ON ASSIGNMENT, INC. FORM 10-K DATED 12/31/2001

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 of the past 90 days. Yes þ No o

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 any amendment to this Form 10-K. o

The aggregate market value of the 14,952,320 shares of voting stock (based on the closing price reported by the Nasdaq Stock Market on January 31, 2002) held by non-affiliates of the registrant as of January 31, 2002 was approximately $296,953,000. For purposes of this disclosure, shares of common stock held by persons who own 5% or more of the shares of outstanding common stock and shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the Rules and Regulations of the Act. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of January 31, 2002, the registrant had outstanding 22,678,259 shares of Common Stock, $0.01 par value.

Portions of the On Assignment, Inc. Proxy Statement for the registrant’s Annual Meeting of Stockholders scheduled to be held on June 18, 2002 are incorporated by reference into part III of this Report on Form 10-K.

This Annual Report on Form 10-K contains forward-looking statements regarding the future financial condition and results of operations and the Company’s business operations. The words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements involve risks and uncertainties. The Company’s actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors that May Affect Future Results” in item 1 of this report, as well as those discussed elsewhere in this report and the registrant’s other filings with the Securities and Exchange Commission.

On Assignment, Inc. (the “Company”), through its first temporary service, Lab Support, is a leading nationwide provider of temporary scientific professionals to laboratories in the biotechnology, pharmaceutical, food and beverage, chemical and environmental industries. In July 1998, the Company acquired substantially all of the assets, offices and operations of LabStaffers, Inc., which were added to the Lab Support temporary service. On May 12, 1997, the Company formed Assignment Ready Inc., a Canadian corporation and wholly owned subsidiary of the Company, and commenced operations in Toronto as Lab Support Canada, during the third quarter of 1997. On February 2, 1999, the Company formed On Assignment UK Limited, a UK corporation and wholly owned subsidiary of the Company. On February 16, 1999, On Assignment UK Limited formed Lab Support (UK) Limited, a UK corporation and wholly owned subsidiary of On Assignment UK Limited, and commenced operations as Lab Support UK during the first quarter of 1999. On June 5, 2000, the Company formed On Assignment Lab Support B.V., a Netherlands corporation and wholly owned subsidiary of the Company, and commenced operations during the second quarter of 2000. On August 25, 2000, the Company formed On Assignment Lab Support N.V., a Belgium corporation and wholly owned subsidiary of the Company, and commenced operations during the third quarter of 2000. On April 14, 2001, the company formed Lab Support Ireland Limited, an Ireland corporation and wholly owned subsidiary of the Company, and commenced operations during the second quarter of 2001. In January 1994, the Company established its second temporary service, Finance Support, with the acquisition of 1st Choice Personnel, Inc. Finance Support was expanded in December 1994, with the acquisition of substantially all of the assets, offices and operations of Sklar Resource Group, Inc. With a shift in Finance Support’s business development focus to medical billing and collections, in January 1997 the name of Finance Support was changed to Healthcare Financial Staffing. In the third quarter of 1999, the Company established its third temporary service, Clinical Lab Staff and in the third quarter of 2001 its fourth temporary service, Diagnostic Imaging Staff. Both of these temporary services provide scientific and medical professionals to hospitals, physicians’ offices, clinics, reference laboratories and HMOs. The Company has two operating segments: Lab Support and Healthcare Staffing, and all of the Company’s domestic operations in these segments are consolidated as divisions of the Company’s wholly-owned subsidiary, Assignment Ready, Inc., a Delaware Corporation. The Healthcare Staffing segment includes the combined results of Healthcare Financial Staffing, Clinical Lab Staff and Diagnostic Imaging Staff. The different temporary services were grouped under these two operating segments as they have similar economic characteristics and they meet the aggregation criteria of SFAS No. 131. As of December 31, 2001, the Company served 81 operational markets through a network of 171 branch offices.

On March 27, 2002, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Health Personnel Options Corporation (“HPO”), which is primarily a temporary provider of travel nurses and other allied healthcare staff to its clients. Under the terms of the Merger Agreement, HPO will be merged into a wholly-owned subsidiary of the Company. The acquisition of HPO (the “HPO Transaction”) is scheduled to be completed in April, 2002. Other terms of the Merger Transaction are described in Note 12, “Subsequent Events”, of the Notes to Consolidated Financial Statements in Item 8. The Merger Agreement has been filed as an exhibit to this Form 10-K, to which reference is made for a full understanding of the HPO Transaction.

The Company’s principal executive offices are located at 26651 West Agoura Road, Calabasas, California 91302 and its telephone number is (818) 878-7900. The Company was incorporated on December 30, 1985.

The Company’s strategy is to serve the needs of targeted industries for quality assignments of temporary professionals. In contrast to the mass market approach used for temporary office/clerical and light industrial personnel, the Company believes effective assignments of temporary professionals require the person making assignments to have significant knowledge of the client’s industry and be able to assess the specific needs of the client as well as the temporary professionals’ qualifications. As a result, the Company has developed a tailored approach to the assignment process — the Account Manager System. Unlike traditional approaches, the Account Manager System is based on the use of experienced professionals, Account Managers, to manage the assignment process. Account Managers meet with clients’ managers to understand position descriptions and workplace environments, and with temporary employee candidates to assess their qualifications and interests. With this information, Account Managers can make quality assignments of temporary professionals to clients, typically within 24 to 48 hours of client requests. The Company’s corporate office performs many functions that allow Account Managers to focus more effectively on the assignment of temporary professionals. These functions include recruiting, ongoing training and coaching, appointment making, business development and administrative support. The corporate office also selects, opens and maintains branch offices according to a standardized model. Temporary personnel assigned to clients are employees of the Company, though clients provide on-the-job supervisors for temporary personnel. Therefore, clients control and direct the work of temporary personnel and approve hours worked, while the Company is responsible for many of the activities typically handled by the client’s personnel department.

At December 31, 2001, the Company had 81 Lab Support segment branch offices and 90 Healthcare Staffing segment branch offices. Of this total of 171 branch offices, 61 branch offices involved shared office space among divisions. Through this network of branch offices, the Company served the following operational markets:

The Lab Support segment’s clients primarily include biotechnology, pharmaceutical, food and beverage, chemical and environmental companies. The Healthcare Staffing segment’s clients primarily include hospitals, central billing offices, physicians’ groups, HMO’s, clinics, reference labs and university research and student health centers. During the year ended December 31, 2001, the Company provided assignment professionals to

The skill and experience levels of the Lab Support segment’s temporary professional employees range from scientists, engineers, geologists, industrial hygienists and safety professionals with bachelor and/or masters degrees and considerable experience to technicians with limited chemistry or biology background and lab experience and environmental field technicians with some applicable experience. The skill and experience levels of the Healthcare Staffing segment’s temporary professional employee range from medical and laboratory clinical technologists to phlebotomists and medical assistants or they typically have two or more years of medical billing and collection experience.

Hourly wage rates are established according to local market conditions. The Company pays the related costs of employment including social security taxes, federal and state unemployment taxes, workers’ compensation insurance and other similar costs. After minimum service periods and hours worked, the Company also provides paid holidays, allows participation in the Company’s 401(k) Retirement Savings Plan and Employee Stock Purchase Plan, creates eligibility for an annual bonus, and facilitates access to and supplements the cost of health insurance for its temporary employees.

The Company intends to expand its services internationally and domestically in the laboratory and scientific, clinical laboratory, medical staffing and medical billing and collections fields it currently serves and to apply its approach to the assignment of temporary professionals in other fields. The Company believes that its experience with the Account Manager System and centralized operational support will enable it to enter new markets effectively. The Company continually reviews opportunities in various industries, evaluating the current volume and profitability of temporary assignments, the length of assignments, the degree of specialization necessary to be successful, the competitive environment and the applicability of its Account Manager approach. If attractive markets are identified, the Company may enter these markets through acquisition or internal growth. The Company’s January 1994 acquisition of 1st Choice Personnel, Inc., December 1994 acquisition of substantially all of the assets of Sklar Resource Group, Inc., July 1998 acquisition of substantially all of the assets of LabStaffers, Inc. and its proposed acquisition during April 2002 as described in Note 12, “Subsequent Events”, of the Notes to Consolidated Financial Statements in Item 8, were consistent with this ongoing activity, and the Company periodically engages in discussions with possible acquisition candidates.

The temporary services industry is highly competitive and fragmented and has low barriers to entry. The Company believes Lab Support is one of the few nationwide temporary service providers that specialize exclusively in scientific laboratory personnel. Although other nationwide temporary personnel companies compete with the Company with respect to scientific, clinical laboratory and medical technologist, environmental services and medical billing and collecting personnel, many of these companies focus on office/clerical and light and heavy industrial personnel, which account for approximately 80% of the overall temporary personnel services market. These companies include Manpower, Inc., Kelly Services, Inc., Adecco, and Aerotech, Inc., each of which is larger and has substantially greater financial and marketing resources than the Company.

The Company also competes with temporary personnel agencies on a regional and local basis. Frequently, the strongest competition in a particular market is a local company with established relationships. The Company also competes with its clients that directly advertise or seek referrals of qualified candidates on their own behalf.

The principal competitive factors in attracting qualified candidates for temporary employment are salaries and benefits, speed, quality and duration of assignments and responsiveness to the needs of employees. The

Company believes that many persons seeking temporary employment through the Company are also pursuing employment through other means, including other temporary employment service firms. Therefore, the speed and availability of appropriate assignments is an important factor in the Company’s ability to complete assignments of qualified candidates. In addition to having high quality temporary personnel to assign in a timely manner, the principal competitive factors in obtaining and retaining clients in the temporary services industry are correctly understanding the client’s specific job requirements, the appropriateness of the temporary personnel assigned to the client, the price of services and the monitoring of client satisfaction. Although the Company believes it competes favorably with respect to these factors, it expects competition to increase.

At December 31, 2001, the Company employed approximately 346 regular employees, including Account Managers and corporate office employees. During the year ended December 31, 2001, the Company employed approximately 16,000 temporary employees. None of the Company’s employees, including its temporary employees, are represented by a collective bargaining agreement. The Company believes its employee relations are good.

The Company’s operations are subject to applicable state and local regulations, both domestically and internationally, governing the provision of personnel placement services which require personnel companies to be licensed or separately registered. To date, the Company has not experienced any material difficulties in complying with such regulations. State mandated workers’ compensation and unemployment insurance premiums, which the Company pays for its temporary and regular employees, can have a direct effect on the Company’s cost of services and thereby, profitability.

The Company has registered its OnAssignment®, Lab Support® Healthcare Financial Staffing® and Clinical Lab Staff® service marks with the United States Patent and Trademark Office. The Company has also registered “The Quality Assignment” mark with the United States Patent and Trademark Office. The Company has also registered its Lab Support service mark in Canada and the UK and has applied for the use of the Lab Support service mark in the Netherlands and Belgium. The Company has also obtained European Community registration for its “On Assignment Employer of Knowledge Workers” logo and for “On Assignment Lab Support Science Professionals On Assignment” logo. The Company has rights in other trademarks used in connection with its business and has other applications pending for the international use of its service marks.

If the HPO Transaction is consummated under the terms of the Merger Agreement executed by the Company on March, 2002, the business of HPO will be operated by a wholly-owned subsidiary of the Company. HPO’s current business includes three operating divisions: Nurse Travel, Allied Travel, and Local Staffing.

The Nurse Travel division provides Registered Nurses (“RNs”) for contract assignments of 4 to 14 weeks or more. As of February 3, 2002, the Nurse Travel division had over 536 traveling nurse professionals on assignment and maintained contracts with approximately 325 hospitals throughout the United States. The Nurse Travel division is operated from HPO’s headquarters in Cincinnati, Ohio.

The Allied Travel division provides radiology professionals, laboratory professionals, respiratory therapists and surgical techs for contract periods of 13 weeks or more. As of February 3, 2002, Allied Travel division had 63 traveling allied healthcare professionals on assignment, and has placed personnel at over 60 hospitals during 2002. The Allied Travel division is operated from HPO’s headquarters in Cincinnati, Ohio.

The Local Staffing division places health care personnel and medical clerical personnel typically for periods of one week or longer. As of February 3, 2002, the Local Staffing division had 236 local allied and medical clerical professionals on assignment. The Local Staffing division’s clients include hospitals, physician practices, clinics and dentists. As of January 31, 2002, the Local Staffing division had 850 active clients. HPO has local staffing offices in Minneapolis, MN, Milwaukee, WI, Columbus, OH, Cincinnati, OH and Indianapolis, IN.

The Company operates in a highly competitive environment that involves a number of risks, many of which are beyond the Company’s control. The following discussion highlights some of the risks that may affect the Company’s future results.

The HPO Transaction, as discussed in Note 12, “Subsequent Events”, of the Notes to Consolidated Financial Statements in Item 8, is subject to closing conditions that could prevent the Company from completing the merger on the scheduled timetable or at all. The Company has incurred significant costs with respect to its due diligence procedures specifically related to the HPO Transaction. If the merger is not consummated, the Company will be required to expense all of the costs associated with the HPO Transaction.

Integrating the Company’s operations with those of HPO may strain the Company’s resources. The significant expansion of the Company’s business and operations, both in terms of geography and magnitude resulting from the HPO Transaction will require the dedication of management resources that may temporarily detract from the Company’s day-to-day business. These types of demands and uncertainties could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company may not be able to manage the combined operations and businesses effectively or realize any of the anticipated benefits of the HPO Transaction.

Future sales of the Company’s common stock to be issued under the terms of the Merger Agreement, may depress the Company’s stock price. Terms of the Merger Agreement require approximately 50% of the purchase price to be paid through the issuance of the Company’s common stock. Approximately 3,900,000 million shares of the Company’s common stock or 17% of its outstanding shares will be issued in connection with the HPO Transaction. The Company is obligated to register approximately 95% of these shares for resale by the holders thereof in the public market. Sales of a substantial number of these shares in the public market, or the perception that such sales could occur, could adversely affect the market price of the Company’s common stock.

Uncertainty of Future Operating Results, Quarterly Fluctuations and Seasonality. Future operating results will depend on many factors, including demand for the Company’s services, the market’s acceptance of price changes, the productivity, recruitment and retention of Account Managers, the results of the Company’s expansion into new geographic markets, the degree and nature of competition, the effectiveness of the Company’s expansion into other professions, and the Company’s ability to control costs and manage its accounts receivable. The Company and the temporary services industry as a whole typically experience seasonal declines in demand from the year-end holiday season through early February and during June, July and August. The Company has experienced variability in the duration and depth of these seasonal declines, which in turn have materially affected period-to-period and current period-to-prior period comparisons of its financial and operating performance. As a result of these and other factors, there can be no assurance that the Company will be able to grow in future periods, sustain its past rate of revenue growth or maintain profitability on a quarterly or annual basis. If in some future quarter or quarters the Company’s operating results are below the expectations of public market analysts or investors, the market price of its common stock may decline significantly.

Reliance on and Ability to Attract, Develop and Retain Account Managers. The Company relies significantly on the performance of its Account Managers, who have primary responsibility for all aspects of the process of assigning the Company’s temporary employees to clients. The Company is highly dependent on its ability to hire, develop and retain qualified Account Managers, as well as on the productivity of its Account Managers. The available pool of qualified Account Manager candidates is limited. In addition, prior to joining the Company, the typical Account Manager has no prior experience in the temporary employment industry. The Company commits substantial resources to the recruitment, training, development and operational support of its Account Managers. There can be no assurance that the Company will be able to continue to recruit, train and retain sufficient numbers of qualified Account Managers or that Account Managers will achieve desired productivity levels. Failure to achieve planned numbers of Account Managers or productivity of Account Managers could result in a material adverse effect on the Company’s financial condition, results of operations and business.

Expansion in Existing Professions and into Other Professions. The Company plans to expand its services domestically and internationally within the laboratory and scientific, clinical laboratory and medical staffing, and medical billing and collections fields it currently serves and to other professional fields. The success of the Company’s expansion efforts will depend on a number of factors, including the Company’s ability to adapt the Account Manager system used in its divisions to other industries and professions, recruit and train new Account Managers with the particular industry or professional experience, establish client relationships in new industries and successfully recruit, qualify and orient new temporary professionals. The ability to manage these factors may be more difficult or take more resources than the Company anticipates, particularly since they may involve industries, clients and professionals that the Company has no experience with. The Company may decide to pursue future expansion by internal growth or acquisition. The rate at which the Company establishes new services may significantly affect the Company’s operating and financial results, especially in the quarters of and immediately following expansion into new domestic and international professional markets. There can be no assurance that the Company will be able to successfully expand its services in the fields it currently serves, identify new professional fields suitable for expansion or continue to grow.

Planned International Operations Face Special Risks. In the first quarter of 1999, the Company expanded its operations to the UK and during 2000, the Company expanded into the Netherlands and Belgium. In the second quarter of 2001, the Company expanded its operations to Ireland. The Company intends to expand its operations in Europe in the future. The Company has limited experience in marketing, selling, and particularly, supporting its services outside of North America. Development of such skills may be more difficult or take longer than the Company anticipates, especially due to the fact that its centralized support functions in Calabasas, California will not be able to provide the same level of support to operations outside of North America as it does to its current North American operations. In addition to establishing operations support functions outside North America, the Company will have to address language barriers and different regulations of temporary employment. Moreover, international operations are subject to a variety of additional risks associated with conducting business internationally that could seriously harm the Company’s financial condition and results of operations. These risks may include the following: problems in collecting accounts receivable; the impact of recessions in economies outside the United States; unexpected changes in regulatory requirements; fluctuations in currency exchange rates; seasonal reductions in business activity during the summer months in Europe; and potentially adverse tax consequences.

Dependence on Availability of Qualified Temporary Professional Employees. The Company is dependent upon continuing to attract qualified laboratory and scientific, clinical laboratory and medical technologist, environmental services and medical billing and collecting personnel with a broad range of skills and experience in order to meet client needs. The Company competes for such personnel with other temporary personnel companies, as well as actual and potential clients, some of which seek to fill positions with either regular or temporary employees. In addition, the Company’s temporary employees sometimes become regular employees of the Company’s clients. There can be no assurance that qualified laboratory and scientific, clinical laboratory and medical technologist, environmental services, and medical billing and collections personnel will be available to the Company in adequate numbers.

Highly Competitive Market. The temporary services industry is highly competitive and fragmented, with limited barriers to entry. The Company competes in national, regional and local markets with full-service agencies and in regional and local markets with specialized temporary services agencies. Several of these companies have significantly greater marketing and financial resources than those of the Company. As the Company expands into new geographic markets, its success will depend in part on its ability to gain market share from competitors. The Company expects that competition will increase in the future and there can be no assurance that the Company will remain competitive.

Effect of Fluctuations in the General Economy. Demand for temporary services is significantly affected by the general level of economic activity. As economic activity slows, many companies reduce their usage of temporary employees before undertaking layoffs of their regular employees. As economic activity increases, many clients convert their temporary employees to regular employees which, depending on the Company’s agreement with the client and when such conversion occurs, may not result in any conversion fee revenue for the Company. The Company is unable to predict the level of economic activity at any particular time and its effect on the Company’s operating and financial results.

Terminability of Client Arrangements. The Company’s arrangements with clients are terminable at will and do not require clients to use the Company’s services. All temporary assignments, regardless of their planned length, may be terminated without advance notice. There can be no assurance that existing clients will continue to use the Company’s services at historical levels, if at all.

Employment Liability Risks. The Company employs and assigns temporary employees to the workplaces of other businesses. Inherent risks of such activity include possible claims of errors and omissions, misuse of customers’ proprietary information, discrimination and harassment, theft of client property, and other criminal activity or torts by temporary employees. The Company seeks to reduce its liability for the acts of its temporary employees by providing in its arrangements with most clients that temporary personnel work under the client’s supervision, control and direction. There can be no assurance that such arrangements will be enforceable or that, if enforceable, would be sufficient to preclude liability as a result of the actions of the Company’s temporary personnel. In addition, there can be no assurance that current liability insurance coverage will be adequate or will continue to be available in sufficient amounts.

Workers’ Compensation Expense. The Company maintains a partially self-insured workers’ compensation program. In connection with this program, the Company pays a base premium plus actual losses incurred up to certain levels, and is insured for losses greater than certain levels per occurrence and in the aggregate. The Company seeks to minimize the impact of workers’ compensation losses through a proactive claims management and accident reduction program. While the Company believes that current loss reserves are reasonable based on claims filed and an estimate of claims incurred but not yet reported, there can be no assurance that loss reserves and insurance coverage will be adequate in amount to cover all workers’ compensation claims.

Dependence on Key Officers. The Company’s future success depends in significant part upon the continued service of its key officers. Competition for such personnel is intense and there can be no assurance that the Company will retain its key officers or that it can attract or retain other highly qualified managerial personnel in the future. The loss of certain of its key officers could have a material adverse effect upon the Company’s business, operating results and financial condition.

On February 14, 2001 the Company announced that H. Tom Buelter, its Chief Executive Officer and Chairman of the Board intended to retire during 2001 as Chief Executive Officer once a successor to his position had been hired. On June 27, 2001, the Company announced the hiring of Joseph Peterson, M.D. to succeed H. Tom Buelter. On August 7, 2001, the Company announced the election of Dr. Peterson as Chief Executive Officer, effective September 1, 2001. The Company also announced that Dr. Peterson would succeed Kathy West, who announced her retirement effective September 1, 2001, as President of the Company. On February 1, 2002, the Company announced the resignation of H. Tom Buelter as Chairman of the Board effective immediately.

Government Regulations. In many states and foreign countries, the temporary services industry is regulated, and firms such as the Company must be registered or qualify for an exemption from registration. While these regulations have not materially affected the conduct of the Company’s business to date, there can be no assurance that future domestic or foreign regulations will not have such effect. Mandated workers’ compensation and unemployment insurance premiums, which the Company pays for its temporary as well as its regular employees in both its domestic and international operations, can have a direct effect on cost of services and thereby, profitability. In the past, federal legislative proposals for national health insurance have included provisions extending health insurance benefits to temporary employees and some states could impose sales taxes or raise sales tax rates on temporary services. Further increases in such premiums or rates or the introduction of new regulatory provisions could substantially raise the costs associated with hiring temporary employees and there is no assurance that these increased costs could be passed on to clients without a significant decrease in the demand for temporary employees.

Many of the risk factors relating to the Company that are described above may also affect the future results of HPO, and therefore those of the Company if the HPO transaction is completed.

The Company has leased approximately 30,500 square feet of office space through March 2004, for its corporate headquarters in Calabasas, California. In addition, the Company leases office space in 100 branch office locations in the metropolitan areas listed under the caption “Branch Office Network” in Item 1 hereof. A branch office typically occupies space ranging from approximately 1,500 to 2,500 square feet with lease terms that typically range from six months to five years.

(a) There is no material legal proceeding to which the Company is a party or to which its properties are subject.

(b) No material legal proceedings were terminated in the fourth quarter of 2001.

The executive officers of the Company and their ages as of December 31, 2001 were:

Joseph Peterson, M.D. joined the company in July 2001 and has served as Chief Executive Officer and President since September 2001. Dr. Peterson also serves as a Director of the Company and as a Director of Global Health Council, the world’s largest membership alliance dedicated to improving health worldwide. From 1992 through 2001, Dr. Peterson co-founded and was Chief Executive Officer of three companies providing innovative customer care to large institutional clients primarily in the financial services industry. From 1988 through 1991, Dr. Peterson served as Medical Director and ultimately Chief Operating Officer of

World Access, Inc., a subsidiary of Blue Cross & Blue Shield of the National Capital Area. Dr. Peterson is a Board-certified emergency physician, and practiced his specialty for ten years in the Emergency Department of the George Washington University Hospital, in Washington, D.C., where he was an Associate Professor of Emergency Medicine, and a Fellow of the American Board of Emergency Medicine.

Ronald W. Rudolph has served as Executive Vice President, Finance and Chief Financial Officer since March 2000. From January 1999 through March 2000, Mr. Rudolph served as Senior Vice President, Finance and Chief Financial Officer. From October 1996 through December 1998, Mr. Rudolph served as Senior Vice President, Finance and Operations Support, and Chief Financial Officer. From January 1996 through October 1996, Mr. Rudolph served as Senior Vice President, Finance and Administration, and Chief Financial Officer. Mr. Rudolph joined the Company in April 1995, as Vice President, Finance and Administration, and Chief Financial Officer. From April 1987 to September 1994, Mr. Rudolph was Vice President, Finance and Administration, and Chief Financial Officer of Retix, a manufacturer of enterprise networking devices, and from June 1993 to September 1994, Mr. Rudolph was a director of Retix. Mr. Rudolph holds an MBA from the University of Chicago, a Bachelor of Industrial Engineering from Ohio State University and is a Certified Public Accountant.

Dana Hallberg has served as Senior Vice President, Review and Analysis since January 2002. From July 2001 through January 2002, Ms. Hallberg served as Senior Vice President, Global Operations. From October 2000 through June 2001, Ms. Hallberg served as Senior Vice President, International Operations. From January 1999 through October 2000, Ms. Hallberg served as Vice President, International Operations. From January 1996 through December 1998, Ms. Hallberg served as Vice President with responsibilities including Business Development, U.S. and Canadian Operations. From April 1993 through December 1995, Ms. Hallberg served as Director of Operations, supporting branch offices throughout the east coast of the U.S. Ms. Hallberg joined the Company in 1991 as an Account Manager for the Piscataway, New Jersey office and served in that role through March 1993. Prior to joining the Company, Ms. Hallberg worked for Hoechst-Roussel Pharmaceuticals, Inc. (renamed Aventis) in Bridgewater, New Jersey as an Analytical Research Chemist from 1986 to 1990. From 1984 to 1986, Ms. Hallberg worked for Mobil Oil Corporation in Princeton, New Jersey as an Analytical Chemist. Ms. Hallberg holds a BS in Chemistry.

Stephen T. Minihan joined the Company in December 2001 as Senior Vice President, Field Support. From November 1995 to April 2001, Mr. Minihan was President and Director of PayPoint Electronic Payment Systems, Inc. PayPoint is a diversified electronic transactions service provider and network, operating as an incorporated subsidiary of ARCO. From August 1994 to November 1995, Mr. Minihan served as the Manager of Credit for ARCO Products Company, the petroleum refining and marketing subsidiary of ARCO. From June 1992 to August 1994, Mr. Minihan was the Manager, Corporate Finance for ARCO, an integrated petroleum and chemical company. Mr. Minihan holds an MBA with specialization in financial management from the University of Chicago and a BS in Economics from Florida State University.

Shelly Carolan has served as Senior Vice President, Lab Support Domestic Operations since November 2001. From December 1999 through November 2001, Ms. Carolan served as Vice President, East Coast Operations. From February 1999 through November 1999, Ms. Carolan served as Director of Operations. From April 1997 through January 1999, Ms. Carolan served as Manager of Operations. Ms. Carolan joined the Company in September 1994 as an Account Manager in the Piscataway, New Jersey office before opening the Elmwood Park, New Jersey office in November 1994 and continuing in the role of Account Manager through March 1997. Prior to joining the Company, Ms. Carolan worked as a Volatile Organics Department Supervisor at IEA, Inc. from April 1991 through August 1994. Ms. Carolan holds a BS from Boston University.

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The Company’s Common Stock trades on the Nasdaq Stock Market under the symbol ASGN. The following table sets forth the range of high and low sales prices, as reported on the Nasdaq Stock Market for the period from January 1, 2000 to December 31, 2001. At January 31, 2002, the Company had approximately 100 holders of record of its Common Stock (although the Company has been informed there are in excess of approximately 3,600 beneficial owners) and 22,678,259 shares outstanding.

On March 7, 2000, the Board of Directors authorized a two-for-one stock split, effected as a 100 percent common stock dividend, to be distributed on April 3, 2000 to shareholders of record as of March 27, 2000. All references to number of shares, sales prices and per share amounts of the Company’s common stock have been retroactively restated to reflect the increased number of common shares outstanding.

Since inception, the Company has not declared or paid any cash dividends on its Common Stock and currently plans to retain all earnings to support the development and expansion of its business. The Company has no present intention of paying any dividends on its Common Stock in the foreseeable future. However, the Board of Directors of the Company periodically reviews the Company’s dividend policy to determine whether the declaration of dividends is appropriate.

The following table presents selected financial data of the Company. This historical data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

The discussion in this Report contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, management of growth, particularly in international markets, risks inherent in expansion into new international markets and new professions, the integration of acquired operations, the Company’s ability to attract, train and retain qualified Account Managers and temporary employees in the laboratory, science, financial and environmental fields, and other risks discussed in “Risk Factors That May Affect Future Results” in Item 1 of this Annual Report, beginning on page 5, as well as those discussed elsewhere in this Report and from time to time in the Company’s other reports filed with the Securities and Exchange Commission.

The Company’s results have historically been subject to seasonal fluctuations. Demand for the Company’s temporary employees typically declines from the year-end holiday season through February, resulting in a corresponding decrease in revenues, operating income and net income. Demand for the Company’s temporary employees also often declines in June, July and August due to decreases in clients’ activity during vacation periods and the availability of students to perform temporary work. As a result, the Company has experienced slower growth or declines in revenues, operating income and net income during the first quarter and from the second quarter to third quarter.

Revenues. Revenues decreased by 0.2% from $195,080,000 in the year ended December 31, 2000, to $194,620,000 in the year ended December 31, 2001, as a result of the decreased revenues of both the Lab Support and the Healthcare Staffing segments.

The Lab Support segment’s revenues decreased by 0.3% from $139,986,000 in the year ended December 31, 2000, to $139,558,000 in the year ended December 31, 2001. The decrease in revenue was primarily attributable to a 4.6% decrease in the number of temporary employees on assignment from December 31, 2000 to December 31, 2001, partially offset by a 4.8% increase in average hourly billing rates during 2001. The decrease in the number of temporary employees on assignment was primarily attributable to the overall economic slowdown beginning in February 2001.

The Healthcare Staffing segment’s revenues remained relatively unchanged at $55,094,000 in the year ended December 31, 2000 and $55,062,000 in the year ended December 31, 2001. The consistency in revenue was primarily attributable to a 5.1% decrease in the number of temporary employees on assignment, offset by a 5.8% increase in average hourly billing rates during 2001. The decrease in the number of temporary employees on assignment was primarily attributable to the overall economic slowdown beginning in February 2001.

Cost of Services. Cost of services consists solely of compensation for temporary employees and payroll taxes, benefits and employment related expenses paid by the Company in connection with such compensation. Cost of services remained relatively unchanged at $131,351,000 in 2000 to $131,343,000 in 2001. The Lab Support segment’s cost of services as a percentage of revenues increased by 0.2% from 67.1% in 2000 to 67.3% in 2001. This increase was primarily attributable to a 0.3% increase in workers’ compensation and a 0.2% increase in employer paid benefits, partially offset by a 0.3% decrease in temporary employee compensation and payroll taxes in 2001. The Healthcare Staffing segment’s cost of service as a percentage of revenues remained consistent at 67.9% in 2000 and 2001. This result was primarily attributable to a 0.3% increase in workers’ compensation and a 0.2% increase in employer paid benefits, offset by a 0.5% decrease in temporary employee compensation and payroll taxes in 2001. The increase in workers’ compensation expense in both segments resulted from higher insurance policy costs and an increase in actual workers’ compensation claims reported and estimated incurred but not yet reported claims in 2001.

Manager compensation, rent, other office expenses and advertising for temporary employees, and corporate office expenses, such as the salaries of corporate operations and support personnel, management compensation, Account Manager recruiting and training expenses, corporate advertising and promotion, rent and other general and administrative expenses. Selling, general and administrative expenses increased 9.1% from $35,532,000 in 2000 to $38,766,000 in 2001. Selling, general and administrative expenses as a percentage of revenues increased from 18.2% in the 2000 period to 19.9% in the 2001 period. This result was primarily attributable to investments in Account Manager training and recruiting and an increase in the hiring of new Account Managers.

Interest Income. Interest income increased 5.5% from $2,442,000 in 2000 to $2,575,000 in 2001, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in 2001, partially offset by lower interest yields earned in 2001.

Provision for Income Taxes. Provision for income taxes decreased 11.8% from $11,392,000 in 2000 to $10,046,000 in 2001. The Company’s effective tax rate decreased slightly from 37.2% in 2000 to 37.1% in 2001.

Revenues. Revenues increased by 22.3% from $159,473,000 in the year ended December 31, 1999, to $195,080,000 in the year ended December 31, 2000, as a result of the increased revenues of both the Lab Support and the Healthcare Staffing segments.

The Lab Support segment’s revenues increased by 17.0% from $119,668,000 in the year ended December 31, 1999, to $139,986,000 in the year ended December 31, 2000. The increase in revenue was primarily attributable to a 10.6% increase in the number of temporary employees on assignment from December 31, 1999 to December 31, 2000 and to a lesser extent to a 5.2% increase in average hourly billing rates during 2000. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Lab Support segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year.

The Healthcare Staffing segment’s revenues increased by 38.4% from $39,805,000 in the year ended December 31, 1999 to $55,094,000 in the year ended December 31, 2000. The increase in revenue was primarily attributable to a 36% increase in the number of temporary employees on assignment and to a lesser extent to a 5.2% increase in average hourly billing rates during 2000. The increase in the number of temporary employees on assignment was primarily attributable to the strong performance in most of the markets in which the Healthcare Staffing segment has older, better established branches and to a lesser extent the contribution of new offices opened in the past year.

Cost of Services. Cost of services consists solely of compensation for temporary employees and payroll taxes, benefits and employment related expenses paid by the Company in connection with such compensation. Cost of services increased 22.0% from $107,652,000 in 1999 to $131,351,000 in 2000. The Lab Support segment’s cost of services as a percentage of revenues decreased by 0.4% from 67.5% in 1999 to 67.1% in 2000. This decrease was primarily attributable to a 0.9% decrease in temporary employee compensation and payroll taxes, partially offset by a 0.4% increase in workers’ compensation and a 0.1% increase in employer paid benefits in 2000. The Healthcare Staffing segment’s cost of service as a percentage of revenues increased by 0.4% from 67.5% in 1999 to 67.9% in 2000. This increase was attributable to an increase in workers’ compensation expense. The increase in workers’ compensation expense in both segments resulted from an increase in actual workers’ compensation claims reported and estimated incurred but not yet reported claims in 2000.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include the costs associated with the Company’s network of Account Managers and branch offices, including Account Manager compensation, rent, other office expenses and advertising for temporary employees, and corporate office expenses, such as the salaries of corporate operations and support personnel, management compensation, Account Manager recruiting and training expenses, corporate advertising and promotion, rent and other

general and administrative expenses. Selling, general and administrative expenses increased 16.8% from $30,428,000 in 1999 to $35,532,000 in 2000. Selling, general and administrative expenses as a percentage of revenues decreased from 19.1% in the 1999 period to 18.2% in the 2000 period. This result was primarily attributable to leveraging a centralized support system over a larger revenue base, offset by investments in Account Manager training and recruiting, expenses for international expansion into Europe, and an increase in the hiring of new Account Managers for the opening of new offices and the expansion of existing offices.

Interest Income. Interest income increased 49.4% from $1,635,000 in 1999 to $2,442,000 in 2000, primarily as a result of interest earned on higher interest-bearing cash, cash equivalent and marketable security account balances in 2000.

Provision for Income Taxes. Provision for income taxes increased 33.0% from $8,566,000 in 1999 to $11,392,000 in 2000. The Company’s effective tax rate remained unchanged at 37.2% in 1999 and 2000.

The change in the Company’s liquidity during the year ended December 31, 2001 is the net effect of funds generated by operations and from equity through employee stock incentive plans and the funds used for repurchases of common stock and purchases of marketable securities net of sales and, to a lesser extent, capital expenditures. As of December 31, 2001, the Board of Directors has authorized the repurchase, from time to time, of up to 2,941,000 shares of the Company’s common stock. During the year ended December 31, 2001, the Company repurchased 473,500 shares of common stock on the open market bringing the total shares repurchased under the authorization to 1,133,500. For the year ended December 31, 2001, the Company generated $25,481,000 from operations, used $10,860,000 in investing activities and used $127,000 in financing activities.

The Company’s working capital at December 31, 2001 was $105,851,000, including $65,694,000 in cash and cash equivalents and $22,886,000 in short-term marketable securities. The Company’s working capital requirements consist primarily of the financing of accounts receivables. At December 31, 2001, the Company has no long-term debt outstanding or other financing agreements in place and had no material capital commitments.

As discussed in Note 12, “Subsequent Events”, of the Notes to Consolidated Financial Statements in Item 8, the Company intends to complete a significant acquisition during April 2002. Under the proposed terms of the Merger Agreement, total consideration of $150 million is to be paid 50% in cash, net of outstanding debt, and 50% to be paid in the Company’s common stock, consisting of approximately 3,900,000 shares which upon issuance will represent approximately 17% of the Company’s outstanding common stock shares. The Company believes it has sufficient cash available as noted in the paragraph above, and if additional cash is required, has the ability to enter into financing agreements in order to satisfy cash requirements under the Merger Agreement as well as meeting its working capital requirements for day-to-day operations on both a short and long term basis.

In June 2001, the Financial Accounting Standards Board issued Statement No. 141 (SFAS No. 141), “Business Combinations,” and Statement No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets”. The adoption of SFAS No. 141 as of July 1, 2001 did not have a material impact on the Company’s financial statements. Amortization of goodwill for the year ended December 31, 2001 was $151,000. SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company has adopted SFAS No. 142 on January 1, 2002. The Company is currently evaluating the impairment provisions of SFAS No. 142 and has not determined the impact, if any, they will have on its financial statements.

(a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company has adopted SFAS No. 144 on January 1, 2002 and is currently evaluating the impact, if any, it will have on its financial statements.

The Company’s accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements in Item 8. The Company prepares its Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The Company considers the following policies to be most critical in understanding the judgments that are involved in preparing its financial statements and the uncertainties that could impact its results of operations, financial condition and cash flows.

Allowance For Doubtful Accounts. The Company estimates an allowance for doubtful accounts related to trade receivables based on its analysis of specific accounts and historical collection experiences applied to the remaining general accounts. For specific accounts, the Company uses its judgments, based on available facts and circumstances, to record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. For the remaining general accounts, a general reserve is established based on a range of percentages applied to aging categories. These percentages are based on historical collection experience. If circumstances change, the Company’s estimates of the recoverability of amounts due the Company could change by a material amount.

Accrued Workers’ Compensation. The Company is partially self-insured for workers’ compensation expense. This workers’ compensation program covers all of the Company’s temporary employees and regular employees. In connection with this program, the Company pays a base premium plus actual losses incurred up to certain levels, and is insured for losses greater than certain levels per occurrence and in the aggregate. The self insurance claim liability is determined based on claims filed and claims incurred but not reported. In order to ensure that the accrued workers’ compensation balance is adequate to cover all costs incurred under its workers’ compensation program, at the end of each fiscal quarter, an actuarial report is prepared by an independent third party who calculates the Company’s self insurance claim liability based on historical experience and trends of industry data. If historical experiences and industry trends change, the self insurance claim liability calculated by the third party actuary could change by a material amount.

Contingencies. The Company accounts for contingencies in accordance with SFAS No. 5, “Accounting for Contingencies”. SFAS No. 5 requires that the Company record an estimated loss from a loss contingency when information available prior to issuance of its financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal matters requires the Company to use its judgment. While the Company believes its accruals for these matters are adequate, if the actual loss from a loss contingency is significantly different than the estimated loss, results of operations may be over or understated.

The Company has entered into several short term leases with respect to its corporate and branch office locations as well as for various office equipment, such as fax machines and photo copiers. All of the lease

The Company is exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with interest rate and foreign currency fluctuations. The Company is exposed to interest rate risk from its held to maturity investments. The interest rate risk is immaterial due to the short maturity of the majority of these investments. The Company is exposed to foreign currency risk from the translation of foreign operations into U.S. dollars. Based on the relative size and nature of its foreign operations, the Company does not believe that a ten percent change in foreign currencies would have a material impact on its financial statements.

We have audited the accompanying consolidated balance sheets of On Assignment, Inc. and subsidiaries (the “Company”) as of December 31, 2000 and 2001, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed at Item 14. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of On Assignment, Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

On Assignment, Inc. (the “Company”), has two operating segments: Lab Support and Healthcare Staffing. The Lab Support segment provides temporary and permanent placement of scientific personnel with laboratories and other institutions. The Healthcare Staffing segment includes the combined results of Healthcare Financial Staffing, Clinical Lab Staff and Diagnostic Imaging Staff. The Healthcare Staffing segment provides temporary and permanent placement of medical billing and collection professionals and laboratory and medical staffing personnel to the healthcare industry. Significant accounting policies are as follows:

Principles of Consolidation. The Consolidated Financial Statements include the accounts of the Company and its wholly owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents and Marketable Securities. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Investments having a maturity of more than three months and less than twelve months are classified under current assets as marketable securities. Investments having a maturity of more than twelve months are classified under non-current assets as marketable securities.

Marketable securities consist principally of Tax Exempt Municipal Bonds and Debt Securities issued by U.S. Government Agencies with maturity dates greater than three months when purchased. All marketable securities are classified as held to maturity and are recorded at amortized cost which approximated market at December 31, 2000 and 2001. Non-current marketable securities are expected to mature during 2003.

The amortized cost and estimated fair value of marketable securities at December 31, 2000 and 2001 are as follows:

Supplemental Cash Flow Information. Cash paid for income taxes (net of refunds) for the years ended December 31, 1999, 2000, and 2001 was $9,262,000, $6,906,000 and $8,412,000, respectively.

Accounts Receivable. Accounts receivable are stated net of allowance for doubtful accounts of approximately $1,460,000 and $1,667,000 at December 31, 2000 and 2001, respectively. Allowance for doubtful accounts is established and maintained based on estimates made by management through its review of specific accounts and historical collection activity. The Company recorded bad debt expense of approximately $738,000, $699,000 and $293,000 for the years ended December 31, 1999, 2000 and 2001, respectively.

Office Furniture, Equipment and Leasehold Improvements and Depreciation. Office furniture, equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, generally three to five years.

Impairment of Long-Lived Assets. The Company evaluates long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future cash flows is less than the carrying amount of the asset, in which case a write-down is recorded to reduce the related asset to its estimated fair value. No such impairment losses have been recognized as of December 31, 2001.

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144 addresses the financial accounting and reporting issues for the impairment or disposal of long-lived assets. This statement supersedes FASB 121 but retains the fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company has adopted SFAS No. 144 on January 1, 2002 and is currently evaluating the impact, if any, it will have on its financial statements.

Income Taxes. Deferred taxes result from temporary differences between the bases of assets and liabilities for financial and tax reporting purposes. Deferred tax assets and liabilities represent future tax consequences of these differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

Stockholders Equity. On August 24, 2000, the Company filed a Certificate of Amendment of Restated Certificate of Incorporation (The “Certificate of Amendment”) with the Secretary of the State of Delaware. The Certificate of Amendment increased the authorized number of shares of common stock from 25,000,000 to 75,000,000 and increased the combined authorized number of shares of preferred and common stock from 26,000,000 to 76,000,000. The Certificate of Amendment was approved by the Company’s stockholders on June 13, 2000.

On June 15, 2001, the Board of Directors authorized the Company to repurchase up to 10% or 2,281,000 shares of its outstanding shares of common stock. On April 1, 1999, the Board of Directors had previously authorized the Company to repurchase up to $15 million of its common stock. At December 31, 2000 and December 31, 2001, the Company had repurchased 660,000 shares and 1,133,500 shares of its common stock at a total cost of $7,812,000 and $15,310,000, respectively. The Company has remaining authorization to repurchase 1,807,500 shares.

Revenue Recognition. Revenue from temporary assignments, net of credits and discounts, is recognized when earned, based on hours worked by the Company’s temporary employees on a weekly basis. Permanent placement fees are recognized when earned, upon conversion of a temporary employee to a client’s regular employee.

Cost of Services. Cost of services consist of compensation for temporary employees and the related payroll taxes and benefits incurred with respect to such compensation. Cost of services are recognized when incurred based on hours worked by the Company’s temporary employees.

Foreign Currency Translation. Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the rate of exchange in effect on the balance sheet date. Income and expenses are translated at the average rates of exchange prevailing during the period. The related translation adjustments are recorded as cumulative foreign currency translation adjustments in accumulated other comprehensive income as a separate component of stockholders’ equity.

Earnings per Share. Basic earnings per share are computed based upon the weighted average number of common shares outstanding and diluted earnings per share are computed based upon the weighted average

number of common shares outstanding and dilutive common share equivalents (consisting of incentive stock options and non-qualified stock options) outstanding during the periods using the treasury stock method. Following is a reconciliation of the shares used to compute basic and diluted earnings per share:

Anti-dilutive options excluded from the computation of diluted earnings per share totaled 865,838 shares, 125,164 shares and 600,794 shares for the years ended December 31, 1999, 2000 and 2001, respectively.

Stock-Based Compensation. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.” The Company has adopted only the disclosure portion of the statement (see Note 8).

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk. Financial instruments that potentially subject the Company to credit risks consist primarily of cash and cash equivalents, marketable securities, and trade receivables. The Company places its cash and cash equivalents and marketable securities with quality credit institutions, and limits the amount of credit exposure with any one institution. Concentration of credit risk with respect to accounts receivable are limited because of the large number of geographically dispersed customers, thus spreading the trade credit risk. The Company performs ongoing credit evaluations to identify risks and maintains an allowance to address these risks.

Fair Value of Financial Instruments. The recorded values of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses approximate their fair value based on their short-term nature. The fair values of marketable securities were estimated using quoted market prices.

Derivative Instruments and Hedging Activities. Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company has adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

Reclassifications. Certain reclassifications have been made to the prior year consolidated financial statements to conform with the current year consolidated financial statement presentation.

Office furniture, equipment and leasehold improvements at December 31, 2000 and 2001, consisted of the following:

Depreciation and amortization expense for the years ended December 31, 1999, 2000 and 2001 was $1,035,000, $1,254,000 and $1,384,000, respectively.

In June 1999, the Company loaned an officer of the Company $400,000, bearing interest at 4.92%, compounded semi-annually. Principal and interest were payable on December 10, 2000. The note was paid in full on December 7, 2000.

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired (see Note 11). It is being amortized on a straight-line basis over 15 years. Goodwill is stated net of accumulated amortization of $486,000 at December 31, 2000 and $637,000 at December 31, 2001. Amortization expense was $108,000, $134,000 and $151,000 for the years ended December 31, 1999, 2000 and 2001.

In June 2001, the Financial Accounting Standards Board issued Statement No. 141 (SFAS No. 141), “Business Combinations,” and Statement No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets”. The adoption of SFAS No. 141 as of July 1, 2001 did not have a material impact on the Company’s financial statements. SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Company has adopted SFAS No. 142 on January 1, 2002. The Company is currently evaluating the impairment provisions of SFAS No. 142 and has not determined the impact, if any, they will have on its financial statements.

5. 401(k) Retirement Savings Plan, Deferred Compensation Plan and Change in Control Severance Plan.

Effective January 1, 1995, the Company adopted the On Assignment, Inc. 401(k) Retirement Savings Plan under Section 401(k) of the Internal Revenue Code, under which eligible employees may elect to have a portion of their salary deferred and contributed to the plan. The amount of salary deferred is not subject to Federal and State income tax at the time of deferral. The Plan covers all eligible employees and provides for matching or discretionary contributions at the discretion of the Board of Directors. The Company made no matching or discretionary contributions to the plan during the years ended December 31, 1999, 2000 and 2001.

Effective January 1, 1998, the Company implemented the On Assignment, Inc. Deferred Compensation Plan. The plan permits a select group of management or highly compensated employees or directors to annually elect to defer up to 100 percent of their base salary, annual bonus, stock option gain or fees on a pre-

tax basis, and earn tax-deferred interest on these amounts. Distributions from the plan are made at retirement, death or termination of employment, in a lump sum, or over five, ten or fifteen years. At December 31, 2000 and 2001, the liability under the plan was approximately $1,423,000 and $1,736,000, respectively. A life insurance policy is maintained on the participants relating to the plan, whereby the Company is the sole owner and beneficiary of such insurance. The cash surrender value of this life insurance policy, which is reflected in other assets, was approximately $1,201,000 and $1,586,000 at December 31, 2000 and 2001, respectively.

During 1999, a participant in the Deferred Compensation Plan performed a stock-for-stock exercise resulting in a gain to the participant of approximately $294,000. A stock certificate for 19,764 shares was issued into a rabbi trust in the Company’s name. The employer stock held by the rabbi trust has been classified in equity in the same manner as treasury stock, with a reduction in shares outstanding and a corresponding reduction to Paid-in Capital. The corresponding deferred compensation liability is also shown as a separate component in equity. There is no effect on the Consolidated Statements of Income as a result of this transaction.

On February 12, 1998, the Company adopted the On Assignment, Inc. Change in Control Severance Plan (“the Plan”) to provide severance benefits for officers and other eligible employees who are terminated following an acquisition of the Company. Under the Plan, if an eligible employee is involuntarily terminated within 18 months of a change in control, as defined in the Plan, then the employee will be entitled to salary plus target bonus payable in a lump sum. The amounts payable would range from one month to 18 months of salary and target bonus depending on the employee’s length of service and position with the Company.

The Company leases its facilities and certain office equipment under operating leases which expire at various dates through 2007. Certain leases contain rent escalations and/or renewal options.

Rent expense for the years ended December 31, 1999, 2000 and 2001 was $2,342,000, $2,995,000 and $3,895,000, respectively.

The Company and its subsidiaries are involved in various legal proceedings, claims and litigation arising in the ordinary course of business. However, based on the facts currently available, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the financial position of the Company.

The Company is partially self-insured for workers’ compensation expense. In connection with this program, the Company pays a base premium plus actual losses incurred up to certain levels, and is insured for losses greater than certain levels per occurrence and in the aggregate. The Company is required to maintain cash deposits for the payment of losses and as collateral amounting to $237,000 and $77,000 at December 31, 2000 and 2001, respectively. These workers’ compensation deposits are restricted as to withdrawal and have

therefore been classified as non-current assets in the accompanying Consolidated Balance Sheets. These funds are invested primarily in three-month treasury bills and are recorded at amortized cost which approximated market at December 31, 2000 and 2001. The self-insurance claim liability is determined based on claims filed and claims incurred but not yet reported. The Company accounts for claims incurred but not yet reported based on actuarial reports prepared by an independent third party who reviews historical experience and current trends of industry data. Changes in estimates and differences in estimates and actual payments for claims are recognized in the period which the estimates changed or payments were made. The self-insurance claim liability amounted to approximately $1,753,000 and $2,662,000 at December 31, 2000 and 2001, respectively.

At December 31, 2001, the Company has accumulated net foreign earnings of $288,000. The Company does not plan to repatriate these earnings, therefore, no U.S. income tax has been provided on the foreign earnings. If such earnings were distributed, U.S. income taxes would be partially reduced for taxes paid to the jurisdictions in which the income was earned. Additionally, the Company has not tax effected the cumulative translation adjustment as there is no intention of repatriating foreign earnings.

Deferred income taxes arise from the recognition of certain assets and liabilities for tax purposes in periods different from those in which they are recognized in the financial statements. These differences relate primarily to workers’ compensation, state taxes, bad debt, deferred compensation, and depreciation and amortization expenses.

Deferred assets and liabilities are classified as current and non-current according to the nature of the assets or liabilities from which they arose.

Foreign deferred tax assets and liabilities were not material as of December 31, 2000 and 2001.

The net operating loss carryforwards included in other non-current deferred tax assets at December 31, 2000 and 2001, were acquired through the 1994 acquisition of 1st Choice Personnel, Inc. These carryforwards, which total $54,000 at December 31, 2001, are available to offset future taxable income, subject to annual limitations, through the year 2009.

The reconciliation between the amount computed by applying the U.S. federal statutory tax rate of 35% in 1999, 2000 and 2001 to income before income taxes and the actual income taxes is as follows:

The Company receives a tax deduction as the result of disqualifying dispositions made by directors, officers and employees. A disqualifying disposition occurs when stock acquired through the exercise of incentive stock options or the Employee Stock Purchase Plan is disposed of prior to the required holding period or upon exercise of a non-qualified stock option. At December 31, 1999, 2000 and 2001, net income taxes payable and additional paid-in capital include tax benefits amounting to $517,000, $3,751,000 and $2,572,000, respectively, resulting from disqualifying dispositions by directors, officers and employees.

Under its Stock Option Plan, the Company may grant employees, contractors, and non-employee members of the Board of Directors incentive or non-qualified stock options to purchase shares of its common stock. On June 13, 2000, the Company’s stockholders approved an amendment to the Stock Option Plan that increased the number of shares of common stock reserved for issuance under the Stock Option Plan from 8,000,000 shares to 10,000,000 shares. Optionees, option prices, option amounts, grant dates and vesting are

established by the Compensation Committee of the Board of Directors. The option prices may not be less than 85% of the fair market value of the stock at the time the option is granted. Stock options granted to date generally become exercisable over a pro rata period of four years and have a maximum term of ten years measured from the grant date.

The following summarizes stock option activity for the years ended December 31, 1999, 2000 and 2001:

The following summarizes pricing and term information for options outstanding as of December 31, 2001:

Options exercisable at December 31, 1999 and 2000 were 599,724 and 956,678, with a weighted average exercise price of $12.32 and $16.19, respectively.

The Employee Stock Purchase Plan allows eligible employees to purchase common stock of the Company, through payroll deductions, at 85% of the lower of the market price on the first day or the last day of the semi-annual purchase period. Eligible employees may contribute up to 10% of their base earnings toward the purchase of the stock. During 1999, 2000 and 2001 shares issued under the plan were 19,848, 18,307 and 13,297, respectively.

The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Stock Option Plan and Employee Stock Purchase Plan and accordingly, no compensation cost has been recognized for its stock option and purchase plans because options are granted at fair market

value. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). The estimated fair value of options granted during 1999, 2000 and 2001 pursuant to SFAS No. 123 was approximately $7,693,000, $9,443,000 and $10,019,000, respectively, and the estimated fair value of stock purchased under the Company’s Employee Stock Purchase Plan was approximately $93,000, $94,000 and $112,000, respectively. Had compensation cost for the Company’s Stock Option Plan and its Employee Stock Purchase Plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company’s pro forma net income would have been $11,993,000, $16,784,000 and $13,798,000 and pro forma earnings per share would have been $0.54, $0.74 and $0.60 for 1999, 2000 and 2001, respectively. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.

The fair value of options granted under the Company’s Stock Option Plan during 1999, 2000 and 2001 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: (i) no dividend yield in 1999, 2000 or 2001, (ii) expected volatility of approximately 50% in 1999, 54% in 2000 and 55% in 2001, (iii) risk-free interest rate of approximately 5.8% in 1999, 5.9% in 2000 and 4.5% in 2001, and (iv) expected lives of the options of approximately 5 years in 1999, 2000 and 2001. Pro forma compensation cost of shares purchased under the Employee Stock Purchase Plan is measured based on the discount from market value.

Indicated below is the information required to comply with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

The Company has two reportable operating segments: Lab Support and Healthcare Staffing. The Lab Support segment provides temporary and permanent placement services of laboratory and scientific professionals to the biotechnology, pharmaceutical, food and beverage, chemical industries. The Healthcare Staffing segment includes the combined results of Healthcare Financial Staffing, Clinical Lab Staff and Diagnostic Imaging Staff because they have similar economic characteristics. The Healthcare Staffing segment provides temporary and permanent placement services of medical billing and collection professionals, and laboratory and medical staffing personnel to the healthcare industry.

The Company’s management evaluates performance of each segment primarily based on revenues, gross profit and operating income (before acquisition costs, interest and income taxes). The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note 1). The information in the following table is derived directly from the segments’ internal financial reporting used for corporate management purposes. Certain corporate expenses are not allocated to and/or

among the operating segments. The following table represents revenues, gross profit and operating income by operating segment:

The Company does not report total assets by segment. The following table represents identifiable assets by business segment:

The Company operates internationally, with operations in the United States, Canada and Europe. The following table represents revenues and long lived assets by geographic location:

The following table presents unaudited quarterly financial information for each of the eight quarters ended December 31, 2001. In the opinion of management, the quarterly information contains all adjustments,

consisting only of normal recurring accruals, necessary for a fair presentation thereof. The operating results for any quarter are not necessarily indicative of the results for any future period.

On July 20, 1998, the Company acquired substantially all of the assets of LabStaffers, Inc., a provider of temporary science and medical laboratory professionals through its branches in Greensboro and Charlotte, N.C. The LabStaffers, Inc. offices and operations acquired have been added to the Company’s Lab Support division. This acquisition has been accounted for using the purchase method of accounting. Consideration for the purchase consisted of $808,000 in cash paid on the purchase date. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill. In addition, in July 1999 and July 2000 the Company paid an additional $360,000 in cash in accordance with the agreement, bringing the total consideration for the purchase to $1,528,000 at December 31, 2001. This contingent consideration has been added to goodwill in the accompanying Consolidated Balance Sheets. No additional contingent consideration is required in accordance with the agreement.

On March 27, 2002, the Company entered into a Merger Agreement pursuant to which Health Personnel Options Corporation (“HPO”), an Ohio corporation, will be merged into a newly organized wholly-owned subsidiary of the Company. Assuming all conditions to closing the transaction are met, the merger will be completed during April, 2002. Under the terms of the Merger Agreement, total consideration of $150 million is to be paid 50% in cash, net of outstanding debt, and 50% through the issuance of approximately 3,900,000 shares of the Company’s common stock. The number of shares to be issued was calculated based upon the ten-day trailing average closing price prior to the signing of the Merger Agreement. HPO provides temporary professionals in the nursing and allied healthcare industries. When the merger is completed, the operations of HPO will be grouped in the Company’s Healthcare Staffing segment.

Information regarding the Company’s directors will be set forth under the caption “Proposal One — Election of Directors” in the Company’s proxy statement for use in connection with its Annual Meeting of Stockholders scheduled to be held on June 18, 2002 (the “2002 Proxy Statement”) and is incorporated herein by reference. The 2002 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year.

Information regarding the Company’s executive officers is set forth in Part I of this Annual Report on Form 10-K and is incorporated herein by reference.

Information regarding compliance with Section 16(a) of the Exchange Act will be set forth under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s 2002 Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year and is incorporated herein by reference.

Information regarding remuneration of the Company’s directors and officers will be set forth under the captions “Proposal One — Election of Directors,” and “Executive Compensation and Related Information” in the Company’s 2002 Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year and is incorporated herein by reference.

Information regarding security ownership of certain beneficial owners and management will be set forth under the captions “General Information for Stockholders — Record Date, Voting and Share Ownership” in the Company’s 2002 Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year and is incorporated herein by reference.

Information regarding certain relationships and related transactions will be set forth under the caption “Executive Compensation and Related Information — Certain Relationships and Related Transactions” in the Company’s 2002 Proxy Statement to be filed within 120 days after the end of the Company’s fiscal year and is incorporated herein by reference.

No reports on Form 8-K were filed during the three months ended December 31, 2001.


(1)	Incorporated by reference from an exhibit filed with the Company’s Current Report on Form 8-K (File No. 0-20540) filed with the Securities and Exchange Commission on October 5, 2000.

(2)	Incorporated by reference from an exhibit filed with the Company’s Current Report on Form 8-K (File No. 0-20540) filed with the Securities and Exchange Commission on February 4, 1998.

(3)	Incorporated by reference from an exhibit filed with the Company’s Registration Statement on Form S-1 (File No. 33-50646) declared effective by the Securities and Exchange Commission on September 21, 1992.


(4)	Incorporated by reference from an exhibit filed with the Company’s Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 29, 2001.

(5)	Incorporated by reference from an exhibit filed with the Company’s Registration Statement on Form S-8 (File No. 33-57078) filed with the Securities and Exchange Commission on January 19, 1993.

(6)	Incorporated by reference from an exhibit filed with the Company’s Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 24, 1994.

Pursuant to the requirements of the Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this to report to be signed on its behalf by the undersigned, thereunto duly authorized, in Calabasas, California on this 29th day of March, 2002.


	BY:	/s/ JOSEPH PETERSON, M.D.



	Joseph Peterson, M.D.
	Chief Executive Officer, President and Director


(1)	Incorporated by reference from an exhibit filed with the Company’s Current Report on Form 8-K (File No. 0-20540) filed with the Securities and Exchange Commission on October 5, 2000.

(2)	Incorporated by reference from an exhibit filed with the Company’s Current Report on Form 8-K (File No. 0-20540) filed with the Securities and Exchange Commission on February 4, 1998.

(3)	Incorporated by reference from an exhibit filed with the Company’s Registration Statement on Form S-1 (File No. 33-50646) declared effective by the Securities and Exchange Commission on September 21, 1992.

(4)	Incorporated by reference from an exhibit filed with the Company’s Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 29, 2001.

(5)	Incorporated by reference from an exhibit filed with the Company’s Registration Statement on Form S-8 (File No. 33-57078) filed with the Securities and Exchange Commission on January 19, 1993.

(6)	Incorporated by reference from an exhibit filed with the Company’s Annual Report on Form 10-K (File No. 0-20540) filed with the Securities and Exchange Commission on March 24, 1994.

38 EX-2.1 3 v80406ex2-1.txt EXHIBIT 2.1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER BY AND AMONG ON ASSIGNMENT, INC., ON ASSIGNMENT ACQUISITION CORP., HEALTH PERSONNEL OPTIONS CORPORATION AND CERTAIN STOCKHOLDERS OF HEALTH PERSONNEL OPTIONS CORPORATION MARCH 27, 2002 TABLE OF CONTENTS

-i- TABLE OF CONTENTS (continued)

-ii- TABLE OF CONTENTS (continued)

-iii- AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of March 27, 2002 (this "MERGER AGREEMENT"), among On Assignment, Inc., a Delaware corporation ("PARENT"), On Assignment Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("SUB"), Health Personnel Options Corporation, an Ohio corporation (the "COMPANY"), Timothy A. Michael ("MICHAEL") and J. William DeVille ("DEVILLE", and collectively with Michael, the "MANAGEMENT STOCKHOLDERS") and for purposes of Sections 3.3, 6.5, 6.10 and Article VIII only of this Merger Agreement, River Cities Capital Fund Limited Partnership, a Delaware limited partnership, River Cities Capital Fund II Limited Partnership, a Delaware limited partnership and Castellini Management Company Limited Partnership, an Ohio limited partnership (collectively, the "VENTURE STOCKHOLDERS"). WHEREAS, each of the Boards of Directors of Parent, Sub and the Company deem it advisable and in the best interests of its corporation and its stockholders to consummate the business combination transaction provided for herein; WHEREAS, the combination of Parent and the Company is to be effected by the terms of this Merger Agreement through a merger as described below (the "MERGER"); WHEREAS, pursuant to the Merger, among other things, the outstanding shares of Company Capital Stock are to be converted into the right to receive the Merger Consideration upon the terms and conditions set forth herein; WHEREAS, immediately prior to the execution of this Merger Agreement, the Board of Directors of the Company has approved the Merger in accordance with the requirements of Ohio law and the charter documents of the Company; WHEREAS, Parent, Sub, the Company, and the Management Stockholders desire to make certain representations, warranties, covenants and agreements in connection with the Merger; and WHEREAS, for Federal income tax purposes, it is intended that the Merger qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"), and the regulations promulgated thereunder. NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements herein contained, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. For purposes of this Merger Agreement: (a) "ACQUISITION PROPOSAL" means any proposal or offer, other than a proposal or offer by Parent or any of its Affiliates, for a tender or exchange offer, a merger, -1- consolidation or other business combination involving the Company or any proposal to acquire in any manner a substantial (10% or more) equity interest in, or substantially all of the assets of, the Company. (b) "AFFILIATE" of any Person means another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person. (c) "AGGREGATE COMPANY CAPITAL STOCK" means the sum of (i) the number of shares of Company Common Stock outstanding immediately prior to the Effective Time, plus (ii) the number of Company Common Stock Equivalents outstanding immediately prior to the Effective Time. (d) "AVERAGE PRICE" means the average of the per share daily closing price of Parent Common Stock as reported on Nasdaq during the ten consecutive trading days ending on the trading day immediately prior to the date on which this Merger Agreement is executed. (e) "BUSINESS DAY" means any day other than (i) Saturday or Sunday or (ii) any other day on which banks in California or Ohio are permitted or required to be closed. (f) "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601 et seq.). (g) "COMPANY CAPITAL STOCK" means the shares of Company Common Stock and Company Preferred Stock. (h) "COMPANY COMMON STOCK" means the shares of the Company's common stock, no par value. (i) "COMPANY COMMON STOCK EQUIVALENTS" means, with respect to any share of Company Preferred Stock, that number of shares of Company Common Stock into which such share is convertible immediately prior to the Effective Time. (j) "COMPANY DEBT" means the sum of all outstanding notes payable, capitalized leases, overdrafts (excluding overdrafts that are used solely as working capital to pay for bona fide accounts payable of the Company, including related accrued payroll and accrued withholding taxes incurred in the Ordinary Course of Business) and lines of credit of the Company and the Company Sub, less all cash and cash equivalents of the Company and the Company Sub, all as reflected on the Company's balance sheet as of February 28, 2002, plus (A) the sum of (i) the Investment Banking Fees, (ii) the Management Bonus Payments, less the amount of the aggregate accrued bonuses on the books of the Company at February 28, 2002, for Wead and DeVille, which are verified to the satisfaction of Parent (iii) one-half of the filing fees incurred by Parent and the Company in connection with the HSR filing, (iv) the payment in cash of any dividends in respect of the Company Preferred Stock, (v) all payments to optionholders in connection with the cash out of their options (vi) any loans or advances to employees which have not been repaid by the Closing Date, (vii) all payments made between February 28, 2002 and the Closing Date in connection with any transaction by the Company not in the Ordinary Course of Business, including all payments to Michael pursuant to the Michael Agreement, (viii) all -2- income, withholding, payroll and excise taxes payable by the Company in connection with the Management Bonus Payments, the cash out of the Vested Options, the exercise of the Vested Options (but only to the extent such taxes have not been withheld by the Company from any such payment or in connection with any such transaction or have otherwise been paid to the Company in connection with any such transaction) and/or the Warrant (as defined in Section 4.1(c)(i)) or arising out of or related to any other transactions of the Company not in the Ordinary Course of Business and (ix) all other fees and expenses, including, without limitation, legal fees, incurred by the Company in connection with this Merger Agreement and the transactions contemplated hereunder, less (B) any cash received by the Company upon the exercise of the Vested Options or the Warrant. (k) "COMPANY DISCLOSURE LETTER" means the disclosure letter to be delivered by the Company to Parent and Sub in connection with this Merger Agreement. (l) "COMPANY INTANGIBLE PROPERTY" means all trademarks, trade names, patents, service marks, brand marks, brand names, computer programs, database, industrial designs, know how, trade secrets, copyrights and other intellectual property rights that the Company uses in its business operations. (m) "COMPANY PREFERRED STOCK" means the shares of the Company's Series A Preferred Stock and Series B Preferred Stock. (n) "COMPANY STOCKHOLDERS" means (i) the Management Stockholders, (ii) those certain non-management stockholders of the Company identified on Exhibit A hereto, including the Venture Stockholders, and (iii) Kenneth Wead ("Wead") ((ii) and (iii) are collectively referred to herein as the "NON-MANAGEMENT STOCKHOLDERS"). (o) "COMPANY SUB" means Nurse Bridge Consultants, LLC, a limited liability company organized under the laws of Ohio. (p) "CONTRACT" means any agreement, contract, obligation, promise or undertaking (whether written or oral and whether express or implied) that is legally binding. (q) "DGCL" means the Delaware General Corporation Law. (r) "ENCUMBRANCE" means any mortgage, pledge, lien (statutory or other), security interest, charge, claim, restriction on transfer, restriction on conveyance, assignment or license, or conditional sale or other title retention device or arrangement (including, without limitation, a capital lease), of any kind or any nature whatsoever, or restriction on the creation of any of the foregoing, whether relating to any property or right or the income or profits therefrom. (s) "ENVIRONMENTAL LAW" means any applicable law regulating, prohibiting or requiring the notification of any Releases into any part of the natural environment, pertaining to the protection of natural resources, the environment and public and employee health and safety, or governing or regulating the use, storage, handling, transportation, treatment, processing, disposal or generation of any Hazardous Materials, including, without limitation, CERCLA, the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Clean Water Act -3- (33 U.S.C. Section 1251 et seq.), the Clean Air Act (33 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 7401 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.), Emergency Planning and Community Right to Know Act (42 U.S.C. Section 11001 et seq.), Safe Drinking Water Act (Section 42 U.S.C. Section 300 et seq.) and the regulations promulgated pursuant thereto, and all other applicable Legal Requirements promulgated pursuant thereto, as such Legal Requirements have been and may be amended or supplemented through the Closing Date. (t) "ESCROW ACCOUNT" means the escrow account established in accordance with, and subject to the terms of, the Escrow Agreement. (u) "ESCROW AGENT" means an independent institution that provides escrow services and which will be selected by Parent and the Company prior to the Closing and any successor pursuant to the Escrow Agreement. (v) "ESCROW AGREEMENT" shall mean the Escrow Agreement in the form attached hereto as Exhibit H. (w) "ESCROW AMOUNT" means that portion of the Merger Consideration equal to $15 million to be transferred at the Effective Time to the Escrow Agent for immediate deposit into the Escrow Account; 50% of such amount shall be paid in cash from the Cash Merger Consideration and 50% shall be paid in the form of Parent Company Stock received as Merger Consideration (such Parent Common Stock to be valued at the Average Price of Parent Common Stock). (x) "GAAP" means United States generally accepted accounting principles as of the date hereof. (y) "GOVERNMENTAL ENTITY" means any federal, state, local or non-U.S. court, administrative agency or commission or other governmental authority or instrumentality. (z) "HAZARDOUS MATERIAL" means any substance, material or waste which is regulated pursuant to any Environmental Law by any Governmental Entity in the jurisdictions in which the applicable party conducts business, or in the United States, including, without limitation, any material or substance which is defined as a "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste" or "restricted hazardous waste," "contaminant," "pollutant," "toxic waste" or "toxic substance" under any provision of Environmental Law. (aa) "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (bb) "INVESTMENT BANKING FEES" means all the fees incurred from SunTrust Robinson Humphrey Capital Markets, and any other investment banker, broker or advisor, by the Company and the Company Stockholders in connection with the Merger and the transactions contemplated hereunder. -4- (cc) "KNOWLEDGE OF THE COMPANY" means, with respect to any matter stated herein to be to the "knowledge of the Company or the Management Stockholders" or similar language, the actual knowledge of the Chairman of the Board, the Chief Executive Officer, President, any Vice President or Controller of the Company, or the actual knowledge of any of the Management Stockholders. (dd) "KNOWLEDGE OF PARENT" means, with respect to any matter stated herein to be to the "knowledge of Parent" or similar language, the actual knowledge of the Chairman of the Board, the Chief Executive Officer, President, any Vice President, Chief Financial Officer or Controller of Parent. (ee) "LEGAL REQUIREMENT" means any federal, state, local, municipal, foreign, international, multinational or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute or treaty. (ff) "LIABILITY" means, with respect to any Person, any liability or obligation of such Person of any kind, character or description, whether known or unknown, absolute or contingent, accrued or unaccrued, disputed or undisputed, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise, and whether or not the same is required to be accrued on the financial statements of such Person. (gg) "LOSS" means any action, cost, damage, disbursement, expense, Liability (including consequential and incidental damages), obligation, indebtedness, expense, claim, deficiency, loss, guaranty of any type, diminution in value, penalty or settlement of any kind or nature, whether foreseeable or unforeseeable, including, but not limited to, interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses incurred in the investigation, collection, prosecution and defense of claims, and amounts paid in settlement, that may be imposed on or otherwise incurred or suffered by an Indemnified Party. (hh) "MATERIAL ADVERSE EFFECT" means any effect or change that is or is reasonably likely to be materially adverse to the business, operations, assets, condition (financial or otherwise), prospects or results of operations of (i) the Company, or (ii) Parent, Operating Sub and Sub taken as a whole, as the case may be. (ii) "MANAGEMENT BONUS PAYMENTS" means all payments, and all withholding taxes related thereto, that have been made or will be made at or prior to the Closing Date by the Company to Michael pursuant to the Michael Agreement, and the contemplated bonus payments of $500,000 to DeVille and $300,000 to Wead. (jj) "MICHAEL AGREEMENT" means that certain Agreement between Michael and the Company, dated March 22, 2002. (kk) "NASDAQ" means the Nasdaq National Market. (ll) "OHIO LAW" means Title XVII of the Ohio Revised Code. -5- (mm) "OPERATING SUB" means Assignment Ready, Inc., a Delaware corporation and wholly-owned subsidiary of Parent. (nn) "ORDINARY COURSE OF BUSINESS" refers to any action taken by a Person, but only if that action (i) is consistent in nature, scope and magnitude with the past practices of such Person and is taken in the ordinary course of the normal, day-to-day operations of such Person and (ii) does not require authorization by the Board of Directors or stockholders of such Person (or by any Person or group of Persons exercising similar authority) and does not require any other separate or special authorization of any nature other than approval of an officer of such Person. (oo) "OSHA" means the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.). (pp) "PBGC" means the Pension Benefit Guaranty Corporation. (qq) "PARENT COMMON STOCK" means shares of the common stock of Parent, par value $0.01 per share. (rr) "PARENT DISCLOSURE LETTER" means the Disclosure Letter to be delivered by Parent to the Company and to the Company Stockholders in connection with this Merger Agreement. (ss) "PERSON" means an individual, corporation, partnership, limited liability company, association, trust, unincorporated organization, joint venture, enterprise or other entity, including any Governmental Entity. (tt) "PER SHARE RATIO" means, (i) with respect to any share of Company Common Stock, the percentage obtained by dividing (A) that share of Company Common Stock by (B) the Aggregate Company Capital Stock, and (ii) with respect to any share of Company Preferred Stock, the percentage obtained by dividing (A) the Company Common Stock Equivalents represented by such share by (B) the Aggregate Company Capital Stock. (uu) "PRO-RATA SHARE" means, (i) with respect to a holder of Company Common Stock, the percentage obtained by dividing (A) the number of such holder's shares of Company Common Stock immediately prior to the Effective Time by (B) the Aggregate Company Capital Stock, and (ii) with respect to a holder of Company Preferred Stock, the percentage obtained by dividing (A) the number of such holder's Company Common Stock Equivalents immediately prior to the Effective Time, by (B) the Aggregate Company Capital Stock. (vv) "RELATED DOCUMENTS" means any certificate, schedule, exhibit, document, agreement or instrument required to be delivered under, or in connection with, this Merger Agreement. (ww) "RELEASE" means any release, spill, effluent, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, or into or out of any property owned, operated or leased by the applicable party. -6- (xx) "REMEDIAL ACTION" means all actions, including, without limitation, any capital expenditures, required by a Governmental Entity or required under any Environmental Law, or voluntarily undertaken to (i) investigate, clean up, remove, treat, or in any other way ameliorate or address any Hazardous Materials or other substance in the indoor or outdoor environment; (ii) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Material so it does not endanger or threaten to endanger the public health or welfare of the indoor or outdoor environment; (iii) perform pre-remedial studies and investigations or post-remedial monitoring and care pertaining or relating to a Release; or (iv) bring the applicable party into compliance with any Environmental Law. (yy) "SERIES A PREFERRED STOCK" means the Series A senior convertible preferred stock of the Company, $1,000 par value. (zz) "SERIES B PREFERRED STOCK" means the Series B senior convertible preferred stock of the Company, $1,000 par value. (aaa) "SUBSIDIARY" means, with respect to any Person, any corporation or other organization, whether incorporated or unincorporated, of which at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is, directly or indirectly, owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and any one or more of its Subsidiaries. (bbb) "TAX" means any tax (including, without limitation, any taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and capital gains, value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise, gift and property taxes), levy, assessment, tariff, duty (including any customs duty), deficiency or other fee, and any related charge or amount (including any fine, penalty, interest or addition to tax), imposed, assessed or collected by or under the authority of any Governmental Entity or payable pursuant to any tax-sharing agreement or any other Contract relating to the sharing or payment of any such tax, levy, assessment, tariff, duty, deficiency or fee. ARTICLE II MERGER 2.1 The Merger. Upon the terms and subject to the conditions of this Merger Agreement, and in accordance with the DGCL and Ohio law, the Company shall be merged with and into Sub at the Effective Time. Following the Merger, the separate corporate existence of the Company shall cease and Sub shall continue as the surviving corporation (the "SURVIVING CORPORATION"). 2.2 Closing and Effective Time of the Merger. Upon the terms and subject to the conditions set forth in Article VII and the termination rights set forth in Article IX, the closing of the Merger (the "CLOSING") will take place on a date to be specified by the parties, which date shall be no later than the third Business Day after satisfaction (or waiver in accordance with this Merger Agreement) of the latest to occur of the conditions (excluding the conditions that, by -7- their nature, can not be satisfied until the Closing Date) set forth in Article VII, at the offices of Fulbright & Jaworski L.L.P., 865 S. Figueroa Street, 29th Floor, Los Angeles, California, unless another date or place is agreed to in writing by the parties (the actual time and date of the Closing being referred to herein as the "CLOSING DATE"). At the Closing, the parties shall cause the Merger to become effective by filing a certificate of merger (the "CERTIFICATE OF MERGER"), prepared and executed in accordance with the relevant provisions of the DGCL with the Secretary of State of the State of Delaware. The time of the filing of the Certificate of Merger, or any later time that the parties may agree and specify in the Certificate of Merger, is referred to as the "EFFECTIVE TIME". The parties shall also take such other action that is required to effectuate the Merger pursuant to the Ohio Law. 2.3 Effects of the Merger. (a) Surviving Corporation. At and after the Effective Time, the Merger will have the effects set forth in the DGCL and as set forth in the Ohio Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Sub shall be vested in the Surviving Corporation, and all debts, liabilities and duties of the Company and Sub shall become the debts, liabilities and duties of the Surviving Corporation. (b) Certificate of Incorporation. The Certificate of Incorporation of Sub as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation. (c) Bylaws. The Bylaws of Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation. (d) Officers and Directors. The directors and officers of Sub at the Effective Time shall, from and after the Effective Time, be the directors and officers of the Surviving Corporation and shall serve until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Certificate of Incorporation and Bylaws. ARTICLE III EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES 3.1 Effect on Company Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holders of Company Capital Stock or Parent Common Stock: (a) Merger Consideration for Company Capital Stock. Each share of Company Common Stock and each share of Company Preferred Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled in accordance with Section 3.1(c)) shall, at the Effective Time, be exchanged for and converted into the right to receive the Per Share Ratio applicable to each such share of Company Common Stock or Company Preferred Stock, as the case may be, of (i) that number of validly issued, fully paid and non-assessable -8- shares of Parent Common Stock, rounded to the nearest thousandth, equal to the quotient derived by dividing $75 million by the Average Price of Parent Common Stock (the "EXCHANGE RATIO") (together with any cash in lieu of fractional shares of Parent Common Stock to be paid pursuant to Section 3.2(d)), less that number of shares, if any, in the Escrow Account (A) returned to Parent or sold pursuant to the indemnification obligations of the Company Stockholders contained in Article VIII or (B) returned to Parent pursuant to Section 3.3 of this Agreement, and (ii) cash of $75 million less the amount of (A) Company Debt and (B) any cash in the Escrow Account that is remitted to Parent pursuant to the indemnification obligations of the Company Stockholders contained in Article VIII or returned to Parent pursuant to Section 3.3 of this Agreement (the "CASH MERGER CONSIDERATION"). The shares of Parent Common Stock described in clause (i) above and the Cash Merger Consideration described in clause (ii) above are collectively referred to herein as the "MERGER CONSIDERATION". If, prior to the Effective Time, Parent should split or combine the Parent Common Stock, or pay a stock dividend or other stock distribution in Parent Common Stock, then the Exchange Ratio shall be appropriately adjusted to reflect such split, combination, dividend or other distribution. (b) Stock of Sub. Each share of capital stock of Sub issued and outstanding immediately prior to the Effective Time shall be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation and the stock of the Surviving Corporation issued in that conversion shall constitute all of the issued and outstanding shares of capital stock of the Surviving Corporation. (c) Cancellation of Treasury Stock and Related Party Stock. Each share of Company Capital Stock owned by the Company, the Company Sub, any entity controlling the Company or any wholly-owned Subsidiary of such entities shall automatically be canceled and retired without any conversion thereof and no Merger Consideration shall be delivered with respect thereto. 3.2 Exchange of Certificates. (a) Exchange Procedures. Upon the surrender to Parent of a certificate or certificates that immediately prior to the Effective Time represented outstanding shares of Company Capital Stock (the "CERTIFICATES"), each record holder thereof shall be entitled to receive in exchange therefor the applicable Merger Consideration provided for in Section 3.1(a) for each share of Company Capital Stock represented by the Certificates, reduced by such holder's Pro-Rata Share of the Escrow Amount ("PRO-RATA ESCROW AMOUNT") attributable to such Merger Consideration for such shares of Company Capital Stock. Parent shall transfer the Escrow Amount to the Escrow Agent for deposit in the Escrow Account immediately after the Effective Time and the Escrow Amount shall be held in accordance with and subject to the terms of the Escrow Agreement. All Cash Merger Consideration shall be paid by the wire transfer of immediately available funds to the accounts of the Company Stockholders. Each Company Stockholder shall provide Parent with written instructions identifying his or its account at least three Business Days prior to the Closing. All Certificates surrendered pursuant to this Section 3.2(a) shall immediately be canceled. In the event of a transfer of ownership of the Company Common Stock or Company Preferred Stock that is not registered in the transfer records of the -9- Company, a certificate representing the appropriate number of shares of Parent Common Stock and the Cash Merger Consideration (less the Pro-Rata Escrow Amount) may be issued and delivered to a transferee if the Certificate representing such Company Common Stock or Company Preferred Stock, as applicable, is presented to Parent accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 3.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration (less the Pro-Rata Escrow Amount) applicable to the shares of Company Capital Stock represented by such Certificate) and all dividends or other distributions thereon with a record date after the Effective Time as contemplated by Section 3.2(b). (b) Distributions with Respect to Shares Prior to Exchange of Certificates. No dividends or other distributions with respect to Parent Common Stock declared or made after the Effective Time with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the Parent Common Stock represented thereby as a result of the exchange and conversion provided in Section 3.1(a), and no cash payment in lieu of fractional shares of Parent Common Stock shall be paid to any such holder pursuant to Section 3.2(d), until the holder of such Certificate surrenders such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the holder thereof, without interest: (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of Parent Common Stock to which such holder is entitled pursuant to Section 3.2(d) and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock; and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Parent Common Stock. (c) No Further Ownership Rights in Company Common Stock or Company Preferred Stock. All shares of Parent Common Stock issued in exchange for and upon the conversion of the Company Common Stock or Company Preferred Stock in accordance with the terms hereof (including any cash paid pursuant to Section 3.2(b) or 3.2(d)) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Common Stock or Company Preferred Stock, as applicable, and after the Effective Time there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock or Company Preferred Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article III. (d) No Fractional Shares. No certificates or scrip representing fractional shares of Parent Common Stock or book-entry credit of the same shall be issued pursuant to this Article III, and, except as provided in this Section 3.2(d), no dividend or other distribution, stock split or interest shall relate to any such fractional security, and such fractional interests shall not entitle the owner thereof to vote or to any rights of a security holder of Parent. In lieu of any fractional security, Parent shall pay to each holder of shares of Company Common Stock or Company Preferred Stock who would otherwise have been entitled to a fraction of a share of Parent -10- Common Stock pursuant to this Article III an amount in cash (without interest) equal to such holder's proportionate interest in the sum of (i) the fraction of a share of Parent Common Stock to which such holder would otherwise have been entitled, multiplied by the Average Price of Parent Common Stock, and (ii) the aggregate dividends or other distributions that are payable with respect to such shares of Parent Common Stock pursuant to Section 3.2(b) (such dividends and distributions being herein called the "FRACTIONAL DIVIDENDS"). For purposes of determining whether a holder of shares of the Company Common Stock or Company Preferred Stock is to receive payment in lieu of fractional shares, all shares of Company Capital Stock held of record by such holder shall be aggregated. 3.3 Return of Merger Consideration. Parent shall be entitled to have returned to it $5 million of the Merger Consideration to be deposited into the Escrow Account if the Revenues (as defined below), do not meet or exceed the "Revenue Hurdle" for the Term. For purposes of clarification, the $5 million deposited into the Escrow Account is part of the aggregate Escrow Amount. If this $5 million in Merger Consideration is returned to Parent pursuant to this Section 3.3, it shall consist of $2.5 million in immediately available funds and $2.5 million in Parent Common Stock valued for purposes of this Section 3.3 at a per share price equal to the average daily closing price of Parent Common Stock as reported on Nasdaq during the ten (10) consecutive trading days ending on the last trading day immediately prior to December 31, 2002 (the "SECTION 3.3 AVERAGE PRICE"). The Revenues shall be determined at the end of the Term in the manner set forth in Section 3.3(b) below. (a) Definitions. The following terms shall have the following meanings for purposes of this Section 3.3: (i) "Acquired Business" means the "Nurse Travel" and "Allied Travel" operations conducted by the Company and the Company Sub immediately prior to the Effective Time and by the Surviving Corporation and the Company Sub thereafter; for purposes of this Section 3.3, the operating results of "Nurse Travel" and "Allied Travel" shall be reported in a manner consistent with the existing practices of the Company; (ii) "REVENUE HURDLE" means $112,570,000; (iii) "REVENUES" has the meaning set forth in Section 3.3(b); and (iv) "TERM" means the period that began on January 1, 2002 and ends at the close of business on December 31, 2002. (b) Manner of Revenue Computation. For purposes of this Merger Agreement, the "Revenues" of the Acquired Business during the Term shall mean the revenues from operations of the Acquired Business as determined in accordance with GAAP as consistently applied by the Company for its fiscal year ended June 30, 2001. Notwithstanding the foregoing, consistent with the Company's past practice for its fiscal year ended June 30, 2001, pass-through travel expenses of nurse and allied staff billed to the Company's customers shall not be included in the computation of Revenues. In determining the Revenues, there shall be excluded: (i) Any revenues from the sale of any assets or property of the Acquired Business; and -11- (ii) Any revenues that are generated by any Person or business acquired by Parent, the Surviving Corporation, or any Affiliate thereof following the Effective Time; provided, however that revenues generated from any customers of the Company that are acquired by Parent, Surviving Corporation or any Affiliate thereof during the Term shall be included in Revenues. (c) Time of Determination. The Revenues shall be determined promptly after December 31, 2002, but in no event later than forty-five (45) days thereafter, by Parent. Copies of the report setting forth Parent's computation of the Revenues of the Acquired Business shall be submitted in writing to Stockholder Representative (as defined in the Escrow Agreement) and, unless Stockholder Representative notifies Parent in writing within thirty (30) days after receipt of the report (the "OBJECTION PERIOD") that it objects to the computation of the Revenues set forth therein, the report shall be binding and conclusive on all parties to this Agreement and all Company Stockholders for the purposes of this Merger Agreement. Stockholder Representative or its authorized representative shall have access to the books and records of the Company and the Surviving Corporation during regular business hours to verify the computation of Revenues made by Parent. If Stockholder Representative notifies Parent in writing within the Objection Period that it objects to the computation of Revenues set forth therein, Parent and Stockholder Representative shall meet to attempt to resolve the objection. If Parent and Stockholder Representative are unable to reach agreement within thirty (30) Business Days after such notification, KPMG or such other independent accounting firm agreed to by Parent and the Stockholder Representative (but excluding Deloitte & Touche L.L.P. and Ernst & Young L.L.P.) ("SPECIAL ACCOUNTANTS") shall perform agreed-upon procedures and issue a report on such procedures (the "AGREED-UPON PROCEDURES REPORT") for determining whether the Revenue Hurdle has been met. The Agreed-Upon Procedures Report shall be binding and conclusive on Parent and Stockholder Representative. Stockholder Representative or its authorized representative shall have access to the workpapers relating to the Agreed-Upon Procedures Report. If the Agreed-Upon Procedures Report indicates that the Revenue Hurdle has been met, then Parent shall pay the Special Accountants' fees, costs and expenses. If the Agreed-Upon Procedures Report indicates that the Revenue Hurdle has not been met, then the Special Accountants' fees, costs and expenses shall be paid to Parent from the Escrow Account by the Escrow Agent. If Parent is entitled to the return of the $5 million of Merger Consideration pursuant to this Section 3.3, such amount shall be delivered to Parent within three (3) Business Days of the earlier of (i) the expiration of the Objection Period (assuming no objection was brought within the Objection Period) or the date prior to the expiration of the Objection Period that Stockholder Representative notifies the Escrow Agent that it does not object to the determination contained in Parent's report, (ii) Parent and Stockholder Representative's delivery of a joint written notice to the Escrow Agent that the Revenue Hurdle was not met, or (iii) delivery to the Escrow Agent of the Agreed Upon Procedures Report that indicates the Revenue Hurdle was not met. The parties agree that notwithstanding anything to the contrary contained in this Merger Agreement or the Escrow Agreement, (i) the return of the $5 Million of Merger Consideration pursuant to this Section 3.3 shall be satisfied solely from the funds held in the Escrow Account and (ii) if the Escrow Account would otherwise be distributed pursuant to the terms of the Escrow Agreement and assuming that there is still sufficient Merger Consideration remaining in the Escrow Account, Escrow Agent shall continue to hold at least $5 million of the Merger Consideration (or such lesser amount then remaining in the Escrow Account) until there has been a final determination pursuant to this Section 3.3 as to whether Parent is entitled to the -12- return of the $5 million of Merger Consideration. Any Merger Consideration which continues to be held for such purpose shall consist of 50% of the Cash Merger Consideration and 50% of Parent's Common Stock, valued at the Section 3.3 Average Price. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of the Company and the Management Stockholders. The Company, Michael and DeVille, each, severally, but not jointly, represent and warrant to Parent and Sub as follows, subject to any exceptions set forth in the Company Disclosure Letter to be delivered to Parent by the Company concurrently herewith: (a) Organization, Standing and Power. (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and except as set forth in Section 4.1(a) of the Company Disclosure Letter, is duly qualified and in good standing to do business in each jurisdiction in which the business it is conducting, or the operation, ownership or leasing of its properties, makes such qualification necessary. The Company has previously made available to Parent complete and correct copies of its Articles of Incorporation and Code of Regulations. (ii) The Company Sub is a limited liability company duly organized, validly existing and in good standing under the laws of its state of organization, has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the business it is conducting, or the operation, ownership or leasing of its properties, makes such qualification necessary. The Company Sub has previously made available to Parent complete and correct copies of its Articles of Organization and Operating Agreement. (b) Subsidiaries. The Company does not own, directly or indirectly, any capital stock or other ownership interest in any Person other than its ownership of one hundred percent (100%) of the membership interests in the Company Sub. (c) Capital Structure. (i) The authorized capital stock of the Company consists of 1,000,000 shares of Company Common Stock and 4,257.14 shares of Company Preferred Stock, of which 1400 shares have been designated Series A Preferred Stock and 2,857.14 shares have been designated Series B Preferred Stock. At the close of business on the last Business Day prior to the execution of this Merger Agreement, (i) 173,100 shares of Company Common Stock and 3,304.76 shares of Company Preferred Stock (comprising 1,400 shares of Series A Preferred Stock and 1,904.76 shares of Series B Preferred Stock) were issued and outstanding; (ii) an aggregate of 304,476 shares of Company Common Stock were authorized and are available for issuance by the Company upon conversion of the Company Preferred Stock, 50,300 shares of Company Common Stock were authorized and are available for issuance upon the exercise of -13- outstanding options granted under the Company's 1999 Stock Option Plan, which is the only stock award, stock bonus or any other stock plan or program of the Company or the Company Sub (the "COMPANY STOCK PLAN") and 5,100 shares of Company Common Stock were authorized and are available for issuance upon exercise of the Warrant (described below); (iii) 21,100 shares of Company Common Stock were held by the Company in its treasury; and (iv) no bonds, debentures, notes or other indebtedness having the right to vote (or convertible into securities having the right to vote) on any matters on which the Company Stockholders may vote ("VOTING DEBT") were issued or outstanding. At the close of business on the last Business Day prior to execution of this Merger Agreement and immediately prior to the Effective Time the issued and outstanding Series A Preferred Stock was and will be convertible into 114,000 shares of Company Common Stock, and the issued and outstanding Series B Preferred Stock was and will be convertible into 190,476 shares of Company Common Stock. At the close of business on the last Business Day prior to the execution of this Merger Agreement, (i) the Company had outstanding 50,300 options granted under the Company Stock Plan which upon exercise will entitle the holders thereof to receive 50,300 shares of Company Common Stock, subject to any adjustment in the number of shares resulting from a cashless exercise of the options held by the Management Stockholders and Wead, and (ii) the Company had outstanding a Warrant held by a Venture Stockholder which provides for the purchase of 5,100 shares of Company Common Stock at an exercise price of $21.00 per share, as more fully described in Schedule 4.1(c) of the Company Disclosure Letter (the "WARRANT"), subject to any adjustment in the number of shares resulting from the cashless exercise of the Warrant. Except as provided in Schedule 4.1(c) of the Company Disclosure Letter, all outstanding shares of Company Common Stock and Company Preferred Stock are validly issued, fully paid and non-assessable and are not subject to any preemptive rights, and all shares that may be issued upon the conversion of the Company Preferred Stock and upon the exercise of the Vested Options and the Warrant will be, when issued, validly issued, fully paid and non-assessable. Except as set forth in Schedule 4.1(c), there are no other accrued, but unpaid dividends on any of the Company's Capital Stock. Except as set forth in this Section 4.1(c) or Schedule 4.1(c) of the Company Disclosure Letter, (i) there are no authorized, outstanding, reserved or issued (A) shares of Company Capital Stock, Voting Debt or other voting securities of the Company; (B) securities of the Company convertible into or exchangeable for shares of Company Capital Stock, Voting Debt or other voting securities of the Company; or (C) options, warrants, calls, rights (including preemptive rights), commitments or agreements to which the Company is a party or by which it is bound in any case obligating the Company to issue, deliver, sell, purchase, redeem or acquire additional shares of Company Capital Stock or any Voting Debt or other voting securities of the Company, or obligating the Company to grant, extend or enter into any such option, warrant, call, right, commitment or agreement, (ii) there are no outstanding obligations of the Company to repurchase, redeem or otherwise acquire any such securities or to issue, deliver or sell, or cause to be issued, delivered or sold, any such securities, (iii) there are no dividends or other amounts owing to the holders of Company Preferred Stock and (iv) the Company Stockholders own all of the issued and outstanding Company Capital Stock. Except as set forth in Schedule 4.1(c) of the Company Disclosure Letter, there are not as of the date hereof and there will not be at the Effective Time any stockholder agreements, voting trusts or other agreements or understandings to which the Company is a party or by which it is bound relating to the voting of any Company Capital Stock. -14- (ii) One hundred percent (100%) of the membership interests in the Company Sub are, and have been from the date of organization of the Company Sub, owned of record and beneficially by the Company. (d) Authority; No Violations; Consents and Approvals. (i) The Board of Directors of the Company has duly approved the Merger and this Merger Agreement in accordance with the Company's Articles of Incorporation, the Ohio Law and all agreements between the Company and the holders of Company Preferred Stock, and have declared the Merger and this Merger Agreement to be in the best interests of the stockholders of the Company. The Company has all requisite corporate power and authority to enter into this Merger Agreement and any Related Documents to which it is a party and to consummate the transactions contemplated hereby. Each of the Management Stockholders, and, to the knowledge of the Company, each of the Venture Stockholders, has all necessary legal capacity to enter into this Merger Agreement and any Related Documents to which such Management Stockholders and Venture Stockholders are parties and to perform their respective obligations hereunder and thereunder. The execution, delivery and performance of this Merger Agreement and any Related Documents by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, except for securing the requisite Company Stockholder Approval (described in Section 4.1(e)). This Merger Agreement has been duly executed and delivered by the Company. Assuming this Merger Agreement constitutes the valid and binding obligation of each of Parent and Sub, subject to securing the Company Stockholder Approval, this Merger Agreement also constitutes a valid and binding obligation of the Company and each of the Management Stockholders and, to the knowledge of the Company and the Management Stockholders, as to Sections 3.3, 6.5, 6.10 and Article VIII, of each of the Venture Stockholders, enforceable in accordance with its terms, except that (i) such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws or judicial decisions now or hereafter in effect relating to creditors' rights generally and (ii) the remedy of specific performance and injunctive relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (ii) Except as set forth on Schedule 4.1(d) to the Company Disclosure Letter, the execution and delivery of this Merger Agreement does not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of a material benefit under, or result in any Encumbrance upon any of the properties or assets of the Company or the Company Sub under any provision of (A) the Articles of Incorporation or Code of Regulations of the Company or the charter documents of the Company Sub, (B) any loan or credit agreement, note, bond, mortgage, indenture, lease or other Contract, instrument, permit, concession, franchise or license applicable to the Company or the Company Sub or their properties or assets or (C) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in Schedule 4.1(d) to the Company Disclosure Letter and in subparagraph (iii) of this Section 4.1(d) are duly and timely obtained or made, any judgment, order, decree or Legal Requirement applicable to the Company or the Company Sub or any of their properties or assets. -15- (iii) No consent, approval, order or authorization of, or registration, declaration or filing with, or permit from, a Governmental Entity is required by or with respect to the Company, or the Company Sub or the Company Stockholders in connection with the execution and delivery of this Merger Agreement and the Related Documents by the Company and the Company Stockholders or the consummation by the Company of the transactions contemplated hereby, except for: (A) the filing of a premerger notification report by the Company under the HSR Act and the expiration or termination of the applicable waiting period with respect thereto; (B) the filing of the Certificate of Merger with the Delaware Secretary of State pursuant to the DGCL and with the Ohio Secretary of State pursuant to the Ohio Law; (C) such filings and approvals as may be required by any applicable state securities, "blue sky" or takeover laws; and (D) such filings and approvals as may be required by any applicable non-U.S. Governmental Entity. (e) Vote Required. The only vote of the Company Stockholders necessary to adopt this Merger Agreement and approve the Merger and the other transactions contemplated hereby on behalf of the Company and the Company Stockholders is (i) the vote required by Section 1701.79 of the Ohio Law and (ii) the vote of a majority of the holders of the Company Preferred Stock voting together as a class (collectively (i) and (ii) are referred to herein as the "COMPANY STOCKHOLDER APPROVAL"). (f) Reports and Financial Statements. The Company has delivered to Parent: (i) an audited balance sheet of the Company as at June 30, 2001 (including the notes thereto, the "AUDITED BALANCE SHEET"), and the related audited statements of operations, changes in stockholders' equity and cash flows for the fiscal year then ended, including the notes thereto, together with the report thereon of Ernst & Young L.L.P., independent certified public accountants; (ii) audited balance sheets of the Company as at June 30, 2000, 1999 and 1998, and the related audited statements of operations, changes in stockholders' equity and cash flows for each of the fiscal years then ended, including the notes thereto together with the report thereon of Joseph DeCosimo and Company, CPAs, independent certified public accountants (all of the preceding are collectively the "AUDITED FINANCIAL STATEMENTS"); and (iii) an unaudited balance sheet of the Company as at February 28, 2002 (the "CURRENT BALANCE SHEET") and the related unaudited statements of operations, changes in stockholders' equity and cash flows for the eight (8) months then ended, including any notes thereto (the "INTERIM FINANCIAL STATEMENTS"), certified by the Company's Controller. The Audited Financial Statements and the Interim Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and present fairly the financial condition of the Company as of such dates and the results of operations, changes in stockholders' equity and cash flows of the Company as at the respective dates of and for such periods; provided, however, that the Interim Financial Statements are subject to normal year-end adjustments, which are not material individually or in the aggregate, and may lack footnotes and a statement of changes in stockholders' equity. The Company has also delivered to Parent copies of all letters from the Company's auditors to the Company's Board of Directors or the audit committee thereof in connection with the audits of the Company's fiscal year 2001, 2000 and 1999 Audited Financial Statements, together with copies of all responses thereto. Except as set forth in Schedule 4.1(f) of the Company Disclosure Letter, there are no debts, Liabilities or obligations, of any nature, of or affecting the Company, except (i) to the extent expressly set forth or reserved against in the Audited Balance Sheet, the Current Balance Sheet or in the notes to the Audited Balance Sheet -16- or the Current Balance Sheet and (ii) current Liabilities incurred in the Ordinary Course of Business of the Company in amounts and on terms consistent with past practices (and in compliance with this Merger Agreement) since the date of the Current Balance Sheet and, in the case of both clause (i) and clause (ii), in compliance with the requirements of Section 13(B)(2) of the Securities Exchange Act of 1934, as amended, (the "EXCHANGE ACT") (regardless of whether the Company or the Company Sub is subject to that Section). (g) Books and Records. The books of account and other financial records of each of the Company and the Company Sub, all of which have been made available to Parent, are complete and correct and represent actual, bona fide transactions and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls. Except as set forth in Schedule 4.1(g) of the Company Disclosure Letter, the minute books of the Company and the Company Sub, all of which have been made available to Parent, contain accurate and complete records of all meetings held of, and corporate action taken by, the stockholders, the Board of Directors and committees of the Board of Directors of the Company and members and managers of the Company Sub, and no meeting of any such stockholders, Board of Directors, committee, members or managers has been held for which minutes have not been prepared or are not contained in such minute books. At the Closing, all of those books and records will be in the possession of the Surviving Corporation by virtue of the Merger. (h) Accounts Receivable. All accounts receivable of the Company and the Company Sub that are reflected on the Audited Balance Sheet, the Current Balance Sheet or on the accounting records of the Company and the Company Sub as of the Closing Date (collectively, the "ACCOUNTS RECEIVABLE"), less the reserve for bad debt set forth in the Audited Balance Sheet, the Current Balance Sheet or on the accounting records of the Company and the Company Sub as of the Closing Date have been collected or are or will be at the Closing Date valid and enforceable claims, fully collectible and subject to no setoff or counterclaim. There is no contest, claim or right of set-off under any Contract with any obligor of an Accounts Receivable relating to the amount or validity of such Accounts Receivable. Schedule 4.1(h) to the Company Disclosure Letter contains a complete and accurate list of all Accounts Receivable as of the date of the Current Balance Sheet, which list sets forth the aging of such Accounts Receivable. Except as set forth on Schedule 4.1(h) to the Company Disclosure Letter, since the date of the Current Balance Sheet, there have not been any write-offs as uncollectible of any Accounts Receivable. (i) Absence of Certain Changes or Events. Except as disclosed in, or reflected in, the financial statements described in Section 4.1(f) or included on Schedule 4.1(i) to the Company Disclosure Letter, or except as contemplated by this Merger Agreement or the Merger, since June 30, 2001, the Company and the Company Sub each has conducted its business in the ordinary course consistent with past practice and there has not been: (i) any Material Adverse Effect on the Company or the Company Sub; (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any Company Capital Stock; (iii) any purchase, redemption or other acquisition of any shares of Company Capital Stock or any other securities of the Company or any options, warrants, calls or rights to acquire such shares or other securities; (iv) any split, combination or reclassification of any Company Capital Stock or any issuance or the authorization of any issuance of any other -17- securities in respect of, in lieu of or in substitution for shares of Company Capital Stock; (v) any amendment of any term of any outstanding equity security of the Company; (vi) (A) any granting by the Company or the Company Sub to any current or former director, consultant, executive officer or other employee of the Company or the Company Sub of any increase in compensation, bonus or other benefits, except for normal increases in cash compensation in the Ordinary Course of Business consistent with past practice or as was required under any employment agreements in effect as of June 30, 2001, (B) any granting by the Company or the Company Sub to any such current or former director, consultant, executive officer or employee of any increase in severance or termination pay, (C) any amendment to or modification of, any Company Stock Plans, (D) any adoption of, or amendment to, any Company Benefit Plan, or (E) any payment of a bonus or other benefit to any current or former employee or director of the Company or the Company Sub; (vii) except insofar as may have been required by a change in GAAP, any change in accounting methods, principles or practices by the Company or the Company Sub affecting its assets, liabilities or business; (viii) any tax election that individually or in the aggregate would reasonably be expected to adversely affect the tax liability or tax attributes of the Company or the Company Sub; (ix) any settlement or compromise of any material income tax liability; (x) any material change in any Contract of the Company; (xi) any change in the terms and conditions of any services or payment therefor provided or to be provided by the Company or the Company Sub to any of their clients; (xii) any workers' compensation claim or reopening of any claim for which the sum of medical payments, indemnity payments and reserves exceeds $25,000; (xiii) any claims or complaints related to professional liability, employment practices or medical malpractice brought against the Company or the Company Sub; (xiv) any damage, Loss or destruction, whether or not covered by insurance; or (xv) any other changes, circumstances or events in the business, operations, properties, prospects, assets or condition of either the Company or the Company Sub outside the Ordinary Course of Business. (j) Compliance with Applicable Laws. The Company and the Company Sub each holds all permits, licenses, variances, exemptions, orders, franchises and approvals of all Governmental Entities necessary for it to own, lease or operate its properties and assets and for the lawful conduct of its business as currently conducted or as contemplated by the Management Stockholders to be conducted (the "COMPANY PERMITS"). To the knowledge of the Company and the Management Stockholders, the Company and the Company Sub are in compliance with the terms of the Company Permits. Except as set forth on Schedule 4.1(j) to the Company Disclosure Letter, neither the business of the Company nor the business of the Company Sub is being conducted in violation of any Legal Requirement of any Governmental Entity, except such violations that individually or in the aggregate could not result in a Material Adverse Effect on the Company. Except as set forth in Schedule 4.1(j) of the Company Disclosure Letter, no investigation or review by any Governmental Entity with respect to the Company or the Company Sub is pending or, to the knowledge of the Company or the Management Stockholders, threatened. The Company and the Company Sub each is, and since July 1, 1999, has been, in compliance with all Legal Requirements. (k) Condition and Sufficiency of Assets. All of the buildings, plants, structures, furniture, fixtures, equipment and other assets of the Company and the Company Sub (the "COMPANY ASSETS") are structurally sound, are in good operating condition and repair (subject to normal wear and tear), and are adequate for the uses to which they are being put, and none of such Company Assets is in need of maintenance or repairs except for ordinary, routine -18- maintenance and repairs that are not material in nature or cost. The Company Assets are sufficient for the continued conduct of the Company's business after the Closing in substantially the same manner as conducted prior to the Closing. (l) Litigation and Claims. Except as set forth on Schedule 4.1(l) to the Company Disclosure Letter, there is no (i) suit, action, claim or proceeding pending, or, to the knowledge of the Company or the Management Stockholders, threatened against the Company or the Company Sub ("COMPANY LITIGATION"), or (ii) judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company or the Company Sub ("COMPANY ORDER"). To the knowledge of the Company, no event has occurred or circumstance exists that is reasonably likely to give rise to or serve as a basis for the commencement of any such Company Litigation. Schedule 4.1(l) to the Company Disclosure Letter lists all Company Litigation or other proceedings, including, without limitation, any Company Litigation relating to any workers' compensation (pending, settled or reopened), employer practices, medical malpractice or professional liability matters and any Company Litigation involving any employee of the Company, threatened, filed or otherwise brought to the attention of the Company, the Company Sub or the Management Stockholders since July 1, 1999, by any Governmental Entity, client of the Company, client of the Company Sub or other Person. (m) Taxes. (i) The Company, the Company Sub and any affiliated, combined or unitary group of which the Company or the Company Sub is or was a member each has (A) timely (taking into account any extensions) filed all true and complete federal, state, local and non-U.S. returns, declarations, reports, estimates, information returns and statements ("RETURNS") required to be filed by or with respect to it in respect of any Taxes, except as set forth in Schedule 4.1(m)(i)(A) of the Company Disclosure Letter, (B) timely paid all Taxes that are due and payable (except for audit adjustments to the extent that liability therefor is reserved for in the Company's Current Balance Sheet) for which the Company or the Company Sub may be liable, except as set forth in Schedule 4.1(m)(i)(B) of the Company Disclosure Letter, (C) established reserves (determined in accordance with GAAP) which are included in the Current Balance Sheet that are adequate for the payment of all Taxes not yet due and payable with respect to the results of operations of the Company or the Company Sub through the date of such Current Balance Sheet, and (D) complied with all Legal Requirements relating to the payment and withholding of Taxes and has timely withheld from employee wages and paid over to the proper Governmental Entities all amounts required to be so withheld and paid over. (ii) Schedule 4.1(m)(ii) to the Company Disclosure Letter sets forth the last taxable period through which the federal income Tax Returns of the Company and the Company Sub have been examined by the Internal Revenue Service ("IRS") or otherwise closed. Except to the extent being contested in good faith, all deficiencies asserted as a result of such examinations and any examination by any applicable state, local or non-U.S. taxing authority have been paid, fully settled or adequately provided for in the Current Balance Sheet. No federal, state, local or non-U.S. Tax audits or other administrative proceedings or court proceedings are currently pending with regard to any Taxes for which the Company or the Company Sub would be liable and no deficiency for any such Taxes has been proposed, asserted -19- or assessed against the Company or the Company Sub by any federal, state, local or non-U.S. taxing authority with respect to any period. (iii) Neither the Company nor the Company Sub has executed or entered into (or prior to the close of business on the Closing Date will execute or enter into) with the IRS or any other taxing authority any Contract or other document extending or having the effect of extending the period for assessments or collection of any Taxes for which the Company or the Company Sub would be liable. (iv) Neither the Company nor the Company Sub is a party to, is bound by or has any obligation under, any tax sharing agreement, tax indemnity agreement or similar agreement or arrangement. (v) Neither the Company nor the Company Sub has taken or agreed to take any action nor has it any knowledge of any fact, agreement, plan or other circumstance that is reasonably likely to prevent the Merger from qualifying as a reorganization within the meaning of section 368(a) of the Code. (vi) There are no Encumbrances for Taxes upon the assets or properties of the Company or the Company Sub (whether real, personal or mixed, tangible or intangible) except for statutory Encumbrances for Taxes not yet due or payable. (vii) Nether the Company nor the Company Sub is required (or will be required as a result of this transaction) to include in income any amount for an adjustment pursuant to section 481(a) of the Code or the regulations thereunder or any similar provision of state law. (viii) Neither the Company, the Company Sub nor, to the knowledge of the Company, any Common Stockholder is a "foreign person" for purposes of section 1445 of the Code. (ix) To the knowledge of the Company, no claim has been made during the last five years by an authority in a jurisdiction where the Company or the Company Sub does not file Tax Returns that the Company or the Company Sub is or may be subject to taxation by that jurisdiction. (x) Neither the Company nor the Company Sub has filed a consent under Code section 341(f) concerning collapsible corporations. (xi) Neither the Company nor the Company Sub has been a United States real property holding corporation within the meaning of Code section 897(c)(2) during the applicable period specified in Code section 897(c)(1)(A)(ii). (xii) Except as set forth in Schedule 4.1(m)(xii) of the Company Disclosure Letter, neither the Company nor the Company Sub (i) has been a member of an affiliated group of corporations within the meaning of section 1504 of the Code and (ii) has any liability for the Taxes of any Person under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise. -20- (xiii) The Company and the Company Sub each has withheld or paid all Taxes required to have been withheld or paid in connection with amounts paid or owed to any employee, independent contractor, creditor, stockholder, member or other third party. (xiv) The Company and the Company Sub each has disclosed on its federal income tax returns all positions taken therein that could give rise to a substantial understatement of federal income tax within the meaning of Code Section 6662. (xv) The Company and the Company Sub each has complied with all sales Tax resale certificate exemption requirements. (xvi) Except as set forth in Schedule 4.1(m)(xvi) of the Company Disclosure Letter, there are no Company Benefit Plans covering any employee or former employee or other Person who is a "disqualified individual" as defined in section 280G(c) of the Code with respect to the Company or the Company Sub that could give rise to the payment of an amount that would not be deductible pursuant to the terms of section 280G of the Code or create any excise tax liability under section 4999 of the Code. (xvii) Except as set forth in Schedule 4.1(m)(i)(A) of the Company Disclosure Letter, to the knowledge of the Company, there is, and since June 30, 2001, has been, no Company Benefit Plan covering any employee or former employee of the Company or the Company Sub that could give rise to the payment of an amount that would not be deductible pursuant to the terms of section 162 of the Code. (xviii) To the knowledge of the Company and the Management Stockholders, the records of each of the Company and the Company Sub contain all information and documentation necessary to support the Tax Returns filed by it. (xix) The Company has not, at any time, constituted either a "distributing corporation" or a "controlled corporation" (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock qualifying for Tax-free treatment under Section 355 of the Code. (xx) Neither the Company nor the Company Sub has entered into any transaction that would be considered listable or reportable under Section 6111 or 6112 of the Code. (n) Employee Matters; ERISA. (i) Benefit Plans. Schedule 4.1(n)(i) to the Company Disclosure Letter contains a true and complete list of each of the following items: each employee benefit plan, program, arrangement or customary practice covering any current or former officer, director, employee or independent contractor of the Company or any Affiliate of the Company or any of their dependents or beneficiaries (each, a "COMPANY BENEFICIARY") or with respect to which the Company or any Affiliates of the Company may have any liability, including, but not limited to, any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any stock option plan, stock purchase plan, cafeteria plan, scholarship program, retention incentive program, vacation -21- policy and sick pay policy. The items described above, together with each management, employment, deferred compensation, severance, change in control, bonus or other contract for personal services with or covering any Company Beneficiary, whether or not terminated, if the Company or the Company Sub could have statutory or contractual liability with respect thereto on or after the date hereof, are referred to collectively herein as the "COMPANY BENEFIT PLANS." (ii) Contributions and Payments. All contributions and other payments required to have been made by the Company, the Company Sub or any entity required to be aggregated therewith pursuant to section 414 of the Code ("COMPANY ERISA AFFILIATE") with respect to any Company Benefit Plan (or to any person pursuant to the terms thereof) have been made or are properly accrued through the date of this Merger Agreement as liabilities that are reflected in the financial statements of the Company or the Company Sub. (iii) Qualification; Compliance. The terms of each Company Benefit Plan that is intended to be "qualified" within the meaning of section 401(a) of the Code have been determined by the IRS to satisfy the requirements of section 401(a) of the Code, or the applicable remedial period applicable to the Company Benefit Plan will not have ended prior to the Effective Time, and no event or condition exists or has occurred that could result in the revocation or denial of any such determination. With respect to each Company Benefit Plan, the Company and each Company ERISA Affiliate are in compliance with, and each Company Benefit Plan and related source of benefit payment is and has been operated in compliance with, all applicable laws, rules and regulations governing such plan or source, including, without limitation, ERISA, the Code and applicable local law (including non-U.S. law). No Company Benefit Plan is subject to any ongoing audit, investigation or other administrative proceeding of the IRS, the Department of Labor or any other Governmental Entity. (iv) Liabilities. With respect to the Company Benefit Plans, individually and in the aggregate, there exists no condition or set of circumstances that could subject the Company or any Company ERISA Affiliate to any liability arising under the Code, ERISA or any other applicable law (including, without limitation, any liability to or under any such plan or to the PBGC, or under any indemnity agreement to which the Company or any Company ERISA Affiliate is a party). No claim, action or litigation has been made, commenced or, to the knowledge of the Company, threatened, by or against the Company, or the Company Sub with respect to any Company Benefit Plan (other than routine claims for benefits). (v) Payments Resulting from Merger. Except as disclosed on Schedule 4.1(n)(v) to the Company Disclosure Letter, the consummation or announcement of any transaction contemplated by this Merger Agreement will not (either alone or upon the occurrence of any additional or further acts or events) result in (A) any payment (whether of severance pay or otherwise) becoming due from the Company or the Company Sub to any Company Beneficiary, or (B) any benefit under any Company Benefit Plan being established or increased, or becoming accelerated, vested or payable. (vi) Absence of Defined Benefit Plans. Neither the Company nor any entity (whether or not incorporated) that was at any time during the past six years a Company ERISA Affiliate has ever maintained or had any liability (contingent or otherwise) with respect -22- to any pension plan (within the meaning of Section 3(2) of ERISA) that is or was subject to Title IV of ERISA or Section 412 of the Code. (vii) Documents Provided. With respect to each Company Benefit Plan, the Company and the Company Sub have heretofore delivered to Parent, as applicable, complete and correct copies of each of the following documents: (A) the Company Benefit Plan and any amendments thereto (or if any the Company Benefit Plan is not a written agreement, a description thereof); (B) its three most recent annual Form 5500 reports filed with the IRS; (C) its most recent statement filed with the Department of Labor pursuant to 29 U.S.C.Section 2520.104-23; (D) a written summary of the legal basis for an exemption from the obligation to file annual Form 5500 reports; (E) its three most recent annual Form 990 and 1041 reports filed with the Internal Revenue Service; (F) its most recent summary plan description and summaries of material modifications thereto; (G) the trust agreement, group annuity contract or other funding agreement that provides for the funding of the Company Benefit Plan; (H) its most recent financial statement; (I) the most recent determination letter received from the IRS with respect to the Company Benefit Plan that is intended to qualify under section 401 of the Code; and (J) any Contract pursuant to which the Company or the Company Sub is obligated to indemnify any person. (viii) No Company Benefit Plans provide medical, surgical, hospitalization, or life insurance benefits (whether or not insured by a third party) for employees or former employees of the Company, the Company Sub or a Company ERISA Affiliate for periods extending beyond their terminations of employment, other than coverage mandated by the Consolidated Omnibus Budget Reconciliation Act of 1985 or similar state law. (o) Labor Matters. Except as set forth in Schedule 4.1(o) to the Company Disclosure Letter, (i) neither the Company nor the Company Sub is a party to any collective bargaining agreement or other current labor agreement with any labor union or -23- organization, and there is no current union representation dispute involving employees of the Company or the Company Sub, nor do the Company, the Company Sub or the Management Stockholders know of any activity or proceeding of any labor organization (or representative thereof) or employee group (or representative thereof) to organize any such employees; (ii) there is no unfair labor practice charge or grievance arising out of a collective bargaining agreement or other grievance procedure against the Company or the Company Sub pending, or, to the knowledge of the Company, threatened; (iii) there is no complaint, lawsuit or proceeding in any forum by or on behalf of any current or former employee or any applicant for employment alleging breach of any express or implied contract of employment, any law or regulation governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with the employment relationship against the Company or the Company Sub pending, or, to the knowledge of the Company or the Management Stockholders, threatened; (iv) the Company and the Company Sub each is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health; and (v) there is no proceeding, claim, suit, action or governmental investigation pending or, to the knowledge of the Company or the Management Stockholders, threatened, in respect of which any current or former director, officer, employee or agent of the Company or the Company Sub is or may be entitled to claim indemnification from the Company or the Company Sub (A) pursuant to the Company's Articles of Incorporation or Code of Regulations or the Company Sub's charter documents, (B) as provided in any indemnification agreement to which the Company or the Company Sub is a party or (C) pursuant to applicable law. (p) Intangible Property. The Company and the Company Sub each possesses or has adequate rights to use all Company Intangible Property. Except as set forth on Schedule 4.1(p) to the Company Disclosure Letter, (i) all of the Company Intangible Property is owned by the Company or the Company Sub free and clear of any and all Encumbrances or (ii) the Company has a right to use the Company Intangible Property pursuant to a valid and enforceable, written license, sublicense or agreement. Neither the operation of the business of the Company nor of the Company Sub conflicts with, infringes upon, violates or interferes with or constitutes an appropriation of any right, title, interest or goodwill, including, without limitation, any intellectual property right, trade secret, trademark, trade name, patent, service mark, brand mark, brand name, computer program, database, industrial design, copyright or any pending application therefor of any other Person and there have been no claims made in connection therewith, and neither the Company, the Company Sub nor the Management Stockholders have received any notice of any claim or otherwise knows that any of the Company Intangible Property is invalid or conflicts with the rights of any other Person or has not been used or enforced or has been failed to be used or enforced in a manner that would result in the abandonment, cancellation or unenforceability of any of the Company Intangible Property. Except as provided on Schedule 4.1(p), each key salaried employee of the Company whose time is not billed to clients and who is neither part-time, temporary nor an on-site nursing coordinator -24- of each of the Company and the Company Sub has executed adequate proprietary information and confidentiality agreements and all such agreements are in full force and effect. (q) Contracts. (i) Schedule 4.1(q) to the Company Disclosure Letter contains a complete and accurate list, and the Company and the Company Sub has delivered to Parent true and complete copies, of: (A) Each Contract that involves performance of services by the Company or the Company Sub of an amount or value in excess of $50,000; (B) Each Contract that involves performance of services or delivery of goods or materials to the Company or the Company Sub of an amount or value in excess of $25,000; (C) Each Contract that was not entered into in the Ordinary Course of Business and that involves expenditures or receipts by the Company or the Company Sub in excess of $10,000; (D) Each lease, rental or occupancy agreement, license, installment and conditional sale agreement, and other Contract affecting the ownership of, leasing of, title to, use of, or any leasehold or other interest in, any real or personal property (except personal property leases and installment and conditional sales agreements having a value per item or aggregate payments of less than $10,000 and with terms less than one (1) year); (E) Each Contract with any labor union or other employee representative of a group of employees relating to wages, hours and other conditions of employment; (F) Each Contract (however named) involving a sharing of profits, Losses, costs or liabilities by the Company or the Company Sub with any other Person; (G) Each Contract containing covenants that in any way purport to restrict the Company's or the Company Sub's business activity or limit the freedom of the Company or the Company Sub to engage in any line of business or to compete with any Person; (H) Each Contract providing for payments to or by any Person based on sales, purchases or profits, other than direct payment for services; (I) Each power of attorney of the Company or the Company Sub that is currently effective and outstanding; (J) Each Contract entered into other than in the Ordinary Course of Business or that contains or provides for an express undertaking by the Company or the Company Sub to be responsible for consequential damages; -25- (K) Each Contract for capital expenditures in excess of $25,000; (L) Each written warranty, guaranty or other similar undertaking with respect to contractual performance extended by the Company or the Company Sub other than in the Ordinary Course of Business; (M) Each Contract with a Governmental Entity; and (N) Each amendment, supplement and modification (whether oral or written) in respect of any of the foregoing. (ii) No Company Stockholder or Affiliate of the Company has or may acquire any rights under, and no Company Stockholder or Affiliate has or may become subject to any obligation or liability under, any Contract that relates to the business of the Company or the Company Sub. (iii) Each Contract identified or required to be identified in Schedule 4.1(q)(i) of the Company Disclosure Letter is in full force and effect and is valid and enforceable in accordance with its terms, except that (i) such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws or judicial decisions now or hereafter in effect relating to creditors' rights generally and (ii) the remedy of specific performance and injunctive relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (iv) Except as set forth on Schedule 4.1(q)(iv) to the Company Disclosure Letter, (A) the Company and the Company Sub each is, and at all times since July 1, 1999 has been, in full compliance with all applicable terms and requirements of each Contract under which the Company or the Company Sub has or had any obligation or liability or by which the Company or the Company Sub or any of the assets owned or used by the Company or the Company Sub is or was bound; (B) to the Knowledge of the Company and the Management Stockholders, each other Person that has or had any obligation or liability under any Contract under which the Company or the Company Sub has or had any rights is, and at all times since July 1, 1999 has been, in full compliance with all applicable terms and requirements of such Contract; (C) no event has occurred or circumstance exists that (with or without notice or lapse of time) may contravene, conflict with, or result in a violation or breach of, or give the Company or the Company Sub or, to the knowledge of the Company and the Management Stockholders, any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Contract; and -26- (D) neither the Company nor the Company Sub has received from any Person, at any time since July 1, 1999, any notice or communication (whether oral or written) regarding any actual, alleged, possible or potential violation or breach of, or default under, any Contract. (v) There are no renegotiations of, attempts to renegotiate, or outstanding rights to renegotiate, any amounts paid or payable to the Company or the Company Sub under current or completed Contracts with any Person and no such Person has made written demand for such renegotiation. (vi) The Contracts relating to the sale or provision of services by the Company or the Company Sub have been entered into in the Ordinary Course of Business and have been entered into without the commission of any act alone or in concert with any other Person, or any consideration having been paid or promised, that is or would be in violation of any Legal Requirement. (r) Environmental Matters. (i) The operation of each of the Company and the Company Sub has been and, as of the Closing Date, will be substantially in compliance with all Environmental Laws; (ii) The Company and the Company Sub each has obtained and will, as of the Closing Date, maintain all permits required under applicable Environmental Laws for the continued operations of their respective businesses; (iii) Neither the Company nor the Company Sub is subject to any outstanding written orders, investigations or contracts with any Governmental Entity or other person respecting (A) Environmental Laws, (B) Remedial Action or (C) any Release or threatened Release of a Hazardous Material; (iv) Neither the Company nor the Company Sub has received any written communication alleging, with respect to any such party, the violation of or liability under any Environmental Law or liability attributable to the Release of any Hazardous Material; and (v) Neither the Company nor the Company Sub has any contingent liabilities in connection with the Release of any Hazardous Material into the indoor or outdoor environment (whether on-site or off-site). (s) Title to Properties. (i) The Company and the Company Sub each has good title to, or valid leasehold interests in, all the properties and assets owned or used by it, except for such as are no longer used or useful in the conduct of its business or as have been disposed of in the Ordinary Course of Business, and except for minor defects in title, easements, restrictive covenants and similar Encumbrances that, in the aggregate, do not and will not have an effect on the Company's or the Company Sub's ability to conduct its business as currently conducted. All such assets and properties, other than assets and properties in which the Company or the -27- Company Sub has leasehold interests, are free and clear of all Encumbrances, other than those disclosed in Schedule 4.1(s)(i) of the Company Disclosure Letter. (ii) The Company has complied in all material respects with the terms of all leases to which it is a party and under which it is in occupancy, and all such leases are in full force and effect. The Company and the Company Sub each enjoy peaceful and undisturbed possession under all such leases. (t) Insurance. The Company and the Company Sub each is, has been since inception, and will be through the Effective Time, adequately insured with responsible insurers in respect of its properties, assets and business, including, without limitation, professional liability, medical malpractice, employer practices liability and workers' compensation insurance, against risks normally insured against by companies in similar lines of business under similar circumstances. Schedule 4.1(t) to the Company Disclosure Letter correctly describes (by type, carrier, policy number, limits, premium, and expiration date) the insurance coverage carried by the Company and the Company Sub, which insurance will remain in full force and effect with respect to all events occurring prior to the Effective Time. Neither the Company nor the Company Sub (i) has failed to give any notice or present any claim under any such policy or binder in due and timely fashion, (ii) has received notice of cancellation or non-renewal of any such policy or binder, (iii) is aware of any threatened or proposed cancellation or non-renewal of any such policy or binder, (iv) has received notice of any insurance premiums which will be increased in the future, or (v) is aware of any insurance premiums which will be increased in the future. There are no outstanding claims under any such policy which have gone unpaid for more than forty-five (45) days, or as to which the insurer has disclaimed liability. Schedule 4.1(t) to the Company Disclosure Letter sets forth a complete listing of any and all claims under any insurance coverage carried by the Company and the Company Sub since July 1, 1999, including, without limitation, any claims under the Company's or the Company Sub's professional liability, medical malpractice, employer practices liability or workers' compensation insurance. Except as set forth in Schedule 4.1(t), there are no other claims, notices or pending actions under any insurance coverage carried by the Company or the Company Sub. (u) Verification of Credentials. Except as set forth in Schedule 4.1(u) of the Company Disclosure Letter, the Company and the Company Sub each has implemented effective policies and procedures to verify the credentials, including, but not limited to, education and licensure, of personnel that it places with its clients and for collecting, maintaining and updating such credentialling information. The employees of the Company and the Company Sub each consistently follow such policies and procedures. (v) Training. Except as set forth in Schedule 4.1(v) of the Company Disclosure Letter, the Company and the Company Sub each has in place a comprehensive training program for the personnel who provide services to clients of the Company and the Company Sub that satisfies the Company's and the Company's Sub's training obligations to its clients. To the extent that the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") applies to the Company or the Company Sub, the Company has developed a plan to comply with any obligations it may have under the privacy standards of HIPAA. -28- (w) Clients and Suppliers. Schedule 4.1(w) of the Company Disclosure Letter sets forth a complete and accurate list of (i) the twenty (20) largest clients (by dollar volume) with respect to the Company and the Company Sub during each of the Company's and the Company's Sub's last two (2) fiscal years ended June 30, 2001, and for the eight (8)-month period ended February 28, 2002, indicating the existing contractual arrangements with each such client by service and Company division and (iii) all suppliers of significant services to the Company or the Company Sub. (x) Off Balance Sheet Transactions. Except for transactions, arrangements and other relationships otherwise specifically identified on the Company's Audited Financial Statements, including, but not limited to, identification of the information set forth below, Schedule 4.1(x) of the Company Disclosure Letter sets forth a true, complete and correct list of all transactions, arrangements and other relationships between or among the Company, and the Company Sub's any Affiliates and any unconsolidated Person, including, but not limited to, any structured finance, special purpose or limited purpose Person (each, a "COMPANY OFF-BALANCE SHEET TRANSACTION"). Schedule 4.1(x) of the Company Disclosure Letter also sets forth (a) the business purpose and activities of each Company Off-Balance Sheet Transaction, (b) the economic substance of each Company Off-Balance Sheet Transaction, (c) the key terms and conditions of each Company Off-Balance Sheet Transaction, (d) the Company's and/or Affiliates' potential risk associated with each Company Off-Balance Sheet Transaction, (e) the amounts of any guarantees, lines of credit, standby letters of credit or commitments or take or pay contracts, throughput contracts or other similar types of arrangements, including tolling, capacity or leasing arrangements, that could require the Company or any of its Affiliates to provide funding of any obligations under any Company Off-Balance Sheet Transaction, including, but not limited to, guarantees of repayments, make whole agreements or value guarantees and (f) any other information with respect to each Company Off-Balance Sheet Transaction. (y) Inducements. (i) Neither the Company, the Company Sub nor the Management Stockholders nor to their knowledge, any employee of Company or Company Sub, have, to obtain or retain business, directly or indirectly, offered, paid or promised to pay, or authorized the payment of, any money or other thing of value (including any fee, gift, sample, travel expense or entertainment with a value in excess of $100 in the aggregate to any one individual in any year) or any commission payment to: (A) Any Person who is an official, officer, agent, employee or representative of any Governmental Entity or of any existing or prospective client (whether government owned or non-government owned); (B) Any political party or official thereof; (C) Any candidate for political or political party office; or (D) Any other Person; -29- while knowing or having reason to believe that all or any portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to any such official, officer, agent, employee, representative, political party, political party official, candidate, individual or any Person affiliated with such client, political party or official or political office. (ii) Each transaction described in this Section 4.1(y) is properly and accurately recorded on the books and records of the Company or the Company Sub, as the case may be, and each document upon which entries in the Company's or the Company Sub's books and records are based is complete and accurate in all respects. The Company maintains a system of internal accounting controls adequate to insure that neither the Company nor the Company Sub maintains off-the-books accounts and that the Company's and the Company Sub's assets are used only in accordance with the Company's management directives. (z) Representations Complete. None of the representations or warranties made by the Company, the Company Sub or any Management Stockholder in this Merger Agreement or in any Related Document, nor any statement made in any Related Document furnished by the Company, the Company Sub or any Management Stockholder pursuant to this Merger Agreement, contains or will contain at the Closing, any untrue statement of a material fact, or will omit at the Closing any material fact necessary in order to make the statements contained herein or therein, in the context of the circumstances under which they were made, not misleading; provided, however, the representations or warranties made by Michael shall be subject to the limitations described in Section 6.13 if the Merger has not been effected prior to June 1, 2002. (aa) Brokers. Except for SunTrust Robinson Humphrey Capital Markets, no broker, investment banker or other person is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Merger Agreement based upon arrangements made by or on behalf of the Company, the Company Sub or the Company Stockholders. 4.2 Representations and Warranties of Parent and Sub. Parent and Sub, jointly and severally, represent and warrant to the Company and the Company Stockholders as follows: (a) Organization, Standing and Power. Each of Parent, Sub and Operating Sub is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the business it is conducting, or the operation, ownership or leasing of its properties, makes such qualification necessary. Each of Parent and Sub has previously made available to the Company complete and correct copies of its respective Certificates of Incorporation and Bylaws. (b) Subsidiaries. Neither Parent nor Sub owns directly or indirectly, any capital stock or other ownership interest in any Person, except as set forth in Schedule 4.2(b) of the Parent Disclosure Letter. -30- (c) Capital Structure. As of the date hereof, the authorized capital stock of Parent consists of the following: 75,000,000 shares of Parent Common Stock, 2,033,184 shares of which are validly issued and outstanding, and 1,000,000 shares of preferred stock, par value $0.01 per share, no shares of which are issued and outstanding. At the close of business on the last Business Day prior to the date of this Merger Agreement, 10,000,000 shares of Parent Common Stock were authorized and are available for issuance pursuant to outstanding options granted under any of Parent's stock option, stock award, stock bonus or any other stock plan or program. As of the date hereof, the authorized capital stock of Sub consists of 1,000 shares of common stock, par value $0.01 per share, all shares of which are validly issued, fully paid and non-assessable and are owned by Parent. All shares of outstanding stock of Operating Sub are validly issued, fully paid and non-assessable and are owned by Parent. Sub was formed solely for the purpose of participating in the Merger, has no assets other than a minimal amount of cash and has conducted no activities to date, other than in connection with the Merger. (d) Authority; No Violations, Consents and Approvals. (i) The Board of Directors of each of Parent and Sub has approved the Merger and this Merger Agreement in accordance with its Certificate of Incorporation and the DGCL, and has declared the Merger and this Merger Agreement to be in the best interest of its stockholders. The approval of the Parent's stockholders is not required for the approval of the Merger or this Merger Agreement under the DGCL or under the Parent's Certificate of Incorporation or Bylaws. Each of Parent and Sub has all requisite corporate power and authority to enter into this Merger Agreement and the Related Documents, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Merger Agreement and the Related Documents, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of Parent and Sub. This Merger Agreement has been duly executed and delivered by Parent and Sub. Assuming this Merger Agreement constitutes the valid and binding obligation of the Company, it also constitutes a valid and binding obligation of each of Parent and Sub and is enforceable against each of them in accordance with its terms; except that (i) such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws or judicial decisions now or hereafter in effect relating to creditors rights generally and (ii) the remedy of specific performance and injunctive relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (ii) The execution and delivery of this Merger Agreement does not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of a material benefit under, or result in the creation of any Encumbrance upon any of the properties or assets of Parent, Sub or Operating Sub under, any provision of (A) the Certificate of Incorporation or Bylaws of Parent, Sub or Operating Sub, (B) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to Parent, Sub, Operating Sub or their respective properties or assets or (C) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in Section 4.2(d)(iii) are duly and timely obtained -31- or made, any judgment, order, decree or Legal Requirements applicable to Parent, Sub or Operating Sub or any of their respective properties or assets. (iii) No consent, approval, order or authorization of, or registration, declaration or filing with, or permit from, any Governmental Entity is required by or with respect to Parent or Sub in connection with the execution and delivery of this Merger Agreement and the Related Documents by Parent and Sub or the consummation by Parent and Sub of the transactions contemplated hereby or thereby, except for: (A) the filing of a premerger notification report under the HSR Act and the expiration or termination of the applicable waiting period with respect thereto; (B) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware pursuant to the DGCL; (C) filings with the Securities and Exchange Commission (the "SEC") required under the Exchange Act; (D) such filings and approvals as may be required by any applicable state securities, "blue sky" or takeover laws; (E) such filings with the SEC under the Securities Act of 1933, as amended (the "SECURITIES ACT"), in connection with the registration of Parent Common Stock in accordance with the Registration Rights Agreement described in Section 6.5; (F) such filings and approvals as may be required by any applicable non-U.S. Governmental Entity; and (G) such filings and approvals as may be required by any non-U.S. premerger notification, securities, corporate or other Legal Requirement. (e) Parent SEC Documents. Parent has filed all required reports, schedules, forms, statements and other documents with the SEC since December 31, 1999 (such documents, together with all exhibits and schedules thereto and documents incorporated by reference therein, collectively referred to herein as the "PARENT SEC DOCUMENTS"). No Subsidiary of Parent is required to file any reports, schedules, forms, statements or other documents with the SEC. As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to the Parent SEC Documents, and none of the Parent SEC Documents contained when filed any untrue statement of a material fact or omitted to state 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. The financial statements of Parent included in the Parent SEC Documents complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly present in accordance with applicable requirements of GAAP (subject, in the case of the unaudited statements, to normal year-end adjustments and other adjustments discussed therein) the consolidated financial position of Parent as of their respective dates and the results of operations and the consolidated cash flows of Parent and its consolidated Subsidiaries for the periods presented therein. (f) Books and Records. The books of account and other financial records of Parent, Sub and Operating Sub, all of which will be made available to the Company upon written request by the Company, are complete and correct and represent actual, bona fide transactions and have been maintained in accordance with sound business practices and the requirements of Section 13(b)(2) of the Exchange Act, as amended (regardless of whether Parent, Sub or Operating Sub is subject to that Section), including the maintenance of an adequate system of internal controls. The minute books of Parent, Sub and Operating Sub, all of which will be made -32- available to the Company upon written request of the Company contain accurate and complete records of all meetings held of the stockholders, the Board of Directors and committees of the Board of Directors of Parent, Sub or Operating Sub, and no meeting of any such stockholders or Board of Directors has been held for which minutes have not been prepared or are not contained in such minute books. (g) Absence of Certain Changes or Events. Except as disclosed in, or reflected in, the financial statements included in the Parent SEC Documents or on Schedule 4.2(g) to the Parent Disclosure Letter, or except as contemplated by the Merger Agreement, since December 31, 2001, there has not been: (i) any Material Adverse Effect on Parent, Sub or Operating Sub, (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of Parent's capital stock, (iii) any amendment of any material term of any outstanding equity security of Parent; (iv) except insofar as may have been required by a change in GAAP, any change in accounting methods, principles or practices by Parent affecting its assets, liabilities or business; or (v) any other changes, circumstances or events in the business, operations, properties, prospects, assets or condition of Parent that would have a Material Adverse Effect on Parent. (h) Compliance with Applicable Laws. Each of Parent, Sub and Operating Sub holds all permits, licenses, variances, exemptions, orders, franchises and approvals of all Governmental Entities necessary for it to own, lease or operate its properties and assets and for the lawful conduct of its business as currently conducted (the "PARENT PERMITS"). Each of Parent, Sub and Operating Sub is in compliance with the terms of the Parent Permits, as applicable. Except as set forth in Schedule 4.2(h) to the Parent Disclosure Letter, the business of Parent and Operating Sub is not being conducted in violation of any Legal Requirement of any Governmental Entity, except such violations that individually or in the aggregate could not result in a Material Adverse Effect on Parent, Sub or Operating Sub. No investigation or review by any Governmental Entity with respect to Parent or Operating Sub is pending or, to the knowledge of Parent, threatened. (i) Condition and Sufficiency of Assets. All of the buildings, plans, structure, furniture, fixtures, equipment and other assets of Parent and Operating Sub (the "PARENT ASSETS") are structurally sound, are in good operating condition and repair (subject to normal wear and tear), and are adequate for the uses to which they are being put, and none of such Parent Assets is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. The Parent Assets are sufficient for the continued conduct of Parent's and Operating Sub's business after the Closing in substantially the same manner as conducted prior to the Closing. (j) Litigation. Except as disclosed in the Parent SEC Documents or on Schedule 4.2(j) to the Parent Disclosure Letter, there is no (i) suit, action or proceeding pending or, to the knowledge of Parent, threatened against or affecting Parent or Operating Sub ("PARENT LITIGATION"), or (ii) judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Parent or Operating Sub that (in any case) would have a Material Adverse Effect on Parent on a consolidated basis or prevent Parent from consummating the transactions contemplated by this Merger Agreement. To the knowledge of Parent, no event has -33- occurred or circumstance exists that is reasonably likely to give rise to or serve as a basis for the commencement of any such Parent Litigation. (k) Taxes. (i) Parent and any affiliated, combined or unitary group of which Parent is or was a member has (A) timely (taking into account any extensions) filed all true and complete federal and all state, local and non-U.S. returns, declarations, reports, estimates, information returns and statements ("PARENT RETURNS") required to be filed by or with respect to it in respect of any Taxes, (B) timely paid all Taxes that are due and payable (except for audit adjustments to the extent that liability therefor is reserved for in the unaudited current balance sheet of Parent as at February 28, 2002 ("PARENT'S CURRENT BALANCE SHEET")) for which Parent is liable, (C) established reserves (determined in accordance with GAAP) which are included in Parent's Current Balance Sheet that are adequate for the payment of all Taxes not yet due and payable with respect to the results of operations of Parent through the date of such Parent's Current Balance Sheet, and (D) complied with all Legal Requirements relating to the payment and withholding of Taxes and has timely withheld from employee wages and paid over to the proper Governmental Entities all amounts required to be so withheld and paid over. (ii) Schedule 4.2(k)(ii) to the Parent Disclosure Letter sets forth the last taxable period through which the federal income Tax Returns of Parent have been examined by the IRS or otherwise closed. Except to the extent being contested in good faith, all deficiencies asserted as a result of such examinations and any examination by any applicable state, local or non-U.S. taxing authority have been paid, fully settled or adequately provided for in Parent's Current Balance Sheet. No federal, state, local or non-U.S. Tax audits or other administrative proceedings or court proceedings are currently pending with regard to any Taxes for which Parent or Operating Sub would be liable and no deficiency for any such Taxes has been proposed, asserted or assessed against Parent or Operating Sub by any federal, state, local or non-U.S. taxing authority with respect to any period. (iii) Parent has not executed or entered into (or prior to the close of business on the Closing Date will not execute or enter into) with the IRS or any other taxing authority any contract or other document extending or having the effect of extending the period for assessments or collection of any Taxes for which Parent would be liable. (iv) Parent is not a party to, is not bound by and does not have any obligation under, any tax sharing agreement, tax indemnity agreement or similar agreement or arrangement. (v) Parent has neither taken or agreed to take any action nor has it any knowledge of any fact, agreement, plan or other circumstance that is reasonably likely to prevent the Merger from qualifying as a reorganization within the meaning of section 368(a) of the Code. (vi) There are no Encumbrances for Taxes upon the assets or properties of Parent or Operating Sub (whether real, personal or mixed, tangible or intangible) except for statutory Encumbrances for Taxes not yet due or payable. -34- (vii) Parent is not required (or will not be required as a result of this transaction) to include in income any amount for an adjustment pursuant to section 481(a) of the Code or the regulations thereunder or any similar provision of state law. (viii) To the knowledge of Parent, no claim has been made during the last five years by an authority in a jurisdiction where Parent or Operating Sub does not file Tax Returns that Parent or Operating Sub is or may be subject to taxation by that jurisdiction. (ix) Parent has not filed a consent under Code section 341(f) concerning collapsible corporations. (x) Each of Parent and Operating Sub has withheld or paid all Taxes required to have been withheld or paid in connection with amounts paid or owed to any employee, independent contractor, creditor, stockholder, member or other third party. (xi) Parent has disclosed on its federal income tax returns all positions taken therein that could give rise to a substantial understatement of federal income tax within the meaning of Code Section 6662. (xii) Each of Parent and Operating Sub has complied with all sales Tax resale certificate exemption requirements. (l) Employee Matters. Schedule 4.2(l) to the Parent Disclosure Letter contains a true and complete list of each of the following items: each employee benefit plan, program, arrangement or customary practice covering any current officer, director, employee or independent contractor of Parent or Operating Sub, or any of their dependents or beneficiaries or with respect to which Parent or any Affiliate of Parent may have any liability, including, but not limited to, any "employee benefit plan" within the meaning of Section 3(3) of ERISA and any stock option plan, stock purchase plan, cafeteria plan, scholarship program, retention incentive program, vacation policy and sick pay policy. (m) Labor Matters. Except as set forth in Schedule 4.1(m) to the Parent Disclosure Letter: (i) Neither Parent nor Operating Sub is a party to any collective bargaining agreement or other current labor agreement with any labor union or organization, and there is no current union representation dispute involving employees of Parent or Operating Sub, nor does Parent or Operating Sub know of any activity or proceeding of any labor organization (or representative thereof) or employee group (or representative thereof) to organize any such employees; (ii) there is no unfair labor practice charge or grievance arising out of a collective bargaining agreement or other grievance procedure against Parent or Operating Sub pending, or, to the knowledge of Parent, threatened; (iii) there is no complaint, lawsuit or proceeding in any forum by or on behalf of any current or former employee or any applicant for employment alleging breach of any express or implied contract of employment, any law or regulation governing employment or -35- the termination thereof or other discriminatory, wrongful or tortious conduct in connection with the employment relationship against Parent or Operating Sub pending, or, to the knowledge of Parent, threatened; (iv) to the knowledge of Parent, each of Parent, Sub and Operating Sub is substantially in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health; and (v) there is no proceeding, claim, suit, action or governmental investigation pending or, to the knowledge of Parent, threatened, in respect to which any current or former director, officer, employee or agent of Parent or Operating Sub is or may be entitled to claim indemnification from Parent or Operating Sub (A) pursuant to their respective Articles of Incorporation or Bylaws, (B) as provided in any indemnification agreement to which Parent or Operating Sub is a party or (C) pursuant to applicable law. (n) Title to Properties. (i) Each of Parent and Operating Sub has good title to, or valid leasehold interests in, all the properties and assets owned or used by it, except for such as are no longer used or useful in the conduct of its business or as have been disposed of in the Ordinary Course of Business, and except for minor defects in title, easements, restrictive covenants and similar Encumbrances that, in the aggregate, do not and will not have an effect on Parent's or Operating Sub's ability to conduct its business as currently conducted. All such assets and properties, other than assets and properties in which Parent or Operating Sub has leasehold interests, are free and clear of all Encumbrances, other than those disclosed in Section 4.2(n)(i) of the Parent Disclosure Letter. (ii) Each of Parent and Operating Sub has complied in all material respects with the terms of all leases to which it is a party and under which it is in occupancy, and all such leases are in full force and effect. Each of Parent and Operating Sub enjoys peaceful and undisturbed possession under all such leases. (o) Off Balance Sheet Transactions. Except for transactions, arrangements and other relationships otherwise specifically identified on Parent's audited financial statements, including, but not limited to, identification of the information set forth below, Schedule 4.2(o) sets forth a true, complete and correct list of all transactions, arrangements and other relationships between or among Parent, any of its Affiliates and any unconsolidated Person, including, but not limited to, any structured finance, special purpose or limited purpose Person (each, a "PARENT OFF-BALANCE SHEET TRANSACTION"). Schedule 4.2(o) also sets forth (a) the business purpose and activities of each Parent Off-Balance Sheet Transaction, (b) the economic substance of each Parent Off-Balance Sheet Transaction, (c) the key terms and conditions of each Parent Off-Balance Sheet Transaction, (d) Parent's and/or its Affiliates' potential risk associated with each Parent Off-Balance Sheet Transaction, (e) the amounts of any guarantees, lines of credit, standby letters of credit or commitments or take or pay contracts, throughput contracts or other similar types of arrangements, including tolling, capacity or leasing arrangements, that could require Parent or any of its Affiliates to provide funding of any -36- obligations under any Parent Off-Balance Sheet Transaction, including, but not limited to, guarantees of repayments, make whole agreements or value guarantees and (f) any other information with respect to each Parent Off-Balance Sheet Transaction. (p) Inducements. (i) Neither Parent nor any Affiliate of Parent has, to obtain or retain business, directly or indirectly, offered, paid or promised to pay, or authorized the payment of, any money or other thing of value (including any fee, gift, sample, travel expense or entertainment with a value in excess of $100 in the aggregate to any one individual in any year) or any commission payment to: (A) Any Person who is an official, officer, agent, employee or representative of any Governmental Entity or of any existing or prospective client (whether government owned or non-government owned); (B) Any political party or official thereof; (C) Any candidate for political or political party office; or (D) Any other Person; while knowing or having reason to believe that all or any portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to any such official, officer, agent, employee, representative, political party, political party official, candidate, individual or any Person affiliated with such client, political party or official or political office. (ii) Each transaction described in this Section 4.2(p) is properly and accurately recorded on the books and records of Parent or its Affiliate, as the case may be, and each document upon which entries in such books and records are based is complete and accurate in all respects. Parent and Parent's Affiliate maintain a system of internal accounting controls adequate to insure that they maintain no off-the-books accounts and that their assets are used only in accordance with Parent's management directives. (q) No Vote Required. No vote of the holders of any class or series of Parent capital stock is necessary to approve this Merger Agreement and the transactions contemplated hereby, or the issuance of Parent Common Stock pursuant to this Merger Agreement. (r) Form S-3 Registration. Parent and Sub have no reason to believe that Form S-3 is not available, or will not continue to be available, to Parent for registration of the Parent Common Stock as provided under the terms of the Registration Rights Agreement (described in Section 6.5). Parent and Sub have complied with all requirements that are necessary to enable Parent to file a Form S-3 to effect the registration of the Parent Common Stock concurrently with the Closing. (s) Brokers. Except for Lehman Brothers, Inc., no broker, investment banker, or other Person is entitled to any broker's, finder's or other similar fee or commission in connection -37- with the transactions contemplated by this Merger Agreement based upon arrangements made by or on behalf of Parent. (t) Representations Complete. None of the representations or warranties made by Parent or Sub in this Merger Agreement or in any Related Document, nor any statement made in any Related Document furnished by Parent or Sub pursuant to this Merger Agreement, contains or will contain at the Closing, any untrue statement of a material fact, or will omit at the Closing any material fact necessary in order to make the statements contained herein or therein, in the context of the circumstances under which they were made, not misleading. ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 Conduct of Business by the Company Pending the Merger. During the period from the date of this Merger Agreement and continuing until the Effective Time, the Company agrees that (except as expressly contemplated or permitted by this Merger Agreement, or as described in the Company Disclosure Letter or to the extent that Parent shall otherwise consent in writing): (a) Ordinary Course. The Company shall carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent therewith, shall use all reasonable efforts to preserve intact its current business organizations, keep available the services of its current officers and employees and endeavor to preserve its relationships with hospitals, other clients and other Persons having business dealings with it, in each case consistent with past practices and in compliance with all applicable Legal Requirements. Without limiting the generality of the foregoing, and except as otherwise expressly contemplated by this Merger Agreement, the Company shall not: (i) Dividends; Changes in Stock. Except as required or permitted by the terms of its Company Preferred Stock outstanding on the date hereof or as contemplated by Section 6.4 of this Agreement or by any existing Company Benefit Plans disclosed in Schedule 5.1(a)(i) of the Company Disclosure Letter (A) declare or pay any dividends on or make other distributions in respect of any of its Company Capital Stock (except for the payment of accrued but unpaid dividends to be paid in respect of the Company Preferred Stock prior to the Effective Time); (B) split, combine or reclassify any of its Company Capital Stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of Company Capital Stock; or (C) repurchase, redeem or otherwise acquire any shares of Company Capital Stock, except as required by the terms of its securities outstanding on the date hereof or as contemplated by any existing Company Benefit Plan. (ii) Issuance of Securities. Issue, deliver or sell, or authorize or propose to issue, deliver or sell, any shares of its capital stock of any class, any Voting Debt or any securities convertible into, or any rights, warrants or options to acquire, any such shares, Voting Debt or convertible securities, other than: (A) the issuance of Company Common Stock upon the exercise of stock options pursuant to the Company Stock Plan and Section 6.3(a) and -38- (B) the issuance of Company Common Stock upon exercise of the Warrant pursuant to Section 6.3(b). (iii) Governing Documents. Amend its Articles of Incorporation or Code of Regulations, except as set forth in Section 6.4. (iv) No Acquisitions. Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business, Person or other business organization or division thereof or any assets other than immaterial assets acquired in the Ordinary Course of Business consistent with past practice. (v) No Dispositions. Other than sales or leases in the Ordinary Course of Business consistent with past practice, sell, lease, encumber or otherwise dispose of, or agree to sell, lease (whether such lease is an operating or capital lease), encumber or otherwise dispose of, any of its assets. (vi) No Dissolution, Etc. Except as otherwise permitted or contemplated by this Merger Agreement, authorize, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation or dissolution of the Company. (vii) Release of Claims. Pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or litigation (whether or not commenced prior to the date of this Merger Agreement) other than the payment, discharge, settlement or satisfaction, in the Ordinary Course of Business consistent with past practice or in accordance with their terms, of liabilities recognized or disclosed in the Current Balance Sheet (or the notes thereto) of the Company or incurred since the date of such Balance Sheet, or (B) waive the benefits of, agree to modify in any manner, terminate, release any Person from or fail to enforce any confidentiality or similar agreement to which the Company or any Affiliate of the Company is a party or of which the Company or any Affiliate of the Company is a beneficiary. (viii) Certain Employee Matters. Except as may be required by applicable law, any disclosed Contract to which the Company is a party on the date hereof or as expressly contemplated by this Merger Agreement, the Company agrees that the Company will not increase, modify or in any other way amend (or enter into any agreement or arrangement to increase, modify or amend), in any manner, the compensation, bonuses, benefits or any other terms and conditions of any current or former director, officer, employee, consultant or independent contractor who would be deemed an employee under state or federal law, or any relation or dependent thereof, except for (A) the agreements with DeVille and Wead regarding the Management Bonus Payments and the payment of such bonuses and any deemed compensation payments by virtue of their exercise of any Vested Options, (B) payments made or to be made pursuant to the Michael Agreement, (C) the cashout of all outstanding stock options other than those held by the Management Stockholders and Wead and (D) an amendment to the Company Stock Plan to provide for the cashless exercise of the Vested Options. -39- (ix) Loans and Advances. Make any loans, advances or capital contributions to, or investments in, any Person. (x) Indebtedness; Leases; Capital Expenditures. (A) Incur any indebtedness for borrowed money (other than in connection with the payment of any post-February 28, 2002 items described in clauses (i) through (ix) of Section 1.1(j) and paying for bona fide accounts payable of the Company, including payment of accrued payroll and accrued withholding taxes, incurred in the Ordinary Course of Business), or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of the Company or guarantee any debt securities of others, (B) pay, discharge or satisfy any liability or Encumbrance, other than the payment, discharge or satisfaction in the Ordinary Course of Business consistent with past practice of any liability or Encumbrance reflected or reserved against in the Current Balance Sheet or incurred in the Ordinary Course of Business since the date of such Current Balance Sheet, (C) except in the Ordinary Course of Business, enter into any lease (whether such lease is an operating or capital lease) or create any Encumbrance on the property of the Company in connection with any indebtedness thereof, except for those securing purchase money indebtedness not in excess of $10,000 individually, or $50,000 in the aggregate, or (D) commit to aggregate capital expenditures in excess of $50,000 or, in the aggregate, in excess of $100,000, outside the capital budget for the Company's June 30, 2002 fiscal year, that was approved by the Company prior to the date hereof. (xi) Taxes. Make any material election relating to Taxes or compromise any material Tax liability. (xii) Accounting. Change any material accounting principle used by it, except as required by statements, rules or regulations promulgated by the Financial Accounting Standards Board ("FASB") or the SEC. (xiii) Intellectual Property Rights. Transfer or license to any Person or otherwise extend, amend or modify any rights to the Company Intangible Property other than in the Ordinary Course of Business consistent with past practices; provided, that in no event shall the Company license on an exclusive basis or sell any Company Intangible Property. (xiv) Contracts. Enter into or amend any Contract of the type listed in Section 4.1(q) except in the Ordinary Course of Business or with the prior written consent of an authorized officer of Parent or Sub, which consent shall not be unreasonably withheld. (xv) Expansion. Obtain, through acquisition, lease, sublease or otherwise, any real property for use as an office or similar facility of the Company, unless pursuant to Contracts for leases of real property as of February 28, 2002. (xvi) Representations and Warranties. Take any action that would, or that would reasonably be expected to, result in (A) any of the representations and warranties made by the Company in this Merger Agreement that are qualified as to materiality becoming untrue, (B) any of such representations and warranties that are not so qualified becoming untrue in any material respect or (C) any condition to the Merger set forth in Article VII not being satisfied. -40- (xvii) Other. Authorize, or commit, resolve or agree to take, any of the foregoing actions. 5.2 No Solicitation; Other Offers. (a) From the date of the execution of this Merger Agreement through the Effective Time, or until such time, if any, as this Merger Agreement is terminated pursuant to Article IX, the Company shall not, and shall not permit any of its officers, directors, employees, attorneys, investment bankers, agents, representatives or Affiliates (collectively, "COMPANY REPRESENTATIVES") to, (i) solicit, initiate or encourage any inquiry or proposal or the making of any inquiry or proposal from any Person (other than Parent), or enter into any agreement with any Person (other than Parent), with respect to any Acquisition Proposal, (b) furnish to any Person (other than Parent) any information with respect to, or otherwise cooperate in any way with, any Acquisition Proposal (other than an Acquisition Proposal with Parent) or (c) enter into, continue or otherwise participate in any discussions or negotiations regarding, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or which may reasonably be expected to result in, any Acquisition Proposal (other than an Acquisition Proposal with Parent). The Company agrees to notify Parent immediately upon the occurrence of any inquiry, proposal or request for information with respect to an Acquisition Proposal, or any request for nonpublic information relating to the Company by any Person who, to the knowledge of the Company, is making or considering making or who has made an Acquisition Proposal, that comes to the attention of the Company the terms thereof, including, without limitation, the identity of the Person making such inquiry or proposal. (b) From the date of the execution of this Merger Agreement through the Effective Time, or until such time, if any, as this Merger Agreement is terminated pursuant to Article IX, the Board of Directors of the Company shall not, except in connection with the termination of this Merger Agreement pursuant to Section 9.1(a), (b), (c) or (e), (i) withdraw or modify in a manner adverse to Parent their approval or recommendation of this Merger Agreement, the Merger or the Related Documents, or take any action having such effect, or (ii) approve or recommend any Acquisition Proposal (other than an Acquisition Proposal with Parent). ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Access to Information. Subject to the provisions of Section 6.2, upon reasonable notice, the Company shall afford to the officers, employees, accountants, counsel and other representatives of Parent, access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, shall furnish promptly to Parent all information concerning its business, properties and personnel as Parent may reasonably request. Parent agrees that neither it nor its representatives will use any information obtained pursuant to this Section 6.1 for any purpose unrelated to the consummation of the transactions contemplated by this Merger Agreement. Notwithstanding the foregoing, the Company shall not be required to give Parent any information that is subject to a confidentiality agreement and that relates primarily to a party other than the Company. The -41- Confidentiality Agreement dated as of December 5, 2001 between Parent and the Company (the "CONFIDENTIALITY AGREEMENT") shall apply with respect to information furnished thereunder or hereunder and any other activities contemplated thereby. 6.2 Legal Conditions to Merger. (a) Except as otherwise provided herein, each of the Company, the Company Sub, Parent and Sub will take all reasonable actions necessary to comply promptly with all Legal Requirements that may be imposed on such party with respect to the Merger (including, without limitation, furnishing all information required under the HSR Act and in connection with approvals of or filings with any other Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them in connection with the Merger. Each of the Company and Parent shall take all reasonable actions as may be necessary to obtain (and will cooperate with each other in obtaining) any consent, acquiescence, authorization, order or approval of, or any exemption or nonopposition by, any Governmental Entity or court required to be obtained or made by the Company, the Company Sub, Parent or Sub in connection with the Merger or the taking of any action contemplated thereby or by this Merger Agreement, including, without limitation, complying with any requests or orders made by the Justice Department or the Federal Trade Commission in connection with the Merger. Parent and the Company agree to share equally in the payment of any and all filing fees relating to the HSR filing. (b) Company and Parent shall each file a premerger notification and report form under the HSR Act (and any other applicable foreign antitrust law or regulation) with respect to the Merger as promptly as reasonably possible following execution and delivery of this Merger Agreement. Each of the parties agrees to use reasonable efforts to respond promptly to any request for additional information that may be received from any Governmental Entity in connection with the HSR filing or any filing under applicable foreign antitrust laws and regulations. Except as otherwise required by United States regulatory considerations, the Company will furnish to Parent copies of all correspondence, filings or communications (or memoranda setting forth the substance thereof (collectively, "COMPANY HSR DOCUMENTS")) between the Company, or any of its representatives, on the one hand, and any Governmental Entity, or members of the staff of such agency or authority, on the other hand, with respect to this Merger Agreement or the Merger; provided, however, that (i) with respect to documents and other materials filed by or on behalf of the Company with the Antitrust Division of the Department of Justice, the Federal Trade Commission, or any state attorneys general that are available for review by Parent, copies will not be required to be provided to Parent and (ii) with respect to any Company HSR Documents (1) that contain any information which, in the reasonable judgment of Keating, Muething & Klekamp, P.L.L., should not be furnished to Parent because of antitrust considerations or (2) relating to a request for additional information pursuant to Section (e)(1) of the HSR Act, the obligation of the Company to furnish any such Company HSR Documents to Parent shall be satisfied by the delivery of such Company HSR Documents on a confidential basis to Fulbright & Jaworski L.L.P., pursuant to a confidentiality agreement containing terms reasonably satisfactory to Parent. Except as otherwise required by United States regulatory considerations, Parent will furnish to the Company copies of all correspondence, filings or communications (or memoranda setting forth the substance thereof (collectively, "PARENT HSR DOCUMENTS")) between Parent or any of its representatives, on the -42- one hand, and any Governmental Entity, or member of the staff of such agency or authority, on the other hand, with respect to this Merger Agreement or the Merger; provided, however, that (i) with respect to documents and other materials filed by or on behalf of Parent with the Antitrust Division of the Department of Justice, the Federal Trade Commission, or any state attorneys general that are available for review by the Company, copies will not be required to be provided to the Company, and (ii) with respect to any Parent HSR Documents (1) that contain information which, in the reasonable judgment of Fulbright & Jaworski L.L.P., should not be furnished to the Company because of antitrust considerations or (2) relating to a request for additional information pursuant to Section (e)(1) of the HSR Act, the obligation of Parent to furnish any such Parent HSR Documents to the Company shall be satisfied by the delivery of such Parent HSR Documents on a confidential basis to Keating, Muething & Klekamp, P.L.L. pursuant to a confidentiality agreement in form and substance reasonably satisfactory to the Company. (c) Notwithstanding the foregoing, nothing contained in this Merger Agreement shall be construed so as to require Parent, Sub, the Company or the Company Sub to sell, license, dispose of, or hold separate, or to operate in any specified manner, any assets or businesses of Parent, Sub, the Company, the Company Sub or the Surviving Corporation or to defend any lawsuits or other legal proceedings by a Governmental Entity, whether judicial or administrative, challenging this Merger Agreement or the consummation of the transactions contemplated hereby, or to seek to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed (or to require Parent, Sub, the Company or the Company Sub to agree to any of the foregoing). 6.3 Stock Options and Warrant. (a) Immediately prior to the Effective Time of the Merger, each outstanding stock option granted under the Company Stock Plan to the Management Stockholders and Wead, and to each other option holder who is not cashed out on or prior to the Effective Time, that is vested or exercisable immediately prior to or at the Effective Time (a "VESTED OPTION" and, collectively, the "VESTED OPTIONS") shall be exercised and the Company shall issue that number of shares of Company Common Stock that the holder thereof is entitled to receive pursuant to such Vested Option, subject to any adjustment in the number of shares resulting from any cashless exercise thereof. The holders of Company Common Stock to be received upon exercise of the Vested Options shall be entitled to receive the Merger Consideration received by the Company Stockholders pursuant to Article III hereof. The Company's Board of Directors or any committee thereof responsible for the administration of the Company Stock Plans shall take any and all action necessary to effectuate the matters described in this Section 6.3(a) on or before the Effective Time. Schedule 6.3(a) to the Company's Disclosure Letter sets forth the number of shares of Company Common Stock authorized and available for issuance upon exercise of outstanding Vested Options and sets forth the exercise price for each such Vested Option. Any amounts payable pursuant to this Section 6.3 shall be subject to any required withholding of Taxes and shall be paid without interest. All other options granted by the Company (other than Vested Options) shall be canceled without any conversion thereof by the Company prior to the Effective Time and no consideration shall be delivered with respect thereto. (b) Immediately prior to the Effective Time of the Merger, the Warrant shall be exercised and the Company shall issue 5,100 shares of Company Common Stock to the holder -43- thereof, subject to any adjustment in the number of shares resulting from a cashless exercise thereof. The holder of the Warrant shall be entitled to receive the Merger Consideration received by the Company Stockholders pursuant to Article III hereof. The Company's Board of Directors or any committee thereof responsible for overseeing the exercise of the Warrant shall take any and all action necessary to effectuate the matters described in this Section 6.3(b) on or before the Effective Time. Schedule 6.3(b) to the Company's Disclosure Letter sets forth the number of shares of Company Common Stock authorized and available for issuance upon exercise of the Warrant and the exercise price. The parties acknowledge, however, that the holder of the Warrant intends to effect a cashless exercise of the Warrant, and the Company Disclosure Letter does not reflect the number of shares that will be issued to the Warrant holder upon a cashless exercise of the Warrant. 6.4 Payment of Accrued Dividends. On or before the Closing Date, the Company shall have paid all accrued dividends due to the holders of the Company Preferred Stock, as set forth on Schedule 4.1(c) of the Company Disclosure Letter. Notwithstanding the preceding, the Company may, prior to the Effective Time, upon approval of the holders of the Company Preferred Stock and the amendment of the Articles of Incorporation of the Company, issue a stock dividend to the holders of the Company Preferred Stock in lieu of and in complete satisfaction of the accrued dividends. 6.5 Registration Rights Agreement. Parent, the Non-Management Stockholders, other than Wead, and Michael shall enter into a Registration Rights Agreement in the form attached hereto as Exhibit C (the "REGISTRATION RIGHTS AGREEMENT"), which agreement shall be executed and delivered at the Closing. 6.6 Agreement to Defend. In the event any claim, action, suit, investigation or other proceeding by any Person, other than a Governmental Entity, or other legal or administrative proceeding is commenced by a Person, other than a Governmental Entity, that questions the validity or legality of the transactions contemplated hereby or seeks damages in connection therewith, the parties hereto agree to cooperate and use their reasonable efforts to defend against and respond thereto. 6.7 Public Announcements. Parent shall consult with the Company before issuing any press release or otherwise making any public statements with respect to this Merger Agreement and the transactions contemplated by this Merger Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except that Parent may respond to questions from stockholders and inquiries from financial analysts and media representatives in a manner consistent with its past practice and may make such disclosures as may be required by applicable law or by obligations pursuant to any listing agreement with Nasdaq without prior consultation to the extent such consultation is not reasonably practicable. The parties agree that the initial press release or releases to be issued in connection with the execution of this Merger Agreement shall be mutually agreed upon prior to the issuance thereof. The Company may not make any press release or public statements with respect to this Merger Agreement or the Merger without Parent's prior written consent. 6.8 Other Actions. Except as contemplated by this Merger Agreement, neither Parent nor the Company shall take or agree or commit to take any action that is reasonably likely to -44- result in any of its representations or warranties hereunder being untrue in any material respect or in any of the conditions to the Merger set forth in Article VII not being satisfied. 6.9 Advice of Changes. The Company shall promptly advise Parent, and Parent shall promptly advise the Company, orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen, could have, a Material Adverse Effect on the Company or Parent, as the case may be. The Company and Parent shall promptly provide each other (or their respective counsel) copies of all filings made by such party with any state or federal Governmental Entity in connection with this Merger Agreement and the transactions contemplated hereby. 6.10 Voting Agreements. Each of the Company Stockholders who is identified on Exhibit G attached hereto shall have executed a Voting Agreement to be delivered to Parent concurrently with the execution of this Merger Agreement (the "VOTING AGREEMENT"). 6.11 Stockholder Vote. The Company shall call a special meeting of the stockholders of the Company to be held no later than twenty (20) days following the execution of this Merger Agreement for the purpose of approving this Merger Agreement and the transactions contemplated hereunder and the Company's Board of Directors shall recommend that the stockholders of the Company vote for such approval. 6.12 Registration of Form S-3. Parent shall use its best efforts to take all actions reasonably necessary from the time of signing through the Effective Time to maintain the right to register the Parent Common Stock on Form S-3. Parent shall comply with the requirements of Rule 144 as amended from time to time. 6.13 Limitation on Michael's Representations and Warranties. It is understood and agreed by all parties to this Merger Agreement that notwithstanding anything to the contrary in the Michael Agreement or this Merger Agreement, if the Closing does not occur before June 1, 2002, the representations and warranties of Michael set forth in Section 4.1 of this Merger Agreement that in any manner relate to the business, operations, condition (financial or otherwise), prospects or results of the Company or the Company Sub, collectively "Company Condition", shall speak only as of March 22, 2002, rather than as of the date of the execution of this Merger Agreement, and shall not be considered for purposes of any indemnification Claim by an Indemnified Parent Party arising under Section 8.2(a) of this Merger Agreement to cover any change in the Company Condition that has occurred after that date. ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation to Effect the Merger. The obligation of each party to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions: (a) Other Approvals. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated and all filings required to be made prior to the Effective Time with, and all consents, approvals, permits and authorizations -45- required to be obtained prior to the Effective Time from, any Governmental Entity in connection with the execution and delivery of this Merger Agreement and the consummation of the transactions contemplated hereby shall have been made or obtained (as the case may be), except where the failure to obtain such consents, approvals, permits and authorizations would not be reasonably likely to result in a Material Adverse Effect on Parent (assuming the Merger has taken place) or to materially adversely affect the consummation of the Merger or the Surviving Corporation. (b) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition (an "INJUNCTION") preventing the consummation of the Merger shall be in effect; provided, however, that prior to invoking this condition, each party shall have complied fully with its obligations under Section 6.6 hereof and, in addition, shall have used all reasonable efforts to have any such decree, ruling, injunction or order vacated, except as otherwise contemplated by this Merger Agreement. (c) Nasdaq National Market Listing. Parent shall cause the shares of Parent Common Stock issuable to the Company's Stockholders pursuant to this Merger Agreement to be approved for quotation on Nasdaq, subject to official notice of issuance. 7.2 Conditions to Obligations of Parent and Sub. The obligations of Parent and Sub to effect the Merger are subject to the satisfaction of the following conditions, any or all of which may be waived in whole or in part by Parent. (a) Representations and Warranties. Each of the representations and warranties of the Company and the Management Stockholders set forth in this Merger Agreement, the Company Disclosure Letter and all the Related Documents shall be true and correct in all material respects as of the date of this Merger Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date (except in connection with the circumstances set forth in Section 6.13 regarding the effective date of Michael's representations and warranties if the Merger has not been effected prior to June 1, 2002) and Parent shall have received a certificate dated the Closing Date on behalf of the Company by its president and controller to that effect. (b) Performance of Obligations of the Company. The Company and the Company Stockholders shall have performed in all material respects all obligations required to be performed by them under this Merger Agreement and the Related Documents at or prior to the Closing Date. (c) Lock-up Agreements. Parent, DeVille and Wead shall enter into Lock-up Agreements in the form attached hereto as Exhibit D (the "LOCK-UP AGREEMENTS"), which agreements shall be executed and delivered at the Closing. (d) Consents. All necessary consents shall have been obtained in connection with any third party Contracts of Company and Company Sub, including the consents, identified in Schedule 4.1(d)(ii), other than such consents, the failure of which to obtain would, in the -46- reasonable determination of Parent, not have a Material Adverse Effect on the Company and Company Sub. (e) Employment Agreements. The employees identified in Exhibit E attached hereto (the "KEY EMPLOYEES"), shall have entered into Employment Agreements in the forms attached hereto as Exhibit F-1 and Exhibit F-2 (the "EMPLOYMENT AGREEMENTS"), which agreements shall be delivered at the Closing. The Company and each of the Management Stockholders shall use their best efforts to cause each Key Employee to execute an Employment Agreement with Parent on or prior to the Closing. (f) Noncompetition; Nonsolicitation. Each Management Stockholder and Wead shall have entered into a noncompetition and nonsolicitation agreement in the form attached hereto as Exhibit B, (the "NONCOMPETITION AND NONSOLICITATION AGREEMENTS"), which agreements shall be delivered by such Persons at the Closing. (g) Escrow Agreement. Each of the Escrow Agent, Parent and the representative of the Company Stockholders ("STOCKHOLDER REPRESENTATIVE") shall have executed an Escrow Agreement, dated as of the Closing, in the form attached hereto as Exhibit H, which agreement shall be delivered at the Closing and shall be in full force and effect. (h) Opinion. The Company shall have furnished Parent with a favorable opinion, dated the Closing Date, of its counsel, Keating, Muething & Klekamp, P.L.L., and a favorable opinion, dated the Closing Date, of counsel to the Venture Stockholders, Frost Brown Todd LLC, in form and substance reasonably satisfactory to the Company and its counsel. (i) Exercise of Vested Options and Warrant. The Company shall have taken all actions necessary to issue the respective shares of Company Common Stock issuable upon exercise of the Vested Options and the Warrant prior to the Effective Time, as adjusted for any cashless exercise thereof, and to issue any shares of Company Capital Stock to the holders of the Company Preferred Stock pursuant to Section 6.4. (j) Consent of Company Auditors. The Company shall have received from Joseph DeCosimo and Company all necessary consents to include the Company's Audited Financial Statements for the fiscal years 1999 and 2000 in Parent's filings with the SEC. 7.3 Conditions to Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction of the following conditions, any or all of which may be waived in whole or in part by the Company: (a) Representations and Warranties. Each of the representations and warranties of Parent and Sub set forth in this Merger Agreement, the Parent Disclosure Letter and the Related Documents shall be true and correct in all material respects as of the date of this Merger Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, and the Company shall have received a certificate dated the Closing Date by a duly authorized officer of Parent to that effect. -47- (b) Performance of Obligations of Parent and Sub. Parent and Sub shall have performed in all material respects all obligations required to be performed by them under this Merger Agreement and the Related Documents at or prior to the Closing Date. (c) Registration Rights Agreement. Parent shall have entered into the Registration Rights Agreement with Michael, all of the Non-Management Stockholders (other than Wead), any stockholders who hold Company Common Stock as a result of having exercised their Vested Options, the Stockholder Representative and A.G. Edwards & Sons, Custodian for Timothy A. Michael, which Registration Rights Agreement shall be executed and delivered at the Closing. (d) Opinion. Parent shall have furnished the Company with an opinion of Fulbright & Jaworski L.L.P., dated the Closing Date, in form and substance reasonably satisfactory to the Company and its counsel. ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 8.1 Survival of Representations and Warranties. All representations, warranties, covenants and obligations of the Company, the Company Sub, any Company Stockholders, Parent and Sub in this Merger Agreement, the Company Disclosure Letter, and the Related Documents shall survive the Closing Date and continue in full force and effect until twelve (12) months after the Closing Date, except that, notwithstanding anything to the contrary contained in this Merger Agreement, (i) any breach of a representation or warranty set forth in Section 4.1(m) or Section 4.1(r) shall survive until the expiration of the applicable statute of limitation, including any extensions thereof, and (ii) if notice of a Claim (as hereafter defined) is given under Article VIII prior to such expiration date, such Claim shall continue indefinitely until such Claim is finally resolved; provided, however, that the availability of equitable remedies for any breach of any covenant or agreement pursuant to Article VIII shall survive indefinitely. -48- 8.2 Indemnification by the Company and the Company Stockholders. (a) The Company and the Company Stockholders shall be obligated to indemnify save and hold harmless Parent, its directors, officers, employees, Affiliates, agents and assigns (each an "INDEMNIFIED PARENT PARTY"), from and against any and all Losses (whether or not arising out of third-party claims) and all amounts paid in investigation, defense or settlement of any of the foregoing (collectively with Losses, "DAMAGES") incurred in connection with, arising out of, resulting from or incident to (i) any breach of any representation or warranty made by the Company or by any Management Stockholder in this Merger Agreement, the Company Disclosure Letter or in any of the Related Documents delivered pursuant hereto, (ii) any breach of any covenant, obligation or agreement made by the Company or any Management Stockholder in this Merger Agreement or in any of the Related Documents delivered pursuant hereto, and (iii) any claim by any Person against Parent, Sub or the Surviving Corporation for broker's or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with the Company (or any person acting on the Company's behalf) in connection with the Merger. (b) In addition to the indemnification obligations pursuant to Section 8.2(a) hereof and notwithstanding anything contained herein to the contrary, the Company and the Company Stockholders shall be obligated to indemnify, hold harmless, pay and reimburse Indemnified Parent Parties for all Damages, in the aggregate, up to the amount of the Merger Consideration, but limited for each Company Stockholder to each such Company Stockholder's Pro Rata Share (except to the extent set forth below), without regard to any of the limitations set forth in Sections 8.1 or 8.6, that are caused by (i) fraud and/or "INTENTIONAL MISREPRESENTATION" by the Company or either of the Management Stockholders of any of their representations and warranties contained in this Merger Agreement, the Company Disclosure Letter or any of the Related Documents, and (ii) knowing, intentional or willful breaches by the Company or either of the Management Stockholders of their covenants or agreements contained in this Merger Agreement or any of the Related Documents to which they are parties; provided, however, that each Company Stockholder shall, with respect to items (i) and (ii) of this Section 8.2(b) be liable only for Damages (A) arising out of his, her or its own fraud or Intentional Misrepresentation or knowing, intentional or willful breaches of his, her or its covenants or agreements contained in this Merger Agreement or any of the Related Documents to which he, she or it is a party, and (B) up to the amount of the Merger Consideration received by such Company Stockholder. For purposes of this Merger Agreement, "INTENTIONAL MISREPRESENTATION" by the Company or the Management Stockholders shall mean a willful and intentional misrepresentation of any facts, information or other matters that are the subject of their representations and warranties or disclosures contained in this Merger Agreement, the Company Disclosure Letter or any of the Related Documents or that are the subject of the covenants or agreements of the Company or the Management Stockholders contained in this Merger Agreement or any of the Related Documents to which they are parties. In determining whether an Intentional Misrepresentation occurred regarding any representations and warranties by the Company or the Management Stockholders, the Management Stockholders shall not be deemed responsible for any other Person's knowledge or intent nor shall there be any constructive or imputed knowledge. (c) The Management Stockholders and the Company each agree to notify Parent of any liabilities, claims or misrepresentations, breaches or other matters covered by this -49- Article VIII upon discovery or receipt of notice thereof (other than from Parent), whether before or after the Closing. Notwithstanding anything in this Section 8.2 to the contrary, the Company shall not have any indemnification obligations pursuant to this Section 8.2 after the Effective Time of the Merger. 8.3 Indemnification by Parent. (a) Parent and Sub shall jointly and severally indemnify, save and hold harmless the Company Stockholders and their directors, officers, employees, Affiliates, agents and assigns (each an "INDEMNIFIED COMPANY PARTY" and together with an Indemnified Parent Party, an "INDEMNIFIED PARTY") from and against any and all Damages incurred in connection with, arising out of, resulting from or incident to (i) any breach of any representation or warranty made by Parent or Sub in this Merger Agreement, the Parent Disclosure Letter or any of the Related Documents delivered pursuant hereto or thereto, (ii) any breach of any covenant or agreement made by Parent or Sub in this Merger Agreement or any of the Related Documents delivered pursuant hereto or thereto, or (iii) any claim by any Person for broker's or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Parent or Sub (or any Person acting on Parent's or Sub's behalf) in connection with the Merger. (b) In addition to the indemnification obligations pursuant to Section 8.3(a) hereof and notwithstanding anything contained herein to the contrary, Parent and Sub jointly and severally agree to indemnify, hold harmless, pay and reimburse Indemnified Company Parties for all Damages, without regard to any of the limitations set forth in Sections 8.1 or 8.6, that are caused by (i) fraud and/or Intentional Misrepresentation by Parent or Sub of their representations and warranties contained in this Merger Agreement, the Parent Disclosure Letter or any of the Related Documents, and (ii) knowing, intentional or willful breaches by Parent or Sub of their covenants or agreements contained in this Merger Agreement or any of the Related Documents to which they are parties; provided, however, that Parent and Sub shall be liable under this Section 8.3(b) only for Damages in an amount not to exceed $50,000,000. For purposes of this Merger Agreement, "INTENTIONAL MISREPRESENTATION" by Parent or Sub shall mean a willful and intentional misrepresentation of any facts, information or other matters that are the subject of their representations and warranties or disclosures contained in this Merger Agreement, the Parent Disclosure Letter or any of the Related Documents or that are the subject of the covenants or agreements of Parent or Sub contained in this Merger Agreement or any of the Related Documents to which they are parties. (c) Each of Parent and Sub agrees to notify the Company of any liabilities, claims or misrepresentations, breaches or other matters covered by this Article VIII upon discovery or receipt of notice thereof (other than from the Company), whether before or after the Closing. 8.4 Damages. The term "Damages" as used in Section 8.2 and 8.3 is not limited to matters asserted by third parties against any Indemnified Party, but includes Damages incurred or sustained by an Indemnified Party in the absence of third party claims. Payments by any Indemnified Party of amounts for which such Indemnified Party is indemnified hereunder shall not be a condition precedent to recovery. Subject to Section 8.6(a), 8.6(b) and 8.6(d), the rights and remedies provided in this Article VIII shall be exclusive as to any Damages incurred by a -50- party under this Merger Agreement and the Related Documents; provided, however, that nothing herein shall preclude a party from exercising its rights under this Merger Agreement, the Related Documents and applicable law to such equitable remedies as may be available, including without limitation, specific performance and injunctions. 8.5 Procedure (a) Cooperation. The Indemnified Party shall cooperate in all reasonable respects with the indemnifying party and its representatives (including, without limitation, its attorneys) in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom; provided, however, that the Indemnified Party may at its own cost participate in negotiations, arbitration and the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom. The parties shall cooperate with each other in any notifications to insurers. (b) Defense of Claim. If a claim for Damages (a "CLAIM") is to be made by an Indemnified Party against the indemnifying party, the Indemnified Party shall give written notice (a "CLAIM NOTICE") to the indemnifying party as soon as practicable after the Indemnified Party becomes aware of any fact, condition or event which may give rise to Damages for which indemnification may be sought under this Article VIII. If any lawsuit or enforcement action is filed against any party entitled to the benefit of indemnity hereunder, written notice thereof shall be given to the indemnifying party as promptly as practicable (and in any event within five (5) Business Days after the service of the citation or summons). The failure of any Indemnified Party to give timely notice hereunder for any purpose shall not affect rights to indemnification hereunder, except to the extent that the indemnifying party has been materially damaged by such failure. After such notice, except as provided in the following sentence, if the indemnifying party shall acknowledge in writing to the Indemnified Party that the indemnifying party shall be obligated under the terms of its indemnity hereunder in connection with such lawsuit or action, then the indemnifying party shall be entitled, if it so elects at its own cost, risk and expense, (i) to take control of the defense and investigation of such lawsuit or action, (ii) to employ and engage attorneys of its own choice but, in any event, reasonably acceptable to the Indemnified Party, to handle and defend the same unless the named parties to such action or proceedings (including any impleaded parties) include both the indemnifying party and the Indemnified Party and the Indemnified Party has been advised in writing by counsel that there may be one or more legal defenses available to such Indemnified Party that are different from or additional to those available to the indemnifying party, in which event the Indemnified Party shall be entitled, at the indemnifying party's cost, risk and expense, to separate counsel of its own choosing and (iii) to compromise or settle such lawsuit or action, which compromise or settlement shall be made only with the written consent of the Indemnified Party. The Company Stockholders may assume the defense of a lawsuit or action as described in the preceding sentence only if the Company Stockholders agree to be responsible for all Claims for Damages related to such lawsuit or action or if there are sufficient moneys available held pursuant to the Escrow Agreement to cover all such Claims for Damages. If the indemnifying party fails to assume the defense of such lawsuit or action within five (5) Business Days after receipt of the Claim Notice, the Indemnified Party against which such lawsuit or action has been asserted shall (upon delivering notice to such effect to the indemnifying party) have the right to undertake, at the indemnifying party's cost and expense, -51- the defense, compromise or settlement of such lawsuit or action on behalf of and for the account and risk of the indemnifying party. In the event the Indemnified Party assumes the defense of the lawsuit or action, the Indemnified Party shall keep the indemnifying party reasonably informed of the progress of any such defense, compromise or settlement. The indemnifying party shall be liable for any settlement of any action effected pursuant to and in accordance with this Article VIII and for any final judgment (subject to any right of appeal) and the indemnifying party agrees to indemnify and hold harmless an Indemnified Party from and against any Damages by reason of such settlement or judgment. 8.6 Limitation on Indemnification After the Effective Time. (a) The Indemnified Parent Parties may not recover Damages after the Effective Time from the Company and the Company Stockholders pursuant to Section 8.2(a) until their aggregate Damages exceed $1,000,000 (the "THRESHOLD"); provided, however, that if the aggregate amount of Damages for which such parties are seeking indemnification pursuant to Section 8.2(a) exceeds the Threshold then such Indemnified Parent Parties may recover only the amount of such Damages that exceeds the Threshold. Notwithstanding the foregoing, (i) the maximum, aggregate amount of Damages for which the Company and the Company Stockholders shall be liable pursuant to Section 8.2(a) shall be $15,000,000 (the "MAXIMUM INDEMNIFICATION AMOUNT"); provided, however, that the Maximum Indemnification Amount shall not limit the amount of Damages for which the Company and the Company Stockholders shall be liable pursuant to Section 8.2(b); and (ii) with respect to indemnification of any Claim pursuant to Section 8.2(a), each Company Stockholder shall only be responsible for his Pro-Rata Share of any Damages arising from each Claim limited to, in the aggregate for all such Claims, such Company Stockholder's Pro-Rata Share of the Maximum Indemnification Amount. Amounts due as a result of indemnification herein shall, in the sole discretion of the Stockholder Representative, be paid by (i) selling shares of Parent Common Stock and distributing the net proceeds thereof to Parent in connection with the payment of any Claim, (ii) paying any such Claim from the Cash Merger Consideration deposited in the Escrow, or (iii) returning to Parent shares of Parent Common Stock (collectively, "PAYMENT ALTERNATIVES"). Stockholder Representative shall be entitled to elect any or all of the Payment Alternatives in connection with the payment of a Claim from the Escrow Amount, provided, however, in no event shall Stockholder Representative be entitled to pay more than 50% of any Claim by the delivery to Parent of shares of Parent Common Stock. Any shares of Parent Common Stock that are returned to Parent as partial payment of a Claim shall be valued at their average daily closing price as reported on the Nasdaq during the ten (10) trading days ending on the day immediately preceding the date such shares are distributed to Parent by the Escrow Agent. Nothing contained herein, however, shall (i) preclude Parent from bringing an action for specific performance or other available equitable remedy for a breach of any covenant or agreement under Section 8.2, or (ii) constitute a waiver by Parent or a limitation of its rights or remedies against the Company or the Company Stockholders based on fraud or Intentional Misrepresentation. Notwithstanding anything to the contrary contained herein, the indemnification obligations of the Company and the Company Stockholders under Section 8.2(a) and the $5 million of Merger Consideration returnable to Parent under the circumstances described in Section 3.3 of the Agreement shall be satisfied only from the funds held in the Escrow Account; provided, however, that after the termination of the Escrow Account, any Damages arising from any Claim brought pursuant to -52- Section 8.2(a) due to a breach of Section 4.1(m) or 4.1(r) shall be paid, subject to the Threshold, by the Company Stockholders in accordance with each Company Stockholder's Pro Rata Share. (b) Indemnified Parties shall have the right to make a Claim hereunder prior to the time at which the Threshold that is applicable to such Claim has been surpassed for the purposes of asserting such Claim within the relevant survival period of the applicable indemnification obligation and any such Claim made within such period shall, to the extent such Threshold ultimately is met, survive until its final resolution. (c) The Company Stockholders agree that, at the Closing, Parent shall deliver the Escrow Amount to the Escrow Agent for deposit in the Escrow Account. Parent shall deposit such funds and Parent Common Stock with the Escrow Agent. The funds shall be held, invested and disbursed in accordance with the terms of the Escrow Agreement. The Company Stockholders and Parent agree to give promptly any necessary instructions through the Stockholder Representative to the Escrow Agent to cause such funds and Parent Common Stock to be placed in the Escrow Account. Subject to the conditions in Section 3.3 of this Merger Agreement, at the expiration of the twelve (12)-month Escrow Account term set forth in Section 4 of the Escrow Agreement, any amounts of cash or Parent Common Stock not subject to Claims made by Indemnified Parent Parties shall be distributed in accordance with the terms of the Escrow Agreement. (d) An Indemnified Company Party may not recover Damages from Parent pursuant to Section 8.3(a) until the aggregate amount of Damages relating to such Claims for which such Indemnified Company Party, in the aggregate, is seeking indemnification under Section 8.3(a) exceeds the Threshold; provided, however, that if the aggregate amount of Damages for which such Indemnified Company Party is seeking indemnification pursuant to Section 8.3(a) exceeds the Threshold, such Indemnified Company Party may recover only the amount of all such Damages that exceeds the Threshold. Notwithstanding the foregoing, the maximum amount of Damages for which Parent shall be liable pursuant to Section 8.3(a) shall be the Maximum Indemnification Amount. Nothing contained herein, however, shall (i) preclude any Company Stockholder from bringing an action for specific performance or other available equitable remedy for a breach of any covenant or agreement under Section 8.3 or (ii) constitute a waiver by any Company Stockholder or a limitation of the rights or remedies of any Company Stockholder against Parent or Sub based on fraud or Intentional Misrepresentation. (e) Neither (i) the termination of the representations or warranties contained herein, nor (ii) the expiration of the indemnification obligations described above, shall affect the rights of an Indemnified Party in respect of any Claim made by such party received by the indemnifying party prior to the expiration of the applicable survival period provided herein. -53- ARTICLE IX TERMINATION AND AMENDMENT 9.1 Termination. This Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after the Company Stockholder Approval: (a) by mutual written consent of the Company and Parent; (b) by either the Company or Parent if the average per share daily closing price of Parent Common Stock as reported on Nasdaq during the 5 consecutive trading days ending on the day immediately prior to the Closing Date is greater than 125% or less than 75% of the Average Price of Parent Common Stock. (c) by either the Company or Parent if (A) the Merger shall not have been consummated within the later of (i) 60 days after the signing of this Merger Agreement by the parties (provided that the right to terminate this Merger Agreement under this clause (i) shall not be available to any party whose breach of any representation or warranty or failure to fulfill any covenant or agreement under this Merger Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or (ii) the date that all filings and approvals required pursuant to Section 7.1(a) have been completed or obtained, but in no event later than one hundred twenty (120) days after the signing of this Merger Agreement by the parties; or (B) any court of competent jurisdiction, or some other Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable (the "TERMINATION DATE"); (d) by Parent if (i) the Company shall have failed to comply in any material respect with any of the covenants or agreements contained in this Merger Agreement to be complied with or performed by the Company at or prior to such date of termination (provided such breach has not been cured within 30 days following receipt by the Company of notice of such breach and is existing at the time of termination of this Merger Agreement); or (ii) any of the representations and warranties of the Company or the Management Stockholders contained in this Merger Agreement shall not have been true and correct in any material respect when made (provided such breach has not been cured within 30 days following receipt by the Company of notice of such breach and is existing at the time of termination of this Merger Agreement) or on and as of the Closing Date as if made on and as of the Effective Time (except to the extent it relates to a particular date); or (e) by the Company if (i) Parent or Sub shall have failed to comply in any material respect with any of the covenants or agreements contained in this Merger Agreement to be complied with or performed by it at or prior to such date of termination (provided such breach has not been cured within 30 days following receipt by Parent of notice of such breach and is existing at the time of termination of this Merger Agreement); or (ii) any representations and warranties of Parent or Sub contained in this Merger Agreement shall not have been true and correct in any material respect when made (provided such breach has not been cured within 30 -54- days following receipt by Parent of notice of such breach and is existing at the time of termination of this Merger Agreement) or on and as of the Effective Time as if made on and as of the Closing Date (except to the extent it relates to a particular date). 9.2 Effect of Termination. Each party's right of termination under Section 9.1(d) or Section 9.1(e), respectively, is in addition to any other rights it may have under this Merger Agreement or otherwise, and the exercise of such right of termination will not be an election of remedies. If this Merger Agreement is terminated pursuant to Section 9.l, all obligations of the parties under this Merger Agreement shall terminate, except that the obligations of the parties in the last sentence of Section 6.1, Section 9.2 and Section 10.1 will survive, provided, however, that if this Merger Agreement is terminated by Parent pursuant to Section 9.1(d), the Company pursuant to Section 9.1(e), or because one or more of the terminating party's obligations under this Merger Agreement is not satisfied as a result of the party's failure to comply with its obligations under this Merger Agreement, the terminating party's right to pursue all legal remedies shall survive such termination unimpaired. 9.3 Amendment. This Merger Agreement may be amended by the parties hereto by action taken or authorized by their respective Boards of Directors at any time before the Effective Time. This Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 9.4 Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed: (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto; (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto; and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. ARTICLE X GENERAL PROVISIONS 10.1 Payment of Expenses. Each party hereto shall pay its own expenses incident to preparing for entering into and carrying out this Merger Agreement, and the consummation of the transactions contemplated hereby, whether or not the Merger shall be consummated. 10.2 Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Merger Agreement or in any instrument delivered pursuant to this Merger Agreement shall survive the Effective Time pursuant to the terms of Article VIII. The Confidentiality Agreement shall survive the execution and delivery of this Merger Agreement, and the provisions of the Confidentiality Agreement shall apply to all information and material delivered hereunder. 10.3 Notices. Any notice or communication required or permitted hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile or sent by overnight -55- courier to the parties at the following address or facsimile number, or to such other address or addresses or facsimile number or numbers, as such person may subsequently designate by notice given hereunder: (a) if to Parent or Sub, to: On Assignment, Inc. 26651 West Agoura Road Calabasas, California 91302 Attention: Dr. Joe Peterson, President and Chief Executive Officer Fax: (818) 878-7930 with a copy to: Fulbright & Jaworski L.L.P. 865 S. Figueroa Street, 29th Floor Los Angeles, California 90017-2576 Attention: David A. Ebershoff, Esq. Fax: (213) 680-4518 -56- and (b) if to the Company, to: Health Personnel Options Corporation 8150 Corporate Park Drive, Suite 300 Cincinnati, Ohio 45242 Attention: J. William DeVille Fax: (513) 891-6145 with a copy to: Keating, Muething & Klekamp, P.L.L. 1400 Provident Tower One East Fourth Street Cincinnati, Ohio 45202 Attention: Joseph P. Rouse, Esq. Fax: (513) 579-6457 and to: Frost Brown Todd LLC 2200 PNC Center 201 East Fifth Street Cincinnati, Ohio 45202-4182 Attention: John S. Stith, Esq. Fax: (513) 651-6889 (c) If to Michael: Timothy A. Michael 4165 Rose Hill Avenue Cincinnati, Ohio 45229 with a copy to: Porter, Wright, Morris & Arthur, LLP 41 South High Street Columbus, Ohio 43215-6194 Attention: K. Michael Taylor, Esq. -57- (d) If to DeVille: William DeVille 130 Shoemaker Dr. Loveland, Ohio 45140 with a copy to: Baker & Hostetler LLP 312 Walnut Street, Suite 2650 Cincinnati, Ohio 45202-4038 Attention: William Appleton, Esq. (e) Parent also agrees to provide notice to: MLK, Inc.* 75 Rhode Island Ave. So. Golden Valley, Minnesota 55426 Attention: Martin Kieffer Fax: (763) 512-3854 with a copy to: Maslon Edelman Borman & Brand, LLP 3300 Wells Fargo Center Minneapolis, Minnesota 55402 Attention: Neil I. Sell Fax: (612) 642-8337 * MLK, Inc. is not a signatory to this Merger Agreement. 10.4 Interpretation. When a reference is made in this Merger Agreement to Sections, such reference shall be to a Section of this Merger Agreement unless otherwise indicated. The table of contents, definitions and headings contained in this Merger Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Merger Agreement. Whenever the word "include," "includes" or "including" is used in this Merger Agreement, it shall be deemed to be followed by the words "without limitation." The phrase "made available" in this Merger Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. 10.5 Counterparts. This Merger Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 10.6 Entire Agreement; No Third-Party Beneficiaries. This Merger Agreement (together with the Related Documents and any other documents and instruments referred to -58- herein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereto and (b) except as provided in Article VIII, is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 10.7 Governing Law. This Merger Agreement shall be governed and construed in accordance with the laws of the State of California, without giving effect to the principles of conflicts of law thereof, except to the extent the DGCL or the Ohio Law mandatorily applies to the mechanics of the Merger. 10.8 No Remedy in Certain Circumstances. Each party agrees that, should any court or other competent authority hold any provision of this Merger Agreement or part hereof to be null, void or unenforceable, or order any party to take any action inconsistent herewith or not to take an action consistent herewith or required hereby, the validity, legality and enforceability of the remaining provisions and obligations contained or set forth herein shall not in any way be affected or impaired thereby, unless the foregoing inconsistent action or the failure to take an action constitutes a material breach of this Merger Agreement or makes the Merger Agreement impossible to perform, in which case this Merger Agreement may be terminated by any party pursuant to Article IX hereof. Except as otherwise contemplated by this Merger Agreement, to the extent that a party hereto took an action inconsistent herewith or failed to take action consistent herewith or required hereby pursuant to an order or judgment of a court or other competent authority, such party shall not incur any liability or obligation unless such party breached its obligations under Section 6.6 hereof or did not in good faith seek to resist or object to the imposition or entering of such order or judgment. 10.9 Assignment. Neither this Merger Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Merger Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 10.10 Enforcement of the Merger Agreement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Merger Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Merger Agreement and to enforce specifically the terms and provisions hereof in any court of the United States located in the State of Delaware, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any federal or state court sitting in Delaware in the event any dispute between the parties hereto arises out of this Merger Agreement solely in connection with such a suit between the parties, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (c) agrees that it will not bring any action relating to this Merger Agreement in any court other than a federal or state court sitting in Delaware. 10.11 Performance by Sub. Parent hereby agrees to cause Sub to comply with the obligations under this Merger Agreement. -59- 10.12 Severability. If any one or more of the provisions contained in this Merger Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close to possible to that of the invalid, illegal or unenforceable provisions. 10.13 Titles and Section Headings. The titles and section headings of this Merger Agreement are for convenience of reference only and do not form a part hereof and do not in any way modify, interpret or construe the intentions of the parties hereto. 10.14 Further Assurances. The parties hereto agree to furnish upon request to each other such further information, to execute and deliver to each other such other documents and to do such other acts and things, all as the other party may reasonably request, for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. -60- IN WITNESS WHEREOF, each party has caused this Merger Agreement to be signed by its officers thereunto duly authorized, all as of the date first written above. HEALTH PERSONNEL OPTIONS CORPORATION By: ____________________________________ J. William DeVille Executive Vice President and Secretary ON ASSIGNMENT, INC. By: ____________________________________ Dr. Joe Peterson Chief Executive Officer ON ASSIGNMENT ACQUISITION CORP. By: ____________________________________ Dr. Joe Peterson Chief Executive Officer MANAGEMENT STOCKHOLDERS ________________________________________ Timothy A. Michael ________________________________________ J. William DeVille SOLELY FOR PURPOSES OF SECTIONS 3.3, 6.5, 6.10 AND ARTICLE VIII: VENTURE STOCKHOLDERS RIVER CITIES CAPITAL FUND LIMITED PARTNERSHIP By: ____________________________________ R. Glen Mayfield, Vice President of Mayson, Inc., the General Partner of River Cities Management Limited Partnership, the General Partner of River Cities Capital Fund Limited Partnership RIVER CITIES CAPITAL FUND II LIMITED PARTNERSHIP By: ____________________________________ R. Glen Mayfield, Vice President of Mayson, Inc., the General Partner of River Cities Capital Fund II Limited Partnership CASTELLINI MANAGEMENT COMPANY LIMITED PARTNERSHIP By: ____________________________________ Christopher L. Fister, Secretary of Robert H. Castellini Holding Company, Inc., the General Partner of Castellini Management Company Limited Partnership EXHIBIT A NON-MANAGEMENT STOCKHOLDERS(1) 1. River Cities Capital Fund Limited Partnership 2. River Cities Capital Fund II Limited Partnership 3. Castellini Management Company Limited Partnership 4. MLK, Inc. 5. R. Patrick Perkins 6. Cynthia G. Falk - -------- (1) This list identifies only the current non-management stockholders of the Company, specifically excluding all those holders of Company stock options who are not currently Company Common Stockholders and who will receive shares of Company Common Stock upon exercise of their options. EXHIBIT B FORM OF NONCOMPETITION AND NONSOLICITATION AGREEMENT EXHIBIT C FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT D FORM OF LOCK-UP AGREEMENT EXHIBIT E KEY EMPLOYEES 1. J. William DeVille 2. Kenneth Wead EXHIBIT F FORM OF EMPLOYMENT AGREEMENT EXHIBIT G STOCKHOLDERS EXECUTING VOTING AGREEMENTS 1. River Cities Capital Fund Limited Partnership 2. River Cities Capital Fund II Limited Partnership 3. Castellini Management Company Limited Partnership 4. MLK, Inc. 5. Timothy A. Michael 6. J. William DeVille 7. A.G. Edwards & Sons, custodian for Timothy A. Michael 8. A.G. Edwards & Sons, custodian for J. William DeVille EXHIBIT H FORM OF ESCROW AGREEMENT EX-21.1 4 v80406ex21-1.txt EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Assignment Ready, Inc., a Delaware corporation, is a wholly owned subsidiary of EnviroStaff, Inc., a Minnesota corporation, which in turn is a wholly owned subsidiary of the Registrant. Assignment Ready, Inc. does business under the names "Lab Support," "Healthcare Financial Staffing," "Clinical Lab Staff," and "Diagnostic Imaging Staff". OTHER SUBSIDIARIES OF THE REGISTRANT ARE OMITTED FROM THIS EXHIBIT PURSUANT TO REGULATION S-K 601(b)(21)(ii). EX-24.1 5 v80406ex24-1.txt EXHIBIT 24.1 Exhibit 24.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statements No. 33-57078 and No. 333-3849 of On Assignment, Inc. and subsidiaries on Form S-8 of our report dated January 24, 2002 (March 27, 2002 as to Note 12), with respect to the consolidated financial statements and financial statement schedule of On Assignment, Inc. appearing in this Annual Report on Form 10-K of On Assignment, Inc. for the year ended December 31, 2001. /s/ Deloitte & Touche LLP Deloitte & Touche LLP March 29, 2002 Los Angeles, California EX-25.1 6 v80406ex25-1.txt EXHIBIT 25.1 Exhibit 25.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joseph Peterson, M.D. and Ronald W. Rudolph and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

-----END PRIVACY-ENHANCED MESSAGE-----


Delaware		95-4023433
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


		Name of each exchange
Title of each class		on which registered

None		None


Alexandria, VA	Dayton, OH	Kansas City, MO	Pasadena, CA	San Francisco, CA
Ann Arbor, MI	Denver, CO	Las Vegas, NV	Philadelphia, PA	San Jose, CA
Antwerp, Belgium	Des Moines, IA	Leeds, United Kingdom	Phoenix, AZ	Savannah, GA
Atlanta, GA	Detroit, MI	London, United Kingdom	Piscataway, NJ	Seattle, WA
Baltimore, MD	Dublin, Ireland	Los Angeles, CA	Pittsburgh, PA	St. Louis, MO
Birmingham, United Kingdom	Edmonton, AB, Canada	Louisville, KY	Pleasanton, CA	Tampa, FL
Boston, MA	Eindhoven, Netherlands	Madison, WI	Portland, OR	Toronto, ON, Canada
Buffalo, NY	Escondido, CA	Manchester, United Kingdom	Princeton, NJ	Tulsa, OK
Cambridge, United Kingdom	Ft. Lauderdale, FL	Memphis, TN	Raleigh-Durham, NC	Utrecht, Netherlands
Charlotte, NC	Ft. Worth, TX	Miami, FL	Richmond, VA	Vancouver, BC, Canada
Cheshire, CT	Glasgow, Scotland	Milwaukee, WI	Riverside, CA	Washington, DC
Chicago, IL	Grand Rapids, MI	Minneapolis, MN	Rotterdam, Netherlands	White Plains, NY
Cincinnati, OH	Greensboro, NC	Montreal, QC, Canada	San Bernardino, CA	Worcester, MA
Cleveland, OH	Harrisburg, PA	New Orleans, LA	Sacramento, CA
Columbus, OH	Houston, TX	Oakland, CA	Salt Lake City, UT
Costa Mesa, CA	Indianapolis, IN	Oklahoma City, OK	San Antonio, TX
Dallas, TX	Jacksonville, FL	Oxford, United Kingdom	San Diego, CA



		Price Range of
		Common Stock

		High		Low

Fiscal Year Ended December 31, 2000
	First Quarter		22.50		13.75
	Second Quarter		34.31		22.25
	Third Quarter		33.00		25.06
	Fourth Quarter		32.25		21.75
Fiscal Year Ended December 31, 2001
	First Quarter		29.69		18.38
	Second Quarter		23.20		16.30
	Third Quarter		20.07		13.45
	Fourth Quarter		24.00		15.66



		Years Ended December 31,

		1997		1998		1999		2000		2001


		(in thousands, except per share data)
Income Statement Data
Revenues		$	107,849	$	132,741	$	159,473	$	195,080	$	194,620
	Cost of services		74,748		90,705		107,652		131,351		131,343

Gross profit			33,101		42,036		51,821		63,729		63,277
	Selling, general and administrative expenses		20,714		25,308		30,428		35,532		38,766

Operating income			12,387		16,728		21,393		28,197		24,511
	Interest income, net		833		1,336		1,635		2,442		2,575

Income before income taxes			13,220		18,064		23,028		30,639		27,086
	Provision for income taxes		4,954		6,748		8,566		11,392		10,046

Net income		$	8,266	$	11,316	$	14,462	$	19,247	$	17,040

Basic earnings per share		$	0.39	$	0.52	$	0.66	$	0.87	$	0.75

Weighted average number of common shares outstanding			21,123		21,721		21,907		22,193		22,645

Diluted earnings per share		$	0.37	$	0.50	$	0.65	$	0.83	$	0.74

Weighted average number of common and common equivalent shares outstanding			22,063		22,604		22,372		23,080		23,037

Balance Sheet Data
Cash, cash equivalents and current portion of marketable securities		$	23,709	$	30,466	$	35,271	$	63,122	$	88,580
Working capital			35,225		43,987		54,769		84,717		105,851
Total assets			44,864		62,028		71,740		105,556		125,251
Long-term liabilities			—		—		—		—		—
Stockholders’ equity			39,272		54,226		63,447		95,291		114,779


Name	Age		Position

Joseph Peterson, M.D.		42	Chief Executive Officer, President and Director
Ronald W. Rudolph		58	Executive Vice President, Finance and Chief Financial Officer
Dana Hallberg		38	Senior Vice President, Global Operations(1)
Stephen T. Minihan		52	Senior Vice President, Field Support
Shelly Carolan		33	Senior Vice President, Lab Support Domestic Operations


(1)	Senior Vice President, Review and Analysis effective January 14, 2002.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


Year Ended	Amount

2002	$	3,069,000
2003		2,520,000
2004		1,483,000
2005		929,000
2006		308,000
After 5 years		325,000

Total commercial commitments	$	8,634,000



			December 31,

			2000		2001

ASSETS
Current Assets:
	Cash and cash equivalents (Note 12)		$	51,202,000	$	65,694,000
	Marketable securities (Note 12)			11,920,000		22,886,000
	Accounts receivable, net of allowance for doubtful accounts of $1,460,000 (2000) and $1,667,000 (2001)			27,679,000		22,782,000
	Advances and deposits			232,000		149,000
	Prepaid expenses			1,626,000		2,030,000
	Income taxes receivable			—		123,000
	Deferred income taxes (Note 7)			2,323,000		2,659,000

		Total current assets		94,982,000		116,323,000

Office Furniture, Equipment and Leasehold Improvements, net (Note 2)				3,338,000		2,804,000
Marketable securities				3,413,000		2,000,000
Deferred income taxes (Note 7)				375,000		454,000
Workers’ compensation restricted deposits (Note 6)				237,000		77,000
Goodwill, net (Note 4)				1,693,000		1,542,000
Other assets (Note 5)				1,518,000		2,051,000

		Total Assets	$	105,556,000	$	125,251,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$	701,000	$	557,000
	Accrued payroll			4,854,000		4,740,000
	Income taxes payable			430,000		—
	Deferred compensation (Note 5)			1,423,000		1,736,000
	Accrued workers’ compensation (Note 6)			1,753,000		2,662,000
	Other accrued expenses			1,104,000		777,000

		Total current liabilities		10,265,000		10,472,000

Commitments and Contingencies (Notes 5 and 6)				—		—
Stockholders’ Equity (Notes 1, 8 and 12):
	Preferred Stock, $0.01 par value, 1,000,000 shares authorized, No shares issued or outstanding in 2000 and 2001			—		—
	Common Stock, $0.01 par value, 75,000,000 shares authorized, 23,136,618 issued and outstanding in 2000 and 23,786,266 issued and outstanding in 2001			231,000		238,000
	Paid-in capital			30,466,000		40,402,000
	Deferred compensation liability (Note 5)			294,000		294,000
	Retained earnings			72,097,000		89,137,000
	Accumulated other comprehensive income			15,000		18,000

				103,103,000		130,089,000
	Less: Treasury Stock at cost, 660,000 shares in 2000 and 1,133,500 shares in 2001			7,812,000		15,310,000

		Total stockholders’ equity		95,291,000		114,779,000

		Total Liabilities and Stockholders’ Equity	$	105,556,000	$	125,251,000


																		Accumulated
																		Other
		Preferred Stock				Common Stock								Deferred				Comprehensive			Treasury Stock
											Paid-in			Compensation		Retained		(Loss)
		Shares		Amount		Shares			Amount		Capital			Liability		Earnings		Income			Shares			Amount			Total

Balance, January 1, 1999			—	$	—		21,888,080		$	219,000	$	15,642,000		$	—	$	38,388,000	$	(23,000	)		—		$	—		$	54,226,000
Exercise of common stock options			—		—		436,886			4,000		1,774,000			—		—		—			—			—			1,778,000
Repurchases of Common Stock			—		—		—			—		—			—		—		—			(660,000	)		(7,812,000	)		(7,812,000	)
Deferred Compensation Liability			—		—		(19,764	)		—		(294,000	)		294,000		—		—			—			—			—
Common stock issued —
	Employee Stock Purchase Plan		—		—		19,848			—		264,000			—		—		—			—			—			264,000
Disqualifying dispositions			—		—		—			—		517,000			—		—		—			—			—			517,000
Other comprehensive income —
	Translation adjustments		—		—		—			—		—			—		—		12,000			—			—			12,000
Net income			—		—		—			—		—			—		14,462,000		—			—			—			14,462,000

Balance, December 31, 1999			—		—		22,325,050			223,000		17,903,000			294,000		52,850,000		(11,000	)		(660,000	)		(7,812,000	)		63,447,000
Exercise of common stock options			—		—		793,261			8,000		8,551,000			—		—		—			—			—			8,559,000
Common stock issued —
	Employee Stock Purchase Plan		—		—		18,307			—		261,000			—		—		—			—			—			261,000
Disqualifying dispositions			—		—		—			—		3,751,000			—		—		—			—			—			3,751,000
Other comprehensive income —
	Translation adjustments		—		—		—			—		—			—		—		26,000			—			—			26,000
Net income			—		—		—			—		—			—		19,247,000		—			—			—			19,247,000

Balance, December 31, 2000			—		—		23,136,618			231,000		30,466,000			294,000		72,097,000		15,000			(660,000	)		(7,812,000	)		95,291,000
Exercise of common stock options			—		—		636,351			7,000		7,141,000			—		—		—			—			—			7,148,000
Repurchases of common stock			—		—		—			—		—			—		—		—			(473,500	)		(7,498,000	)		(7,498,000	)
Common stock issued —
	Employee Stock Purchase Plan		—		—		13,297			—		234,000			—		—		—			—			—			234,000
Disqualifying dispositions			—		—		—			—		2,572,000			—		—		—			—			—			2,572,000
Common stock registration fee			—		—		—			—		(11,000	)		—		—		—			—			—			(11,000	)
Other comprehensive income —
	Translation adjustments		—		—		—			—		—			—		—		3,000			—			—			3,000
Net income			—		—		—			—		—			—		17,040,000		—			—			—			17,040,000

Balance December 31, 2001			—	$	—		23,786,266		$	238,000	$	40,402,000		$	294,000	$	89,137,000	$	18,000			(1,133,500	)	$	(15,310,000	)	$	114,779,000


				Gross		Gross
				Unrealized		Unrealized			Estimated
		Amortized Cost		Gains		Losses			Fair Value

2000:
Current marketable securities		$	11,920,000	$	41,000	$	(66,000	)	$	11,895,000
Non-current marketable securities			3,413,000		59,000		(7,000	)		3,465,000

	Total	$	15,333,000	$	100,000	$	(73,000	)	$	15,360,000

2001:
Current marketable securities		$	22,886,000	$	389,000	$	—		$	23,275,000
Non-current marketable securities			2,000,000		106,000		—			2,106,000

	Total	$	24,886,000	$	495,000	$	—		$	25,381,000


		2000			2001

Furniture and fixtures		$	1,296,000		$	1,436,000
Computers and related equipment			3,158,000			3,346,000
Machinery and equipment			1,192,000			1,369,000
Leasehold improvements			1,055,000			1,302,000
Construction in progress			26,000			37,000

			6,727,000			7,490,000
Less accumulated depreciation and amortization			(3,389,000	)		(4,686,000	)

	Total	$	3,338,000		$	2,804,000


			Operating
			Leases

		2002	$	3,069,000
		2003		2,520,000
		2004		1,483,000
		2005		929,000
		2006		308,000
	Thereafter			325,000

Total Minimum Lease Payments			$	8,634,000



			December 31, 2000				December 31, 2001

			Federal		State		Federal		State

Deferred tax assets:
	Current:
		Allowance for doubtful accounts	$	483,000	$	42,000	$	504,000	$	43,000
		Employee related accruals		632,000		56,000		605,000		51,000
		State taxes		507,000		—		410,000		—
		Workers’ compensation loss reserve		512,000		45,000		917,000		77,000
		Other		46,000		—		52,000		—

Total current deferred tax assets				2,180,000		143,000		2,488,000		171,000

	Non-current:
		Depreciation and amortization expense		239,000		21,000		228,000		19,000
		Other		103,000		12,000		180,000		27,000

Total non-current deferred tax assets				342,000		33,000		408,000		46,000

Total deferred tax assets			$	2,522,000	$	176,000	$	2,896,000	$	217,000



		Years Ended December 31,

		1999			2000			2001

Current:
	Federal	$	8,263,000		$	10,385,000		$	8,726,000
	State		1,155,000			1,449,000			1,160,000
	Foreign		(67,000	)		(74,000	)		575,000

			9,351,000			11,760,000			10,461,000

Deferred:
	Federal		(628,000	)		(439,000	)		(337,000	)
	State		(78,000	)		69,000			(32,000	)
	Foreign		(79,000	)		2,000			(46,000	)

			(785,000	)		(368,000	)		(415,000	)

Total		$	8,566,000		$	11,392,000		$	10,046,000


		Incentive			Non-Qualified			Weighted Average
		Stock			Stock			Exercise Price
		Options			Options			Per Share

Outstanding at January 1, 1999			1,598,744			914,318		$	10.67
	Granted		837,822			337,078		$	13.43
	Exercised		(407,360	)		(29,526	)	$	4.07
	Canceled		(409,584	)		(20,894	)	$	13.99

Outstanding at December 31, 1999			1,619,622			1,200,976		$	12.32
	Granted		539,906			199,294		$	25.11
	Exercised		(402,778	)		(390,483	)	$	10.79
	Canceled		(374,096	)		(22,348	)	$	15.99

Outstanding at December 31, 2000			1,382,654			987,439		$	16.19
	Granted		623,783			404,467		$	19.21
	Exercised		(343,977	)		(292,374	)	$	11.23
	Canceled		(510,970	)		(175,588	)	$	20.20

Outstanding at December 31, 2001			1,151,490			923,944		$	18.07



	Options Outstanding						Options Exercisable

	Number		Weighted		Weighted				Weighted
	Outstanding at		Average		Average		Exercisable at		Average
Range of	December 31,		Remaining		Exercise		December 31,		Exercise
Exercise Prices	2001		Contractual Life		Price		2001		Price

$ 2.50 to $13.6875		471,385		7.1 years	$	12.28		334,616	$	11.85
14.00 to 16.219		363,582		7.3 years		15.82		236,023		15.92
16.39 to 17.97		514,082		9.4 years		17.51		39,019		17.19
18.00 to 23.46		352,728		9.6 years		21.11		63,954		22.11
23.75 to 33.00		373,657		8.8 years		25.46		135,689		25.84

$ 2.50 to $33.00		2,075,434		8.4 years	$	18.07		809,301	$	16.45



		Years Ended December 31,

		1999		2000		2001

Revenues:
	Lab Support	$	119,668,000	$	139,986,000	$	139,558,000
	Healthcare Staffing		39,805,000		55,094,000		55,062,000

		$	159,473,000	$	195,080,000	$	194,620,000

Gross Profit:
	Lab Support	$	38,866,000	$	46,021,000	$	45,575,000
	Healthcare Staffing		12,955,000		17,708,000		17,702,000

		$	51,821,000	$	63,729,000	$	63,277,000

Operating Income:
	Lab Support	$	14,830,000	$	19,353,000	$	17,309,000
	Healthcare Staffing		6,563,000		8,844,000		7,202,000

		$	21,393,000	$	28,197,000	$	24,511,000



		Quarter Ended

		Mar. 31,		June 30,		Sept. 30,		Dec. 31,		Mar. 31,		June 30,		Sept. 30,		Dec. 31,
		2000		2000		2000		2000		2001		2001		2001		2001


		(Unaudited)
		(in thousands, except per share data)
Revenues		$	44,345	$	47,817	$	51,109	$	51,808	$	51,181	$	49,674	$	46,943	$	46,822
	Cost of services		29,899		32,163		34,328		34,961		34,454		33,609		31,803		31,477

Gross profit			14,446		15,654		16,781		16,847		16,727		16,065		15,140		15,345
	Selling, general and administrative expenses		8,190		9,035		9,347		8,959		9,919		9,613		9,371		9,863

Operating income			6,256		6,619		7,434		7,888		6,808		6,452		5,769		5,482
	Interest income		446		571		679		746		807		692		648		428

Income before income taxes			6,702		7,190		8,113		8,634		7,615		7,144		6,417		5,910
	Provision for income taxes		2,496		2,666		3,018		3,212		2,789		2,641		2,358		2,258

Net income		$	4,206	$	4,524	$	5,095	$	5,422	$	4,826	$	4,503	$	4,059	$	3,652

Basic earnings per share		$	0.19	$	0.20	$	0.23	$	0.24	$	0.21	$	0.20	$	0.18	$	0.16

Weighted average number of common shares outstanding			21,846		22,177		22,312		22,434		22,620		22,794		22,683		22,482

Diluted earnings per share		$	0.19	$	0.20	$	0.22	$	0.23	$	0.21	$	0.19	$	0.18	$	0.16

Weighted average number of common and common equivalent shares outstanding			22,476		23,182		23,233		23,217		23,249		23,154		22,960		22,780


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*


Item 14.	*Exhibits, Financial Statement Schedules and Reports on Form 8-K*


			Page

1.	Financial Statements:
		Report of Independent Auditors		17
		Consolidated Balance Sheets at December 31, 2000 and 2001		18
		Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 1999, 2000 and 2001		19
		Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 1999, 2000 and 2001		20
		Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001		21
		Notes to Consolidated Financial Statements		22
2.	Financial Statement Schedule:
		Schedule II — Valuation and Qualifying Accounts		37
	Schedules other than those referred to above have been
	omitted because they are not applicable or not required under instructions contained in Regulation S-X or because the infor is included elsewhere in the financial statements or notes the		the mation reto.


Number		Footnote		Description

	2.1			Agreement and Plan of Merger By and Among On Assignment, Inc., On Assignment Acquisition Corp., Health Personnel Options Corporation and certain stockholders of Health Personnel Options Corporation, dated March 27, 2002.
	3.1		(1)	Amended and Restated Certificate of Incorporation of the Company.
	3.2		(2)	Amended and Restated Bylaws of the Company.
	4.2		(3)	Specimen Common Stock Certificate.
	10.1		(3)	Form of Indemnification Agreement.
	10.2		(4)	Restated 1987 Stock Option Plan, as amended.
	10.3		(5)	1992 Employee Stock Purchase Plan.
	10.9		(6)	Office lease dated December 7, 1993, by and between the Company and Malibu Canyon Office Partners, LP.
	21.1			Subsidiaries of the Registrant.
	24.1			Consent of Deloitte & Touche LLP.
	25.1			Power of Attorney.


		Balance at		Charged to		Charged to					Balance at
		beginning of		costs and		other					end of
Description		period		expenses		accounts		Deductions			period

Year ended December 31, 1999
	Allowance for doubtful accounts	$	1,009,000		738,000		—		(531,000	)	$	1,216,000
	Accrued workers’ compensation		1,437,000		641,000		—		(631,000	)		1,447,000

Year ended December 31, 2000
	Allowance for doubtful accounts	$	1,216,000		699,000		—		(455,000	)	$	1,460,000
	Accrued workers’ compensation		1,447,000		1,078,000		—		(772,000	)		1,753,000

Year ended December 31, 2001
	Allowance for doubtful accounts	$	1,460,000		293,000		—		(86,000	)	$	1,667,000
	Accrued workers’ compensation		1,753,000		1,654,000		—		(745,000	)		2,662,000


Exhibit						Page
Number		Footnote			Description	Number

	2.1				Agreement and Plan of Merger By and Among On Assignment, Inc., On Assignment Acquisition Corp., Health Personnel Options Corporation and certain stockholders of Health Personnel Options Corporation, dated March 27, 2002.
	3.1		(1	)	Amended and Restated Certificate of Incorporation of the Company.
	3.2		(2	)	Amended and Restated Bylaws of the Company.
	4.2		(3	)	Specimen Common Stock Certificate.
	10.1		(3	)	Form of Indemnification Agreement.
	10.2		(4	)	Restated 1987 Stock Option Plan, as amended.
	10.3		(5	)	1992 Employee Stock Purchase Plan.
	10.9		(6	)	Office lease dated December 7, 1993, by and between the Company and Malibu Canyon Office Partners, LP.
	21.1				Subsidiaries of the Registrant.
	24.1				Consent of Deloitte & Touche LLP.
	25.1				Power of Attorney.