extent that the Indemnifying Party
demonstrates that it has been materially prejudiced thereby. If the Indemnifying
Party notifies the Indemnified Party that it does not dispute the claim
described in such Indemnity Notice or fails to notify the Indemnified Party
within the Dispute Period as to whether the Indemnifying Party disputes the
claim described in such Indemnity Notice, the Loss in the amount specified in
the Indemnity Notice will be conclusively deemed a liability of the Indemnifying
Party under Section 10.1 and, subject to the "basket" provisions of Section
10.1, the Indemnifying Party shall pay the amount of such Loss to the
Indemnified Party on demand. If the Indemnifying Party has timely disputed its
liability with respect to such claim, the Indemnifying Party and the Indemnified
Party will proceed in good faith to negotiate a resolution of such dispute, and
if not resolved through negotiations within the Resolution Period, such dispute
shall be resolved by litigation in a court of competent jurisdiction.
(d) The rights accorded to Indemnified Parties hereunder shall
be in addition to any rights that any Indemnified Party may have at law or in
equity, under federal and state securities laws, by separate agreement
(including under the Transaction Documents) or otherwise.
-29-
<PAGE>
ARTICLE XI
[INTENTIONALLY OMITTED.]
ARTICLE XII
MISCELLANEOUS
XII.1 NOTICES. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally against written receipt or by facsimile transmission or
mailed by prepaid first class certified mail, return receipt requested, or
mailed by overnight courier prepaid, to the parties at the following addresses
or facsimile numbers:
(a) if to the Purchaser, to:
Recovery Equity Investors II, L.P.
901 Mariner's Island Boulevard
Suite 555
San Mateo, CA 94404
Facsimile No.: (650) 578-9842
Attn: Joseph J. Finn-Egan
Jeffrey A. Lipkin
with a copy to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Facsimile No.: (212) 309-6273
Attn: James A. Mercadante, Esq.
(b) if to the Seller Parties, to:
QAD INC.
6450 Via Real
Carpinteria, CA 93013
Facsimile No.: (856) 840-2698
Attn: Roland B. Desilets, General Counsel
and to:
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<PAGE>
Karl F. Lopker
305 Woodley Road
Santa Barbara, CA 93108
and to:
Pamela M. Lopker
305 Woodley Road
Santa Barbara, CA 93108
with a copy to:
Nida & Maloney LLP
800 Anacapa Street
Santa Barbara, CA 93101-2212
Facsimile No.: 805-568-1955
All such notices, requests and other communications to any party hereto will (i)
if delivered personally to such party at its address as provided in this Section
12.1, be deemed given upon delivery, (ii) if delivered by facsimile transmission
to such party at its facsimile number as provided in this Section 12.1, be
deemed given upon receipt, (iii) if delivered by mail in the manner described
above to such party at its address as provided in this Section 12.1, be deemed
given on the earlier of the third Business Day following mailing or upon receipt
and (iv) if delivered by overnight courier to such party at its address as
provided in this Section 12.1, be deemed given on the earlier of the first
Business Day following the date sent by such overnight courier or upon receipt
(in each case regardless of whether such notice, request or other communication
is received by any other Person to whom a copy of such notice is to be delivered
pursuant to this Section 12.1). Any party from time to time may change its
address, facsimile number or other information for the purpose of notices to
that party by giving notice specifying such change to the other parties hereto.
XII.2 ENTIRE AGREEMENT. This Agreement and the Transaction
Documents supersede all prior discussions and agreements between the parties
hereto with respect to the subject matter hereof and thereof and contain the
sole and entire agreement between the parties hereto with respect to the subject
matter hereof and thereof.
XII.3 FEES AND EXPENSES. Except as otherwise expressly
provided herein or in any Transaction Document, each party hereto shall be
responsible for the payment of all fees and expenses incurred by it in
connection with this Agreement or any Transaction Document.
XII.4 PUBLIC ANNOUNCEMENTS. At all times at or before the
Closing, the Purchaser will not issue or make any statements or releases to the
public with respect to this Agreement or the
-31-
<PAGE>
transactions contemplated hereby without the consent of the Company, which
consent shall not be unreasonably withheld. If the Purchaser is unable to
obtain the approval of its public statement or release from the Company and
such statement or release is, in the opinion of legal counsel to the
Purchaser, required by Law in order to discharge the Purchaser's disclosure
obligations, then the Purchaser may make or issue the legally required
statement or release and promptly furnish the other parties hereto with a
copy thereof. The Purchaser will also obtain the Company's prior approval of
any press release to be issued by or on behalf of the Purchaser following the
Closing announcing the consummation of the transactions contemplated by this
Agreement.
XII.5 FURTHER ASSURANCES. At any time and from time to time
after the Closing, the Seller Parties shall execute and deliver to the Purchaser
such other documents and instruments, provide such materials and information and
take such other actions as the Purchaser may reasonably request more effectively
to vest title in such Purchaser to the Purchased Shares and the Warrant and
otherwise to cause the Seller Parties to fulfill their obligations under this
Agreement and the Transaction Documents.
XII.6 WAIVER. Any term or condition of this Agreement may be
waived at any time by the party that is entitled to the benefit thereof, but no
such waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition (and no
such waiver shall in any event be binding on any other party hereto that is
entitled to the benefits of such term or provision). No waiver by any party
hereto of any term or condition of this Agreement, in any one or more instances,
shall be deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any future occasion. All remedies, either under
this Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.
XII.7 AMENDMENT. This Agreement may be amended, supplemented
or modified only by a written instrument duly executed by or on behalf of each
party hereto.
XII.8 THIRD PARTY BENEFICIARIES. The terms and provisions of
this Agreement are intended solely for the benefit of the parties hereto and
their respective successors and permitted assigns, and it is not the intention
of the parties to confer third-party beneficiary rights, and this Agreement does
not confer any such rights, upon any other Person other than any Person entitled
to indemnity under Article X.
XII.9 NO ASSIGNMENT; BINDING EFFECT. Neither this Agreement
nor any right, interest or obligation hereunder may be assigned (by operation of
Law or otherwise) by any of the Seller Parties without the prior written consent
of the Purchaser, and any attempt to do so will be void AB INITIO. Neither this
Agreement nor any right, interest or obligation hereunder may be assigned by the
Purchaser without the prior written consent of the other parties hereto, and any
attempt to do so will be void AB INITIO. Subject to the immediately preceding
sentence, this Agreement shall bind and inure to the benefit of and be
enforceable by the parties hereto and their respective successors and assigns,
including any holder of Purchased Shares (or any successor securities) or the
Warrant.
-32-
<PAGE>
XII.10 HEADINGS; CONSTRUCTION. The headings used in this
Agreement have been inserted for convenience of reference only and do not define
or limit the provisions hereof. The parties hereto agree that this Agreement is
the product of negotiation between sophisticated parties and individuals, all of
whom were represented by counsel, and each of whom had an opportunity to
participate in and did participate in, the drafting of each provision hereof.
Accordingly, ambiguities in this Agreement, if any, shall not be construed
strictly or in favor of or against any party hereto but rather shall be given a
fair and reasonable construction without regard to the rule of CONTRA
PROFERENTUM.
XII.11 INVALID PROVISIONS. If any provision of this Agreement
is held to be illegal, invalid or unenforceable under any present or future Law,
and if the rights or obligations of any party hereto under this Agreement will
not be materially and adversely affected thereby, (i) such provision will be
fully severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
XII.12 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of New York.
XII.13 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
XII.14 LIMITED RECOURSE. Notwithstanding anything in this
Agreement, any Transaction Document or any other document, agreement or
instrument contemplated hereby to the contrary, (a) the obligations of the
Purchaser hereunder shall be without recourse to any Affiliate of the Purchaser
or any stockholder, partner, member, officer, director, manager, employee or
agent of the Purchaser or any such Affiliate, and shall be limited to the assets
of the Purchaser and (b) the obligations of the Company hereunder shall be
without recourse to any Affiliate of the Company or any stockholder, officer,
director, employee or agent of the Company (in each case other than the Selling
Stockholders), and shall be limited to the assets of the Company.
XII.15 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EACH OF
THE SELLER PARTIES AND THE PURCHASER CONSENTS TO THE JURISDICTION OF ANY STATE
OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF NEW YORK, STATE OF NEW YORK, AND
IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS
-33-
<PAGE>
RELATING TO THIS AGREEMENT OR THE TRANSACTION DOCUMENTS MAY BE LITIGATED IN
SUCH COURTS. EACH OF THE SELLER PARTIES AND THE PURCHASER ACCEPTS FOR ITSELF
AND IN CONNECTION WITH ITS RESPECTIVE PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND
WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE
BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT OR
THE TRANSACTION DOCUMENTS. EACH OF THE SELLER PARTIES AND THE PURCHASER
FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT THE
ADDRESS SPECIFIED IN THIS AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE 15 DAYS
AFTER SUCH MAILING. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE
ABILITY OF ANY PARTY HERETO TO SERVE ANY SUCH LEGAL PROCESS, SUMMONS, NOTICES
AND DOCUMENTS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW OR TO OBTAIN
JURISDICTION OVER OR TO BRING ACTIONS, SUITS OR PROCEEDINGS AGAINST ANY OF
THE OTHER PARTIES HERETO IN SUCH OTHER JURISDICTIONS, AND IN SUCH MANNER, AS
MAY BE PERMITTED BY ANY APPLICABLE LAW.
[SIGNATURE PAGE TO FOLLOW]
-34-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer or other representative of each party
hereto as of the date first above written.
QAD INC.
By:_______________________________
Name:
Title:
PAMELA M. LOPKER
KARL F. LOPKER
RECOVERY EQUITY INVESTORS II, L.P.
By: RECOVERY EQUITY PARTNERS, II,
L.P., its General Partner
By:_______________________________
Name: Joseph J. Finn-Egan
Title: General Partner
By:_______________________________
Name: Jeffrey A. Lipkin
Title: General Partner
[SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
<PAGE>
THE LOPKER LIVING TRUST
DATED MARCH 23, 1993
By:_______________________________
Karl F. Lopker, in his capacity
as trustee of such trust and
not in his individual capacity
[SIGNATURE PAGE TO PURCHASE AGREEMENT]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I DEFINITIONS.............................................................................................1
1.1 Definitions.....................................................................................1
1.2 Certain Conventions.............................................................................7
ARTICLE II SALE OF SHARES; CLOSING................................................................................7
2.1 Purchase and Sale...............................................................................7
2.2 Closing.........................................................................................8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................................8
3.1 Organization of the Company....................................................................8
3.2 Power and Authority.............................................................................8
3.3 Capital Stock...................................................................................9
3.4 Subsidiaries...................................................................................10
3.5 No Conflicts...................................................................................10
3.6 Governmental Approvals and Filings.............................................................11
3.7 SEC Documents; Financial Statements; Projections...............................................11
3.8 Absence of Changes.............................................................................11
3.9 Legal Proceedings..............................................................................12
3.10 Compliance with Laws; Anti-Takeover Plans......................................................12
3.11 Other Negotiations; Brokers....................................................................12
3.12 Exemption from Registration; Restrictions on Offer and Sale of Same or Similar
Securities.....................................................................................13
3.13 No Undisclosed Liabilities.....................................................................13
3.14 Affiliate Transactions.........................................................................14
3.15 Substantial Customers and Suppliers; Related Matters...........................................14
3.16 Year 2000. ...................................................................................15
3.17 Holding Company Act and Investment Company Act Status..........................................15
3.18 NASD Matters...................................................................................15
3.19 Intellectual Property..........................................................................15
3.20 Bank One Credit Facilities.....................................................................16
3.21 Disclosure.....................................................................................15
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS............................................16
4.1 Power and Authority............................................................................16
4.2 Ownership of the Selling Stockholders'Shares...................................................17
4.3 No Conflicts...................................................................................17
4.4 Governmental Approvals and Filings.............................................................18
4.5 Other Negotiations; Brokers....................................................................18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.6 Exemption from Registration; Restrictions on Offer and Sale of Same
or Similar Securities..........................................................................18
4.7 Legal Proceedings..............................................................................19
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PURCHASER........................................................19
5.1 Organization; Power and Authority..............................................................19
5.2 No Conflicts...................................................................................19
5.3 Acquisition for Investment.....................................................................20
5.4 Brokers........................................................................................20
ARTICLE VI COVENANTS OF THE SELLER PARTIES.......................................................................20
6.1 Regulatory and Other Approvals.................................................................20
6.2 Use of Proceeds................................................................................21
6.3 Venture Capital Operating Company Status.......................................................21
6.4 Nasdaq National Market.........................................................................21
6.5 Notice of Defaults.............................................................................21
6.6 Reservation of Shares..........................................................................22
6.7 Management Services; Management Fee............................................................22
ARTICLE VII CONDITIONS TO OBLIGATIONS OF THE PURCHASER...........................................................23
7.1 Representations and Warranties.................................................................23
7.2 Performance....................................................................................23
7.3 Certificates...................................................................................23
7.4 Orders and Laws................................................................................23
7.5 Regulatory Consents and Approvals..............................................................23
7.6 Third Party Consents...........................................................................24
7.7 Opinion of Counsel.............................................................................24
7.8 Transaction Documents..........................................................................24
7.9 Closing Fee....................................................................................24
7.10 Delivery of Certificates.......................................................................24
7.11 NASDAQ National Market.........................................................................24
7.12 Proceedings....................................................................................25
ARTICLE VIII CONDITIONS TO OBLIGATIONS OF THE SELLER PARTIES.....................................................25
8.1 Representations and Warranties.................................................................25
8.2 Performance....................................................................................25
8.3 Certificate....................................................................................25
8.4 Orders and Laws................................................................................25
8.5 Transaction Documents..........................................................................25
ARTICLE IX SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.....................................25
ARTICLE X INDEMNIFICATION........................................................................................26
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.1 Indemnification................................................................................26
10.2 Method of Asserting Claims.....................................................................28
ARTICLE XI [INTENTIONALLY OMITTED.].............................................................................29
ARTICLE XII MISCELLANEOUS........................................................................................30
12.1 Notices........................................................................................30
12.2 Entire Agreement...............................................................................31
12.3 Fees and Expenses..............................................................................31
12.4 Public Announcements...........................................................................31
12.5 Further Assurances.............................................................................32
12.6 Waiver.........................................................................................32
12.7 Amendment......................................................................................32
12.8 Third Party Beneficiaries......................................................................32
12.9 No Assignment; Binding Effect..................................................................32
12.10 Headings; Construction.........................................................................33
12.11 Invalid Provisions.............................................................................33
12.12 Governing Law..................................................................................33
12.13 Counterparts...................................................................................33
12.14 Limited Recourse...............................................................................33
12.15 Consent to Jurisdiction and Service of Process.................................................33
</TABLE>
<PAGE>
EXHIBITS
Exhibit A -- Form of Holdback Agreement
Exhibit B -- Form of Registration Rights Agreement
Exhibit C -- Form of Stockholders' Agreement
Exhibit D -- Form of Warrants
Exhibit E-1 -- Form of Company Officer's Certificate
Exhibit E-2 -- Form of Company Secretary's Certificate
Exhibit E-3 -- Form of Selling Stockholders' Certificate
Exhibit F -- Form of Opinion of Nida & Maloney LLP
Exhibit G -- Form of Purchaser's Closing Certificate
SCHEDULES
Schedule I -- Purchased Shares; Purchase Price; Address for Notices
Schedule 3.3(a) -- Outstanding Options
Schedule 3.3(b) -- Antidilution Adjustments, etc.
Schedule 3.4(a) -- Majority Owned Subsidiaries
Schedule 3.4(b) -- Other Equity Interests
Schedule 3.5 -- No Conflicts - the Company
Schedule 3.6 -- Governmental Approvals and Filings
Schedule 3.8 -- Absence of Changes
Schedule 3.9 -- Legal Proceedings
Schedule 3.13 -- No Undisclosed Liabilities
Schedule 3.14 -- Affiliate Transactions
Schedule 4.3 -- No Conflicts - Selling Stockholders
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.47
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 10.47
<TEXT>
<PAGE>
REGISTRATION RIGHTS AGREEMENT dated as of December 23, 1999,
between QAD INC., a Delaware corporation (the "COMPANY") and RECOVERY EQUITY
INVESTORS II, L.P., a Delaware limited partnership (together with its permitted
successors, transferees and assigns hereunder, "REI"). Capitalized terms are
used as defined in Article X hereto.
RECITALS
WHEREAS, pursuant to that certain Stock Purchase Agreement (as
the same may be amended, supplemented or otherwise modified from time to time,
the "STOCK PURCHASE AGREEMENT") dated as of December 23, 1999, among REI, the
Company, Pamela M. Lopker, Karl F. Lopker and The Lopker Living Trust dated
March 23, 1993, REI is acquiring an aggregate of 2,777,778 shares of Common
Stock of the Company for an aggregate purchase price equal to $12,500,000;
WHEREAS, pursuant to the Stock Purchase Agreement, the Company
is issuing to REI a warrant exercisable for an aggregate of 225,000 shares of
Common Stock (as such amount may be adjusted from time to time pursuant to the
anti-dilution provisions of such warrant);
WHEREAS, each of REI and the Company desires to enter into
this Agreement to provide for registration rights with respect to the Common
Stock, including shares issuable upon exercise of the aforementioned warrant;
WHEREAS, the Purchase Agreement provides, among other things,
that the execution and delivery of an agreement in substantially the form hereof
is a condition to the consummation of the other transactions contemplated by the
Stock Purchase Agreement.
NOW THEREFORE, in connection with the Stock Purchase Agreement
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
DEMAND REGISTRATIONS
1.1 REQUESTS FOR REGISTRATION. (a) Subject to Sections 1.2 and
1.7, at any time after the date hereof, any or all of the Required REI
Stockholders may request in writing registration under the Securities Act of all
or part of their Registrable Securities (i) on Form S-1 or Form S-2 or any
similar or successor long-form registration statement (any such registration, a
"LONG-FORM REGISTRATION") or (ii) on Form S-3 or any similar or successor
short-form registration statement (any such registration, a "SHORT-FORM
REGISTRATION") if the Company qualifies to use such short form. Within 10 days
after its receipt of any such request, the Company will give written notice of
such request to all other Participating Stockholders. Thereafter, the Company
will use all reasonable efforts to effect the registration under the
<PAGE>
Securities Act on the form requested by the Requesting Investors, and to
include in such registration, (i) all Registrable Securities which the
Requesting Investors have so requested to be included therein, and (ii) all
other Registrable Securities with respect to which the Company has received
written requests for inclusion therein by the Participating Stockholders
within 30 days after their receipt of the Company's notice, subject in each
case to the provisions of Section 1.4. Each Long-Form Registration or
Short-Form Registration requested in accordance with this Section 1.1 is
referred to herein as a "DEMAND REGISTRATION."
(b) The Requesting Investors which request a Demand
Registration pursuant to this Section 1.1 may, at any time prior to the
effective date of the registration statement relating to such Demand
Registration, revoke such request by providing written notice to the Company;
PROVIDED, HOWEVER, that notwithstanding such revocation, such Demand
Registration shall be deemed a request for purposes of Section 1.2 unless, after
consultation with the Company and any proposed underwriter, the Requesting
Investors in good faith determine that more than 25% of the amount of
Registrable Securities which they have requested to be registered (before giving
effect to any cutback pursuant to Section 1.4) would not be sold pursuant to
such Demand Registration within a reasonable amount of time or at a price
reasonably acceptable to such Requesting Investors.
(c) Any request for a Demand Registration pursuant to Section
1.1 shall specify the number of Registrable Securities proposed to be sold by
the Requesting Investors and the intended method of disposition thereof.
1.2 DEMAND REGISTRATIONS. The Required REI Stockholders will
be entitled to request pursuant to Section 1.1 two Demand Registrations. The
Company will pay all Registration Expenses in connection with any such Demand
Registration. All Demand Registrations (unless otherwise requested by the
Requisite Registration Participants) shall be underwritten registrations.
1.3 EFFECTIVE REGISTRATION STATEMENT. No Demand Registration
shall be deemed to have been requested or effected for purposes of Section
1.1(a) or 1.2:
(i) unless a registration statement with respect
thereto has been declared effective by the Commission (other
than in connection with a revocation notice delivered pursuant
to Section 1.1(b)) and the Company has complied in all
material respects with all obligations required to be
performed by it on or prior to the date of such declaration in
connection with such Demand Registration;
(ii) if after such registration statement has become
effective, any stop order, injunction or other order or
requirement of the Commission or any other Governmental or
Regulatory Authority affecting any of the Registrable
Securities covered by such registration statement, is for any
reason threatened in writing or issued by the Commission or
such other Governmental or Regulatory Authority and, as a
result thereof, none of the Registrable Securities covered
thereby have been sold;
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<PAGE>
(iii) if the conditions to closing specified in the
purchase agreement or underwriting agreement entered into in
connection with such Demand Registration are not satisfied by
reason of a failure by or inability of the Company to satisfy
any of such conditions to closing;
(iv) if the Company declines to effect such Demand
Registration pursuant to Section 1.7(a) or delivers a
Black-Out Notice with respect to such Demand Registration;
(v) if the Requesting Investors have made the
determination contemplated by the PROVISO to Section 1.1(b)
with respect to such Demand Registration and have notified the
Company of such determination in accordance with Section
1.1(b);
(vi) if the Requesting Investors are not able to
register and sell at least 75% of the amount of Registrable
Securities which they requested (before giving effect to any
cutback effected pursuant to Section 1.4) to be included in
such registration; or
(vii) if the registration statement with respect to
such Demand Registration does not remain effective for a
period of at least 180 days beyond the effective date thereof
or, in the case of any Demand Registration that constitutes an
underwritten offering of Registrable Securities, until 45 days
after the commencement of the distribution by the holders of
the Registrable Securities included in such Demand
Registration, in each case unless all of the Registrable
Securities included in such Demand Registration have been sold
to the public prior thereto in accordance with the plan of
distribution specified in such registration statement.
If a Demand Registration requested pursuant to this Article I
is deemed not to have been requested or effected as provided in this Section
1.3, then the Company shall continue to be obligated to effect the number of
Demand Registrations set forth in Section 1.2 without giving effect to such
requested Demand Registration and will pay all Registration Expenses in
connection with such Demand Registration.
1.4 PRIORITY ON DEMAND REGISTRATIONS. The Company will not
include in any Demand Registration any securities which are not Registrable
Securities of the Participating Stockholders without the written consent of the
Requisite Registration Participants. If the Requesting Investors and other
holders of Registrable Securities request Registrable Securities to be included
in a Demand Registration which is an underwritten offering and the managing
underwriter advises the Company in writing that in its opinion the number of
Registrable Securities requested to be included exceeds the number of
Registrable Securities which can be sold in such offering within a price range
acceptable to the Requisite Requesting Investors, the Company will include any
securities to be sold in such Demand Registration in the following
-3-
<PAGE>
order: (i) FIRST, the Registrable Securities requested to be included in such
registration by the Requesting Investors in accordance with Section 1.1(a);
(ii) SECOND, the Registrable Securities requested to be included in such
registration by other Participating Stockholders in accordance with Section
1.1(a); (iii) THIRD, the securities which the Company proposes to sell; and
(iv) FOURTH, any securities other than Registrable Securities to be sold by
persons other than the Company included in such registration in compliance
with Section 1.6.
1.5 SELECTION OF UNDERWRITERS. The Requisite Registration
Participants with respect to any Demand Registration will have the right to
select the underwriters and the managing underwriter to administer such Demand
Registration (which underwriters and managing underwriters shall be reasonably
acceptable to the Company).
1.6 OTHER REGISTRATION RIGHTS. Except as provided in this
Agreement, without the written consent of the Participating Stockholders which
then hold Registrable Securities representing at least a majority (by number of
shares) of the Registrable Securities (on a Fully-Diluted Basis) then held by
all Participating Stockholders, the Company will not grant to any Person the
right to request the Company to register any equity securities of the Company,
or any securities convertible, exchangeable or exercisable for or into such
securities, other than piggyback registration rights entitling the holder
thereof to participate in Company-initiated registrations, subject to the prior
rights of Participating Stockholders to include their Registrable Securities in
Company-initiated registrations in accordance with Section 2.3; PROVIDED,
HOWEVER, that this Section 1.6 shall not apply to any grant of registration
rights that is made by the Company after the Participating Stockholders cease to
hold shares of Common Stock and Equity Equivalents representing (on a
Fully-Diluted Basis) at least 50% of REI's Original Ownership Level.
1.7 BLACK-OUT RIGHTS AND POSTPONEMENT. (a) The Company shall
not be required to effect a Demand Registration if the Company, within the
120-day period preceding the date of a request for a Demand Registration, has
effected a registration of securities in which the Participating Stockholders
were able to register and sell at least 75% of the amount of Registrable
Securities which they requested (before giving effect to any cutback effected
pursuant to Section 1.4, 2.3 or 2.4) to be included in such registration
pursuant to Demand Registration rights under Article I or Piggyback Registration
rights under Article II.
(b) The Company may, upon written notice (a "BLACK-OUT
NOTICE") to the Requesting Investors requesting a Demand Registration, require
such Requesting Investors to withdraw such Demand Registration upon the good
faith determination by the Company that such postponement is necessary (i) to
avoid disclosure of material non-public information or (ii) as a result of a
pending material financing or acquisition transaction, and in each case, each of
the REI Stockholders may not request another Demand Registration for a period of
up to 120 days, as specified by the Company in such Black-Out Notice. The
Company may only give a Black-Out Notice where the giving of such notice has
been specifically approved by the Board of Directors of the Company. Upon
receipt of a Black-Out Notice, the related Demand Registration shall be deemed
to be rescinded and retracted and shall not be counted as a Demand Registration
for any purpose hereunder. The Company may not deliver more than three Black-Out
Notices in
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any 12-month period; PROVIDED, HOWEVER, that the aggregate number of days
covered by Black-Out Notices in any 12-month period shall not under any
circumstances exceed 120.
ARTICLE II
PIGGYBACK REGISTRATIONS
2.1 RIGHT TO PIGGYBACK. Whenever the Company proposes to
register any of its equity securities under the Securities Act (other than
pursuant to a Demand Registration and other than on Forms S-4 or S-8 or any
successor forms), whether for the Company's own account or for the account of
any other Person, and the registration form to be used may be used for the
registration of Registrable Securities (a "PIGGYBACK Registration"), the Company
will give prompt written notice (in any event within 10 days after its receipt
of notice of any exercise of other demand registration rights) to all
Participating Stockholders of its intention to effect such a registration. Such
notice shall offer each Participating Stockholder the opportunity to register,
on the same terms and conditions, such number of such Participating
Stockholder's Registrable Securities as such Participating Stockholder may
request. The Company will include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein by Participating Stockholders within 30 days after their
receipt of the Company's notice, subject to the provisions of Sections 2.3 and
2.4. Such requests for inclusion shall specify the number of Registrable
Securities intended to be disposed of and the intended method of distribution
thereof.
2.2 PIGGYBACK EXPENSES. The Registration Expenses of the
Participating Stockholders will be paid by the Company in all Piggyback
Registrations.
2.3 PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback
Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriter advises the Company in writing that in its opinion
the number of securities requested to be included in such registration is such
that the success of the Company's offering will be materially and adversely
affected, then the Company will include any securities to be sold in such
Piggyback Registration in the following order: (i) FIRST, the securities the
Company proposes to sell; (ii) SECOND, the Registrable Securities requested to
be included in such registration by the Participating Stockholders in accordance
with Section 2.1, PROVIDED that if the managing underwriter in good faith
determines that a lower number of Registrable Securities of the Participating
Stockholders should be included, then the Company shall be required to include
in such registration only that lower number of Registrable Securities, and the
Participating Stockholders shall participate in such registration on a pro rata
basis in accordance with the number of Registrable Securities requested to be
included in such registration by each Participating Stockholder; and (iii)
THIRD, if all Registrable Securities requested to be included in such
registration by the Participating Stockholders in accordance with Section 2.1
are included in such registration, any other securities requested to be included
in such registration in compliance with Section 1.6.
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2.4 PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback
Registration is an underwritten secondary registration on behalf of holders of
the Company's securities, and the managing underwriter advises the Company in
writing that in its opinion the number of securities requested to be included in
such registration is such that the success of such holders' offering would be
materially and adversely affected, then the Company will include any securities
to be sold in such Piggyback Registration in the following order: (i) FIRST, the
securities which such holders propose to sell in compliance with Section 1.6;
(ii) SECOND, the Registrable Securities requested to be included in such
registration by the Participating Stockholders in accordance with Section 2.1,
PROVIDED that if the managing underwriter determines in good faith that a lower
number of Registrable Securities of the Participating Stockholders should be
included, then the Company shall be required to include in such registration
only that lower number of Registrable Securities, and the Participating
Stockholders shall participate in such registration on a pro rata basis in
accordance with the number of Registrable Securities requested to be included in
such registration by each; and (iii) THIRD, any other securities proposed to be
included in such registration in compliance with Section 1.6.
ARTICLE III
HOLDBACK AGREEMENTS
3.1 HOLDER'S HOLDBACK OBLIGATIONS. Each Participating
Stockholder agrees not to effect any public sale or distribution of Registrable
Securities, or any securities convertible, exchangeable or exercisable for or
into Registrable Securities during the seven days prior to, and the 180-day
period beginning on, the effective date of any underwritten Demand Registration
or any underwritten Piggyback Registration in which such Participating
Stockholder had an opportunity to participate without cutback under Article II
hereof (in each case except as part of such underwritten registration), unless
the managing underwriter of such underwritten registration otherwise agrees.
3.2 COMPANY'S HOLDBACK OBLIGATIONS. Unless the managing
underwriter of the relevant underwritten Demand Registration or an underwritten
Piggyback Registration otherwise agrees, the Company agrees (i) not to effect
any public sale or distribution of its equity securities, or any securities
convertible, exchangeable or exercisable for or into such securities, during the
14 days prior to, and during the 90-day period beginning on, the effective date
of any underwritten Demand Registration or any underwritten Piggyback
Registration in which holders of Registrable Securities are selling stockholders
(except as part of such underwritten registration or pursuant to registrations
on Form S-4 or S-8 or any successor forms), and (ii) to use all reasonable
efforts to cause each holder of at least 5% (on a Fully-Diluted Basis) of its
equity securities to agree not to effect any public sale or distribution of any
such equity securities or any securities convertible, exchangeable or
exercisable for into such equity securities during the 180-day period beginning
on the effective date of any underwritten Demand Registration or any
underwritten Piggyback Registration in which holders of Registrable Securities
are selling stockholders (except as part of such underwritten registration, if
otherwise permitted).
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ARTICLE IV
REGISTRATION PROCEDURES
Whenever Participating Stockholders have requested that any
Registrable Securities be registered in accordance with Article I or II, the
Company will use all reasonable efforts to effect the registration and the sale
of such Registrable Securities in accordance with the intended method of
disposition thereof, and pursuant thereto the Company will as reasonably
expeditiously as possible (or, in the case of clause (p) below, will not):
(a) promptly prepare and file with the Commission a
registration statement with respect to such Registrable Securities (such
registration statement to include all information which the Participating
Stockholders holding the Registrable Securities to be registered thereby shall
reasonably request) and use all reasonable efforts to cause such registration
statement to become effective, PROVIDED, that as promptly as practicable before
filing a registration statement or prospectus or any amendments or supplements
thereto, the Company will (i) furnish to one counsel selected by the Requisite
Registration Participants copies of all such documents proposed to be filed, and
the Company shall not file any such document to which such counsel shall have
reasonably objected on the grounds that such document does not comply in all
material respects with the requirements of the Securities Act, and (ii) notify
each Participating Stockholder holding Registrable Securities covered by such
registration statement of (x) any request by the Commission to amend such
registration statement or amend or supplement any prospectus, or (y) any stop
order issued or threatened by the Commission, and take all reasonable actions
required to prevent the entry of such stop order or to promptly remove it if
entered;
(b) (i) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective at all times during the period commencing on the effective date of
such registration statement and ending on the first date as of which all
Registrable Securities of the Participating Stockholders covered by such
registration statement are sold in accordance with the intended plan of
distribution set forth in such registration statement and (ii) comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(c) furnish to each Participating Stockholder holding
Registrable Securities covered by such registration statement, without charge,
such number of conformed copies of such registration statement, each amendment
and supplement thereto, the prospectus included in such registration statement
(including each preliminary prospectus and, in each case, including all exhibits
thereto and documents incorporated by reference therein) and such other
documents as such Participating Stockholder may reasonably request in order to
facilitate the disposition of the Registrable Securities covered thereby that
are held by such Participating Stockholder;
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(d) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions in the United States as any
Participating Stockholder holding any such Registrable Securities shall
reasonably request, to keep such registration or qualification in effect for so
long as such registration statement remains in effect and to do any and all
other acts and things which may be reasonably necessary or advisable to enable
such Participating Stockholder to consummate the disposition in such
jurisdictions of any such Registrable Securities held by such Participating
Stockholder; PROVIDED, HOWEVER, that the Company will not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this clause (d), (ii) subject itself to
taxation in any such jurisdiction or (iii) consent to general service of process
in any such jurisdiction;
(e) furnish to each Participating Stockholder holding
Registrable Securities covered by such registration statement a signed copy,
addressed to such Participating Stockholder (and the underwriters, if any), of
an opinion of counsel for the Company or special counsel to such Participating
Stockholder dated the effective date of such registration statement (and, if
such registration statement includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), reasonably satisfactory
in form and substance to the Requisite Registration Participants, covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) as are customarily covered in opinions of
issuer's counsel delivered to the underwriters in underwritten public offerings,
and such other legal matters as the Requisite Registration Participants (or the
underwriters, if any) may reasonably request;
(f) notify each Participating Stockholder holding Registrable
Securities covered by such registration statement, at a time when a prospectus
relating to such Registrable Securities is required to be delivered under the
Securities Act, of the occurrence of any event known to the Company as a result
of which the prospectus included in such registration statement, as then in
effect, contains an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made,
and, at the request of any such Participating Stockholder, (i) the Company will
prepare and furnish such Participating Stockholder a reasonable number of copies
of a supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made and (ii) the Company shall extend the period during which such
registration statement shall be maintained effective by the number of days
during the period from and including the date of the giving of such notice to
such Participating Stockholder to the date when the Company made available to
such Participating Stockholder an appropriately amended or supplemented
prospectus;
(g) cause all Registrable Securities of the Participating
Stockholders covered by such registration statement to be listed on each
securities exchange and quotation system on which similar securities issued by
the Company are then listed and to enter into such customary
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agreements as may be required in furtherance thereof, including listing
applications and indemnification agreements in customary form;
(h) provide a transfer agent and registrar for the Registrable
Securities of the Participating Stockholders covered by such registration
statement not later than the effective date of such registration statement;
(i) enter into such customary arrangements and take all such
other actions as the Requisite Registration Participants or the underwriters, if
any, for the offering of the Registered Securities covered by such registration
statement reasonably request in order to expedite or facilitate the disposition
of such Registrable Securities;
(j) make available for inspection by any Participating
Stockholder holding Registrable Securities covered by such registration
statement, any underwriter participating in any disposition of securities
pursuant to such registration statement and any attorney, accountant or other
agent retained by any such Participating Stockholder or underwriter, all
pertinent financial and other records, corporate documents and properties of the
Company and all correspondence between the Commission and the Company or its
counsel or auditors and all memoranda relating to discussions with the
Commission or its staff in connection with such registration statement, and
cause the Company's officers, directors, employees and independent accountants
to supply all information reasonably requested by any such Participating
Stockholder, underwriter, attorney, accountant or agent in connection with such
registration statement;
(k) subject to other provisions hereof, use all reasonable
efforts to cause the Registrable Securities of the Participating Stockholders
covered by such registration statement to be registered with or approved by such
Governmental or Regulatory Authorities or self-regulatory organizations as may
be necessary to enable such Participating Stockholders to consummate the
disposition of such Registrable Securities;
(l) use all reasonable efforts to obtain a "cold comfort"
letter, dated the effective date of such registration statement (and, if such
registration includes an underwritten offering, dated the date of the closing
under the underwriting agreement), signed by the independent public accountants
who have certified the Company's financial statements included in such
registration statement, addressed to the Company, to each Participating
Stockholder holding Registrable Securities covered by such registration
statement, and to the underwriters, if any, covering substantially the same
matters with respect to such registration statement (and the prospectus included
therein) and with respect to events subsequent to the date of such financial
statements, as are customarily covered in accountants' letters delivered to the
underwriters in underwritten public offerings of securities and such other
financial matters as the Requisite Registration Participants (or the
underwriters, if any) may reasonably request;
(m) otherwise use all reasonable efforts to comply with all
applicable rules and regulations of the Commission and make available to its
security holders, in each case as soon as practicable, an earnings statement
covering a period of at least 12 months, beginning with the
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first month after the effective date of such registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
(n) permit any Participating Stockholder holding Registrable
Securities covered by such registration statement, which Participating
Stockholder, in its sole judgment exercised in good faith, might be deemed to be
a controlling person of the Company (within the meaning of the Securities Act or
the Exchange Act) to participate in the preparation of such registration
statement and to include therein material, furnished to the Company in writing,
which in the reasonable judgment of such Participating Stockholder should be
included and which is reasonably acceptable to the Company;
(o) promptly notify the Participating Stockholders holding the
Registrable Securities covered by such registration statement of the issuance by
any state securities commission or other Governmental or Regulatory Authority of
any order suspending the qualification or exemption from qualification of any
such Registrable Securities under any state securities or "blue sky" law, and
use every reasonable effort to obtain the lifting at the earliest possible time
of any stop order (whether issued by the Commission or otherwise) suspending the
effectiveness of such registration statement or of any order preventing or
suspending the use of any preliminary prospectus included therein;
(p) at any time file or make any amendment to such
registration statement, or any amendment of or supplement to the prospectus
included therein (including amendments of the documents incorporated by
reference into the prospectus), (i) of which each Participating Stockholder
holding Registrable Securities covered by such registration statement or the
managing underwriter, if any, shall not have previously been advised and
furnished a copy or (ii) to which the Requisite Registration Participants, the
managing underwriter (if any) or counsel for the Requisite Registration
Participants or any such managing underwriter shall reasonably object;
(q) make such representations and warranties (subject to
appropriate disclosure schedule exceptions) to the Participating Stockholders
holding Registrable Securities covered by such registration statement and the
underwriters, if any, in form, substance and scope as are customarily made by
issuers to underwriters and selling holders, as the case may be, in underwritten
public offerings of substantially the same type;
(r) during the period when the prospectus included in such
registration statement is required to be delivered under the Securities Act,
promptly file all documents required to be filed with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act; and
(s) if such registration statement refers to any Participating
Stockholder holding Registrable Securities covered thereby by name or otherwise
as the holder of any securities of the Company, then (whether or not, in the
sole judgment, exercised in good faith, of such Participating Stockholder, such
Participating Stockholder is or might be deemed to be a controlling person of
the Company), (i) at the request of such Participating Stockholder, insert
therein language, in form and substance reasonably satisfactory to such
Participating
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Stockholder, the Company and the managing underwriter (if any), to the effect
that the holding by such Participating Stockholder of such securities is not
to be construed as a recommendation by such Participating Stockholder of the
investment quality of the Company's Registrable Securities or the Company's
other securities covered thereby and that such holding does not imply that
such Participating Stockholder will assist in meeting any future financial
requirements of the Company, or (ii) in the event that such reference to such
Participating Stockholder by name or otherwise is not required by the
Securities Act, any similar Federal or state statute, or any rule or
regulation of any Governmental or Regulatory Authority having jurisdiction
over the offering, then in force, the Company shall be required at the
request of such Participating Stockholder to delete the reference to such
Participating Stockholder.
ARTICLE V
REGISTRATION EXPENSES
5.1 FEES AND EXPENSES GENERALLY. Subject to the next
succeeding sentence, all expenses incident to the Company's performance of or
compliance with this Agreement, including internal expenses (including all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual or special audit or quarterly
review, the expense of any liability insurance, the expenses and fees for
listing securities on one or more securities exchanges or quotation systems
pursuant to clause (g) of Article IV, all registration and filing fees, fees and
expenses of compliance with securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with blue sky qualifications of
the Registrable Securities), printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Company and all independent
certified public accountants, underwriters (excluding underwriting fees,
discounts and commissions) and other Persons retained by the Company (all such
expenses being herein called "REGISTRATION EXPENSES"), will be borne by the
Company. Notwithstanding anything in this Agreement to the contrary, each
Participating Stockholder shall pay any underwriting fees, discounts or
commissions attributable to the sale of its Registrable Securities.
5.2 COUNSEL FEES. In connection with each Demand Registration,
the Company will reimburse the Participating Stockholders for the reasonable
fees and disbursements of one counsel selected by the Requisite Registration
Participants.
ARTICLE VI
UNDERWRITTEN OFFERINGS
6.1 DEMAND UNDERWRITTEN OFFERINGS. If requested by the
underwriters for any underwritten offering of Registrable Securities pursuant to
a Demand Registration, the Company will enter into an underwriting agreement
with such underwriters for such offering, such agreement to be consistent with
the terms hereof, to contain such representations and warranties by the Company
and such other terms as are generally included in agreements of this type,
including indemnities customarily included in such agreements, and to be
otherwise
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reasonably satisfactory in form and substance to the Requisite Registration
Participants, the Company and the underwriters. The Participating
Stockholders holding the Registrable Securities to be distributed by such
underwriters will cooperate in good faith with the Company in the negotiation
of the underwriting agreement. The Participating Stockholders holding the
Registrable Securities to be distributed by such underwriters shall be
parties to such underwriting agreement and may, at the option of the
Requisite Registration Participants, require that any or all of the
representations and warranties by, and the other agreements on the part of,
the Company to and for the benefit of such underwriters shall also be made to
and for the benefit of such Participating Stockholders and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement also be conditions precedent to the obligations of
such Participating Stockholders. The Company shall cooperate as reasonably
requested by any such Participating Stockholder in order to limit (a) any
representations or warranties to, or agreements with, the Company or the
underwriters to be made by such Participating Stockholder only to
representations, warranties or agreements regarding such Participating
Stockholder, such Participating Stockholder's Registrable Securities and such
Participating Stockholder's intended method of distribution and any other
representation required by applicable law and (b) such Participating
Stockholder's maximum liability in respect of its indemnification and
contribution obligations under such underwriting agreement to an amount equal
to the net proceeds actually received by such Participating Stockholder
(after deducting any underwriting fees, discounts and expenses) from the sale
of Registrable Securities pursuant to such Demand Registration.
6.2 INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company at any
time proposes to register any of its equity securities under the Securities Act
as contemplated by Article II and such equity securities are to be distributed
by or through one or more underwriters, the Company will, if requested by any
Participating Stockholder as provided in Article II, arrange for such
underwriters to include all the Registrable Securities to be offered and sold by
such Participating Stockholder, subject to the limitations set forth in Article
II, among the securities to be distributed by such underwriters. The
Participating Stockholders holding Registrable Securities to be distributed by
such underwriters shall be parties to the underwriting agreement between the
Company and such underwriters (provided that such underwriting agreement is
consistent with the terms hereof), and may, at their option, require that any or
all of the representations and warranties by, and the other agreements on the
part of, the Company to and for the benefit of such underwriters shall also be
made to and for the benefit of such Participating Stockholders and that any or
all of the conditions precedent to the obligations of such underwriters under
such underwriting agreement also be conditions precedent to the obligations of
such Participating Stockholders. The Company shall cooperate as reasonably
requested by any such Participating Stockholder in order to limit (a) any
representations or warranties to, or agreements with, the Company or the
underwriters to be made by such Participating Stockholder only to
representations, warranties or agreements regarding such Participating
Stockholder, such Participating Stockholder's Registrable Securities and such
Participating Stockholder's intended method of distribution and any other
representation required by applicable law and (b) such Participating
Stockholder's maximum liability in respect of its indemnification and
contribution obligations under such underwriting agreement to an amount equal to
the net proceeds actually received by such Participating Stockholder (after
deducting any
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underwriting fees, discounts and expenses) from the sale of Registrable
Securities pursuant to the applicable Piggyback Registration.
ARTICLE VII
INDEMNIFICATION
7.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless, to the fullest extent permitted by law, each of the
Participating Stockholders holding any Registrable Securities covered by a
registration statement that has been filed with the Commission pursuant to this
Agreement, each underwriter for such Participating Stockholder in connection
therewith, each other Person, if any, who controls such Participating
Stockholder or any such underwriter within the meaning of the Securities Act or
the Exchange Act, and each of their respective managers, partners, officers,
directors, employees and general partners, as follows:
(i) against any and all loss, liability, claim,
damage or expense (other than amounts paid in settlement)
incurred by such Person arising out of or based upon an untrue
statement or alleged untrue statement of a material fact
contained in such registration statement (or any amendment or
supplement thereto), including all documents incorporated
therein by reference, or in any preliminary prospectus or
prospectus included therein (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim,
damage and expense incurred by such Person to the extent of
the aggregate amount paid in settlement of any litigation,
investigation or proceeding by any Governmental or Regulatory
Authority, in each case whether commenced or threatened, or of
any claim whatsoever, that is based upon any such untrue
statement or omission or any such alleged untrue statement or
omission, if such settlement is effected with the written
consent of the Company (which consent shall not be
unreasonably withheld or delayed); and
(iii) against any and all expense incurred by such
Person in connection with investigating, preparing or
defending against any litigation or any investigation or
proceeding by any Governmental or Regulatory Authority, in
each case whether commenced or threatened in writing, or
against any claim whatsoever, that is based upon any such
untrue statement or omission or any such alleged untrue
statement or omission, to the extent that any such expense is
not paid under clause (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of or based upon an untrue
statement or alleged untrue statement
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or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any
Participating Stockholder expressly for use in the preparation of such
registration statement (or any amendment or supplement thereto), including
all documents incorporated therein by reference, or in any preliminary
prospectus or prospectus included therein (or any amendment or supplement
thereto); and PROVIDED FURTHER, HOWEVER, that the Company will not be liable
to any Participating Stockholder (or any other indemnified Person) under the
indemnity agreement in this Section 7.1, with respect to any preliminary
prospectus or the final prospectus or the final prospectus as amended or
supplemented, as the case may be, to the extent that any such loss,
liability, claim, damage or expense of such Participating Stockholder (or
other indemnified Person) results from the fact that such Participating
Stockholder sold Registrable Securities to a Person to whom there was not
sent or given, at or prior to the written confirmation of such sale, a copy
of the final prospectus or of the final prospectus as then amended or
supplemented, whichever is most recent, if the Company has previously and
timely furnished copies thereof to such Participating Stockholder. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any Participating Stockholder or any
other Person eligible for indemnification under this Section 7.1, and shall
survive the transfer of the relevant Registrable Securities by the
Participating Stockholder who theretofore held them.
7.2 INDEMNIFICATION BY A SELLING SHAREHOLDER. In connection
with any registration statement which covers Registrable Securities of a
Participating Stockholder pursuant to this Agreement, each such Participating
Stockholder agrees to indemnify and hold harmless (in the same manner and to the
same extent as set forth in Section 7.1 of this Agreement), to the extent
permitted by law, the Company and each underwriter for the Company or any such
Participating Stockholder in connection therewith, each other Person who
controls the Company or any such underwriter within the meaning of the
Securities Act or the Exchange Act, and each of their respective managers,
officers, directors and general partners, with respect to any statement or
alleged statement in or omission or alleged omission from such registration
statement, any preliminary, final or summary prospectus contained therein, or
any amendment or supplement thereto or to any such prospectus, if such statement
or alleged statement or omission or alleged omission was made in reliance upon
and in conformity with written information that relates only to such
Participating Stockholder and its affiliates or the plan of distribution and
that is furnished to the Company by or on behalf of such Participating
Stockholder expressly for use in the preparation of such registration statement,
preliminary, final or summary prospectus or amendment or supplement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any other Person eligible under this
Section 7.2, and shall survive the transfer of Registrable Securities by such
Participating Stockholder. The obligations of each Participating Stockholder
pursuant to this Section 7.2 are to be several and not joint. Additionally, with
respect to each claim pursuant to this Section 7.2 and each corresponding claim
for contribution under Section 7.5, each such Participating Stockholder's
maximum aggregate liability under this Section 7.2 and Section 7.5 shall be
limited to an amount equal to the net proceeds actually received by such
Participating Stockholder (after deducting any underwriting fees, discounts and
expenses) from the sale of Registrable Securities being sold pursuant to such
registration statement or prospectus by such Participating Stockholder.
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7.3 INDEMNIFICATION PROCEDURE. Within 10 days after receipt by
an indemnified party hereunder of written notice of the commencement of any
action or proceeding involving a claim referred to in Section 7.1 or 7.2, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; PROVIDED, HOWEVER, that the failure of any indemnified party to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under Section 7.1 or 7.2, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any such
action or proceeding is brought against an indemnified party, the indemnifying
party will be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified, with counsel
reasonably satisfactory to such indemnified party; and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party for any legal fees and expenses subsequently incurred by the latter in
connection with the defense thereof, unless in such indemnified party's
reasonable judgment an actual or potential conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, in
which case the indemnifying party shall not assume the defense of such claim but
also shall not be liable for the fees and expenses of (i) in the case of a claim
referred to in Section 7.1, more than one counsel (in addition to any local
counsel) for all indemnified parties selected by the holders of a majority (by
number of shares) of the Registrable Securities held by such indemnified
parties, or (ii) in the case of a claim referred to in Section 7.2, more than
one counsel (in addition to any local counsel) for the Company, in each case in
connection with any one action or separate but similar or related actions or
proceedings. An indemnifying party who is not entitled to (pursuant to the
immediately preceding sentence), or elects not to, assume the defense of a claim
will not be obligated to pay the fees and expenses of more than one counsel (in
addition to any local counsel) for all parties indemnified by such indemnifying
party with respect to such claim, unless in the reasonable judgment of any
indemnified party an actual or potential conflict of interest may exist between
such indemnified party and any other of such indemnified parties with respect to
such claim, in which event the indemnifying party shall be obligated to pay the
fees and expenses of such additional counsel or counsels as may be reasonable in
light of such conflict. The indemnifying party will not, without the prior
written consent of each indemnified party, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit,
investigation or proceeding in respect of which indemnification may be sought
hereunder (whether or not such indemnified party or any Person who controls such
indemnified party is a party to such claim, action, suit, investigation or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of such indemnified party from all liability arising out
of such claim, action, suit, investigation or proceeding. An indemnified party
will not settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit, investigation or proceeding in
respect of which it is then seeking (or thereafter seeks) indemnification
hereunder, in each case without the prior written consent of the indemnifying
party (which consent shall not be unreasonably withheld or delayed).
Notwithstanding anything to the contrary set forth herein, and without limiting
any of the rights set forth above, an indemnified party hereunder will have the
right to retain, at its own expense, counsel with respect to the defense of a
claim.
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7.4 UNDERWRITING AGREEMENT. The Company and each
Participating Stockholder requesting registration of all or any part of its
Registrable Securities pursuant to Article I or II, shall provide for the
foregoing indemnity (with appropriate modifications) in any underwriting
agreement entered into in connection with a Demand Registration or a
Piggyback Registration with respect to any required registration or other
qualification of Registrable Securities under any Federal or state law or
regulation of any Governmental or Regulatory Authority.
7.5 CONTRIBUTION. If the indemnification provided for in
Sections 7.1 and 7.2 of this Agreement is unavailable to hold harmless an
indemnified party under such Section, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to
in Section 7.1 or 7.2, as the case may be, in such proportion as is
appropriate to reflect the relative fault of such indemnifying party, on the
one hand, and such indemnified party, on the other hand, in connection with
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations,
including the relative benefits received by each party from the offering of
the securities covered by the relevant registration statement, the parties'
relative knowledge and access to information concerning the matter with
respect to which the relevant claim was asserted and the parties' relative
opportunities to correct and prevent any relevant statement or omission.
Without limiting the generality of the foregoing, the parties' relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
indemnifying party or the indemnified party and the parties' relative intent,
knowledge, access to relevant information and opportunity to correct or
prevent such alleged untrue or untrue statement or omission. The parties
hereto agree that it would not be just and equitable if contributions
pursuant to this Section 7.5 were to be determined by pro rata or per capita
allocation (even if the underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in the first and second sentences of
this Section 7.5. The amount paid by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses referred to in the first
sentence of this Section 7.5 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending the relevant action or proceeding and shall be
limited as provided in Section 7.3 if the indemnifying party has assumed the
defense of the relevant action or proceeding in accordance with the
provisions of Section 7.3. Promptly after receipt by an indemnified party
under this Section 7.5 of notice of the commencement of any action or
proceeding against such party in respect of which a claim for contribution
may be made against an indemnifying party under this Section 7.5, such
indemnified party shall notify the indemnifying party in writing of the
commencement thereof if the notice specified in Section 7.3 has not been
given with respect to such action or proceeding; PROVIDED, HOWEVER, that the
omission to so notify the indemnifying party shall not relieve the
indemnifying party from any liability which it may otherwise have to any
indemnified party under this Section 7.5, except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. The
Company and the Participating Stockholders agree with each other, and will
agree with and the
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underwriters of Registrable Securities registered pursuant to Article I or
II, if requested by such underwriters, that (i) the underwriters' portion of
the contribution paid to the Participating Stockholders pursuant to this
Section 7.5 shall not exceed the total underwriting fees, discounts and
commissions in connection with the relevant offering of Registrable
Securities and (ii) the total amount of such Participating Stockholder's
contributions under this Section 7.5 and any amounts paid by such
Participating Stockholder in respect of corresponding claims for
indemnification under Section 7.2 shall not exceed an amount equal to the net
proceeds actually received by such Participating Stockholder from the sale of
Registrable Securities in the offering to which the losses, liabilities,
claims, damages or expenses of the indemnified parties relate. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to contribution from any Person who
was not guilty of such fraudulent misrepresentation.
7.6 PERIODIC PAYMENTS. The indemnification required by this
Article VII shall be made by periodic payments of the amount thereof during
the course of the relevant investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred; PROVIDED,
HOWEVER, that if it is finally determined by a court of competent
jurisdiction that the relevant indemnified party was not entitled to
indemnification hereunder in respect of such investigation or defense, such
indemnified party shall repay to the indemnifying party, on demand, all
amounts received by it in respect of such investigation or defense pursuant
to this Section 7.6, together with interest thereon at a rate per annum equal
to the "prime rate" (as published from time to time in the Wall Street
Journal) for the period from and including the date on which the indemnified
party received the relevant amount to but excluding the date on which it
repaid such amount to the indemnifying party.
ARTICLE VIII
RULE 144
The Company shall file all reports required to be filed by
it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the Commission thereunder (or, if the Company is not
required to file such reports, it will, upon the request of any Participating
Stockholder, make publicly available other information), and it will take
such further action as any Participating Stockholder may reasonably request,
all to the extent required from time to time to enable such Participating
Stockholder to sell shares of Registrable Securities without registration
under the Securities Act in compliance with (i) Rule 144 under the Securities
Act, as such Rule may be amended from time to time, or (ii) any similar rule
or regulation hereafter adopted by the Commission. Upon the request of any
Participating Stockholder, the Company will deliver to such Participating
Stockholder a written statement as to whether it has complied with such
requirements.
ARTICLE IX
PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Participating Stockholder may participate in any
underwritten registration
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hereunder unless such Participating Stockholder (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting arrangements
approved by the Person or Persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements, escrow agreements and other
documents reasonably required under the terms of such underwriting
arrangements and consistent with the provisions of this Agreement. If the
Requesting Investors with respect to any Demand Registration are subsequently
not entitled to participate in such Demand Registration solely by reason of
their failure to comply with any material requirement of this Article IX
then, notwithstanding anything in Section 1.1(b) or 1.3 to the contrary, the
request by such Requesting Investors for such Demand Registration shall
continue to be counted for purposes of Section 1.2.
ARTICLE X
DEFINITIONS
10.1 TERMS. As used in this Agreement, the following
defined terms shall have the meanings set forth below:
"ADDITIONAL STOCKHOLDER" means any person to whom the
Company has granted registration rights in compliance with Section 1.6 and
who has executed a Registration Rights Joinder Agreement in substantially the
form of Exhibit A, so long as any such person shall hold Registrable
Securities.
"BUSINESS DAY" means a day other than Saturday, Sunday or
any day on which banks located in the State of New York or California are
authorized or obligated to close.
"COMMISSION" means the U.S. Securities and Exchange
Commission.
"COMMON STOCK" means the Common Stock, par value $.001 per
share, of the Company, any securities into which such Common Stock shall have
been changed and any securities resulting from any reclassification or
recapitalization of such Common Stock, and all other securities of any class
or classes (however designated) of the Company the holders of which have the
right, without limitation as to amount, after payment on any securities
entitled to a preference on dividends or other distributions upon any
dissolution, liquidation or winding up, either to all or to a share of the
balance of payments upon such dissolution, liquidation or winding up.
"EQUITY EQUIVALENTS" means any securities (other than
employee options) which, by their terms, are or may be exercisable,
convertible or exchangeable for or into Common Stock at the election of the
holder thereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended, or any similar Federal statute then in effect, and any reference
to a particular section thereof shall include a reference to a comparable
section, if any, of any such similar Federal statute, and the rules and
regulations thereunder.
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"FULLY-DILUTED BASIS" means with respect to the calculation
of the number of shares of Common Stock, (i) all shares of Common Stock
outstanding at the time of determination, (ii) all shares of Common Stock
issuable upon the exercise, conversion or exchange of any Equity Equivalents
outstanding at the time of determination and (iii) all shares of Common Stock
issuable upon the exercise, conversion or exchange of any securities that are
issuable upon the exercise, conversion or exchange of any Equity Equivalents
outstanding at the time of determination.
"ORIGINAL OWNERSHIP LEVEL" has the meaning ascribed to it
in the Stockholders' Agreement.
"PARTICIPATING STOCKHOLDERS" means the REI Stockholders and
any Additional Stockholders or transferee of any of the foregoing persons who
has acquired Registrable Securities and who has executed a Registration
Rights Joinder Agreement.
"PERMITTED TRANSFEREE" means:
(i) with respect to any Stockholder who is a natural
person, the spouse or any lineal descendant (including by adoption and
stepchildren) of such Stockholder, or any trust of which such Stockholder is
the trustee and which is established solely for the benefit of any of the
foregoing individuals and whose terms are not inconsistent with the terms of
this Agreement;
(ii) with respect to any Stockholder who is not a natural
person, (A) any Affiliate of such Stockholder and any trustee, officer,
director or employee of such Stockholder or any such Affiliate, (B) any
spouse, lineal descendant (including by adoption and stepchildren) of the
trustees, officers, directors and employees referred to in clause (A) above,
and any trust where a majority in interest of the beneficiaries thereof are
one or more of the persons described in this clause (B) and the trustees,
officers, directors and employees described in clause (A) above and whose
terms are not inconsistent with the terms of this Agreement; and
(iii) as to any REI Stockholder, (w) any other REI
Stockholder, (x) any general partner or limited partner of REI (and any
subsequent transferee of such partner), (y) any partner, member, director,
officer, employee or investment advisor of any such general partner or
limited partner, (z) any Affiliate of any such general partner or limited
partner, (ww) any director, officer, employee, investment advisor, partner or
member of any such Affiliate, and (xx) any liquidating trust or similar
entity established by REI or any of the foregoing entities for the benefit of
its partners or interest holders and their Permitted Transferees for the
purpose of holding Restricted Securities.
"PRO RATA" means, with respect to one or more Participating
Stockholders, in proportion to the number of shares of Common Stock on a
Fully-Diluted Basis owned by such Participating Stockholder or Stockholders
or which may be acquired by any such Participating Stockholder or
Stockholders upon exercising any rights under any Equity Equivalent owned by
such Participating Stockholder or Stockholders.
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"REGISTRABLE SECURITIES" means, at any time of
determination, (i) the shares of Common Stock then issued and outstanding or
which are issuable upon the conversion, exercise or exchange of Equity
Equivalents, (ii) any then outstanding securities into which shares of Common
Stock shall have been changed and (iii) any then outstanding securities
resulting from any reclassification or recapitalization of Common Stock;
PROVIDED, HOWEVER, that "REGISTRABLE SECURITIES" shall not include any shares
of Common Stock or other securities obtained or transferred pursuant to an
effective registration statement under the Securities Act or in a Rule 144
Transaction; and PROVIDED FURTHER, HOWEVER, that "REGISTRABLE SECURITIES"
shall not include any shares of Common Stock or other securities which are
held by a Person who is not a Participating Stockholder.
"REI STOCKHOLDERS" means REI and its Permitted Transferees
who have executed a Registration Rights Joinder Agreement in substantially
the form of Exhibit A, so long as any such person shall hold Registrable
Securities.
"REQUESTING INVESTORS" means, with respect to any Demand
Registration, the Required REI Stockholders that have requested such Demand
Registration in accordance with Section 1.1.
"REQUISITE REGISTRATION PARTICIPANTS" means, with respect
to any Demand Registration or Piggyback Registration, Participating
Stockholders which then hold Registrable Securities representing at least a
majority (by number of shares) of the Registrable Securities requested to be
included in such Demand Registration (whether as Requesting Investors or
otherwise) or Piggyback Registration pursuant to Section 1.1 or 2.1, as
applicable.
"REQUIRED REI STOCKHOLDERS" means, as of the date of any
determination thereof, REI Stockholders which then hold Registrable
Securities representing at least a majority (by number of shares) of the
Registrable Securities on a Fully-Diluted Basis, then held by all REI
Stockholders.
"REQUISITE REQUESTING INVESTORS" means, as of the date of
any determination thereof with respect to any Demand Registration, Requesting
Investors which then hold a majority (by number of shares) of the Registrable
Securities, on a Fully-Diluted Basis, then held by all Requesting Investors
of such Demand Registration.
"RESTRICTED SECURITIES" means the Common Stock, any Equity
Equivalents and any securities issued with respect to any of the foregoing as
a result of any stock dividend, stock split, reclassification,
recapitalization, reorganization, merger, consolidation or similar event or
upon the conversion, exchange or exercise thereof.
"RULE 144 TRANSACTION" means a transfer of Common Stock (a)
complying with Rule 144 under the Securities Act (or any successor statute or
rule) as such Rule (or such successor statute or rule, as the case may be) is in
effect on the date of such transfer (but not including a sale other than
pursuant to a "brokers transaction" as defined in clauses (1) and (2) of
paragraph (g) of such Rule as in effect on the date hereof) and (b) occurring at
a time when
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shares of Common Stock are registered pursuant to Section 12 of the Exchange
Act (or any successor to such Section).
"SECURITIES ACT" means the Securities Act of 1933, as
amended, or any similar Federal statute then in effect, and any reference to
a particular section thereof shall include a reference to a comparable
section, if any, of any such similar Federal statute, and the rules and
regulations thereunder.
"STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement
dated as of the date hereof among the parties to the Stock Purchase
Agreement, as such Stockholders' Agreement may be amended, supplemented or
otherwise modified from time to time.
"TRANSFER" means any direct or indirect sale, transfer,
assignment, grant of a participation in, gift, hypothecation, pledge or other
disposition of any Restricted Security or any interest therein or, as the
context may require, to sell, transfer, assign, grant a participation in,
give as a gift, hypothecate, pledge or otherwise dispose of, directly or
indirectly, any Restricted Security or any interest therein.
10.2 OTHER DEFINED TERMS. Unless otherwise defined herein,
capitalized terms used in this Agreement shall have the respective meanings
assigned to them in the Stock Purchase Agreement.
10.3 DEFINED TERMS IN CORRESPONDING SECTIONS. The following
defined terms, when used in this Agreement, shall have the meaning ascribed
to them in the corresponding Sections of this Agreement listed below:
"Black-Out Notice" -- Section 1.7(b)
"Company" -- Preamble
"Demand Registration" -- Section 1.1
"Investment Agreements" -- Recitals
"Long-Form Registration" -- Section 1.1(a)
"Piggyback Registration" -- Section 2.1
"Registration Expenses" -- Section 5.1
"REI" -- Preamble
"Short-Form Registration" -- Section 1.1(a)
"Stock Purchase Agreement" -- Recitals
ARTICLE XI
MISCELLANEOUS
11.1 NO INCONSISTENT AGREEMENTS. The Company represents and
warrants that it does not currently have, and covenants that it will not
hereafter enter into any Contract which is inconsistent with, or would otherwise
restrict the performance by the Company of, its obligations hereunder.
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11.2 ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES.
The Company will use all reasonable efforts not to take any
action, and not to fail to take any action which it may properly take, with
respect to its securities if such action or failure to act would adversely
affect (a) the ability of the holders of Registrable Securities to include
Registrable Securities in a registration undertaken pursuant to this
Agreement or (b) to the extent within the Company's control, would adversely
affect the marketability of such Registrable Securities in any such
registration (it being understood that the actions referred to in this
Section 11.2 include effecting a stock split or a combination of shares).
11.3 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties
hereto shall be entitled to specific performance of the terms hereof, in
addition to any other remedy that may be available to any of them at law or
equity; PROVIDED, HOWEVER, that each of the parties hereto agrees to provide
the other parties hereto with written notice at least two Business Days prior
to filing any motion or other pleading seeking a temporary restraining order,
a temporary or permanent injunction, specific performance, or any other
equitable remedy and to give the other parties hereto and their counsel a
reasonable opportunity to attend and participate in any judicial or
administrative hearing or other proceeding held to adjudicate or rule upon
any such motion or pleading.
11.4 AMENDMENTS AND WAIVERS. Except as otherwise provided
herein, no modification, amendment or waiver of any provision of this
Agreement will be effective against the Company or any holder of Registrable
Securities or Restricted Securities, unless such modification, amendment or
waiver is approved in writing by the Company and the Required REI
Stockholders. Each of the Participating Stockholders and the Company shall be
bound by each modification, amendment or waiver authorized in accordance with
this Section 11.4, regardless of whether the certificates evidencing the
Registrable Securities or the Restricted Securities shall have been marked to
indicate such modification, amendment or waiver. The failure of any party
hereto to enforce any of the provisions of this Agreement will in no way be
construed as a waiver of such provisions and will not affect the right of
such party thereafter to enforce each and every provision of this Agreement
in accordance with its terms.
11.5 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors and permitted assigns. In addition,
whether or not any express assignment has been made, the provisions of this
Agreement which are for the benefit of purchasers or holders of Registrable
Securities are also for the benefit of, and enforceable by, any subsequent
holder of Registrable Securities, except to the extent reserved to or by the
transferor in connection with any such transfer; PROVIDED, HOWEVER, that the
benefits of this Agreement shall inure to and be enforceable by any
transferee of Registrable Securities only if such transferee shall have
executed a Registration Rights Joinder Agreement substantially in the form of
Exhibit A hereto.
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11.6 NOTICES. All notices, requests and other
communications hereunder must be in writing and will be deemed to have been
duly given only if delivered personally against written receipt or by
facsimile transmission or mailed by prepaid first class certified mail,
return receipt requested or mailed by reputable overnight courier, fee
prepaid, to the parties at the following addresses or facsimile numbers:
(a) if to the Company, to:
QAD Inc.
6450 Via Real
Carpinteria, CA 93013-2924
Facsimile No: (805)
Attn: Chief Financial Officer
with a copy to
10,000 Midlantic, #200 East
Mt. Laurel, NJ 08054-1520
Facsimile No: (856) 840-2695
Attn: General Counsel
And a copy to
Nida & Maloney, LLP
800 Anacapa Street
Santa Barbara, CA 93101-2212
Facsimile No: (805) 568-1955
Attn: Joseph E. Nida, Esq.
(b) if to any REI Stockholder, to:
Recovery Equity Investors II, L.P.
901 Mariners Island Boulevard, Suite 465
San Mateo, CA 94404
Facsimile No: (650) 578-9842
Attn: Joseph J. Finn-Egan
Jeffrey A. Lipkin
with a copy to:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Facsimile No: (212) 309-6273
Attn: James A. Mercadante, Esq.
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All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section 11.6, be deemed given
upon delivery, (ii) if delivered by facsimile transmission to the facsimile
number as provided in this Section 11.6, be deemed given upon receipt, (iii)
if delivered by mail in the manner described above to the address as provided
in this Section 11.6, be deemed given on the earlier of the third full
Business Day following the day of mailing or upon receipt, and (iv) if
delivered by overnight courier to the address provided in this Section 11.6,
be deemed given on the earlier of the first Business Day following the date
sent by such overnight courier or upon receipt (in each case regardless of
whether such notice, request or other communication is received by any other
Person to whom a copy of such notice is to be delivered pursuant to this
Section 11.6). Any party from time to time may change its address, facsimile
number or other information for the purpose of notices to that party by
giving notice specifying such change to the other parties hereto.
11.7 HEADINGS, CERTAIN CONVENTIONS. The headings used in
this Agreement have been inserted for convenience of reference only and do
not define or limit any terms or provisions hereof. Unless the context
otherwise expressly requires, all references herein to Articles, Sections and
Exhibits are to Articles and Sections of, and Exhibits to, this Agreement.
The words "herein," "hereunder" and "hereof" and words of similar import
refer to this Agreement as a whole and not to any particular Section or
provision. The words "include," "includes" and "including" shall be deemed to
be followed by the phrase "without limitation."
11.8 GENDER. Whenever the pronouns "he" or "his" are used
herein they shall also be deemed to mean "she" or "hers" or "it" or "its"
whenever applicable. Words in the singular shall be read and construed as
though in the plural and words in the plural shall be construed as though in
the singular in all cases where they would so apply.
11.9 INVALID PROVISIONS. If any provision of this Agreement
is held to be illegal, invalid or unenforceable under any present or future
law, and if the rights or obligations of any party hereto under this
Agreement will not be materially and adversely affected thereby, (i) such
provision will be fully severable, (ii) this Agreement will be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, (iii) the remaining provisions of this Agreement
will remain in full force and effect and will not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom and (iv) in
lieu of such illegal, invalid or unenforceable provision, there will be added
automatically as a part of this Agreement a legal, valid and enforceable
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible.
11.10 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the domestic laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of New York or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
New York.
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11.11 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EACH
OF THE PARTIES HERETO CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE COUNTY OF NEW YORK, STATE OF NEW YORK AND
IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS RELATING TO THIS AGREEMENT
MAY BE LITIGATED IN SUCH COURTS. EACH OF THE PARTIES HERETO ACCEPTS FOR
ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE
OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF THE PARTIES
HERETO FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF
THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE PARTY
AT THE ADDRESS SPECIFIED IN THIS AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE
15 DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO
LIMIT THE ABILITY OF ANY PARTY HERETO TO SERVE ANY SUCH LEGAL PROCESS,
SUMMONS, NOTICES AND DOCUMENTS IN ANY OTHER MANNER PERMITTED BY APPLICABLE
LAW OR TO OBTAIN JURISDICTION OVER OR TO BRING ACTIONS, SUITS OR PROCEEDINGS
AGAINST ANY OF THE OTHER PARTIES HERETO IN SUCH OTHER JURISDICTIONS, AND IN
SUCH MANNER, AS MAY BE PERMITTED BY ANY APPLICABLE LAW.
11.12 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO
HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. EACH OF THE PARTIES
HERETO ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT,
BUT FOR THIS WAIVER, BE REQUIRED OF SUCH PARTY. THE SCOPE OF THIS WAIVER IS
INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN
ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING
WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND
ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH OF THE PARTIES HERETO FURTHER
WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL, AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS
WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT
MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
11.13 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
25
<PAGE>
[Signature Page Follows]
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
QAD INC.
By:___________________________________
Name:
Title:
RECOVERY EQUITY INVESTORS II, L.P.
By: RECOVERY EQUITY PARTNERS II, L.P.,
its General Partner
By: _____________________________
Name: Joseph J. Finn-Egan
Title: General Partner
By: _____________________________
Name: Jeffrey A. Lipkin
Title: General Partner
[Signature Page to Registration Rights Agreement]
<PAGE>
EXHIBIT A
Form of Registration Rights Joinder Agreement
QAD Inc.
6450 Via Real
Carpinteria, CA 93013-2924
Attention: Chief Financial Officer
Ladies & Gentlemen:
In consideration of the transfer to the undersigned of ____
shares of Common Stock of QAD Inc., a Delaware corporation (the "COMPANY"), by
[INSERT NAME OF TRANSFEROR], the undersigned agrees that, as of the date written
below, [HE][SHE][IT] shall become a party to that certain Registration Rights
Agreement dated as of December 23, 1999, as such agreement may have been amended
from time to time (the "AGREEMENT"), among the Company and the persons named
therein, and shall be fully bound by, and subject to, all of the covenants,
terms and conditions of the Agreement that were applicable to the undersigned's
transferor, as though an original party thereto, and shall be deemed an
Additional Stockholder for all purposes thereof.
Executed as of the day of , .
SIGNATORY:
Address:
ACKNOWLEDGED AND
ACCEPTED:
QAD INC.
By
Name:
Title:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.48
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 10.48
<TEXT>
<PAGE>
EXHIBIT 10.48
ENTERPRISE ENGINES, INC.
STOCK PURCHASE AGREEMENT
dated as of December 15, 1999
by and among
QAD INC.
("Purchaser")
and
DAVID A. TAYLOR
("SELLER")
and
ENTERPRISE ENGINES, INC.
("COMPANY")
with respect to
One Hundred Percent of the Outstanding Common Stock of
ENTERPRISE ENGINES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I SALE OF SHARES AND CLOSING.............................................................................1
1.1 Purchase and Sale. ............................................................................1
1.2 Purchase Price. ...............................................................................1
1.3 Closing. ......................................................................................1
1.4 Further Assurances; Post-Closing Cooperation. .................................................2
1.5 Seller's Retention of Certain Rights. .........................................................2
1.6 Company Source Code. ..........................................................................2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER..............................................................2
2.1 Authority. ....................................................................................3
2.2 Organization of the Company. ..................................................................3
2.3 Capital Stock. ................................................................................3
2.4 Subsidiaries. .................................................................................3
2.5 No Conflicts. .................................................................................3
2.6 Governmental Approvals and Filings. ...........................................................4
2.7 Books and Records. ............................................................................4
2.8 Financial Statements; Assets and Liabilities. .................................................4
2.9 Absence of Changes. ...........................................................................5
2.10 No Undisclosed Liabilities. ...................................................................6
2.11 Taxes. ........................................................................................6
2.12 Legal Proceedings...............................................................................7
2.13 Compliance With Laws and Orders. ..............................................................7
2.14 Benefit and Compensation Plans. ...............................................................7
2.15 Real Property...................................................................................7
2.16 Tangible Personal Property; Investment Assets...................................................8
2.17 Intellectual Property...........................................................................8
2.18 Contracts. ...................................................................................10
2.19 Licenses. ....................................................................................10
2.20 Insurance. ...................................................................................11
2.21 Affiliate Transactions. ......................................................................11
2.22 Employees; Labor Relations. ..................................................................11
2.23 Environmental Matters. .......................................................................11
2.24 Bank and Brokerage Accounts; Investment Assets. ..............................................12
2.25 No Powers of Attorney. .......................................................................12
2.26 Accounts Receivable. .........................................................................13
2.27 Brokers. .....................................................................................13
2.28 Disclosure. ..................................................................................13
2.29 Warranties and Indemnities. ..................................................................13
2.30 Confidentiality Agreements. ..................................................................13
2.31 Products. ....................................................................................14
2.32 Product Liability. ...........................................................................14
2.33 Year 2000 Compliance. ........................................................................14
2.34 Seller's Investment Representations. .........................................................14
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
<S> <C>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER.........................................................15
3.1 Organization. ................................................................................15
3.2 Authority. ...................................................................................15
3.3 No Conflicts. ................................................................................15
3.4 Governmental Approvals and Filings. ..........................................................15
3.5 QAD Stock. ...................................................................................15
3.6 Reports; Financial Statements. ...............................................................15
3.7 Absence Of Certain Changes. ..................................................................16
ARTICLE IV COVENANTS OF SELLER, THE COMPANY AND
PURCHASER....................................................................................16
4.1 Regulatory and Other Approvals. ..............................................................16
4.2 Investigation by Purchaser. ..................................................................17
4.3 No Solicitations. ............................................................................17
4.4 Conduct of Business. .........................................................................17
4.5 Financial Statements and Reports; Filings......................................................18
4.6 Certain Restrictions. ........................................................................18
4.7 Affiliate Transactions. ......................................................................19
ARTICLE V COVENANT OF PURCHASER.................................................................................20
5.1 Form S-3. ....................................................................................20
ARTICLE VI CONDITIONS TO OBLIGATIONS OF PURCHASER
AND SELLER...................................................................................20
6.1 Conditions to Obligations of Purchaser. ......................................................20
6.2 Conditions to Obligations of Seller. .........................................................22
ARTICLE VII SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS...............................................................................24
7.1 Survival of Representations, Warranties, Covenants and
Agreements. ..................................................................................24
ARTICLE VIII INDEMNIFICATION....................................................................................24
8.1 Indemnification................................................................................24
8.2 Method of Asserting Claims. ..................................................................25
ARTICLE IX TERMINATION..........................................................................................27
9.1 Termination. .................................................................................27
9.2 Effect of Termination. .......................................................................28
ARTICLE X DEFINITIONS...........................................................................................28
10.1 Definitions....................................................................................28
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
<S> <C>
ARTICLE XI MISCELLANEOUS........................................................................................34
11.1 Notices. .....................................................................................34
11.2 Entire Agreement. ............................................................................35
11.3 Expenses. ....................................................................................35
11.4 Public Announcements. ........................................................................35
11.5 Confidentiality. .............................................................................36
11.6 Waiver. ......................................................................................36
11.7 Amendment. ...................................................................................36
11.8 No Third Party Beneficiary. ..................................................................36
11.9 No Assignment; Binding Effect. ...............................................................37
11.10 Headings. ....................................................................................37
11.11 Arbitration. .................................................................................37
11.12 Consent to Jurisdiction and Service of Process. ..............................................37
11.13 Invalid Provisions. ..........................................................................38
11.14 Governing Law. ...............................................................................38
11.15 Post-Closing Operation of Business. ..........................................................38
11.16 Counterparts. ................................................................................38
</TABLE>
iii
<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT dated as of December 15, 1999 is made and
entered into by and among QAD Inc., a Delaware corporation ("PURCHASER") and
DAVID A. TAYLOR ("SELLER") and ENTERPRISE ENGINES, INC. (the "COMPANY").
Capitalized terms not otherwise defined herein have the meanings set forth in
SECTION 9.1.
WHEREAS, Seller owns Two Million One Hundred (2,000,100) shares of
common stock, without par value, of the Company, constituting One Hundred
Percent (100%) of the issued and outstanding shares of common stock of the
Company (such shares being referred to herein as the "SHARES"); and
WHEREAS, Seller desires to sell, and Purchaser desires to purchase, all
of the Shares on the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
SALE OF SHARES AND CLOSING
1.1 PURCHASE AND SALE. Seller agrees to sell to Purchaser, and
Purchaser agrees to purchase from Seller, all of the right, title and interest
of Seller in and to the Shares at the Closing on the terms and subject to the
conditions set forth in this Agreement.
1.2 PURCHASE PRICE. The consideration for the purchase of the Shares
is: (i) ONE MILLION DOLLARS ($1,000,000), payable FIVE HUNDRED THOUSAND DOLLARS
($500,000) in immediately available funds at the Closing, as hereinafter
defined, in the manner provided in SECTION 1.3, together with a one (1) year
Promissory Note in the form attached hereto as EXHIBIT A (the "PROMISSORY
NOTE"), and (ii) the issuance of up to One Hundred Twenty Thousand (120,000)
shares of the Purchaser's common stock, upon the achievement of the Milestones
as set forth in the Escrow Agreement in the form attached hereto as EXHIBIT B
(the "QAD STOCK") to be deposited in escrow with Santa Barbara Bank & Trust and
to be released as the Milestones are reached or returned to the Purchaser if the
Milestones are not achieved (the cash payment, the Promissory Note and the QAD
Stock are collectively referred to as the "PURCHASE PRICE"). The Seller will be
responsible for all ordinary income taxes and capital gains taxes which may be
due as a result of receipt of the Purchase Price.
1.3 CLOSING. The Closing will take place at the offices of Purchaser,
6450 Via Real, Carpenteria, California, U.S.A. 93103, or at such other place as
Purchaser and Seller mutually agree, on the Closing Date, as hereinafter
defined. At the Closing, Purchaser will pay the Purchase Price by wire transfer
of immediately available funds to such account as Seller may reasonably direct
by written notice delivered to Purchaser by Seller at least two (2) Business
Days before the Closing Date. Simultaneously, Seller will assign and transfer to
Purchaser all of
<PAGE>
Seller's right, title and interest in and to the Shares by delivering to
Purchaser a certificate or certificates representing the Shares, in genuine
and unaltered form, duly endorsed in the name of Purchaser or its designee.
At the Closing, there shall also be delivered to Seller and Purchaser the
opinions, certificates and other documents and instruments to be delivered
under ARTICLE VI.
1.4 FURTHER ASSURANCES; POST-CLOSING COOPERATION. At any time or from
time to time after the Closing, Seller shall execute and deliver to Purchaser
such other documents and instruments, provide such materials and information and
take such other actions as Purchaser may reasonably request more effectively to
vest title to the Shares in Purchaser and, to the full extent permitted by Law,
to put Purchaser in actual possession and operating control of the Company and
its Assets and Properties and Books and Records, and otherwise to cause Seller
to fulfill his obligations under this Agreement to which he is a party. The
obligation of Seller under this SECTION 1.4 shall survive until two (2) years
following the Closing Date.
1.5 SELLER'S RETENTION OF CERTAIN RIGHTS. The Seller wishes to secure
certain Intellectual Property rights from the Company which the Seller was
instrumental in creating, and Purchaser is agreeable to the Company's divestment
of such Intellectual Property rights, as follows. The Company hereby agrees to
assign, effective as of immediately following the Closing without any further
action required on the part of any of Seller, Purchaser or the Company, all its
right, title and interest in and to (collectively, the "Divested IP"): (i) the
trademark "Convergent Engineering" (the "Name"); (ii) the copyright to the book,
"Business Engineering With Object Technology" (the "Book"); and (iii) any
royalty or license agreements associated with the Name and/or the Book. Company
and Purchaser agree to execute any documents reasonably necessary to vest in the
Seller all such right, title and interest in and to the Divested IP. Except for
the Divested IP, Seller has no other rights to the Company or its Assets and
Properties. The Company shall retain, and, together with Seller, hereby grants
to Purchaser, effective as of the Closing, transferable, worldwide,
non-exclusive, royalty-free, licenses to make, use and sell the Divested IP in
the state Divested IP exists at the Closing, whether or not utilized
independently or included in the Purchaser's software products. The license
includes all rights necessary to utilize the Company's and the Purchaser's
software and create derivative works in and to the Divested IP and to create
appropriate documentation, training and marketing materials. The parties hereto
agree and acknowledge that the value of the Divested IP is $5,000.00. Except as
provided herein, the Seller has no other rights to the Company or its Assets and
Properties.
1.6 COMPANY SOURCE CODE. The Seller acknowledges that it has deposited
into Escrow with Robert Stephens the Company's Enterprise Engine Source Code
which will be delivered by Robert Stephens to the Purchaser upon the Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Except with respect to any contract, arrangement or understanding
between the Company and Purchaser, as to which Seller makes no representation,
warranty or covenant, Seller hereby represents and warrants to Purchaser as
follows:
2
<PAGE>
2.1 AUTHORITY. The execution and delivery by Seller of this Agreement
to which he is a party, and the performance by Seller of his obligations
hereunder and thereunder, have been duly and validly authorized by the Seller,
no other action on the part of Seller being necessary. This Agreement has been
duly and validly executed and delivered by Seller and constitutes the legal,
valid and binding obligations of Seller enforceable against Seller in accordance
with its terms.
2.2 ORGANIZATION OF THE COMPANY. The Company is a corporation duly
organized, validly existing and in good standing under the State of California,
and has full corporate power and authority to conduct its business as and to the
extent now conducted and to own, use and lease its Assets and Properties.
SECTION 2.2 OF THE DISCLOSURE SCHEDULE lists all lines of business in which the
Company is participating or engaged. The Company is duly qualified, licensed or
admitted to do business and is in good standing in the State of California,
which is the only jurisdiction in which the ownership, use or leasing of its
Assets and Properties, or the conduct or nature of its business, makes such
qualification, licensing or admission necessary, except for those jurisdictions
in which the adverse effects of all such failures by the Company to be
qualified, licensed or admitted and in good standing can in the aggregate be
eliminated without material cost or expense by the Company, as the case may be,
becoming qualified or admitted and in good standing. The name of each director
and officer of the Company on the date hereof, and the position with the Company
held by each, are listed in SECTION 2.2 OF THE DISCLOSURE SCHEDULE. Seller has
prior to the execution of this Agreement delivered to Purchaser true and
complete copies of the Articles of Incorporation and the Bylaws of the Company
as in effect on the date hereof.
2.3 CAPITAL STOCK. The authorized capital stock of the Company consists
solely of Forty Million (40,000,000) shares of Common Stock, of which only the
Shares have been issued, and of which the Shares represent One Hundred Percent
(100%) of the entire outstanding common stock of the Company, and Twenty Million
(20,000,000) shares of Preferred Stock. Shares of Series A Preferred Stock have
been authorized, of which One Million (1,000,000) is outstanding. The Shares are
duly authorized, validly issued, outstanding, fully paid and nonassessable.
Seller owns the Company Shares, beneficially and of record, free and clear of
all Liens. Except for options or warrants disclosed in SECTION 2.3 of the
Disclosure Schedule, there are no outstanding stock options or warrants or other
securities or debt which is convertible into common stock. The delivery of a
certificate or certificates at the Closing representing the Shares in the manner
provided in SECTION 1.3 will transfer to Purchaser good and valid title to the
Shares, free and clear of all Liens.
2.4 SUBSIDIARIES. The Company does not have, nor has it ever had, any
Subsidiaries.
2.5 NO CONFLICTS. The execution and delivery by Seller of this
Agreement do not conflict with the performance by Seller of his obligations
under this Agreement and the consummation of the transactions contemplated
hereby and thereby will not:
(a) conflict with or result in a violation or breach of any of
the terms, conditions or provisions of the articles of incorporation or by-laws
(or other comparable corporate charter documents) of the Company or any
Subsidiary;
3
<PAGE>
(b) conflict with or result in a violation or breach of any
term or provision of any Law or Order applicable to Seller, the Company or any
Subsidiary or any of their respective Assets and Properties; or
(c) except as disclosed in SECTION 2.5 OF THE DISCLOSURE
SCHEDULE, (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default under,
(iii) require Seller, the Company or any Subsidiary to obtain any consent,
approval or action of, make any filing with or give any notice to any Person as
a result or under the terms of, (iv) result in or give to any Person any right
of termination, cancellation, acceleration or modification in or with respect
to, (v) result in or give to any Person any additional rights or entitlement to
increased, additional, accelerated or guaranteed payments under, or (vi) result
in the creation or imposition of any Lien upon the Company or any Subsidiary or
any of their respective Assets and Properties under, any material Contract or
License to which Seller, the Company or any Subsidiary is a party or by which
any of their respective Assets and Properties is bound.
2.6 GOVERNMENTAL APPROVALS AND FILINGS. No consent, approval or action
of, filing with or notice to any Governmental or Regulatory Authority on the
part of Seller, the Company or any Subsidiary is required in connection with the
execution, delivery and performance of this Agreement to which it is a party or
the consummation of the transactions contemplated hereby or thereby.
2.7 BOOKS AND RECORDS. The minute books and other similar records of
the Company as made available to Purchaser prior to the execution of this
Agreement contain a true and complete record, in all material respects, of all
action taken at all meetings and by all written consents in lieu of meetings of
the stockholders, the boards of directors and committees of the boards of
directors of the Company. The stock transfer ledgers, stock option schedules,
and other similar records of the Company as made available to Purchaser prior to
the execution of this Agreement accurately reflect all record transfers prior to
the execution of this Agreement in the capital stock of the Company. The Company
has not recorded, stored, maintained, operated or otherwise wholly or partly
dependent upon or held any of its Books and Records by any means (including any
electronic, mechanical or photographic process, whether computerized or not)
which (including all means of access thereto and therefrom) are not under the
exclusive ownership and direct control of the Company.
2.8 FINANCIAL STATEMENTS; ASSETS AND LIABILITIES. Prior to the
execution of this Agreement, Seller has delivered to Purchaser a true and
complete copy of the unaudited balance sheet of the Company as of November 30,
1999, a copy of which is attached hereto as EXHIBIT C, and the related unaudited
statements of operations, stockholders' equity and cash flows for the portion of
the fiscal year then ended.
Except as set forth in the notes thereto, all such financial statements
(i) were prepared in accordance with GAAP, (ii) fairly present the consolidated
financial condition and results of operations of the Company as of the
respective dates thereof and for the respective periods covered thereby, and
(iii) were compiled from the Books and Records of the Company regularly
maintained by management and used to prepare the financial statements of the
Company in accordance with the principles stated therein. The Company has
maintained its Books and
4
<PAGE>
Records in a manner sufficient to permit the preparation of financial
statements in accordance with GAAP.
2.9 ABSENCE OF CHANGES. Except for the execution and delivery of this
Agreement and the transactions to take place pursuant hereto and thereto on or
prior to the Closing Date, since the Financial Statement Date there has not been
any material adverse change, or any event or development which, individually or
together with other such events, could reasonably be expected to result in a
material adverse change, in the Business or Condition of the Company. Without
limiting the foregoing, there has not occurred between the Financial Statement
Date and the date hereof:
(i) any declaration, setting aside or payment of any dividend
or other distribution in respect of the capital stock of the Company, or any
direct or indirect redemption, purchase or other acquisition by the Company of
any such capital stock of or any Option with respect to the Company;
(ii) any authorization, issuance, sale or other disposition by
the Company of any shares of capital stock of or Option with respect to the
Company, or any modification or amendment of any right of any holder of any
outstanding shares of capital stock of or Option with respect to the Company;
(iii) (A) incurrences by the Company of Indebtedness in an
aggregate principal amount exceeding $25,000 (net of any amounts discharged
during such period), or (B) any voluntary purchase, cancellation, prepayment or
complete or partial discharge in advance of a scheduled payment date with
respect to, or waiver of any right of the Company under, any Indebtedness of or
owing to the Company;
(iv) any physical damage, destruction or other casualty loss
(whether or not covered by insurance) affecting any of the real or personal
property or equipment of the Company or any Subsidiary in an aggregate amount
exceeding $25,000;
(v) any material change in (x) any pricing, investment,
accounting, financial reporting, inventory, credit, allowance or Tax practice or
policy of the Company, or (y) any method of calculating any bad debt,
contingency or other reserve of the Company for accounting, financial reporting
or Tax purposes, or any change in the fiscal year of the Company;
(vi) any write-off or write-down of or any determination to
write off or write down any of the Assets and Properties of the Company in an
aggregate amount exceeding $25,000;
(vii) any acquisition or disposition of, or incurrence of a
Lien (other than a Permitted Lien) on, any Assets and Properties of the Company,
other than in the ordinary course of business consistent with past practice;
(viii) any (x) amendment of the certificate or acts of
incorporation or by-laws (or other comparable corporate charter documents) of
the Company, (y) recapitalization, reorganization, liquidation or dissolution of
the Company or (z) merger or other business combination involving the Company
and any other Person;
5
<PAGE>
(ix) any entering into, amendment, modification, termination
(partial or complete) or granting of a waiver under or giving any consent with
respect to (A) any Contract which is required (or had it been in effect on the
date hereof would have been required) to be disclosed in the Disclosure Schedule
pursuant to SECTION 2.18(A) or (B) any material License held by the Company;
(x) capital expenditures or commitments for additions to
property, plant or equipment of the Company constituting capital assets in an
aggregate amount exceeding $25,000;
(xi) any commencement or termination by the Company of any
line of business;
(xii) any transaction by the Company with Seller, any officer,
director or Affiliate (other than the Company) of Seller (A) other than on an
arm's-length basis, other than pursuant to any Contract in effect on the
Financial Statement Date and disclosed pursuant to SECTION 2.18(A)(VII) OF THE
DISCLOSURE SCHEDULE;
(xiii) any entering into of a Contract to do or engage in any
of the foregoing after the date hereof;
(xiv) any other transaction involving or development affecting
the Seller outside the ordinary course of business consistent with past
practice; or
(xv) any increase in the annual level of compensation of any
employee whose compensation from the Company in the last preceding fiscal year
exceeded $50,000, or any grant of any unusual or extraordinary bonuses, benefits
or other forms of direct or indirect compensation to any current or former
employee, officer, director or consultant, except in amounts in keeping with
past practices by formulas or otherwise.
2.10 NO UNDISCLOSED LIABILITIES. To the Knowledge of Seller, Except as
reflected or reserved against in the balance sheet included in the Financial
Statements or in the notes thereto or as disclosed in SECTION 2.10 OF THE
DISCLOSURE SCHEDULE, there are no Liabilities against, relating to or affecting
the Company or any of its Assets and Properties, other than Liabilities which,
individually or in the aggregate, are not material to the Business or Condition
of the Company.
2.11 TAXES. The Company has filed all Tax Returns which are required to
have been filed in any jurisdiction, and have paid all Taxes shown to be due and
payable on the Tax Returns and all other Taxes payable by the Company to the
extent the same have become due and payable and before they have become
delinquent. The Seller knows of no proposed material Tax assessment against the
Company and all Tax liabilities are adequately provided for on the Books and
Records of the Company. There are no pending or, to the Knowledge of Seller,
threatened Actions or Proceedings against the Company with respect to any Taxes.
With respect to any Tax audits, the Company has not received any adverse notice
or communication of any kind or nature whatsoever from any Governmental or
Regulatory Authority with respect to any Tax Returns filed by the Company. No
Liens for Taxes (other than with respect to Taxes not yet due and payable)
encumber any of the Assets and Properties of the Company.
6
<PAGE>
2.12 LEGAL PROCEEDINGS.
(a) there are no Actions or Proceedings pending or, to the
Knowledge of Seller, threatened against, relating to or affecting Seller, the
Company or any Subsidiary or any of their respective Assets and Properties which
(i) could reasonably be expected to result in the issuance of an Order
restraining, enjoining or otherwise prohibiting or making illegal the
consummation of any of the transactions contemplated by this Agreement or
otherwise result in a material diminution of the benefits contemplated by this
Agreement, or (ii) if determined adversely to the Company, could reasonably be
expected to result in (x) any injunction or other equitable relief against the
Company that would interfere in any material respect with its business or
operations or (y) Losses by the Company or any Subsidiary, individually or in
the aggregate with Losses in respect of other such Actions or Proceedings,
exceeding $5,000;
(b) there are no facts or circumstances Known to Seller that
could reasonably be expected to give rise to any Action or Proceeding that would
be required to be disclosed pursuant to clause (a) above; and
(c) there are no Orders outstanding against the Company.
2.13 COMPLIANCE WITH LAWS AND ORDERS. The Company is not and has not at
any time within the last five (5) years been, or has received any notice that it
is or has at any time within the last five (5) years been, in violation of or in
default under, in any material respect, any Law or Order applicable to the
Company or any of its Assets and Properties.
2.14 BENEFIT AND COMPENSATION PLANS. The Company has a Section 401-K
Employee Benefit Plan, a copy of which has been made available to Purchaser, and
has no other employee benefit or compensation plans except as set forth in
SECTION 2.14 OF THE DISCLOSURE SCHEDULE.
2.15 REAL PROPERTY.
(a) SECTION 2.15(A) OF THE DISCLOSURE SCHEDULE contains a true
and correct list of each parcel of real property leased by the Company. The
Company owns no real property.
(b) The Company has adequate rights of ingress and egress with
respect to the real property listed in SECTION 2.15(A) OF THE DISCLOSURE
SCHEDULE and all buildings, structures, facilities, fixtures and other
improvements thereon. To the Knowledge of Seller, none of such real property,
buildings, structures, facilities, fixtures or other improvements, or the use
thereof, contravenes or violates any building, zoning, administrative,
occupational safety and health or other applicable Law in any material respect
(whether or not permitted on the basis of prior nonconforming use, waiver or
variance).
(c) The Company has a valid and subsisting leasehold estate in
and the right to quiet enjoyment of the real properties leased by it for the
full term of the lease thereof. Each lease referred to in paragraph (a) above is
a legal, valid and binding agreement, enforceable in accordance with its terms,
of the Company and, to the Knowledge of Seller, of each other Person that is a
party thereto, and, there is no, and the Company has not received notice of any,
default (or any condition or event which, after notice or lapse of time or both,
would constitute a default)
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thereunder. The Company does not owe any brokerage commissions with respect
to any such leased space.
(d) Seller has delivered to Purchaser prior to the execution
of this Agreement true and complete copies of all leases (including any
amendments and renewal letters).
(e) The improvements on the real property identified in
SECTION 2.15(A) OF THE DISCLOSURE SCHEDULE are in good operating condition and
in a state of good maintenance and repair, ordinary wear and tear excepted, are
adequate and suitable for the purposes for which they are presently being used
and, to the Knowledge of Seller, there are no condemnation or appropriation
proceedings pending or threatened against any of such real property or the
improvements thereon.
2.16 TANGIBLE PERSONAL PROPERTY; INVESTMENT ASSETS.
(a) The Company is in possession of and has good title to, or
has valid leasehold interests in or valid rights under Contract to use, all
tangible personal property used in or reasonably necessary for the conduct of
their business, including all tangible personal property reflected on the
balance sheet included in the Financial Statements and tangible personal
property acquired since the Financial Statement Date other than property
disposed of since such date in the ordinary course of business consistent with
past practice. All such tangible personal property is free and clear of all
Liens, other than Permitted Liens, and is in good working order and condition,
ordinary wear and tear excepted, and its use complies in all material respects
with all applicable Laws.
(b) SECTION 2.16(B) OF THE DISCLOSURE SCHEDULE describes each
Investment Asset owned by the Company on the date hereof. Except as disclosed in
SECTION 2.16(B) OF THE DISCLOSURE SCHEDULE, all such Investment Assets are owned
by the Company free and clear of all Liens other than Permitted Liens.
2.17 INTELLECTUAL PROPERTY.
(a) To the Knowledge of Seller, Company owns, or is licensed
or otherwise entitled to exercise pursuant to the terms of a license or other
similar agreement identified in SECTION 2.17(A) OF THE DISCLOSURE SCHEDULE, all
rights to all Intellectual Property used in the Business as currently conducted
or in connection with products to be used in the Business currently under
development without any conflict or infringement of the rights of others. The
source code created by Company and included within the Assets and Properties of
the Company constitutes a trade secret of Company, and as a whole, is not part
of the public knowledge or literature, and Company has taken reasonable action
to protect such source code as a trade secret and has not been disclosed to any
party or retained by any party other than the Company. In addition, Company has
taken reasonable and practicable steps (including, without limitation, entering
into confidentiality and non-disclosure agreements with all officers and
employees of and consultants to Seller) to maintain the secrecy and
confidentiality of and its proprietary rights in, Company's trade secrets.
Furthermore, all of the employees of Company that have participated in the
development or creation of any of the Company's Intellectual Property are listed
in SECTION 2.17(A) OF THE DISCLOSURE SCHEDULE, and each such employee has
already
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entered, or will prior to the Closing enter, into agreements with Company
whereby each such employee assigns any and all of his or her rights in the
Intellectual Property created pursuant to his or her employment with the
Company.
(b) In addition to the foregoing, SECTION 2.17(B) OF THE
DISCLOSURE SCHEDULE lists (i) all patents and patent applications and all
registered copyrights, trade names, trademarks, service marks and other company,
product or service identifiers included in Company's Intellectual Property, and
specifies the jurisdictions in which each such Company's Intellectual Property
has been registered, including the respective registration numbers; (ii) other
than nonexclusive end user licenses entered into in the ordinary course of
business, all licenses, sublicenses and other agreements as to which Company is
a party and pursuant to which Company or any other person is authorized to use
any of Company's Intellectual Property; and (iii) all licenses relating to the
Business under which Company is or may be obligated to make royalty or other
payments. Copies of all licenses, sublicenses, and other agreements identified
pursuant to clauses (ii) and (iii) above have been delivered by Company to
Purchaser.
(c) To the Knowledge of Seller, Company is not in violation in
any material respect of any license, sublicense or agreement described in
SECTION 2.17 OF THE DISCLOSURE SCHEDULE. As a result of the execution and
delivery of this Agreement or the performance of Company's obligations hereunder
or thereunder, to Company's and Seller's knowledge, Company will not be in
violation in any material respect of any license, sublicense or agreement
described in SECTION 2.17 OF THE DISCLOSURE SCHEDULE, or lose or in any way
impair any rights pursuant thereto.
(d) To the Knowledge of Seller, Company is the owner or a
licensee of, with all necessary right, title and interest in and to (free and
clear of any liens, encumbrances or security interests) all Intellectual
Property being used or proposed to be used in the Business in connection with
products currently under development, and has rights to the use, sale, license
or disposal thereof in connection with the services or products in respect of
which such Intellectual Property are used.
(e) No claims with respect to the Intellectual Property used
in the Business have been asserted to Company, or, to Company's and Seller's
knowledge, are threatened by any person, and Seller knows of no claims (i) to
the effect that Company in the conduct of the Business infringes any copyright,
patent, trade secret, or other intellectual property right of any third party or
violates any license or agreement with any third party, (ii) contesting the
right of Company to use, sell, license or dispose of any Intellectual Property
used in the Business, or (iii) challenging the ownership, validity or
effectiveness of any of the Intellectual Property used in the Business.
(f) To the Knowledge of Seller, all trademarks, service marks,
and other company, product or service identifiers held by Company and used in
the Business are valid and subsisting.
(g) To the Knowledge of Seller, there has not been and there
is not now any unauthorized use, infringement or misappropriation of any of
Company's Intellectual Property by any third party, including, without
limitation, any service provider of Company; Company has
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not been sued or, to Company's and Seller's knowledge, charged as a defendant
in any claim, suit, action or proceeding that involves a claim of
infringement of any patents, trademarks, service marks, copyrights or other
intellectual property rights. To Company's and Seller's knowledge, Company
does not have any infringement liability due to its conduct of the Business
with respect to any patent, trademark, service mark, copyright or other
intellectual property right of another.
(h) To the Knowledge of Seller, none of Company's Intellectual
Property is subject to any outstanding order, judgment, decree, stipulation or
agreement restricting in any material manner the licensing thereof by Company.
Company has not entered into any agreement to indemnify any other person against
any charge of infringement of any Intellectual Property, except in the ordinary
course of business. Company has not entered into any agreement granting any
third party the right to bring infringement actions with respect to, or
otherwise to enforce rights with respect to, any of Company's Intellectual
Property. Company has the exclusive right to file, prosecute and maintain all
applications and registrations with respect to Company's Intellectual Property
developed or owned by Company.
(i) No person has a license to use or the right to acquire a
license to use any future version of any Company product used in or sold by the
Business or any such Company product that is under development, and no agreement
to which Company is a party will restrict Purchaser from charging customers for
any such new version. SECTION 2.17(I) OF THE DISCLOSURE SCHEDULE separately
identifies each exclusive arrangement between Company and any third party to
use, license, sublicense, sell or distribute any of Company's Intellectual
Property or any Company products sold or distributed by the Business.
2.18 CONTRACTS. SECTION 2.18 OF THE DISCLOSURE SCHEDULE contains a true
and complete list of each of Contracts or other arrangements (true and complete
copies or reasonably complete and accurate written descriptions of, together
with all amendments and supplements thereto and all waivers of any terms
thereof, have been made available to Purchaser prior to the execution of this
Agreement), to which the Company is a party or by which any of its Assets and
Properties are bound which (i) has a value in excess of $10,000.00 and (ii) is
not listed in any other section of the DISCLOSURE SCHEDULE.
2.19 LICENSES. SECTION 2.19 OF THE DISCLOSURE SCHEDULE contains a true
and complete list of all Licenses used in and material, individually or in the
aggregate, to the business or operations of the Company (and all pending
applications for any such Licenses), setting forth the grantor, the grantee, the
function and the expiration and renewal date of each. Prior to the execution of
this Agreement, Seller has delivered to Purchaser true and complete copies of
all such Licenses. Except as disclosed in SECTION 2.19 OF THE DISCLOSURE
SCHEDULE:
(i) the Company owns or validly holds all Licenses that are
material, individually or in the aggregate, to its business or operations;
(ii) each License listed in SECTION 2.19 OF THE DISCLOSURE
SCHEDULE is valid, binding and in full force and effect; and
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(iii) neither the Company is, or has received any notice that
it is, in default (or with the giving of notice or lapse of time or both, would
be in default) under any such License.
2.20 INSURANCE. SECTION 2.20 OF THE DISCLOSURE SCHEDULE contains a true
and complete list of all liability, property, workers' compensation, directors'
and officers' liability and other insurance policies currently in effect that
insure the business, operations or employees of the Company or affect or relate
to the ownership, use or operation of any of the Assets and Properties of the
Company and that (i) have been issued to the Company or (ii) have been issued to
any Person (other than the Company) for the benefit of the Company. The
insurance coverage provided by any of the policies described in clause (i) above
will not terminate or lapse by reason of the transactions contemplated by this
Agreement. Each policy listed in SECTION 2.20 OF THE DISCLOSURE SCHEDULE is
valid and binding and in full force and effect, no premiums due thereunder have
not been paid and neither the Company, nor the Person to whom such policy has
been issued has received any notice of cancellation or termination in respect of
any such policy or is in default thereunder. The insurance policies listed in
SECTION 2.20 OF THE DISCLOSURE SCHEDULE are, in light of the respective
business, operations and Assets and Properties of the Company, in amounts and
have coverages that are reasonable and customary for Persons engaged in such
businesses and operations and having such Assets and Properties. Neither the
Company, nor the Person to whom such policy has been issued has received notice
that any insurer under any policy referred to in this Section is denying
liability with respect to a claim thereunder or defending under a reservation of
rights clause.
2.21 AFFILIATE TRANSACTIONS. Except as disclosed in SECTION
2.18(a)(VII) OR SECTION 2.21(a) OF THE DISCLOSURE SCHEDULE, (i) there are no
intercompany Liabilities between the Company, on the one hand, and Seller, any
present or former officer, director or Affiliate (other than the Company) of
Seller, on the other, (ii) neither Seller nor any such present or former
officer, director or Affiliate provides or causes to be provided any assets,
services or facilities to the Company, (iii) the Company does not provide or
cause to be provided any assets, services or facilities to Seller or any such
present or former officer, director or Affiliate and (iv) the Company does not
beneficially own, directly or indirectly, any Investment Assets issued by Seller
or any such present or former officer, director or Affiliate. Except as
disclosed in SECTION 2.21(b) OF THE DISCLOSURE SCHEDULE, each of the Liabilities
and transactions listed in SECTION 2.21(a) OF THE DISCLOSURE SCHEDULE was
incurred or engaged in, as the case may be, on an arm's-length basis. Except as
disclosed in SECTION 2.21(c) OF THE DISCLOSURE SCHEDULE, since the Financial
Statement Date, all settlements of intercompany Liabilities between the Company,
on the one hand, and Seller or any such present or former officer, director or
Affiliate, on the other, have been made, and all allocations of intercompany
expenses have been applied, in the ordinary course of business consistent with
past practice. Since November 30, 1999, the Company has not made any
distributions to Seller other than normal payroll or expense reimbursement.
2.22 EMPLOYEES; LABOR RELATIONS. There are no outstanding claims
pending or, to the Knowledge of Seller, asserted by or against the Company by
any employee, consultant or former employee or former consultant of the Company.
2.23 ENVIRONMENTAL MATTERS. To the Knowledge of Seller, the Company has
obtained all Licenses which are required under applicable Environmental Laws in
connection with the conduct of the business or operations of the Company. Each
of such Licenses is in full force and
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effect and the Company is in compliance in all material respects with the
terms and conditions of all such Licenses and with any applicable
Environmental Law. In addition, to the Knowledge of Seller:
(a) No Order has been issued, no Environmental Claim has been
filed, no penalty has been assessed and no investigation or review is pending
or, to the Knowledge of Seller, threatened by any Governmental or Regulatory
Authority with respect to any alleged failure by the Company to have any License
required under applicable Environmental Laws in connection with the conduct of
the business or operations of the Company or with respect to any generation,
treatment, storage, recycling, transportation, discharge, disposal or Release of
any Hazardous Material generated by the Company or any Subsidiary, and to the
Knowledge of Seller, there are no facts or circumstances in existence which
could reasonably be expected to form the basis for any such Order, Environmental
Claim, penalty or investigation.
(b) The Company has not transported or arranged for the
transportation of any Hazardous Material to any location that is the subject of
enforcement actions by Governmental or Regulatory Authorities that may lead to
Environmental Claims against the Company.
(c) No Hazardous Material generated by the Company has been
recycled, treated, stored, disposed of or Released by the Company at any
location.
(d) No Liens have arisen under or pursuant to any
Environmental Law on any site or facility owned, operated or leased by the
Company, and no Governmental or Regulatory Authority action has been taken or,
to the Knowledge of Seller, is in process that could subject any such site or
facility to such Liens, and the Company would not be required to place any
notice or restriction relating to the presence of Hazardous Materials at any
site or facility owned by it in any deed to the real property on which such site
or facility is located.
(e) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by, or that are in the
possession of, the Company in relation to any site or facility now or previously
owned, operated or leased by the Company which have not been delivered to
Purchaser prior to the execution of this Agreement.
2.24 BANK AND BROKERAGE ACCOUNTS; INVESTMENT ASSETS. SECTION 2.24 OF
THE DISCLOSURE SCHEDULE sets forth (a) a true and complete list of the names and
locations of all banks, trust companies, securities brokers and other financial
institutions at which the Company has an account or safe deposit box or
maintains a banking, custodial, trading or other similar relationship; (b) a
true and complete list and description of each such account, box and
relationship, indicating in each case the account number and the names of the
respective officers, employees, agents or other similar representatives of the
Company having signatory power with respect thereto; and (c) a list of each
Investment Asset, the name of the record and beneficial owner thereof, the
location of the certificates, if any, therefor, the maturity date, if any, and
any stock or bond powers or other authority for transfer granted with respect
thereto.
2.25 NO POWERS OF ATTORNEY. Except as set forth in SECTION 2.25 OF THE
DISCLOSURE SCHEDULE, the Company does not have any powers of attorney or
comparable delegations of authority outstanding.
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2.26 ACCOUNTS RECEIVABLE. Except as set forth in SECTION 2.26 OF THE
DISCLOSURE SCHEDULE, the accounts and notes receivable of the Company reflected
on the balance sheet included in the Financial Statements, and all accounts and
notes receivable arising subsequent to the Financial Statement Date, (i) arose
from bona fide sales transactions in the ordinary course of business and are
payable on ordinary trade terms, (ii) are legal, valid and binding obligations
of the respective debtors enforceable in accordance with their terms, (iii) are
not subject to any valid set-off or counterclaim, (iv) do not represent
obligations for goods sold on consignment, on approval or on a sale-or-return
basis or subject to any other repurchase or return arrangement, (v) are
collectible in the ordinary course of business consistent with past practice in
the aggregate recorded amounts thereof, net of any applicable reserve reflected
in the balance sheet included in the Financial Statements, and (vi) are not the
subject of any Actions or Proceedings brought by or on behalf of the Company.
SECTION 2.26 OF THE DISCLOSURE SCHEDULE sets forth a description of any security
arrangements and collateral securing the repayment or other satisfaction of
receivables of the Company. All steps necessary to render all such security
arrangements legal, valid, binding and enforceable, and to give and maintain for
the Company, as the case may be, a perfected security interest in the related
collateral, have been taken.
2.27 BROKERS. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by Seller directly with
Purchaser without the intervention of any Person on behalf of Seller in such
manner as to give rise to any valid claim by any Person against Purchaser or the
Company for a finder's fee, brokerage commission or similar payment.
2.28 DISCLOSURE. To the Knowledge of Seller, all material facts
relating to the Business or Condition of the Company have been disclosed by the
Seller to the Purchaser in or in connection with this Agreement. No
representation or warranty contained in this Agreement, and no statement
contained in the Disclosure Schedule or in any certificate, list or other
writing furnished to Purchaser pursuant to any provision of this Agreement
(including without limitation the Financial Statements), contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
2.29 WARRANTIES AND INDEMNITIES. SECTION 2.29 OF THE DISCLOSURE
SCHEDULE sets forth a summary of all warranties and indemnities, express or
implied, relating to products sold or services rendered by the Company, and no
warranty or indemnity has been given by the Company that is not listed on
SECTION 2.29 OF THE DISCLOSURE SCHEDULE or which differs therefrom in any
respect. The Company is in compliance with all warranties described in SECTION
2.29 OF THE DISCLOSURE SCHEDULE. SECTION 2.29 OF THE DISCLOSURE SCHEDULE also
indicates all warranty and indemnity claims currently pending against the
Company.
2.30 CONFIDENTIALITY AGREEMENTS. All present or former employees,
consultants, officers and directors of the Company that have had access to the
Proprietary Assets of the Company are parties to a written agreement (a
"CONFIDENTIALITY AGREEMENT"), under which each such Person (i) is obligated to
disclose and transfer to the Company, without the receipt by such Person of any
additional value therefor (other than normal salary or fees for consulting
services), all inventions, developments and discoveries which, during the period
of employment with or performance of services for the Company, he or she makes
or conceives of either solely or
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jointly with others, that relate to any subject matter with which his or her
work for the Company may be concerned, and (ii) is obligated to maintain the
confidentiality of proprietary information of the Company. To the Knowledge
of Seller, none of the Company's present or former employees, consultants,
officers or directors is obligated under any Contract (including licenses,
covenants or commitments of any nature), or subject to any judgment, decree
or Order of any Governmental or Regulatory Authority, that would conflict
with their obligation to promote the interests of the Company with regard to
their business or the proprietary assets. To the Knowledge of Seller, neither
the execution nor the delivery of this Agreement, nor the carrying on of the
Company's business by its present or former employees and consultants, 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 of such Persons are now obligated. It is currently not necessary
nor will it be necessary for the Company to utilize any inventions of any of
such Persons (or Persons the Company currently intends to hire) made or owned
prior to their employment by or affiliation with the Company, nor is it or
will it be necessary to utilize any other assets or rights of any such
persons or entities (or Persons the Company currently intends to hire) made
or owned prior to their employment with or engagement by the Company, in
violation of any registered patents, trade names, trademarks or copyrights or
any other limitations or restrictions to which any such persons or entity is
a party or to which any of such assets or rights may be subject. To the
Knowledge of Seller, none of the Company's present or former employees,
consultants, officers, directors or shareholders that has had knowledge or
access to information relating to the proprietary assets has taken, removed
or made use of any Proprietary Assets, or any other tangible item from his or
her previous employer relating to the proprietary assets by such previous
employer which has resulted in the Company's access to or use of such
proprietary items included in the Proprietary Assets, and the Company will
not gain access to or make use of any such proprietary items in their
business.
2.31 PRODUCTS. Each of the products and services produced, sold or
provided by the Company is, and at all times has been, in compliance in all
material respects with all applicable Laws and, to the Knowledge of the Seller,
at all relevant times has been fit for the ordinary purposes for which it is
intended to be used and conforms in all material respects to any promises or
affirmations of fact made in connection with the sale of such product or
service.
2.32 PRODUCT LIABILITY. There are no claims, actions, suits, inquiries,
proceedings or investigations pending by or against the Company, or threatened
by or against relating to the Company's products and containing allegations that
such products are defective or were improperly designed or manufactured or
improperly labeled or otherwise improperly described for use.
2.33 YEAR 2000 COMPLIANCE. Seller represents and warrants that Seller
owned and controlled business systems ("SELLER'S SYSTEMS") that are part of the
Business will not have a material interruption of operations due to a Year 2000
problem provided items not owned and controlled by Seller properly exchange date
data with the Seller's Systems. Such warranty shall remain in place up to and
including one hundred eighty (180) days following January 1, 2000.
2.34 SELLER'S INVESTMENT REPRESENTATIONS. The Seller understands that
the sale of the QAD Stock has not been registered under the Securities Act of
1933, as amended (the "Securities Act") or qualified under the California
Corporations Code (the "Code") in reliance upon
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exemptions therefrom the nonpublic offerings. The Seller understands that the
QAD Stock must be held indefinitely unless the sale thereof is subsequently
registered or qualified under the Act and the Code and applicable state
securities laws or exemptions from such registration or qualification are
available. The QAD Stock is being purchased solely for the Seller's own
account for investment and not for the account of any other person and not
for distribution, assignment or resale to others or a view to distribution to
others and no other person has a direct or indirect beneficial interest in
the QAD Stock, and the certificates representing the QAD Stock will bear
appropriate restrictive legends.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
3.1 ORGANIZATION. Purchaser is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Delaware. Purchaser
has full corporate power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby.
3.2 AUTHORITY. The execution and delivery by Purchaser of this
Agreement, and the performance by Purchaser of its obligations hereunder, have
been duly and validly authorized by the Board of Directors of Purchaser, no
other corporate action on the part of Purchaser or its stockholders being
necessary. This Agreement has been duly and validly executed and delivered by
Purchaser and constitutes a legal, valid and binding obligation of Purchaser
enforceable against Purchaser in accordance with its terms.
3.3 NO CONFLICTS. The execution and delivery by Purchaser of this
Agreement and the performance by the Purchaser of its obligations under this
Agreement and the consummation of the transactions contemplated hereby will not
conflict with or result in a violation or breach of any of the terms, conditions
or provisions of the certificate of incorporation or by-laws (or other
comparable corporate charter document) of Purchaser.
3.4 GOVERNMENTAL APPROVALS AND FILINGS. Except for routine filings with
the Securities and Exchange Commission (the "SEC") that may be required pursuant
to the Securities Exchange Act of 1934, as amended, no consent, approval or
action of, filing with or notice to any Governmental or Regulatory Authority on
the part of Purchaser is required in connection with the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby.
3.5 QAD STOCK. The QAD Stock will be duly authorized, issued and
outstanding, and fully paid and non-assessable.
3.6 REPORTS; FINANCIAL STATEMENTS. Each registration statement, report,
proxy statement or information statement prepared by Purchaser since January 31,
1999, including Purchaser's Annual Report on Form 10-K for the years ended
January 31, 1999 and Purchaser's Quarterly Reports on Form 10-Q for the quarters
ended April 30, 1999 and July 31, 1999 in the form (including exhibits, annexes
and any amendments thereto) filed with the SEC (collectively,
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including any such reports filed subsequent to the date of this Agreement,
"Purchaser's Reports") complied as to form with all applicable requirements
under the Securities Act, the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations thereunder and did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not
misleading. Each of the consolidated balance sheets included in or
incorporated by reference into Purchaser's Reports (including the related
notes and schedules) fairly presents the consolidated financial position of
Purchaser and its Subsidiaries as of its date and each of the consolidated
statements of income, shareholders' investment and cash flows included in or
incorporated by reference into Purchaser's Reports (including any related
notes and schedules) fairly presents the consolidated results of operations,
statement of shareholders' investment and cash flows, as the case may be, of
Purchaser and its Subsidiaries for the periods set forth therein (subject, in
the case of unaudited statements, to the absence of notes (to the extent
permitted by the rules applicable to Form 10-Q) and to normal year-end audit
adjustments that will not be material in amount or effect), in each case in
accordance with GAAP consistently applied during the periods involved, except
as may be noted therein.
3.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed in Purchaser's
Reports filed prior to the date of this Agreement or in any press releases made
by Purchaser, since January 31, 1999, there has not been: (i) any material
change in the financial condition, liabilities and assets (taken together),
business or results of operations of Purchaser and its Subsidiaries; (ii) any
material damage, destruction or other casualty loss with respect to any asset or
property owned, leased or otherwise used by Purchaser or any of its
Subsidiaries, whether or not covered by insurance; or (iii) any change by
Purchaser in accounting principles, practices or methods, except as required by
GAAP.
ARTICLE IV
COVENANTS OF SELLER, THE COMPANY AND PURCHASER
The Seller and the Company covenant and agree with the Purchaser that,
at all times from and after the date hereof until the Closing, they will comply
with the following covenants:
4.1 REGULATORY AND OTHER APPROVALS. The Seller and the Company will as
promptly as practicable (a) take all commercially reasonable steps necessary or
desirable to obtain all consents, approvals or actions of, make all filings with
and give all notices to Governmental or Regulatory Authorities or any other
Person required of the Seller, the Company to consummate the transactions
contemplated hereby, including without limitation those described in SECTIONS
2.6 AND 2.7 OF THE DISCLOSURE SCHEDULE, (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other Persons
as the Purchaser or such Governmental or Regulatory Authorities or other Persons
may reasonably request in connection therewith and (c) cooperate with Purchaser
in connection with the performance of its obligations under SECTIONS 6.1(B) AND
(C). The Seller and the Company will provide prompt notification to the
Purchaser when any such consent, approval, action, filing or notice referred to
in clause (a) above is obtained, taken, made or given, as applicable, and will
advise the Purchaser of any communications (and, unless precluded by Law,
provide copies of any such communications that
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are in writing) with any Governmental or Regulatory Authority or other Person
regarding any of the transactions contemplated by this Agreement.
4.2 INVESTIGATION BY PURCHASER. The Seller and the Company (a) provide
the Purchaser and its officers, directors, employees, agents, counsel,
accountants, financial advisors, consultants and other representatives (together
"REPRESENTATIVES") with full access, upon reasonable prior notice and during
normal business hours, to all officers, employees, agents and accountants of the
Company and its Assets and Properties and Books and Records, and (b) furnish the
Purchaser and such other Persons with all such information and data (including
without limitation copies of Contracts, Benefit Plans and other Books and
Records) concerning the business and operations of the Company as the Purchaser
or any of such other Persons reasonably may request in connection with such
investigation.
4.3 NO SOLICITATIONS. The Seller and the Company will not take, nor
will they permit the Company or any Affiliate of Seller (or authorize or permit
any investment banker, financial advisor, attorney, accountant or other Person
retained by or acting for or on behalf of the Seller, the Company or any such
Affiliate) to take, directly or indirectly, any action to solicit, encourage,
receive, negotiate, assist or otherwise facilitate (including by furnishing
confidential information with respect to the Company or permitting access to the
Assets and Properties and Books and Records of the Company ) any offer or
inquiry from any Person concerning an Acquisition Proposal. If the Seller, the
Company or any such Affiliate (or any such Person acting for or on their behalf)
receives from any Person any offer, inquiry or informational request referred to
above, the Seller and the Company will promptly advise such Person, by written
notice, of the terms of this SECTION 4.3 and will promptly, orally and in
writing, advise the Purchaser of such offer, inquiry or request and deliver a
copy of such notice to the Purchaser.
4.4 CONDUCT OF BUSINESS. The Seller and the Company will cause the
Company to conduct business only in the ordinary course consistent with past
practice. Without limiting the generality of the foregoing, Seller and the
Company will:
(a) cause the Company to use commercially reasonable efforts
to (i) preserve intact the present business organization and reputation of the
Company, (ii) keep available (subject to dismissals and retirements in the
ordinary course of business consistent with past practice) the services of the
present officers, employees and consultants of the Company, (iii) maintain the
Assets and Properties of the Company in good working order and condition,
ordinary wear and tear excepted, (iv) maintain the good will of customers,
suppliers, lenders and other Persons to whom the Company sells goods or provides
services or with whom the Company otherwise has significant business
relationships and (v) continue all current sales, marketing and promotional
activities relating to the business and operations of the Company;
(b) except to the extent required by applicable Law, (i) cause
the Books and Records to be maintained in the usual, regular and ordinary
manner, (ii) not permit any material change in (A) any pricing, investment,
accounting, financial reporting, inventory, credit, allowance or Tax practice or
policy of the Company, or (B) any method of calculating any bad debt,
contingency or other reserve of the Company for accounting, financial reporting
or Tax purposes and (iii) not permit any change in the fiscal year of the
Company;
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(c) (i) use, and will cause the Company to use, commercially
reasonable efforts to maintain in full force and effect until the Closing
substantially the same levels of coverage as the insurance afforded under the
Contracts listed in SECTION 2.18 OF THE DISCLOSURE SCHEDULE, (ii) to the extent
requested by the Purchaser prior to the Closing Date, use all commercially
reasonable efforts to cause such insurance coverage held by any Person (other
than the Company) for the benefit of the Company to continue to be provided at
the expense of the Company for at least ninety (90) days after the Closing on
substantially the same terms and conditions as provided on the date of this
Agreement and (iii) cause any and all benefits under such Contracts paid or
payable (whether before or after the date of this Agreement) with respect to the
business, operations, employees or Assets and Properties of the Company to be
paid to the Company; and
(d) cause the Company to comply, in all material respects,
with all Laws and Orders applicable to the business and operations of the
Company, and promptly following receipt thereof to give the Purchaser copies of
any notice received from any Governmental or Regulatory Authority or other
Person alleging any violation of any such Law or Order.
4.5 FINANCIAL STATEMENTS AND REPORTS; FILINGS.
(a) As promptly as practicable after the date hereof and
before the Closing Date, the Seller will deliver to the Purchaser true and
complete copies of such financial statements, reports and analyses as may be
prepared or received by Seller or the Company relating to the business or
operations of the Company or as the Purchaser may otherwise reasonably request.
(b) As promptly as practicable, the Seller will deliver copies
of all License applications and other filings made by the Company after the date
hereof and before the Closing Date with any Governmental or Regulatory Authority
(other than routine, recurring filings made in the ordinary course of business
consistent with past practice).
4.6 CERTAIN RESTRICTIONS. Except as contemplated by this Agreement, the
Seller will cause the Company to refrain from:
(a) amending its articles of incorporation or by-laws (or
other comparable corporate charter documents) or taking any action with respect
to any such amendment or any recapitalization, reorganization, liquidation or
dissolution of any such corporation;
(b) authorizing, issuing (except pursuant to the exercise of
outstanding options to purchase Common Stock of the Company), selling or
otherwise disposing of any shares of capital stock of or any Option with respect
to the Company, or modifying or amending any right of any holder of outstanding
shares of capital stock of or Option with respect to the Company;
(c) declaring, setting aside or paying any dividend or other
distribution in respect of the capital stock of the Company, or directly or
indirectly redeeming, purchasing or otherwise acquiring any capital stock of or
any Option with respect to the Company;
(d) acquiring or disposing of, or incurring any Lien (other
than a Permitted Lien) on, any Assets and Properties;
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(e) (i) entering into, amending, modifying, terminating
(partially or completely), granting any waiver under or giving any consent with
respect to (A) any Contract that would, if in existence on the date of this
Agreement, be required to be disclosed in the Disclosure Schedule pursuant to
SECTION 2.18 or (B) any material License or (ii) granting any irrevocable powers
of attorney;
(f) violating, breaching or defaulting under in any material
respect, or taking or failing to take any action that (with or without notice or
lapse of time or both) would constitute a material violation or breach of, or
default under, any term or provision of any License held or used by the Company
or any Contract to which the Company is a party or by which any of its Assets
and Properties is bound;
(g) (i) incurring Indebtedness in an aggregate principal
amount exceeding $10,000 (net of any amounts of Indebtedness discharged during
such period), or (ii) voluntarily purchasing, canceling, prepaying or otherwise
providing for a complete or partial discharge in advance of a scheduled payment
date with respect to, or waiving any right of the Company under, any
Indebtedness of or owing to the Company;
(h) engaging with any Person in any merger or other business
combination;
(i) making capital expenditures or commitments for additions
to property, plant or equipment constituting capital assets in an aggregate
amount exceeding $10,000;
(j) making any change in the lines of business in which they
participate or are engaged;
(k) writing off or writing down any of their Assets and
Properties;
(l) except as set forth in SECTION 4.6(L) OF THE DISCLOSURE
SCHEDULe, modifying any compensation terms or paying any bonuses to a current or
former employee, director, consultant or Affiliate; or
(m) entering into any Contract to do or engage in any of the
foregoing.
4.7 AFFILIATE TRANSACTIONS. Except as set forth in SECTION 4.7 OF THE
DISCLOSURE SCHEDULE, immediately prior to the Closing, all Indebtedness and
other amounts owing under Contracts between the Seller, the Company, any
officer, director or Affiliate (other than the Company) of Seller, on the one
hand, and the Company, on the other, will be paid in full, and Seller will
terminate and will cause any such officer, director or Affiliate to terminate
each Contract with the Company. Prior to the Closing, the Company will not enter
into any Contract or amend or modify any existing Contract, and will not engage
in any transaction outside the ordinary course of business consistent with past
practice or not on an arm's-length basis (other than pursuant to Contracts
disclosed pursuant to SECTION 2.21 OF THE DISCLOSURE SCHEDULE), with Seller, or
any such officer, director or Affiliate.
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ARTICLE V
COVENANT OF PURCHASER
5.1 FORM S-3. No later than 30 days after the Closing Date, Purchaser
shall file with the SEC, at Purchaser's expense a Registration Statement on Form
S-3 (the "Registration Statement") or other appropriate form under the
Securities Act to register the QAD Stock. Purchaser shall use commercially
reasonable efforts to cause the Registration Statement to remain continuously
effective, including without limitation by timely making all required filings
with the SEC and supplementing the prospectus related to the QAD Stock as
necessary, until the earlier to occur of the following: (i) Seller has disposed
of all of the shares of QAD Stock; and (ii) all of the shares of QAD Stock are
can be sold within a given 30-day period pursuant to Rule 144 of the Securities
Act.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PURCHASER AND SELLER
6.1 CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of
Purchaser hereunder to purchase the Shares are subject to the fulfillment, at or
before the Closing, of each of the following conditions (all or any of which may
be waived in whole or in part by Purchaser in its sole discretion):
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by Seller in this Agreement (other than
those made as of a specified date earlier than the Closing Date) shall be true
and correct in all material respects on and as of the Closing Date as though
such representation or warranty was made on and as of the Closing Date, and any
representation or warranty made as of a specified date earlier than the Closing
Date shall have been true and correct in all material respects on and as of such
earlier date.
(b) PERFORMANCE. Seller shall have performed and complied
with, in all material respects, each agreement, covenant and obligation required
by this Agreement to be so performed or complied with by Seller at or before the
Closing.
(c) SELLER'S CERTIFICATES. Seller shall have delivered to
Purchaser a certificate, dated the Closing Date and executed in the name and on
behalf of Seller, substantially in the form and to the effect of EXHIBIT D
hereto.
(d) ORDERS AND LAWS. There shall not be in effect on the
Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or
making illegal the consummation of any of the transactions contemplated by this
Agreement or which could reasonably be expected to otherwise result in a
material diminution of the benefits of the transactions contemplated by this
Agreement, and there shall not be pending or threatened on the Closing Date any
Action or Proceeding in, before or by any Governmental or Regulatory Authority
which could reasonably be expected to result in the issuance of any such Order
or the enactment, promulgation or deemed applicability to Purchaser, the
Company, or the transactions contemplated by this Agreement of any such Law.
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(e) REGULATORY CONSENTS AND APPROVALS. All consents, approvals
and actions of, filings with and notices to any Governmental or Regulatory
Authority necessary to permit the Seller to perform his obligations under this
Agreement and to consummate the transactions contemplated hereby and thereby (a)
shall have been duly obtained, made or given, (b) shall be in form and substance
reasonably satisfactory to Purchaser, (c) shall not be subject to the
satisfaction of any condition that has not been satisfied or waived and (d)
shall be in full force and effect, and all terminations or expirations of
waiting periods imposed by any Governmental or Regulatory Authority necessary
for the consummation of the transactions contemplated by this Agreement, shall
have occurred.
(f) THIRD PARTY CONSENTS. All consents (or in lieu thereof
waivers) to the performance by Purchaser or Seller of their obligations under
this Agreement or to the consummation of the transactions contemplated hereby
and thereby as are required under any Contract to which Purchaser, Seller or the
Company is a party or by which any of their respective Assets and Properties are
bound (a) shall have been obtained, (b) shall be in form and substance
reasonably satisfactory to Purchaser, (c) shall not be subject to the
satisfaction of any condition that has not been satisfied or waived and (d)
shall be in full force and effect, except where the failure to obtain any such
consent (or in lieu thereof waiver) could not reasonably be expected,
individually or in the aggregate with other such failures, to materially
adversely affect Purchaser or the Business or Condition of the Company or
otherwise result in a material diminution of the benefits of the transactions
contemplated by this Agreement.
(g) DUE DILIGENCE. Purchaser's due diligence investigation of
the Company shall not have disclosed any matter or matters which, individually
or in the aggregate, could reasonably be expected to materially adversely affect
the Company or the Business or Conditions of the Company.
(h) RESIGNATIONS OF DIRECTORS AND OFFICERS. Such members of
the boards of directors and such officers of the Company as are designated in a
written notice delivered prior to the Closing Date by Purchaser to Seller shall
have tendered, effective at the Closing, their resignations as such directors
and officers.
(i) CONSULTING AGREEMENT. Seller will execute a Consulting
Agreement in the form attached hereto as EXHIBIT E (the "CONSULTING AGREEMENT").
(j) RELEASE AGREEMENT. Seller will deliver a Release
Agreement, in the form attached hereto as EXHIBIT F, releasing the Company and
the Purchaser from all claims and liabilities, except for this Agreement, the
Promissory Note, the QAD Stock, the Consulting Agreement and the Noncompetition
Agreement (as defined below).
(k) EMPLOYMENT AGREEMENTS. The employees listed in SECTION
6.1(K) OF THE DISCLOSURE SCHEDULE will have executed employment agreements in a
form satisfactory to the Purchaser, together with the cancellation of any
existing options to purchase shares of the Company.
(l) PROCEEDINGS. All proceedings to be taken on the part of
Seller in connection with the transactions contemplated by this Agreement and
all documents incident
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thereto shall be reasonably satisfactory in form and substance to Purchaser,
and Purchaser shall have received copies of all such documents and other
evidences as Purchaser may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
(m) SOURCE CODE. The Seller shall have delivered the Source
Code for Enterprise Engines to Robert Stephens.
(n) PURCHASER'S LENDER AND BOARD OF DIRECTORS APPROVAL. The
Purchaser's lender and the Purchaser's Board of Directors has consented to or
approved this Agreement.
(o) NONCOMPETITION AGREEMENT. The Seller shall have executed
the Noncompetition Agreement in the form attached hereto as EXHIBIT G (the
"Noncompetition Agreement").
(p) GEMSTONE AGREEMENT. The Value-Added Remarketer Agreement
between the Company and Gemstone Systems, Inc. (the "GEMSTONE AGREEMENT") shall
remain in effect and shall be unaffected by the transactions contemplated herein
such that the Purchaser has determined that the Company may receive the full
benefit of the Gemstone Agreement and that it is valid and in full force and
effect.
6.2 CONDITIONS TO OBLIGATIONS OF SELLER. The obligations of Seller
hereunder to sell the Shares are subject to the fulfillment, at or before the
Closing, of each of the following conditions (all or any of which may be waived
in whole or in part by Seller in its sole discretion):
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by Purchaser in this Agreement (other than
those made as of a specified date earlier than the Closing Date) shall be true
and correct in all material respects on and as of the Closing Date as though
such representation or warranty was made on and as of the Closing Date, and any
representation or warranty made as of a specified date earlier than the Closing
Date shall have been true and correct in all material respects on and as of such
earlier date.
(b) PERFORMANCE. Purchaser shall have performed and complied
with, in all material respects, each agreement, covenant and obligation required
by this Agreement to be so performed or complied with by Seller at or before the
Closing.
(c) PURCHASER'S CERTIFICATE. Purchaser shall have delivered to
Seller a certificate, dated the Closing Date and executed in the name and on
behalf of Seller, substantially in the form and to the effect of EXHIBIT H
hereto.
(d) ORDERS AND LAWS. There shall not be in effect on the
Closing Date any Order or Law restraining, enjoining or otherwise prohibiting or
making illegal the consummation of any of the transactions contemplated by this
Agreement or which could reasonably be expected to otherwise result in a
material diminution of the benefits of the transactions contemplated by this
Agreement, and there shall not be pending or threatened on the Closing Date any
Action or Proceeding in, before or by any Governmental or Regulatory Authority
which could reasonably be expected to result in the issuance of any such Order
or the enactment,
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promulgation or deemed applicability to Purchaser, the Company, or the
transactions contemplated by this Agreement of any such Law.
(e) REGULATORY CONSENTS AND APPROVALS. All consents, approvals
and actions of, filings with and notices to any Governmental or Regulatory
Authority necessary to permit the Purchaser to perform its obligations under
this Agreement and to consummate the transactions contemplated hereby and
thereby (a) shall have been duly obtained, made or given, (b) shall be in form
and substance reasonably satisfactory to Seller, (c) shall not be subject to the
satisfaction of any condition that has not been satisfied or waived and (d)
shall be in full force and effect, and all terminations or expirations of
waiting periods imposed by any Governmental or Regulatory Authority necessary
for the consummation of the transactions contemplated by this Agreement, shall
have occurred.
(f) THIRD PARTY CONSENTS. All consents (or in lieu thereof
waivers) to the performance by Seller or Purchaser of their obligations under
this Agreement or to the consummation of the transactions contemplated hereby
and thereby as are required under any Contract to which Seller, Purchaser or the
Company is a party or by which any of their respective Assets and Properties are
bound (a) shall have been obtained, (b) shall be in form and substance
reasonably satisfactory to Seller, (c) shall not be subject to the satisfaction
of any condition that has not been satisfied or waived and (d) shall be in full
force and effect, except where the failure to obtain any such consent (or in
lieu thereof waiver) could not reasonably be expected, individually or in the
aggregate with other such failures, to materially adversely affect Seller or the
Business or Condition of the Company or otherwise result in a material
diminution of the benefits of the transactions contemplated by this Agreement.
(g) CONSULTING AGREEMENT. Purchaser shall have executed the
Consulting Agreement.
(h) PROCEEDINGS. All proceedings to be taken on the part of
Purchaser in connection with the transactions contemplated by this Agreement and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Seller, and Seller shall have received copies of all such documents
and other evidences as Seller may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
(i) THE COMPANY'S BOARD OF DIRECTORS APPROVAL. The Company's
Board of Directors shall have consented to or approved this Agreement.
(j) NONCOMPETITION AGREEMENT. Purchaser shall have executed
the Noncompetition Agreement.
(k) TERMINATION OF EMPLOYMENT AGREEMENT. The Company and
Seller shall have terminated the Employment Agreement, dated March 26, 1997,
between the Company and Seller.
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ARTICLE VII
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.
The representations, warranties, covenants and agreements of Seller and
Purchaser contained in this Agreement will survive the Closing for eighteen (18)
months; PROVIDED that an Indemnified Party shall be entitled to indemnification
in accordance with the terms of this Agreement provided that a Claim Notice or
Indemnity Notice (as applicable) is timely given under ARTICLE VIII on or prior
to May 15, 2001.
ARTICLE VIII
INDEMNIFICATION
8.1 INDEMNIFICATION.
(a) Subject to paragraph (c) of this Section and the other
Sections of this ARTICLE VIII, the Seller shall indemnify the Purchaser
Indemnified Parties in respect of, and hold each of them harmless from and
against, any and all Losses suffered, incurred or sustained by any of them or to
which any of them becomes subject, resulting from, arising out of or relating to
any breach of representation or warranty or nonfulfillment of or failure to
perform any covenant or agreement on the part of Seller, contained in this
Agreement.
(b) Subject to the other Sections of this ARTICLE VIII,
Purchaser shall indemnify the Seller Indemnified Parties in respect of, and hold
each of them harmless from and against, any and all Losses suffered, incurred or
sustained by any of them or to which any of them becomes subject, resulting
from, arising out of or relating to any breach of representation or warranty or
nonfulfillment of or failure to perform any covenant or agreement on the part of
Purchaser contained in this Agreement.
(c) No amounts of indemnity shall be payable in the case of a
claim by an Indemnified Party, as the case may be, under SECTION 8.2(A) unless
and until the Seller or Purchaser Indemnified Parties, as the case may be, have
suffered, incurred, sustained or become subject to Losses referred to in such
Section in excess of $10,000 in the aggregate; in which event the Indemnified
Parties shall be entitled to claim indemnity for the full amount of such Losses;
provided in no event shall the aggregate liability under this Article VIII of
Purchaser or Seller to indemnify, defend or hold harmless all Indemnified
Parties exceed Five Hundred Thousand Dollars ($500,000.00).
(d) The indemnification provisions of this Article VIII shall
constitute the sole and exclusive remedy of each party hereto with respect to
the breach or falsity of any representation or warranty, or the failure to
perform or comply with any covenant or agreement to be performed on or prior to
the Closing Date, made by another party hereto in this Agreement or in any
certificate delivered pursuant to this Agreement.
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8.2 METHOD OF ASSERTING CLAIMS. All claims for indemnification by any
Indemnified Party under SECTION 8.2 will be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which an
Indemnified Party might seek indemnity under SECTION 8.2 is asserted against or
sought to be collected from such Indemnified Party by a Person other than Seller
or any Affiliate of Seller or of Purchaser (a "THIRD PARTY CLAIM"), the
Indemnified Party shall deliver a Claim Notice with reasonable promptness to the
Indemnifying Party. If the Indemnified Party fails to provide the Claim Notice
with reasonable promptness after the Indemnified Party receives notice of such
Third Party Claim, the Indemnifying Party will not be obligated to indemnify the
Indemnified Party with respect to such Third Party Claim to the extent that the
Indemnifying Party's ability to defend has been irreparably prejudiced by such
failure of the Indemnified Party. The Indemnifying Party will notify the
Indemnified Party as soon as practicable within the Dispute Period whether the
Indemnifying Party disputes its liability to the Indemnified Party under SECTION
8.2 and whether the Indemnifying Party desires, at its sole cost and expense, to
defend the Indemnified Party against such Third Party Claim.
(i) If the Indemnifying Party notifies the
Indemnified Party within the Dispute Period that the Indemnifying Party desires
to defend the Indemnified Party with respect to the Third Party Claim pursuant
to this SECTION 8.2(A), then the Indemnifying Party will have the right to
defend, with counsel reasonably satisfactory to the Indemnified Party, at the
sole cost and expense of the Indemnifying Party, such Third Party Claim by all
appropriate proceedings, which proceedings will be vigorously and diligently
prosecuted by the Indemnifying Party to a final conclusion or will be settled at
the discretion of the Indemnifying Party (but only with the consent of the
Indemnified Party, which consent will not be unreasonably withheld, in the case
of any settlement tha