-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Py6es+sRPrTneL9IDs7ZGFp8COqHyyh8zrjjJ95axFoKMrIWpurnvyK84c4ZsiST V5PfNzf/rG3Qc+vnXnXgDw== 0000950144-96-007389.txt : 19961030 0000950144-96-007389.hdr.sgml : 19961030 ACCESSION NUMBER: 0000950144-96-007389 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961029 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABR INFORMATION SERVICES INC CENTRAL INDEX KEY: 0000920985 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 593228107 STATE OF INCORPORATION: FL FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24132 FILM NUMBER: 96649623 BUSINESS ADDRESS: STREET 1: 34125 US HGHWY 19 N CITY: PALM HARBOR STATE: FL ZIP: 34684 BUSINESS PHONE: 8137852819 MAIL ADDRESS: STREET 1: 34125 US HGHWY 19 N CITY: PALM HARBOR STATE: FL ZIP: 34684 10-K 1 ABR INFORMATION SERVICES, INC. FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1996 ---------------------- COMMISSION FILE NUMBER 0-24132 ABR INFORMATION SERVICES, INC. (Exact name of registrant as specified in its charter) FLORIDA 59-3228107 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 34125 U.S. HIGHWAY 19 NORTH PALM HARBOR, FLORIDA (Address of registrant's principal executive offices) 34684-2116 (Zip Code) (813) 785-2819 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS ---------------------- Voting Common Stock $.0l Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of October 18, 1996, there were outstanding 13,619,895 shares of Common Stock. The aggregate market value of the voting stock held by non-affiliates of the registrant based on the last sale price reported on the Nasdaq National Market as of October 18, 1996 was $810,094,064. DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENTS FORM 10-K REFERENCE - --------- ------------------- 1996 Annual Report to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part II Items 5, 6, 7 and 8 Proxy Statement dated November 8, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III Items 10-12
2 ABR INFORMATION SERVICES, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PAGE NO. -------
PART I Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 10 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . 10 Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . 11 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 PART III Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 11 Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 11 Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 11 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . 12
3 PART I ITEM 1 -- BUSINESS ABR Information Services, Inc. (the "Company") provides comprehensive benefits administration, compliance and information services to employers seeking to outsource their benefits administration functions. Currently, a significant portion of the Company's revenues are derived from the Company's COBRA compliance services. The Company believes it is the largest provider of COBRA compliance services in the United States, serving more than 21,000 employers with a total employee population exceeding 10.0 million. The Company serves approximately 400 of the estimated 12,000 U.S. companies employing 1,000 or more employees, including Fortune 500 companies. The Company provides COBRA compliance services to approximately 3% of the estimated 650,000 companies that are required to comply with COBRA. Enacted in 1986, COBRA (the "Consolidated Omnibus Reconciliation Act") requires virtually all employers with 20 or more employees that maintain group health insurance plans to offer continued healthcare coverage for employees and their dependents following "qualifying events," such as changes in employment status. The Company assists its COBRA compliance customers in (i) complying with complex and frequently changing regulations, (ii) reducing healthcare costs through uniform enforcement of COBRA eligibility and other requirements, and (iii) decreasing their exposure for federal excise taxes and other obligations that may be imposed for noncompliance with COBRA. The Company also provides administration services to large employers for benefits provided to their retirees and inactive employees, including retiree healthcare, disability, surviving dependent, family leave and severance benefits. These services are currently utilized by 60 employers (most of which are also COBRA compliance customers), including Fortune 500 companies. Additionally, the Company provides administration services to large employers for benefits provided to their active employees, including enrollment, eligibility verification, QDRO (Qualified Domestic Relations Order) administration, Flexible Spending Account ("FSA") administration and pension services. These services are offered on either an "a la carte" basis or a total outsourcing basis, allowing customers to outsource certain benefits administration tasks that they find too costly or burdensome to perform in-house, or to outsource the total benefits administration function. The Company is currently providing these services to 1000 employers on an "a la carte" basis, including Fortune 500 companies. In June of 1996, the Company commenced providing services under a five-year contract with a Fortune 100 company with approximately 90,000 active and inactive employees and retirees, whereby the Company provides total benefits administration services for this customer. TREND TOWARD OUTSOURCING Since the late 1980s, many U.S. companies, in order to focus on core competencies and revenue-producing activities, have sought to outsource to specialized vendors certain functions or services that were historically performed in-house. In addition, the trend in recent legislation and healthcare reform proposals has been to provide employees with the ability to continue their healthcare coverage after a change in employment status and to take certain benefits with them to new employers, a concept known as "portability." Based on the following factors, the Company believes that benefits administration and compliance is often too complicated, costly and administratively burdensome to be performed in-house: - Extensive staff training and associated costs required to monitor complex and frequently changing government regulations. - Substantial exposure to liability for noncompliance with federal laws concerning benefits, such as COBRA. - Employer awareness of benefit plans, including the concern for adverse effects on employee relations and potential litigation due to inadequate benefits administration. 1 4 - Cost of investment in specialized data processing systems requiring periodic maintenance, updates and reinvestment. - Disproportionate expenditures of management time and attention to a function that is not directly related to the generation of revenues. The Company believes that its market position, proprietary software and compliance systems and experience in benefits administration should enable the Company to capitalize on trends favoring portability and outsourcing. The Company is strategically positioned to capitalize on the benefits administration outsourcing trend because of its proven ability to deliver (i) economies of location by performing administrative functions in low-cost areas, (ii) economies of scale by spreading fixed costs over a large number of customers, and (iii) economies of technology by utilizing its sophisticated information systems and proprietary databases. STRATEGY The Company's objective is to strengthen its market position by becoming the leading provider of benefits administration services relating to COBRA compliance, retiree/inactive employee benefits and benefits provided to active employees. To achieve this objective, the Company has developed a strategy that includes the following key components: - Increase COBRA Compliance Market Share. This market consists of approximately 650,000 employers that are required under federal law to comply with COBRA. The Company believes that, based on the number of current and former employees covered by its customers' healthcare benefit plans, it is the largest COBRA compliance service provider in the United States. The Company provides COBRA compliance services for more than 21,000 employers, which represents approximately 3% of the potential market. The Company intends to increase its market share by expanding its marketing efforts and geographic presence, and by marketing its services directly through its sales force and indirectly through the Company's agreements with insurance companies and other distribution channels. - Increase Retiree/Inactive Employee Benefits Administration Market Share. In response to demand from customers for services beyond COBRA compliance, the Company provides administration services to large employers for benefits provided to their retirees and inactive employees. The Company is marketing this service to its current customer base as well as to other prospects. The Company believes that this market is significant due to the large number of retirees and inactive employees who make periodic payments for healthcare and other benefits coverage, and the complexity and cost of efficiently administering such arrangements. - Expand Active Employee Benefits Administration Services. The Company has invested significant resources in proprietary information systems. The Company's databases include customer healthcare benefit plan information, such as premium rates, healthcare provider data and other employee and plan data that may be readily stored, sorted and manipulated to support additional benefit services. This data can be used to provide other services for active employees (e.g., enrollment, eligibility verification, QDRO administration, FSA plan administration, HMO consolidation and pension services), thereby leveraging the Company's investment in proprietary information systems and databases. The Company's active employee benefits administration services are offered on either an "a la carte" basis or a total outsourcing basis. This flexibility allows customers to outsource certain benefits administration tasks that they find too costly or burdensome, or to outsource the total benefits administration function. The Company believes that customers who outsource certain benefits administration tasks will take advantage of the flexibility of the "a la carte" process by outsourcing an increasing number of tasks. - Acquire Complementary Businesses. The Company intends to acquire complementary businesses in order to increase its market share, expand its services and expand its geographic presence. These 2 5 acquisitions will permit the Company to cross-sell additional services to its existing customer base and gain new customers to increase market share. - Generate Recurring Revenue. The Company's services are structured to generate revenue based on events which occur in the normal course of a customer's business and in a relatively frequent manner. Furthermore, the Company develops extensive systems and databases that are not easily duplicated, resulting in favorable customer retention. Due to the frequency of events that generate revenues, the Company's high rate of customer retention, and the monthly billing arrangements with capitation customers, the company generates a high level of recurring revenue. ACQUISITIONS The Company intends to acquire complementary businesses in order to increase its market share, expand its services and expand its geographic presence. These acquisitions will permit the Company to cross-sell additional services to its existing customer base and gain new customers to increase market share. The Company believes that opportunities exist in the benefits administration sector which would enable the Company to acquire complementary businesses. Since December 1995, the Company has acquired three benefits administration companies, one of these acquisitions was completed by a pooling of interest (all financial information has been restated to reflect this). These acquisitions have enabled the Company to increase the range of benefits administration services it provides, expand its geographic presence and decrease the Company's reliance on revenues from COBRA compliance services. During fiscal 1995 and fiscal 1996, the Company derived approximately 83.8% and 69.9%, respectively, of its revenues from COBRA compliance services. Assuming the New Jersey Acquisition had occurred on August 1, 1994, the Company would have derived approximately 62.1% and 64.4%, respectively, of its revenues from COBRA compliance services for the same periods. Assuming the New Jersey Acquisition had occurred on August 1, 1995, the Company's revenues and net income also would have been $34.7 million and $6.0 million, respectively, for the year ended July 31, 1996. The recently completed acquisitions are discussed below: New Jersey Acquisition. On December 15, 1995, the Company acquired all of the outstanding capital stock of Bullock Associates, Inc., which was subsequently renamed ABR Benefits Services, Inc. ("BSI") for $12.5 million, with an additional $2.0 million payable upon the attainment of certain revenue requirements during 1996 and 1997. BSI is located in Princeton, New Jersey and provides COBRA administration, retiree insurance administration, insurance continuation billing and collection, pension benefits administration, QDRO administration and educational benefit administration services, as well as administration services for other employee benefits programs such as employee discount plans, adoption programs, program rebates and emergency loans. For the year ended December 31, 1995, BSI had revenues of $9.3 million. As part of the New Jersey Acquisition, the Company entered into a four-year contract with BSI's largest customer, which accounted for approximately 89.0% and 76.1% of BSI's revenues in fiscal years 1994 and 1995, respectively. The New Jersey Acquisition expands the Company's market share in the COBRA compliance market, gives it a geographic presence in the northeast and expands the number of active employee benefits administration services it provides. California Acquisition. Effective February 1, 1996, the Company acquired all of the outstanding capital stock of Total Cobra Services ("TCS") for 132,712 shares of the Company's Common Stock, subject to possible adjustment. TCS is located in Irvine, California and provides COBRA administration and retiree billing services. For the fiscal year ended December 31, 1995, TCS had revenues of less than $2.0 million. The California Acquisition increases the Company's market share in the COBRA compliance market and enhances its ability to market its services to clients on the west coast of the United States. Virginia Acquisition. On June 28, 1996, the Company acquired, by a pooling of interest, all of the outstanding stock of the L.P. Baier Company ("LPB") for 143,010 shares of the Company's Common Stock. LPB is located in Fairfax, Virginia and provides primarily COBRA administration and FSA administration. LPB had revenues of approximately $2.4 million in calendar year 1995. 3 6 BENEFITS ADMINISTRATION SERVICES The Company provides the following benefits administration, compliance and information services to its customers, as described below: COBRA Compliance Services. The Company provides comprehensive COBRA compliance services to a diverse customer base throughout the United States. Once the Company's customer or the qualified beneficiary notifies the Company of a qualifying event, the Company assumes responsibility for COBRA compliance and administration. Under COBRA, premiums paid by continuants are generally limited to 102% of the applicable insurance premium. Eligible participants have in most cases at least 105 days after the occurrence of a qualifying event to elect to continue, and pay for, insurance coverage retroactively. As a result, COBRA claims and administration costs generally exceed premiums due primarily to adverse selection (i.e., those who are eligible for continued insurance coverage under COBRA, and have pending claims, are more likely to select coverage retroactively when the cost of claims exceeds the cost of healthcare coverage, and those who have no need for healthcare coverage typically do not elect coverage and consequently do not pay premiums). According to an annual survey published in 1995 by Charles D. Spencer & Associates, Inc., COBRA continuants have higher healthcare coverage claims than active employees. Among those survey respondents that could compare COBRA costs with the cost of active employee claims, healthcare coverage claim costs for COBRA continuants were 149% and 155% of active employee claim costs in 1994 and 1995, respectively. The Company believes that uniform determination of coverage eligibility and administration of COBRA claims in accordance with applicable requirements can in most cases reduce COBRA claim costs and, as a result, reduce healthcare costs for employers. The COBRA compliance process begins when the Company or the employer sends each employee and his or her dependents a notification of COBRA rights letter when they become eligible to participate in the employer's group healthcare plan. Thereafter, it is the employer's or the participant's responsibility to send the Company a qualifying event notice following any qualifying event. After processing the qualifying event, the Company communicates with any qualified beneficiary who elects COBRA coverage throughout the period of coverage, which typically extends for 18 to 36 months after the qualifying event. During this period, the Company: (i) processes and archives all election forms and correspondence; (ii) determines whether coverage elections have been made on a timely basis; (iii) sends premium notices to, and collects payments from, continuants; (iv) generates daily and monthly reports for customers; and (v) maintains automated and customer representative telephone services for continuant and customer inquiries. As a provider of COBRA compliance and administration services, the Company is subject to excise taxes for noncompliance with certain provisions of COBRA. Under current federal laws, the maximum amount of such taxes that may be imposed on the Company in any year for unintentional violations of COBRA is $2.0 million. In addition to the excise tax liability that may be imposed on the Company, substantial excise taxes may be imposed under COBRA on the Company's customers. Under the Company's service agreements with its customers, the Company assumes financial responsibility for the payment of such taxes assessed against its customers arising out of the Company's failure to comply with COBRA, unless such taxes are attributable to the customer's failure to comply with COBRA or with the terms of its agreement with the Company. In addition to liability for excise taxes for noncompliance with COBRA, the Company accepts financial responsibility for certain liabilities incurred by its customers that are attributable to the Company's failure to comply with COBRA or to fulfill its obligations to its customers under its agreements. These liabilities could, in certain cases, be substantial. Although there can be no assurance that the Company will not incur any material liability for noncompliance with COBRA or for its failure to comply with its agreement with any customer, as of July 31, 1996, the Company has not incurred any such material liability. The imposition of such liability on the Company in excess of any available insurance coverage could have a material adverse effect on the Company. See "--Regulatory Environment." Retiree/Inactive Employee Benefits Administration. The Company's experience with benefits administration and compliance services, and the extensive databases maintained to provide these services, have enabled the Company 4 7 to provide for the administration of various employer-sponsored benefits that are not mandated by law. For example, the Company provides benefits administration services to employers who offer healthcare benefits to their retirees. Financial accounting standards that require the accrual of certain retiree healthcare costs have increased employer awareness in this area. As a result, many employers have modified retiree healthcare benefit arrangements, often requiring retirees to pay a portion of this cost. The Company provides notification, billing, collection, record keeping and reporting services to larger employers where a periodic benefit plan contribution is required to be made by retirees or their dependents. The Company also administers benefits provided for inactive employees, such as healthcare benefits. Active Employee Benefits Administration. The Company also provides services to large employers for benefits provided to their active employees. These services are offered on either an "a la carte" basis or a total outsourcing basis, thus allowing customers to outsource certain benefits administration tasks that they find too costly or burdensome, or to outsource the total benefits administration function. The Company is currently providing these services to 1000 employers on an "a la carte" basis. In June of 1996, the Company commenced providing services under a five-year contract with a Fortune 100 company with approximately 90,000 active and inactive employees and retirees, whereby the Company provides total benefits administration services for this customer. The menu of services the Company offers to customers with respect to their active employees, many of which are also provided with respect to retirees and inactive employees, includes the following: - Enrollment Services. Provide enrollment services for employers, such as disseminating enrollment materials, processing responses, providing telephone assistance to enrollees, determining eligibility for coverage and reporting. Provide employers with assistance in enrollment communications. - Pension Services. Provide active and retired employees who are vested in their company's pension plan with benefit information, process retirement election forms and other materials to begin the retirement payment process. Maintain Retiree and Vestee Answer Centers which provide access to benefit analysts who are proficient in client-specific plans and procedures. - QDRO Services. Develop packages to assist QDRO participants of the process to properly and accurately divide pension plan assets. Verify "qualification" of a domestic relations order. Respond to telephone and written inquires regarding QDRO benefits. - Educational Benefits Administration Services. Administer various educational benefit programs such as student loans, reimbursements and scholarships. Verify eligibility and process payments and loan forms. Monitor for compliance against the customer's benefit plan. - New Hire Processing Services. Process benefits administration forms and information relating to the provision of benefits to newly hired employees. - FSA Administration Services. Design and support all types of Section 125 flexible benefit formats, including plan design, legal documents, employee education, enrollment support, compliance testing, claims administration and the preparation of required IRS forms. - Other. Administer employee discount plans, adoption programs, employee emergency loan programs, product rebate programs, HMO consolidation, employee help desk, eligibility verification, tuition refund, education and other loan programs, and FMLA insurance programs. Summary of Functions. In connection with the performance of benefits administration services, the Company generally provides one or more of the following functions: - Notification. Provide timely notifications of eligibility for coverage and healthcare benefit plan requirements to participants, employers and insurance companies. 5 8 - Billing and Premium Collections. Send detailed monthly premium notice, return envelope for payment and request for ongoing certification of eligibility to participants. Remit collected premiums to employers on a monthly basis in accordance with employer's instructions. - Automated Response System. Maintain 24 hour-a-day, 365 day-a-year toll-free automated voice and facsimile response systems for certain status information available to customers and participants. - Customer Service Hotline. Respond during normal business hours to inquiries from participants or employers requiring individual attention from trained customer service representatives. - Compliance Monitoring and Determination of eligibility. Monitor government compliance guidelines regarding availability of healthcare coverage. Determine whether applications and premium payments comply with applicable regulations and established eligibility criteria. - Reporting and Auditing. Generate daily reports for employers to monitor elections and terminations of coverage by participants. Generate monthly reports for employers providing current status of all participants. - Archive and Record-keeping Systems. Archive in an off-site facility all electronic storage media, correspondence, postmarked envelopes and copies of premium notices and checks evidencing payment. SALES, MARKETING AND CUSTOMER SERVICE Approximately 36.3%, 35.2% and 39.7% of the Company's revenues in fiscal 1994, 1995 and 1996, respectively, were derived solely from agreements with the Company's ten largest customers. Assuming the New Jersey Acquisition had occurred on August 1, 1994, approximately 51.7% and 44.9% of the Company's revenues in fiscal 1995 and fiscal 1996, respectively, would have been attributable to the Company's ten largest customers, with approximately 24.6% and 20.8% of such revenues being derived from the largest customer of the company acquired in the New Jersey Acquisition. As part of the New Jersey Acquisition, the Company entered into a four-year contract with this customer. The Company's loss of any of these large customers could have a material adverse effect on the Company. The Company markets its services throughout the United States through a sales, marketing and support staff consisting of 30 employees as of July 31, 1996. The Company identifies prospective customers through a combination of direct mail, telemarketing and advertising. Generally, the Company markets its services in one of two ways, depending upon whether a potential customer is a large employer or insurance company, or a small employer. When a large employer or insurance company has been identified as a potential customer, the Company's sales strategy is to focus its sales and marketing efforts on developing relationships with key decision makers, such as the potential customer's chief executive officer, chief financial officer or director of human resources or benefits. The Company's sales executives make presentations that are designed to acquaint the potential customer with the Company's services and the benefits associated with outsourcing functions to the Company. A formal presentation is usually followed by a visit to the Company's facility where the prospective customer evaluates the Company's internal procedures, data processing capabilities and customer support team. With respect to potential customers who are small employers, the Company markets its services directly to the employer via telemarketing. The Company's telemarketing staff sells the Company's services by educating the potential customer about the benefits of its outsourcing services without the need for face-to-face presentations. The Company is also expanding its channels of distribution, such as marketing its services through independent insurance agents. The agents typically receive a one-time commission for each client who utilizes the Company's services. 6 9 The Company also emphasizes account development to strengthen its relationship with existing customers. The Company disseminates information about its services through newsletters and various periodic reports. These activities are designed to increase existing customer awareness and understanding of the scope of benefits administration services offered by the Company. COMPUTER OPERATIONS, SOFTWARE DEVELOPMENT AND PROPRIETARY PRODUCT PROTECTION The Company's central data processing and information system consists of high-performance micro processors linked in multiple local-area networks through high-speed routers and intelligent hubs. Installed in the data center located at the Company's headquarters, the network utilizes client-server technology in a DOS and Windows environment. The Company is currently expanding its capacity by implementing systems based on a UNIX platform and Oracle database environment, which the Company believes will increase its capacity to service its growing customer base. The Company meets the changing information needs of its customers by developing, maintaining and enhancing its software. The Company provides its services to customers using proprietary software that is owned by the Company and is not licensed to others. The Company's computer system provides for timely system updates and modifications because of its flexible modular design. The Company's computer system works with on-line, real-time information, thus allowing its service representatives to give accurate, up-to-date information to continuants and customers. In addition, the Company believes that its ability to upload and download information to customers and insurance carriers with minimal development time provides the Company with a competitive advantage. The Company's software and systems have supported the customer base without interruption for over eight years. As of July 31, 1996, the Company had 58 employees in programming, software development, modifications and maintenance. The Company's primary data center is protected by a fire extinguishing system and by two centralized UPS (uninterruptible power supply) systems that provide short-term battery backup in the event of a power outage, reduced voltage or power surge. Multiple layers of password and access authorization are imposed to prevent unauthorized access, use or distribution of information. The Company maintains log-in records of all users, restricts certain key record fields and maintains audit trail records of all changes. Software and related data files are backed up three times a day and stored off-site at multiple locations. The Company is currently in the process of developing a disaster recovery facility which will provide the Company with off-site data storage and archiving as well as a secure, off-site facility for the continuation of operations in the event of a natural disaster. The Company believes that the quality of its systems and the ability to adapt to the changing business requirements of its customers have proven to be key factors in maintaining its current customers and obtaining new customers. The Company ensures the accuracy of data, customers' deposits and continuant records by independent double-entry of premium payments and verification and reconciliation of continuant records. The Company carries property insurance and business interruption insurance covering interruptions that might occur as a result of damage to its business See "-- Insurance." In addition, the Company believes that it has adequate arrangements with its equipment vendors pursuant to which damaged equipment can be replaced promptly. The Company does not believe that its system faces a material risk of technological change. The Company relies upon a combination of contract provisions and trade secret laws to protect its proprietary technology. The Company attempts to protect its trade secrets and other proprietary information through agreements with employees and consultants. The Company does not hold any patents and does not have any patent applications pending. There can be no assurance that the steps taken by the Company to protect its proprietary technology will be adequate to deter misappropriation of its proprietary rights or third party development of similar proprietary software. REGULATORY ENVIRONMENT The benefit plans administered by the Company generally are subject to various laws and regulations, including COBRA, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), proposed regulations of the Internal Revenue Service and the Public Health Service Act. These laws and regulations are administered by numerous agencies, such as the Internal Revenue Service, the Department of Labor and the Department of Health and Human Services. The Company's internal 7 10 compliance department regularly reviews the Company's operations to ensure compliance with applicable federal laws and regulations. Enacted in 1986, COBRA was amended significantly by Congress in 1987 and 1989 and is the subject of proposed regulations of the Internal Revenue Service. COBRA, which amended the Internal Revenue Code, ERISA, and the Public Health Service Act, is subject to interpretation by the federal courts and is administered jointly by several federal agencies, including the Internal Revenue Service, the Department of Labor and the Department of Health and Human Services. In addition, COBRA is affected by certain other federal legislation and entitlement programs, such as Medicaid, Medicare, FMLA and, most recently, Health Insurance Portability and Accountability Act of 1996 ("HIPA"). COBRA applies to virtually all employers with 20 or more employees that maintain group health insurance plans, including fully-insured, self-insured or partially-insured plans, and union or non-union plans. Church groups and the District of Columbia government are exempt from compliance with COBRA. To comply with COBRA, an employer must provide written notice to all employees, including newly hired employees and their dependents, of their rights under COBRA. Employees and their dependents become eligible for COBRA coverage upon the occurrence of a qualifying event. The occurrence of a qualifying event triggers a series of notifications and related response and payment deadlines, including grace periods, that results in an employee's or qualified beneficiary's ability to elect continued group healthcare plan coverage retroactively, and often after the occurrence of an event leading to claims under the related coverage. The penalties for noncompliance with COBRA are substantial. As a provider of COBRA compliance and administration services, the Company's exposure under the Internal Revenue Code for excise taxes imposed for unintentional violations of certain provisions of COBRA is limited to an aggregate of $2.0 million per year. Under the Internal Revenue Code, employers that are subject to COBRA are liable for excise taxes at the rate of $100 per "qualified beneficiary" ($200 if the qualified beneficiary has covered dependents) for each day during which the group healthcare plan is in noncompliance, subject to an annual maximum for unintentional violations. When such noncompliance is not corrected before an audit by the Internal Revenue Service, the employer is subject to certain minimum excise tax obligations, depending on whether or not the violations are "de minimis." ERISA also imposes personal liability on the plan administrator for the benefit of plan participants for COBRA violations in the form of a penalty of up to $100 for each day the violation continues. In addition to liability for COBRA violations under the Internal Revenue Code and ERISA, improper denial of coverage under COBRA or failure to comply with COBRA's notification requirements may result in an employer's liability for damages and equitable remedies, including, but not limited to healthcare coverage for a former employee or dependent retroactive to the date of the qualifying event which triggered the notification requirement. Depending on the terms of the employer's group healthcare plan, such an employer may be required to provide this type of retroactive coverage without reimbursement from its insurance carrier. The Company is not subject to federal or state regulations specifically applicable to financial and insurance institutions such as banks, thrifts, credit unions, insurance companies and third-party administrators. As a provider of COBRA compliance services to its customers, the Company is required to comply with various federal laws and regulations as noted above. The Company follows changes in federal laws and regulations related to COBRA and judicial interpretations of COBRA and promptly implements required changes to its data processing operations. COMPETITION The market for the Company's services is highly competitive. The Company's existing competitors include insurance companies, third-party administrators and other outsourcing service companies. Certain of these existing competitors, as well as a number of potential competitors, possess substantially greater resources than the Company. In addition to the Company's competitors, services offered by the Company are often provided in-house. Consequently, outsourcing may require the Company's potential customers to reduce, reassign or eliminate in-house benefits administration or human resource personnel, who often have an interest in maintaining these responsibilities in-house. The Company believes that the most significant competitive factors in the sale of its services include quality, reliability of services and integrity of data provided, flexibility in tailoring services to client needs, assumption of certain responsibilities for compliance with complex laws and regulations, experience, reputation, comprehensive services, integrated services and price. 8 11 EMPLOYEES As of July 31, 1996, the Company had approximately 557 full-time equivalent employees, including 30 in sales and marketing, 437 in customer support services, 58 in programming, software development, modifications and maintenance, and 32 in management, administration and finance. The service nature of the Company's business makes its employees an important corporate asset. While the market for qualified personnel is competitive, the Company has not experienced difficulty in hiring or retaining its personnel and believes its relations with its employees are good. The Company's employees are not represented by any union. SERVICEMARKS CobraServ(R) is a registered servicemark of the Company. Other than CobraServ(R), the Company does not believe that any other intellectual property is material to its business. INSURANCE As a provider of COBRA compliance and administration services, the Company is subject to excise taxes for noncompliance with certain provisions of COBRA. In addition, the Company accepts financial responsibility for certain liabilities incurred by its customers that are attributable to the Company's failure to fulfill its obligations to its customers under its agreements. The Company maintains a professional liability policy, with a deductible of $25,000 per occurrence, and an annual per aggregate limit on coverage of $5.0 million. In addition to professional liability coverage, The Company maintains the following policies: (i) a general commercial liability policy which has an aggregate coverage of $2.0 million, with a $1.0 million limit per occurrence; (ii) an automobile liability policy with a combined single coverage limit of $1.0 million; (iii) an excess liability policy, which covers liabilities that exceed the limits of the above policies, with an aggregate and a per occurrence limit of $4.0 million; and (iv) a business interruption policy, which covers three months of operations, with an aggregate limit of $2.0 million. ITEM 2 -- PROPERTIES The Company leases the following facilities:
SQUARE EXPIRATION RENEWAL LOCATION FOOTAGE OF LEASE OPTION -------- ------- ---------- ------- Clearwater, Florida 23,000 October 1997 1 year Princeton, New Jersey 20,000 May 1999 None Glenville, New York 7,000 December 1997 4 years Irvine, California 5,000 March 1997 None Fairfax, Virginia 13,000 May 2005 None
The Company maintains its 54,000 square foot headquarters at its Palm Harbor, Florida facility. The Company purchased this facility in June 1996 for $3.5 million (including the land). In December 1995, the Company also purchased a 110,000 square foot facility in Palm Harbor, Florida for $3.4 million in order to consolidate its Tampa-area 9 12 employees. The Company anticipates capital expenditures of approximately $5.8 million to improve the facility and expects to occupy this facility in calendar 1997. Thereafter, the Company believes that its facilities are adequate through 1999, at which time the Company believes it may need to expand its facilities. The Company acquired real estate in February 1996, in Tarpon Springs, Florida at a price of $2.5 million to facilitate this future expansion. ITEM 3 -- LEGAL PROCEEDINGS The Company is not a party to any litigation that is expected to have a material adverse effect on the Company or its business. The Company maintains detailed records of its services for at least seven years, including physical return receipts of COBRA notifications to employees upon a qualifying event, to evidence compliance with applicable rules and regulations to reduce potential litigation and limit litigation exposure. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1996. EXECUTIVE OFFICERS OF THE REGISTRANT As of July 31, 1996 there were no executive officers who are not also directors of the Company. Executive officers are elected annually by the Board of Directors. PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Market Price Information" on the inside back cover page of the 1996 Annual Report to Shareholders (the "Annual Report") is incorporated herein by reference. The total number of shareholders of record as of October 18, 1996 was 8,354. The Company has not declared nor paid cash dividends on the Common Stock and does not anticipate that it will pay cash dividends in 1997. Any payment of future dividends and the amounts thereof will be dependent upon the Company's earnings, financial requirements and other factors deemed relevant by the Board of Directors. On May 25, 1994, the Company completed a tax-free restructuring (the "Reorganization") in which ABR CobraServ, Inc., formerly known as Applied Benefits Research, Inc., (the "Subsidiary") became the sole, wholly-owned subsidiary of ABR. A principal objective of the Reorganization was to establish a holding company structure, thereby allowing the Company to conduct the business of the Subsidiary independently from other business units that may be operated by the Company in the future. Pursuant to the Reorganization, each share of common stock of the Subsidiary outstanding immediately prior to the Reorganization was converted into the right to receive 2.15 shares of Common Stock. The Company completed a three-for-two stock split, on July 13, 1995 and on February 19, 1996, to stockholders of record at the close of business on June 22, 1995 and January 31, 1996, respectively. ITEM 6 -- SELECTED FINANCIAL DATA The information set forth under the caption "Selected Financial Data" in the Company's Annual Report on page 10 is incorporated herein by reference. ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 13 The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 11 through 13 of the Annual Report is incorporated herein by reference. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Company and its independent certified public accountant's Reports set forth on pages 14 through 27 of the Annual Report are incorporated herein by reference: - Report of Independent Certified Public Accountants; - Consolidated Balance Sheets as of July 31, 1995 and 1996; - Consolidated Statements of Income for the Years Ended July 31, 1994, 1995, and 1996; - Consolidated Statements of Shareholders' Equity for the Years Ended July 31, 1994, 1995 and 1996; - Consolidated Statements of Cash Flows for the Years Ended July 31, 1994, 1995 and 1996; and - Notes to Consolidated Financial Statements. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Item 1: Election of Directors" in the Company's Proxy Statement dated November 8, 1996 for the Annual Meeting of Shareholders to be held December 6, 1996 (the "Proxy Statement"), and the information set forth in the last paragraph under the caption "Board of Directors - General" in the Proxy Statement is incorporated herein by reference. The information set forth under "Executive Officers of the Registrant" in Part I hereof is also incorporated herein by reference. ITEM 11 -- EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference and the Company specifically excludes from such incorporation by reference any information set forth under the captions "Compensation Committee Report on Executive Compensation" and "Stock Price Performance Graph" in the Proxy Statement. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners and management as set forth under the caption "Principal Shareholders" in the Proxy Statement is incorporated herein by reference. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 11 14 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: (1) Financial Statements. - Report of Independent Certified Public Accountants. - Consolidated Balance Sheets as of July 31, 1995 and 1996. - Consolidated Statements of Income for the Years Ended July 31, 1994, 1995, and 1996. - Consolidated Statements of Shareholders' Equity for the Years Ended July 31, 1994, 1995 and 1996. - Consolidated Statements of Cash Flows for the Years Ended July 31, 1994, 1995 and 1996. - Notes to Consolidated Financial Statements. (2) Financial Statement Schedule. - Report of Independent Certified Public Accountants on The Schedule. Schedule Number Description -------- ----------- II -- Valuation and Qualifying Accounts (3) Exhibits. Exhibit Number Description ------- ----------- 3.1 -- Articles of Incorporation of ABR Information Services, Inc.* 3.2 -- Bylaws of ABR Information Services, Inc.* 10.1 -- Form of Employment Agreement between ABR Information Services, Inc. and each of its executive officers.* 10.2 -- ABR Information Services, Inc. 1995 Non-Employee Director Stock Option Plan.** 10.3 -- ABR Information Services, Inc. 1996 Non-Employee Director Stock Option Plan. 10.4 -- ABR Information Services, Inc. Amended and Restated 1987 Stock Option Plan.*** 10.5 -- ABR Information Services, Inc. Amended and Restated 1993 Stock Option Plan (as amended).** 10.6 -- ABR Information Services, Inc. Incentive Bonus Plan.* 10.7 -- Agreement between ABR Information Services, Inc., Applied Benefits Research, Inc. (now known as ABR CobraServ, Inc.) and IBJS Capital Corporation dated as of March 23, 1994.* 10.8 -- Revolving Line of Credit/Term Loan Agreement dated January 30, 1996 by and between NationsBank, N.A. (South) and ABR Information Services, Inc.****
12 15 10.9 -- Employment and Non-Competition Agreement dated December 15, 1995 by and between Bullock Associates, Inc. (now known as ABR Benefits Services, Inc.) and W. Carl Bullock.**** 10.10 -- Services Agreement between Corporate Benefits Delivery of General Electric Company and Bullock Associates, Inc. (now known as ABR Benefits Services, Inc.) and as amended on December 15, 1995.**** 10.11 -- Lease Agreement dated February 9, 1996 by and between ABR Plymouth, Ltd. and ABR Information Services, Inc.**** 10.12 -- Agreement and Plan of Reorganization dated as of February 1, 1996 by and among ABR Information Services, Inc., Total Cobra Services and John M. Hermann. 10.13 -- Agreement and Plan of Reorganization dated as of June 28, 1996 by and among ABR Information Services, Inc., The L.P. Baier Company and L.P. Baier's shareholders. 10.14 -- Employment and Non-Competition Agreement dated June 28, 1996 by and between The L.P. Baier Company and Rick Snyder. 10.15 -- Stock Purchase Agreement by and among ABR Information Services, Inc., Bullock Associates, Inc., (now known as ABR Benefits Services, Inc.) W. Carl Bullock, Barbara A. Biasotti and Nancy L. Clark dated as of December 15, 1995.***** 11.1 -- Statement regarding computation of per share earnings. 13.1 -- 1996 Annual Report of ABR Information Services, Inc. 21.1 -- List of subsidiaries of ABR Information Services, Inc. 23.1 -- Consent of Grant Thornton LLP. 24.1 -- Powers of Attorney (included on signature page hereto). 27.1 -- Financial Data Schedule (For SEC use only) - --------------------
* Previously filed as part of the Company's Form S-1 Registration Statement (No. 33-76922) dated May 26, 1994 and incorporated herein by reference. ** Previously filed as part of the Company's Form 10-K for the fiscal year ended July 31, 1995. *** Previously filed as part of the Company's Form 10-K for the fiscal year ended July 31, 1994. **** Previously filed as part of the Company's Form 10-Q for the quarter ended January 31, 1996. ***** Previously filed as part of the Company's Form 8-K dated as of December 26, 1995. Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.9 and 10.14 represent management contracts and compensatory plans. (b) Reports on Form 8-K. The Company filed no Reports on Form 8-K during the quarter ended July 31, 1996. 13 16 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON THE SCHEDULE Board of Directors ABR Information Services, Inc. In connection with our audit of the consolidated financial statements of ABR Information Services, Inc. referred to in our report dated September 13, 1996, which is included on page 27 of the Annual Report to Shareholders for the year ended July 31, 1996, that is incorporated by reference in this Form 10-K for the year ended July 31, 1996, we have also audited Schedule II for each of the three years in the period ended July 31, 1996. In our opinion, the schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ Grant Thorton LLP Tampa, Florida September 13, 1996 14 17 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ABR INFORMATION SERVICES, INC.
Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------------------ Additions ----------------------------- Balance at Charge to Charged to Deductions Beginning of Costs and Other Accounts Describe Balance at Description Period Expenses - Describe (1) End of Period - -------------------------------- ---------------- ------------- --------------- ------------- ------------------ Year Ended July 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts $11,475 $12,006 -- $5,928 $17,553 Year Ended July 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts 17,553 12,000 -- 3,351 26,202 Year Ended July 31, 1996 Deducted from asset accounts: Allowance for doubtful accounts 26,202 20,000 -- 7,308 38,894
(1) Uncollectible accounts written-off, net of recoveries 15 18 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. October 29, 1996 ABR INFORMATION SERVICES, INC. By: /s/ Vincent Addonisio ---------------------------------- Vincent Addonisio, Executive Vice President, Chief Financial Officer and Treasurer ------------------------ POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James E. MacDougald and Vincent Addonisio, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and any 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 perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their 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 INDICATED ON OCTOBER 29, 1996. /s/ James E. MacDougald /s/ Suzanne M. MacDougald -------------------------------------------- ------------------------------------------------ James E. MacDougald, Chairman of the Board, Suzanne M. MacDougald, President and Chief Executive Officer and Senior Vice President, Secretary and Director Director (Principal Executive Officer) /s/ Vincent Addonisio /s/ Thomas F. Costello -------------------------------------------- ------------------------------------------------ Vincent Addonisio, Executive Vice President, Thomas F. Costello, Director Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Mark M. Goldman -------------------------------------------- Mark M. Goldman, Director
16 19 ABR INFORMATION SERVICES, INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED JULY 31, 1996
Exhibit Filed Number Description Herewith ------- ---------------------------------------------------------------------------------- -------- 3.1 Articles of Incorporation of ABR Information Services, Inc. 3.2 Bylaws of ABR Information Services, Inc. 10.1 Form of Employment Agreement between ABR Information Services, Inc. and each of its executive officers. 10.2 ABR Information Services, Inc. 1995 Non-Employee Director Stock Option Plan. 10.3 ABR Information Services, Inc. 1996 Non-Employee Director Stock Option Plan. X 10.4 ABR Information Services, Inc. Amended and Restated 1987 Stock Option Plan. 10.5 ABR Information Services, Inc. Amended and Restated 1993 Stock Option Plan (as amended). 10.6 ABR Information Services, Inc. Incentive Bonus Plan. 10.7 Agreement between ABR Information Services, Inc., Applied Benefits Research, Inc. (now known as ABR CobraServ, Inc.) and IBJS Capital Corporation dated as of March 23, 1994. 10.8 Revolving Line of Credit/Term Loan Agreement dated January 30, 1996 by and between NationsBank, N.A. (South) and ABR Information Services, Inc. 10.9 Employment and Non-Competition Agreement dated December 15, 1995 by and between Bullock Associates, Inc. (now known as ABR Benefits Services, Inc.) and W. Carl Bullock. 10.10 Services Agreement between Corporate Benefits Delivery of General Electric Company and Bullock Associates, Inc. (now known as ABR Benefits Services, Inc.) 1993-1997 and as amended on December 15, 1995. 10.11 Lease Agreement dated February 9, 1996 by and between ABR Plymouth, Ltd. and ABR Information Services, Inc. 10.12 Agreement and Plan of Reorganization dated as of February 1, 1996 by and among ABR X Information Services, Inc., Total Cobra Services and John M. Hermann. 10.13 Agreement and Plan of Reorganization dated as of June 28, 1996 by and among ABR X Information Services, Inc., The L.P. Baier Company and L.P. Baier's shareholders. 10.14 Employment and Non-Competition Agreement dated June 28, 1996 by and between The X L.P. Baier Company and Rick Snyder. 10.15 Stock Purchase Agreement by and among ABR Information Services, Inc., Bullock Associates, Inc., (now knows as ABR Benefits Services, Inc.) W. Carl Bullock, Barbara A. Biasotti and Nancy L. Clark dated as of December 15, 1995.
20
Exhibit Filed Number Description Herewith ------- ----------------------------------------------------------------------------------- -------- 11.1 Statement regarding computation of per share earnings. X 13.1 1996 Annual Report of ABR Information Services, Inc. X 21.1 List of subsidiaries of ABR Information Services, Inc. X 23.1 Consent of Grant Thornton LLP. X 24.1 Powers of Attorney (included on signature page hereto). X 27.1 Financial Data Schedule. (for SEC use only)
19 EX-10.3 2 STOCK OPTION PLAN 1 EXHIBIT 10.3 ABR INFORMATION SERVICES, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 2 TABLE OF CONTENTS
Page 1. Purpose of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Limits on Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. Granting and Terms of Options . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5. Effect of Changes in Capitalization . . . . . . . . . . . . . . . . . . . . . . . 3 6. Delivery and Payment for Shares . . . . . . . . . . . . . . . . . . . . . . . . . 4 7. No Continuation as a Director and Disclaimer of Rights . . . . . . . . . . . . . . 4 8. Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 9. No Reservation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 10. Amendment of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 11. Termination of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 12. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
i 3 ABR INFORMATION SERVICES, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. PURPOSE OF PLAN The purpose of this Plan is to enable ABR Information Services, Inc. (the "Company") and its Subsidiaries to compete successfully in attracting, motivating and retaining Non-Employee Directors with outstanding abilities by making it possible for them to purchase Shares on terms that will give them a direct and continuing interest in the future success of the businesses of the Company and its Subsidiaries and encourage them to remain as directors of the Company or one or more of its Subsidiaries. 2. DEFINITIONS For purposes of the Plan, except where the context clearly indicates otherwise, the following terms shall have the meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the United States Internal Revenue Code of 1986, as amended. (c) "Effective Date" means the date the Plan is adopted by the Board. (d) "Fair Market Value" means, with respect to a Share, if the Shares are then listed and traded on a registered national or regional securities exchange, or quoted on The National Association of Securities Dealers' Automated Quotation System (including The Nasdaq Stock Market's National Market), the average closing price of a Share on such exchange or quotation system for the five trading days immediately preceding the date of grant of an Option, or, if Fair Market Value is used herein in connection with any event other than the grant of an Option, then such average closing price for the ten trading days immediately preceding the date of such event. If the Shares are not traded on a registered securities exchange or quoted in such a quotation system, the Board shall determine the Fair Market Value of a Share. (e) "Non-Employee Director" shall mean any member of the Company's Board of Directors who is not an employee of the Company or any Subsidiary. (f) "Option" means an option granted under this Plan, which Option shall not be an incentive stock option within the meaning of Section 422 of the Code, or the corresponding provision of any subsequently enacted tax statute. (g) "Optionee" means any person who has been granted an Option which Option has not expired or been fully exercised or surrendered. (h) "Plan" means the Company's 1996 Non-Employee Director Stock Option Plan. (i) "Rule 16b-3" means Rule 16b-3 promulgated pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or any successor rule. (j) "Share" means one share of voting common stock, par value $.01 per share, of the Company, and such other stock or securities that may be substituted therefor pursuant to Section 5 hereof. (k) "Subsidiary" means any "subsidiary corporation" within the meaning of Section 424(f) of the Code. 4 3. LIMITS ON OPTIONS The total number of Shares with respect to which Options may be granted under the Plan shall not exceed in the aggregate 200,000 Shares, subject to adjustment as provided in Section 5 hereof. If any Option expires, terminates or is terminated for any reason prior to its exercise in full, the Shares that were subject to the unexercised portion of such Option shall be available for future grants under the Plan. 4. GRANTING AND TERMS OF OPTIONS (a) On the date on which a Non-Employee Director, other than a Non-Employee Director who is serving as such on the Effective Date, is first elected or appointed as a Non-Employee Director during the existence of the Plan, such Non-Employee Director shall automatically be granted an Option to purchase 5,000 Shares. Each Non-Employee Director as of the Effective Date shall, on the Effective Date, automatically be granted an Option to purchase 5,000 Shares. (b) Each Non-Employee Director (if he or she continues to serve in such capacity) shall, on the day following the annual meeting of shareholders in each year during the time the Plan is in effect, automatically be granted an Option to purchase 5,000 Shares; provided, however, that a Non-Employee Director who receives, in any year, an Option pursuant to Section 4.(a) hereof shall not be eligible to begin to receive grants pursuant to this Section 4.(b) until the following year. (c) Notwithstanding the provisions of Section 4.(a) and 4.(b) hereof, Options shall be automatically granted to Non-Employee Directors under the Plan only for so long as the Plan remains in effect and a sufficient number of Shares are available hereunder for the granting of such Options. (d) The exercise price of each Share subject to an Option shall be equal to 100% of the Fair Market Value of the Shares on the date of grant of such Option. (e) Options shall not be assignable or transferable by the Optionee other than by will or by the laws of descent and distribution. (f) Each Option shall expire and all rights thereunder shall end at the expiration of ten (10) years after the date on which it was granted, subject in all cases to earlier expiration as provided in subsections (g) and (h) of this Section 4. (g) During the life of an Optionee, an Option shall be exercisable only by such Optionee and only within one (1) month after the date on which the Optionee ceases to be a Non-Employee Director, other than by reason of the Optionee's death or resignation from the Board with the consent of the Company as provided in subsection (h) of this Section 4, but only if and to the extent the Option was exercisable immediately prior to such date, and subject to the provisions of the subsections (f) and (i) of this Section 4. If the Optionee is removed as a Director for cause (as defined in the Company's Articles of Incorporation, as amended from time to time), all Options of the Optionee shall terminate immediately on the date of removal. (h) If an Optionee: (i) dies while a Non-Employee Director or within the period when an Option could have otherwise been exercised by the Optionee; or (ii) ceases to be a Non-Employee Director as a result of such Optionee's resignation from the Board, provided that the Company has consented in writing to such Optionee's resignation, then, in each such case, such Optionee, or the duly authorized representatives of such Optionee, shall have the right, at any time within three (3) months after the death or after such resignation of the Optionee, as the case may be, and prior to the termination of the Option pursuant to subsections (f) and (i) of this Section 4, to exercise any Option to the extent such Option was exercisable by the Optionee immediately prior to such Optionee's death or resignation. B-2 5 (i) The Optionee may exercise the Option (subject to the limitations on exercise set forth in subsection (f) of this Section 4), in whole or in part, as follows: (i) the Option may not be exercised to any extent prior to one (1) year following the date of grant; and (ii) the Option may be exercised to the extent of 25% of the Shares subject to such Option after one year following the date of grant and may be exercised to the extent of an additional 25% of the Shares subject to such Option after each of the second, third and fourth years following the date of grant. (j) An Option may be exercised in whole at one time or in part from time to time, subject to subsection (i) of this Section 4. 5. EFFECT OF CHANGES IN CAPITALIZATION (a) If the number of outstanding Shares is increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company, a proportionate and appropriate adjustment shall be made by the Board of Directors in (i) the number and type of Shares subject to the Plan and which thereafter may be made the subject of Options under the Plan, and (ii) the number and kind of shares for which Options are outstanding, so that the proportionate interest of the Optionee immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in outstanding Options shall not change the aggregate option price payable with respect to Shares subject to the unexercised portion of the Options outstanding but shall include a corresponding proportionate adjustment in the option price per Share. (b) Subject to Section 5.(c) hereof, if the Company shall be the surviving corporation in any reorganization, merger, share exchange or consolidation of the Company with one or more other corporations or other entities, any Option theretofore granted shall pertain to and apply to the securities to which a holder of the number of Shares subject to such Option would have been entitled immediately following such reorganization, merger, share exchange or consolidation, with a corresponding proportionate adjustment of the option price per Share so that the aggregate option price thereafter shall be the same as the aggregate option price of the Shares remaining subject to the Option immediately prior to such reorganization, merger, share exchange or consolidation. (c) In the event of: (i) the adoption of a plan of reorganization, merger, share exchange or consolidation of the Company with one or more other corporations or other entities as a result of which the holders of the Shares as a group would receive less than fifty percent (50%) of the voting power of the capital stock or other interests of the surviving or resulting corporation or entity; (ii) the adoption of a plan of liquidation or the approval of the dissolution of the Company; (iii) the approval by the Board of an agreement providing for the sale or transfer of the assets of the Company; or (iv) the acquisition of more than fifty percent (50%) of the outstanding shares by any person within the meaning of Rule 13(d)(3) under the Securities Exchange Act of 1934 if such acquisition is not preceded by a prior expression of approval by the Board, then, in each such case, any Option granted hereunder shall become immediately exercisable in full, subject to any appropriate adjustments in the number of Shares subject to such Option and the option price, regardless of any provision contained in the Plan with respect thereto limiting the exercisability of the Option for any length of time. Notwithstanding the foregoing, if a successor corporation or other entity as contemplated in clause (i) or (iii) of the preceding sentence agrees to assume the outstanding Options or to substitute substantially equivalent options, then the outstanding Options issued hereunder shall not be immediately exercisable, but shall remain exercisable in accordance with the terms of the Plan and the applicable stock option agreements. (d) Adjustments under this Section 5 relating to Shares or securities of the Company shall be made by the Board, whose determination in that respect shall be final and conclusive. Options subject to grant or B-3 6 previously granted under the Plan at the time of any event described in this Section 5 shall be subject to only such adjustments as shall be necessary to maintain the proportionate interest of the Options and preserve, without exceeding, the value of such Options. No fractional Shares or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding upward to the nearest whole Share or unit. (e) The grant of an Option pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 6. DELIVERY AND PAYMENT FOR SHARES (a) No Shares shall be delivered upon the exercise of an Option until the option price for the Shares acquired has been paid in full. No shares shall be issued or transferred under the Plan unless and until all legal requirements applicable to the issuance or transfer of such Shares have been complied with to the satisfaction of the Board. Any Shares issued by the Company to an Optionee upon exercise of an Option may be made only in strict compliance with and in accordance with applicable state and federal securities laws. (b) Payment of the option price for the Shares purchased pursuant to the exercise of an Option shall be made: (i) in cash or by check payable to the order of the Company; (ii) through the tender to the Company of Shares, which Shares shall be valued, for purposes of determining the extent to which the option price has been paid thereby, at their Fair Market Value on the date of exercise; or (iii) by a combination of the methods described in (i) and (ii) hereof. 7. NO CONTINUATION AS A DIRECTOR AND DISCLAIMER OF RIGHTS No provision in the Plan or in any Option granted or option agreement entered into pursuant to the Plan shall be construed to confer upon any individual the right to remain a director of the Company or any Subsidiary. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any Optionee or beneficiary under the terms of the Plan. An Optionee shall have none of the rights of a shareholder of the Company until all or some of the Shares covered by an Option are fully paid and issued to such Optionee. 8. ADMINISTRATION The Plan is intended to meet the requirements of Rule 16b-3(c)(2)(ii) adopted under the Securities Exchange Act of 1934, as amended, and accordingly is intended to be self-governing. To this end, the Plan requires no discretionary action by any administrative body with regard to any transaction under the Plan. To the extent, if any, that any questions of interpretation arise, these shall be resolved by the Board. 9. NO RESERVATION OF SHARES The Company shall be under no obligation to reserve or to retain in its treasury any particular number of Shares in connection with its obligations hereunder. 10. AMENDMENT OF PLAN The Board, without further action by the shareholders, may amend this Plan from time to time as it deems desirable; provided, that (i) no such amendment shall be made without shareholder approval if such approval would be required to comply with Rule 16b-3 and (ii) the provisions of Sections 4.(a) and 4.(b) shall not be amended more B-4 7 than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated thereunder. 11. TERMINATION OF PLAN This Plan shall terminate ten (10) years from the Effective Date. The Board may, in its discretion, suspend or terminate the Plan at any time prior to such date, but such termination or suspension shall not adversely affect any right or obligation with respect to any outstanding Option. 12. EFFECTIVE DATE The Plan shall become effective on the Effective Date and Options hereunder may be granted at any time on or after that date, subject to approval of the Plan by the Company's shareholders within one year after the Effective Date by a majority of the votes cast at a duly held meeting of the shareholders of the Company at which a quorum representing a majority of all outstanding stock is present, either in person or by proxy, and in a manner that satisfies the requirements of Rule 16b-3. Upon approval of the Plan by the shareholders of the Company as set forth above, all Options granted under the Plan on or after the Effective Date shall be fully effective as if the shareholders of the Company had approved the Plan on the Effective Date. B-5 EX-10.12 3 AGREEMENT & PLAN OF REORGANIZATION 1 EXHIBIT 10.12 AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF FEBRUARY 1, 1996 BY AND AMONG ABR INFORMATION SERVICES, INC. ("BUYER"), TOTAL COBRA SERVICES ("TCS"), AND JOHN M. HERMANN ("SHAREHOLDER"). 2 TABLE OF CONTENTS 1. TRANSFER AND ISSUANCE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1. Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2. Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3. Floor Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. SECURITIES ACT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1. Restrictions on Disposition of Buyer Shares . . . . . . . . . . . . . . . . 3 2.2. Evidence of Compliance with Private Offering Exemption . . . . . . . . . . . 3 2.3. Notice of Limitation Upon Disposition . . . . . . . . . . . . . . . . . . . 3 3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF TCS AND THE SHAREHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.1. Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.2. The Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.3. No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.4. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.5. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.6. Accounts Receivable and COBRA Payables . . . . . . . . . . . . . . . . . . . 7 3.7. Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.8. Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . 9 3.9. No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.10. Compliance With Laws and Orders . . . . . . . . . . . . . . . . . . . . . . 9 3.11. Title to and Condition of Properties . . . . . . . . . . . . . . . . . . . . 11 3.12. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.13. Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.14. Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.15. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.16. Employment Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.17. Trade Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.18. Major Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.19. Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.20. Shareholder Affiliates' Relationships to TCS . . . . . . . . . . . . . . . . 19 3.21. No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.22. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . . . . . 19 4.1. Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.2. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3. No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.4. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.5. Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.6. Approvals and Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
i 3 5. POST-CLOSING COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.1. Noncompetition; Confidentiality . . . . . . . . . . . . . . . . . . . . . . 20 5.2. Confidentiality of Shareholder Information . . . . . . . . . . . . . . . . . 22 5.3. Income Tax Returns and Allocation of Tax . . . . . . . . . . . . . . . . . . 22 5.4. Resale Restriction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.5. Rule 144 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.1. By the Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.2. By Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.3. Indemnification of Third-Party Claims . . . . . . . . . . . . . . . . . . . 23 6.4. Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.5. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.6. Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . 24 6.7. Indemnification - Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . 25 7. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.1. Documents Delivered by TCS and the Shareholders . . . . . . . . . . . . . . 26 7.2. Documents Delivered by Buyer . . . . . . . . . . . . . . . . . . . . . . . . 26 8. RESOLUTION OF DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.1. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.2. Arbitrators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.3. Procedures; No Appeal . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.4. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.5. Entry of Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.6. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.7. Continued Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.8. Tolling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.1. Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.2. Further Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.3. Disclosures and Announcements . . . . . . . . . . . . . . . . . . . . . . . 28 9.4. Assignment; Parties in Interest . . . . . . . . . . . . . . . . . . . . . . 29 9.5. Law Governing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.6. Amendment and Modification . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.7. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.8. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.9. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.10. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.11. Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.12. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.13. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ii 4 DISCLOSURE SCHEDULES Schedule 3.1.(c) - Foreign Corporation Qualification Schedule 3.1.(e) - Director/Officer List Schedule 3.3 - Violation, Conflict, Default Schedule 3.5.(c) - Tax Returns (Exceptions to Representations) Schedule 3.5.(d) - Tax Audits Schedule 3.6 - Accounts Receivable (Aged Schedule) Schedule 3.7 - Certain Changes Schedule 3.8 - Off-Balance Sheet Liabilities Schedule 3.9 - Litigation Matters Schedule 3.10.(a) - Non-Compliance with Laws Schedule 3.10.(b) - Licenses and Permits Schedule 3.10.(c) - Environmental Matters (Exceptions to Representations) Schedule 3.11.(a) - Liens Schedule 3.11.(c) - Real Property Occupied Schedule 3.12 - Insurance Schedule 3.13.(b) - Personal Property Leases Schedule 3.13.(c) - Sales Commitments Schedule 3.13.(e) - Powers of Attorney Schedule 3.13.(f) - Collective Bargaining Agreements Schedule 3.13.(g) - Loan Agreements, etc. Schedule 3.13.(h) - Guarantees Schedule 3.13.(k) - Material Contracts Schedule 3.14 - Labor Matters Schedule 3.15.(a) - Employee Plans/Agreements Schedule 3.17 - Trade Rights Schedule 3.18 - Major Customers Schedule 3.19 - Bank Accounts Schedule 5.1.(d) - Business of TERS Schedule 7.1.(g) - Closing Date Balance Sheet
iii 5 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") dated as of February 1, 1996, is by and among ABR INFORMATION SERVICES, INC, a Florida corporation ("Buyer"), TOTAL COBRA SERVICES, a California corporation ("TCS"), and JOHN M. HERMANN (the "Shareholder"). RECITALS 1. Prior to December 11, 1995, TCS was known as "Total Employee Relations Services, Inc." and was engaged in the business of providing COBRA compliance services, retiree billing services and automatic check clearing services (the "COBRA Business") and employee relations consulting services, membership services, unemployment insurance services and personnel forms administration (the "Consulting Business"). 2. On December 11, 1995, TCS amended its Articles of Incorporation to change its name from "Total Employee Relations Services, Inc." to "Total COBRA Services." 3. In connection with the name change, TCS formed a wholly-owned subsidiary, Total Employee Relations Services, Inc., a California corporation ("TERS"), and transferred all of the assets and liabilities associated with the Consulting Business to TERS. Thereafter, TCS transferred all of the outstanding capital stock of TERS to the Shareholder in a tax free spin-off (the "Spin-off") within the meaning of Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). 4. Following the transfer of the Consulting Business, TCS is engaged solely in the COBRA Business ("TCS's Business"). 5. The Shareholder owns all of the issued and outstanding shares of capital stock of TCS (the "TCS Shares"). 6. Buyer desires to acquire the TCS Shares from the Shareholder solely in exchange for shares of voting common stock, $.01 par value per share, of Buyer (the "Common Stock"), upon the terms and conditions herein set forth. 7. For federal income tax purposes, it is intended that the transactions contemplated hereby will constitute a reorganization within the meaning of Section 368(a)(1)(B) of the Code. 8. For financial accounting purposes, it is intended that the transactions contemplated hereby be accounted for as a "purchase." 6 AGREEMENT NOW THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants, agreements and conditions hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: 1. TRANSFER AND ISSUANCE OF SHARES 1.1. Transfer of Shares. Subject to the terms and conditions of this Agreement, at the Closing (as defined in Section 7), the Shareholder shall transfer to Buyer all of the Shareholder's right, title and interest in and to all of the TCS Shares. 1.2. Issuance of Shares. At the Closing and in exchange for the TCS Shares, Buyer shall issue and deliver to the Shareholder a number of validly issued, fully paid and nonassessable shares of Common Stock which, when multiplied by the average closing per share sales price of the Common Stock for the thirty (30) trading days prior to the day before the Closing Date (as defined herein) (the "Issue Price"), results in an aggregate price of $3,800,000 (the "Buyer Shares"), subject to adjustment as provided in Section 1.3. In the event that the issued and outstanding shares of Common Stock shall have been changed into a different number of shares as a result of a stock split, reverse stock split, stock dividend, recapitalization, reclassification, reorganization, merger or other similar transaction with a record date within the 30-day period described above, the average closing per share sales price to calculate the Issue Price shall be adjusted accordingly in order for the Buyer Shares, if delivered after such record date, to be adjusted accordingly. Any fractional shares resulting from such computation shall be eliminated by rounding upward to the nearest whole share. 1.3. Floor Price Adjustment. In the event the greater of (i) the closing sales price of the Common Stock on the second anniversary date of this Agreement or (ii) the average closing sales price of the Common Stock for the thirty (30) trading days immediately following the second anniversary date of this Agreement (the greater value shall be referred to as the "Anniversary Price") is less than 75% of the Issue Price (the "Floor Price"), Buyer shall issue to the Shareholder an aggregate number of additional validly issued, fully paid and nonassessable shares of Common Stock equal to the product obtained by multiplying (i) the number of Buyer Shares held by the Shareholder at the end of the 30-day period described above by (ii) the difference between the Floor Price and the Anniversary Price (which difference, however, shall be offset by any gain realized upon the sale of any of the Buyer Shares prior to such 30-day period). Buyer shall issue and deliver to the Shareholder such additional shares, if any, within fifteen (15) days after the end of the 30-day period. In the event that the issued and outstanding shares of Common Stock shall have been changed into a different number of shares or into shares of a different corporation as a result of a stock split, reverse stock split, stock dividend, recapitalization, reclassification, reorganization, merger or other similar transaction from the Closing Date to the date of the floor price adjustment described in this Section 1.3, the Floor Price shall be adjusted accordingly in order for such additional shares, if any, to be adjusted 2 7 accordingly. Any fractional shares resulting from such computation shall be eliminated by rounding upward to the nearest whole share. 2. SECURITIES ACT PROVISIONS 2.1. Restrictions on Disposition of Buyer Shares. The Shareholder covenants and warrants that the Buyer Shares to be received pursuant to this Agreement are acquired for his own account and not with the present view towards the distribution thereof and he will not dispose of the Buyer Shares except (i) pursuant to an effective registration statement under the Securities Act of 1933, as amended, or (ii) in any other transaction which, in the opinion of counsel acceptable to Buyer, is exempt from registration under the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. In order to effectuate the covenants of this subsection 2.1, an appropriate endorsement will be placed on the certificate evidencing the Buyer Shares at the time of distribution of such shares by Buyer pursuant to this Agreement, and stop transfer instructions shall be placed with the transfer agent for the securities. 2.2. Evidence of Compliance with Private Offering Exemption. The Shareholder represents to Buyer that the Shareholder has the financial sophistication to assess the merits and risks of the transaction contemplated hereby and agrees to supply Buyer with such other items as counsel for Buyer may require in order to evidence the private offering character of the distribution of the Buyer Shares made pursuant to this Agreement. 2.3. Notice of Limitation Upon Disposition. The Shareholder is aware that the Buyer Shares distributed to him will not have been registered pursuant to the Securities Act of 1933, as amended; and, therefore, under current interpretations and applicable rules, he will be required to retain such shares for a period of at least two (2) years following the Closing Date and, at the expiration of such two (2) year period, sales of the Buyer Shares may be confined to brokerage transactions of limited amounts requiring certain notification filings with the Securities and Exchange Commission and such disposition may be available only if Buyer is current in its filings with the Securities and Exchange Commission under the Securities Act of 1933, as amended, and the other limitations imposed thereby on the disposition of the Buyer Shares. 3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF TCS AND THE SHAREHOLDER TCS and the Shareholder make the following representations and warranties to Buyer with respect or related to, or concerning, TCS, each of which is true and correct on the date hereof, is or shall be unaffected by any investigation heretofore or hereafter made by Buyer, or any of Buyer's agents or representatives, or any knowledge of Buyer, its agents or representatives other than as specifically disclosed in the Disclosure Schedules delivered to Buyer at the time of the execution of this Agreement, and shall survive the Closing of the transactions provided for herein. The representations and warranties of TCS and the Shareholder hereunder 3 8 shall be joint and several except for the representations in Section 3.2. with respect solely to the Shareholder, and any representations to the "knowledge" of TCS or the Shareholder, which shall be deemed made separately by TCS or the Shareholder, as the case may be. For purposes of this Agreement and except as specified in the following sentence, each of TCS and the Shareholder shall be deemed to have knowledge of the subject matter of any representation or warranty if the Shareholder has actual knowledge thereof or, after adequate investigation, should reasonably be expected to have knowledge thereof. 3.1. Corporate. 3.1.(a) Organization. TCS is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 3.1.(b) Corporate Power; Validity. TCS has all requisite corporate power and authority to own, operate and lease its properties and to carry on TCS's Business as and where such is now being conducted. TCS has full power, legal right and authority to enter into, execute and deliver this Agreement and the other agreements, instruments and documents contemplated hereby and delivered on the date hereof (such other documents are sometimes referred to herein as "Ancillary Instruments"), and to carry out the transactions contemplated hereby and thereby. This Agreement and each Ancillary Instrument that provides for its execution by TCS has been duly and validly executed and delivered by TCS. 3.1.(c) Qualification. TCS is duly licensed or qualified to do business as a foreign corporation, and is in good standing, in each jurisdiction wherein the character of the properties owned or leased by it, or the nature of TCS's Business, makes such licensing or qualification necessary except where failure to be so qualified or licensed would not have a material adverse effect on the financial condition or results of operations of TCS. The states in which TCS is licensed or qualified to do business are listed in Schedule 3.1.(c). 3.1.(d) No Subsidiaries. TCS does not own, directly or indirectly, any capital stock or other equity securities of any corporation or maintain any direct or indirect equity or other ownership interest in any entity or business. 3.1.(e) Corporate Documents, etc. The copies of the articles or certificate of incorporation and bylaws of TCS, as amended or restated (hereinafter, "Certificate of Incorporation" and "Bylaws," respectively), which have been delivered by the Shareholder to Buyer are true, correct and complete copies of such instruments as presently in effect. The corporate minute books and stock record books of TCS which have been furnished to Buyer for inspection are true, correct and complete and accurately reflect all meetings held of, and corporate action taken by, the shareholders and Board of Directors of TCS. The duly elected and qualified directors and officers of TCS are listed in Schedule 3.1.(e). 4 9 3.1.(f) Capitalization. The authorized capital stock of TCS consists entirely of 100,000 shares of Common Stock. No shares of such capital stock are issued or outstanding except for 10,000 shares of Common Stock which are owned of record and beneficially by the Shareholder. All such shares of capital stock of TCS are validly issued, fully paid and nonassessable. There are no (a) securities convertible into or exchangeable for any of TCS's capital stock or other securities, (b) options, warrants or other rights to purchase or subscribe to capital stock or other securities of TCS or securities which are convertible into or exchangeable for capital stock or other securities of TCS, or (c) contracts, commitments, agreements, understandings or arrangements of any kind relating to the issuance, sale or transfer of any capital stock or other equity securities of TCS, any such convertible or exchangeable securities or any such options, warrants or other rights. 3.2. The Shareholder. 3.2.(a) Power. The Shareholder has full power, legal right and authority to enter into, execute and deliver this Agreement and the Ancillary Instruments to which the Shareholder is a party and to carry out the transactions contemplated hereby and thereby. 3.2.(b) Validity. This Agreement and each Ancillary Instrument that provides for its execution by the Shareholder has been duly and validly executed and delivered by the Shareholder and is the legal, valid and binding obligation of the Shareholder, enforceable in accordance with its terms, subject to the limitations contained herein, and except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally, and by general equitable principles. 3.2.(c) Title. The Shareholder is transferring, good and valid title to the TCS Shares to be transferred by the Shareholder hereunder, free and clear of all Liens (as defined in Section 3.12), including, without limitation, voting trusts or agreements, proxies, marital or community property interests. 3.3. No Violation. Except as set forth on Schedule 3.3, neither the execution and delivery of this Agreement or the Ancillary Instruments nor the consummation by TCS and the Shareholder of the transactions contemplated hereby and thereby (a) to the best knowledge of the Shareholder, violates any currently existing statute, law, ordinance, rule or regulation (collectively, "Laws") or any currently existing order, writ, injunction, judgment, plan or decree (collectively, "Orders") of any court, arbitrator, department, commission, board, bureau, agency, authority, instrumentality or other body, whether federal, state, municipal, foreign or other (collectively, "Government Entities"), (b) to the best knowledge of the Shareholder, requires any authorization, consent, approval, exemption or other action by or notice to any Government Entity (including, without limitation, under any "plant-closing" or similar law assuming, for this purpose, that Buyer will cause TCS after Closing not to take any action that would result in a violation of such law), or (c) subject to obtaining the consents referred to in 5 10 Schedule 3.3, violates or conflicts with, or constitutes a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or results in the termination of, or accelerates the performance required by, or results in the creation of any Lien upon any of the assets of TCS (or the TCS Shares) under, any term or provision of the Certificate of Incorporation or Bylaws of TCS, or of any material contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which TCS or the Shareholder is a party or by which TCS or the Shareholder or any of its, his or her assets or properties may be bound or affected. 3.4. Financial Statements. True and complete copies have been delivered to Buyer of the financial statements of TCS consisting of the balance sheets on a modified cash basis of TCS as of December 31, 1995, 1994, 1993, 1992 and 1991, (the December 31, 1995 balance sheet is referred to herein as the "TCS Recent Balance Sheet"), and the related statement of income on a modified cash basis for each of the years then ended (including the notes contained therein or annexed thereto), all of which financial statements have been compiled by independent accountants for TCS for such years and periods. All of such TCS financial statements (including all notes and schedules contained therein or annexed thereto) and the Closing Balance Sheet (as required pursuant to Section 7.1.(i) hereof), have been prepared in accordance with statements on standards for accounting and review services issued by the American Institute of CPA's, have been prepared in accordance with the books and records of TCS, and fairly present, in accordance with statements on standards for accounting and review services issued by the American Institute of CPA's, the financial position, the results of operations and cash flows of TCS as of the dates and for the years and periods indicated. True and correct copies have been delivered to Buyer of all written reports submitted to TCS or the Shareholder by TCS's accountants related to the books and records of TCS. 3.5. Tax Matters. 3.5.(a) Spin-Off. The Spin-off qualifies as a tax-free transaction within the meaning of Section 355 of the Code. 3.5.(b) Provision For Taxes. The provision made for taxes on the Closing Balance Sheet is sufficient for the payment of all federal, state, foreign, county, local and other income, ad valorem, excise, profits, franchise, occupation, property, payroll, sales, use, gross receipts and other taxes (and any interest and penalties) and assessments ("Taxes"), whether or not disputed, that were unpaid and owed by TCS as of the date of the Closing Balance Sheet. Since the date of the Closing Balance Sheet and excluding the effect of the transactions contemplated herein, TCS has not incurred any taxes other than taxes incurred in the ordinary course of business consistent in type and amount with past practices. 3.5.(c) Tax Returns Filed. Except as set forth on Schedule 3.5.(c), all federal, state, foreign, county, local and other tax returns required to be filed by or on behalf of TCS have been timely filed and when filed were true and correct, and the taxes 6 11 shown as due thereon were paid or adequately accrued. True and complete copies of all tax returns or reports filed by TCS for each of its three (3) most recent tax years have been delivered to Buyer. TCS has duly withheld and paid all Taxes which it was required to withhold and pay in connection with amounts heretofore paid to any employee, independent contractor, creditor or shareholder of TCS. 3.5.(d) No Tax Audits. Except as set forth on Schedule 3.5.(d), the federal and state income tax returns of TCS have not been audited by the Internal Revenue Service or any state taxing authorities, and neither TCS nor the Shareholder has received from the Internal Revenue Service or from the tax authorities of any state, county, local or other jurisdiction any notice of underpayment of taxes by TCS or other deficiency with respect to TCS's taxes which has not been paid nor any objection to any return or report filed by TCS. There are no outstanding agreements or waivers extending the statutory period of limitations applicable to any tax return or report. 3.5.(e) No Consolidated Group. TCS has never been a member of an affiliated group of corporations that filed a consolidated tax return. 3.5.(f) Other. TCS has not (i) filed any consent or agreement under Section 341(f) of the Code, (ii) applied for any tax ruling, (iii) entered into a closing agreement with any taxing authority, (iv) filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election under Section 338(e) of the Code occurred), except as contemplated hereby, or (v) been a party to any tax allocation or tax sharing agreement. TCS is not a "United States real property holding company" within the meaning of Section 897 of the Code. 3.6. Accounts Receivable and COBRA Payables. All accounts receivable of TCS reflected on the Closing Balance Sheet and as incurred in the normal course of business since the date thereof, represent arm's length sales actually made in the ordinary course of business. To the best knowledge of the Shareholder, no portion of the accounts receivable is or will be subject to counterclaim or set-off or is or will be otherwise in dispute. All of the accounts receivable are and as of the Closing Date will be good and collectible in full (less an allowance of 1% for doubtful accounts receivable) within 120 days following the Closing Date. Schedule 3.6 contains an estimated aged schedule of accounts receivable included in the Closing Balance Sheet. The cash and cash equivalents held by TCS related to insurance premiums collected on behalf of customers as of the Closing Date are equal to or greater than any insurance premiums payable relating to the COBRA Business. 3.7. Absence of Certain Changes. Except as and to the extent set forth in Schedule 3.7, or as reflected in the Closing Balance Sheet and excluding the transactions contemplated herein, since December 31, 1995 there has not been: 3.7.(a) No Adverse Change. Any material adverse change in the financial condition, assets, liabilities, business or operations of TCS; 7 12 3.7.(b) No Damage. Any material loss, damage or destruction, whether covered by insurance or not, affecting TCS's Business or the properties of TCS; 3.7.(c) No Increase in Compensation. Any increase in the compensation, salaries or wages payable or to become payable to any employee or agent of TCS (including, without limitation, any increase or change pursuant to any bonus, pension, profit sharing, retirement or other plan or commitment), or any bonus or other employee benefit granted, made or accrued, other than in the ordinary course of business; 3.7.(d) No Labor Disputes. Any labor dispute or disturbance, other than routine individual grievances which are not material to TCS's Business, financial condition or the results of operations of TCS; 3.7.(e) No Commitments. Any loan commitment or related financial transaction by TCS (including, without limitation, any borrowing or capital expenditure) other than in the ordinary course of business consistent with past practice; 3.7.(f) No Dividends. Any declaration, setting aside, or payment of any dividend or any other distribution in respect of the capital stock of TCS; any redemption, purchase or other acquisition by TCS of any shares of its capital stock, or any security relating thereto; or any other payment to any shareholder of TCS as such a shareholder; 3.7.(g) No Disposition of Property. Any sale, lease or other transfer or disposition of any properties or assets of TCS; 3.7.(h) No Indebtedness. Any indebtedness for borrowed money incurred, assumed or guaranteed by TCS; 3.7.(i) No Liens. Any mortgage, pledge, lien or encumbrance made on any of the properties or assets of TCS; 3.7.(j) No Amendment of Contracts. Any amendment or termination of any contract or agreement of TCS, or any waiver of material rights thereunder, other than in the ordinary course of business which would have a material adverse effect on the Business, financial condition or results of operations of TCS; 3.7.(k) Loans and Advances. Any loan or advance (other than advances to employees in the ordinary course of business for travel and entertainment in accordance with past practice) from TCS to any person including, but not limited to, any Shareholder Affiliate; or 3.7.(l) Credit. Any grant of credit from TCS to any customer on terms or in amounts more favorable than those which have been extended to such customer in 8 13 the past, any other change in the terms of any credit heretofore extended, or any other change of policies or practices with respect to the granting of credit. 3.8. Absence of Undisclosed Liabilities. Except as and to the extent specifically disclosed in the Closing Balance Sheet, or in Schedule 3.8, TCS has no liabilities (secured or unsecured, and whether accrued, absolute, contingent, direct, indirect or otherwise, and whether known or unknown), other than liabilities incurred since the date of the Closing Balance Sheet in the ordinary course of business and consistent with past practice and liabilities which will not have a material adverse effect on the Business, financial condition or results of operations of TCS. 3.9. No Litigation. Except as set forth in Schedule 3.9, there is no action, suit, arbitration, proceeding, investigation or inquiry, whether civil, criminal or administrative ("Litigation"), pending or, to the best knowledge of the Shareholder, threatened, against TCS, its officers and directors (in such capacity), TCS's Business or any of its assets. Except as set forth in Schedule 3.9, neither TCS nor the Shareholder has been notified that TCS, TCS's Business or its assets is subject to any Order of any Government Entity. 3.10. Compliance With Laws and Orders. 3.10.(a) Compliance. Except as set forth in Schedule 3.10.(a), to the best knowledge of the Shareholder, TCS (including its operations, practices, properties and assets) is in compliance with all applicable material Laws and Orders of all Government Entities, including, without limitation, those applicable to discrimination in employment, occupational safety and health, trade practices, competition and pricing, zoning, building and sanitation, employment, retirement and labor relations, product advertising and the Environmental Laws (as hereinafter defined). Except as set forth in Schedule 3.10.(a), TCS has not received notice of any violation or alleged violation of, any Laws or Orders. All reports and returns required to be filed by TCS with any Government Entity have been filed, and were accurate and complete when filed. Without limiting the generality of the foregoing: (i) TCS has made all required payments to its unemployment compensation reserve accounts with the appropriate governmental departments of the states where it is required to maintain such accounts; and (ii) TCS has not received any report for the past five (5) years required under the federal Occupational Safety and Health Act of 1970, as amended, and under all other applicable health and safety laws and regulations. 3.10.(b) Licenses and Permits. TCS has all material licenses, permits, approvals, authorizations and consents of all Government Entities and all certifications required for the conduct of TCS's Business (as presently conducted) and operation of any of the facilities at which TCS's Business is conducted. All such licenses, permits, 9 14 approvals, authorizations and consents are described in Schedule 3.10.(b), are in full force and effect and will not be affected or made subject to loss, limitation or any obligation to reapply as a result of the transactions contemplated hereby. Except as set forth in Schedule 3.10.(b), TCS (including its operations, practices, properties and assets) is and has been in compliance with all such permits and licenses, approvals, authorizations and consents. No governmental approval or filing with any federal, state or local agency is required of TCS in order to consummate the transactions contemplated hereby. 3.10.(c) Environmental Matters. The applicable Laws relating to pollution or protection of the environment, including Laws relating to emissions, discharges, generation, storage, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic, hazardous or petroleum or petroleum-based substances or wastes ("Waste") into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Waste including, without limitation, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act and the Comprehensive Environmental Response Compensation Liability Act ("CERCLA"), as amended, and their state and local counterparts (the "Environmental Laws"). Without limiting the generality of the foregoing provisions of this Section 3.10, TCS is in full compliance with all material limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any regulations, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder. Except as set forth in Schedule 3.10.(c), there is no Litigation nor any demand, claim, hearing or notice of violation pending or threatened against TCS relating in any way to the Environmental Laws or any Order issued, entered, promulgated or approved thereunder. Except as set forth in Schedule 3.10.(c), there are no past or present events, conditions, circumstances, activities, practices, incidents, actions, omissions or plans which will interfere with or prevent compliance or continued compliance with the Environmental Laws or with any Order issued, entered, promulgated or approved thereunder, or which will give rise to any liability, including, without limitation, liability under CERCLA or similar state or local Laws, or otherwise form the basis of any Litigation, hearing, notice of violation, study or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release or threatened release into the environment, of any Waste. 3.10.(d) COBRA Compliance. With respect to the conduct of the COBRA Business, TCS has not received notice of, nor has TCS (through its acts or omissions) created circumstances which would give rise to, a claim against TCS for the failure to comply with the provisions of any law related to the continuation of health care coverage, including, without limitation, the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. 10 15 3.11. Title to and Condition of Properties. 3.11.(a) Title. TCS has good and valid title to all of its assets and properties that it purports to own, including, without limitation, all such properties (tangible and intangible) reflected in the Closing Balance Sheet (except for assets held under capitalized leases and property sold since the date of the Closing Balance Sheet in the ordinary course of business), free and clear of all mortgages, liens, (statutory or otherwise) security interests, claims, pledges, licenses, equities, options, conditional sales contracts, assessments, levies, easements, covenants, reservations, restrictions, rights-of-way, exceptions, limitations, charges or encumbrances of any nature whatsoever (collectively, "Liens"), except those Liens that are described in Schedule 3.11(a). Except as described in Schedule 3.11(a), TCS's assets or properties are not subject to any restrictions with respect to the transferability thereof. 3.11.(b) Condition. All tangible personal property and assets owned or utilized by TCS are in satisfactory operating condition, and have been maintained consistent with the standards generally followed in the industry. 3.11.(c) Real Property. TCS does not own any real property. Schedule 3.11.(c) sets forth all real property used or occupied by TCS (the "Real Property"). Schedule 3.11.(c) also sets forth, with respect to each parcel of Real Property which is leased, the material terms of such lease. There are no oral terms or past practice inconsistent with the written terms thereof. All such leases are valid and binding agreements, enforceable in accordance with their respective terms, and are in full force and effect. TCS has performed all obligations required to be performed by it to date under each such lease and is not in breach or default in any respect thereunder, and there has been no event which, with the giving of notice or the lapse of time or both, would become a breach or default thereunder. To the best knowledge of TCS and the Shareholder, no lessor or landlord to any of such leases is in breach or default thereunder. To the best knowledge of the Shareholder, there are now in full force and effect duly issued certificates of occupancy permitting the Real Property and improvements located thereon to be legally used and occupied by TCS as the same are now constituted. 3.12. Insurance. Set forth in Schedule 3.12 is a complete and accurate list and description of all policies of fire, liability, professional liability, general liability, business interruption, workers compensation, health and other forms of insurance presently in effect with respect to TCS's Business and the properties of TCS, true and correct copies of which have heretofore been delivered to Buyer. Schedule 3.12 includes, without limitation, the carrier, the description of coverage, the limits of coverage, retention or deductible amounts, amount of annual premiums, date of expiration and the date through which premiums have been paid with respect to each such policy, and any pending claims in excess of $5,000, whether or not covered by insurance. Schedule 3.12 indicates each policy as to which (a) the coverage limit has been reached or (b) the total incurred losses to date equal 75% or more of the coverage limit. No 11 16 notice of cancellation or termination has been received with respect to any such policy. Each policy is in full force and effect and all premiums with respect thereto covering all periods up to and including the date hereof have been paid. TCS has not been refused any insurance with respect to any aspect of the operations of its Business nor has its coverage been limited by any insurance carrier to which it has applied for insurance or with which it has carried insurance during the last three (3) years. TCS has not received any written notice from or on behalf of any insurance carrier issuing any such policy that insurance rates therefor will hereafter be substantially increased (except to the extent that insurance rates may be increased for all similarly situated risks) or that there will hereafter be a cancellation or an increase in a deductible (or an increase in premiums in order to maintain an existing deductible) or nonrenewal of any such policy. Such policies are sufficient in all material respects for compliance by TCS with all requirements of all contracts to which TCS is a party. None of such policies will in any way be affected by, or terminate or lapse by reason of, the transactions contemplated hereby. 3.13. Contracts and Commitments. 3.13.(a) Real Property Leases. Except as set forth in Schedule 3.11.(a), TCS has no leases of real property. 3.13.(b) Personal Property Leases. Except as set forth in Schedule 3.13.(b), TCS has no leases of personal property involving consideration or other expenditure in excess of $5,000. 3.13.(c) Sales Commitments. Except as set forth in Schedule 3.13.(c), TCS has no sales or service contracts or commitments to customers which aggregate in excess of the amounts set forth on Schedule 3.18 to any one customer (or group of affiliated customers). True and complete copies of all contracts or commitments with respect to those customers set forth on Schedule 3.18 have been delivered by TCS to Buyer. TCS has no sales contracts or commitments except those made in the ordinary course of business, at arm's length. 3.13.(d) Contracts With Affiliates and Certain Others. Except as set forth in Schedule 3.13.(d) and except for this Agreement and the Ancillary Instruments, TCS has no agreement, understanding, contract or commitment (written or oral) with any Shareholder Affiliate (as defined herein) or any employee, agent, consultant, dealer or franchisee that is not cancelable by TCS, on notice of not longer than 30 days without liability, penalty or premium of any nature or kind whatsoever. For purposes of this Agreement, "Shareholder Affiliate" shall mean and include the Shareholder, the Shareholder's spouse, any person who would be the heir or descendant of any such person if he or she were not living, and any entity in which any of the foregoing has a direct or indirect interest, except through the ownership of less than 5% of the outstanding shares of any entity whose securities are listed on a national securities exchange or traded in the national over-the-counter market. 12 17 3.13.(e) Powers of Attorney. Except as set forth on Schedule 3.13.(e), TCS has not given a power of attorney, which is currently in effect, to any person, firm or corporation for any purpose whatsoever. 3.13.(f) Collective Bargaining Agreements. Except as set forth in Schedule 3.13.(f), TCS is not a party to any collective bargaining agreements with any unions, guilds, shop committees or other collective bargaining groups. 3.13.(g) Loan Agreements. Except as set forth in Schedule 3.13.(g), TCS is not obligated under any loan agreement, promissory note, letter of credit, or other evidence of indebtedness as a signatory, guarantor or otherwise. Copies of all such agreements have heretofore been delivered by TCS to Buyer. 3.13.(h) Guarantees. Except as set forth in Schedule 3.13.(h) and except for indemnification undertakings set forth in TCS's agreements with its customers, TCS has not guaranteed the payment or performance of any person, firm or corporation, agreed to indemnify any person or act as a surety, or otherwise agreed to be contingently or secondarily liable for the obligations of any person. 3.13.(i) Contracts Subject to Renegotiation. TCS is not a party to any contract with any governmental body which is subject to renegotiation. 3.13.(j) Burdensome or Restrictive Agreements. TCS is not a party to nor is it bound by any agreement requiring it to assign any interest in any trade secret or proprietary information, or prohibiting or restricting it from competing in any business or geographical area or soliciting customers or otherwise restricting it from carrying on TCS's Business anywhere in the world. 3.13.(k) Other Material Contracts. Except as set forth in Schedule 3.13.(k), TCS is not a party or subject to any lease, contract or commitment of any nature involving consideration or other expenditure in excess of $5,000. 3.13.(l) No Default. TCS is not in default under any lease, contract or commitment to which it is a party or is otherwise bound, nor has any event or omission occurred which through the passage of time or the giving of notice, or both, would constitute a default thereunder or cause the acceleration of any of TCS's obligations or result in the creation of any Lien on any of the assets owned, used or occupied by TCS. 3.14. Labor Matters. Except as set forth in Schedule 3.14, within the last five (5) years TCS has not experienced any labor disputes, union organization attempts or any work stoppage due to labor disagreements in connection with its Business. Except to the extent set forth in Schedule 3.14, (a) TCS is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice; (b) there is no unfair labor practice charge or complaint 13 18 actually pending or threatened against TCS; (c) there is no labor strike, dispute, request for representation, slowdown or stoppage actually pending or threatened against or affecting TCS nor any secondary boycott with respect to products of TCS; (d) no question concerning representation has been raised or is threatened respecting the employees of TCS; (e) no grievance which might have a material adverse effect on TCS, nor any arbitration proceeding arising out of or under collective bargaining agreements, is pending and no such claim therefor exists; and (f) there are no administrative charges or court complaints against TCS concerning alleged employment discrimination or other employment related matters pending or threatened before the U.S. Equal Employment Opportunity Commission or any Government Entity. 3.15. Employee Benefit Plans. 3.15.(a) Disclosure. Schedule 3.15.(a) sets forth all pension, thrift, savings, profit sharing, retirement, incentive bonus or other bonus, medical, dental, life, accident insurance, employee welfare, disability, group insurance, stock purchase, stock option, stock appreciation, stock bonus, executive or deferred compensation, hospitalization and other similar fringe or employee benefit plans, programs and arrangements, and any employment or consulting contracts, collective bargaining agreements, severance agreements or plans, vacation and sick leave plans, programs, arrangements and policies, including, without limitation, all "employee benefit plans" (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all employee manuals, and all written statements of policies, practices or understandings relating to employment, which are provided to, for the benefit of, or relate to, any persons employed by TCS. The items described in the foregoing sentence are hereinafter sometimes referred to collectively as "Employee Plans/Agreements," and each individually as an "Employee Plan/Agreement." True and correct copies of all the Employee Plans/Agreements, including all amendments thereto, have heretofore been provided by TCS to Buyer. Each of the Employee Plans/Agreements is identified on Schedule 3.15.(a), to the extent applicable, as one or more of the following: an "employee pension benefit plan" (as defined in Section 3(2) of ERISA), a "defined benefit plan" (as defined in Section 414 of the Code), an "employee welfare benefit plan" (as defined in Section 3(1) of ERISA), and/or as a plan intended to be qualified under Section 401 of the Code. No Employee Plan/Agreement is a "multiemployer plan" (as defined in Section 4001 of ERISA), and TCS has never contributed nor been obligated to contribute to any such multiemployer plan. 3.15.(b) Terminations, Proceedings, Penalties, etc. With respect to each Employee Plan/Agreement that is subject to the provisions of Title IV of ERISA and with respect to which TCS, or any of its assets may, directly or indirectly, be subject to any Liability, contingent or otherwise, or the imposition of any Lien (whether by reason of the complete or partial termination of any such plan, the funded status of any such plan, any "complete withdrawal" (as defined in Section 4203 of ERISA) or "partial withdrawal" (as defined in Section 4205 of ERISA) by any person from any such plan, or otherwise): 14 19 (i) no such plan has been terminated so as to subject, directly or indirectly, any assets of TCS to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA; (ii) no proceeding has been initiated or threatened by any person (including the Pension Benefit Guaranty Corporation ("PBGC")) to terminate any such plan; (iii) no condition or event currently exists or currently is expected to occur that could subject, directly or indirectly, any assets of TCS to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA, whether to the PBGC or to any other person or otherwise on account of the termination of any such plan; (iv) if any such plan were to be terminated as of the Closing Date, no assets of TCS would be subject, directly or indirectly, to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA; (v) no "reportable event" (as defined in Section 4043 of ERISA) has occurred with respect to any such plan; (vi) no such plan which is subject to Section 302 of ERISA or Section 412 of the Code has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code, respectively), whether or not waived; and (vii) no such plan is a multiemployer plan or a plan described in Section 4064 of ERISA. 3.15.(c) Prohibited Transactions, etc. To the best of the knowledge of the Shareholder, there have been no "prohibited transactions" within the meaning of Section 406 of ERISA or Section 4975 of the Code for which a statutory or administrative exemption does not exist with respect to any Employee Plan/Agreement, and to the best of the knowledge of the Shareholder, no event or omission has occurred in connection with which TCS or its assets or any Employee Plan/Agreement, directly or indirectly, could be subject to any material liability under ERISA, the Code or any other Law or Order applicable to any Employee Plan/Agreement, or under any agreement, instrument, Law or Order pursuant to or under which TCS has agreed to indemnify or is required to indemnify any person against liability incurred under any such Law or Order. 3.15.(d) Full Funding. The funds available under each Employee Plan/Agreement which is intended to be a funded plan equal or exceed the amounts required to be paid, or which would be required to be paid if such Employee Plan/Agreement were terminated, on account of rights vested or accrued as of the 15 20 Closing Date (using the actuarial methods and assumptions then used by TCS in connection with the funding of such Employee Plan/Agreement). 3.15.(e) Controlled Group; Affiliated Service Group; Leased Employees. Other than TCS and TERS, no organization is or has been: (i) a member of a controlled group of corporations as defined in Section 414(b) of the Code, of which TCS was a member, or (ii) under common control, as determined under Section 414(c) of the Code, with TCS. TCS has never been a member of an "affiliated service group" within the meaning of Section 414(m) of the Code. There are not and never have been any leased employees within the meaning of Section 414(n) of the Code who perform services for TCS. 3.15.(f) Payments and Compliance. With respect to each Employee Plan/Agreement, (i) all payments due from TCS to date have been made and all amounts properly accrued to date as liabilities of TCS which have not been paid have been properly recorded on the books of TCS (as appropriate) and, to the extent such liabilities were due and payable but were not paid as of the date of the Closing Balance Sheet, are reflected in the Closing Balance Sheet; (ii) TCS has complied with, and each such Employee Plan/Agreement conforms in form and operation to, all applicable laws and regulations, including but not limited to ERISA and the Code, in all material respects and all reports and information relating to such Employee Plan/Agreement required to be filed with any governmental entity have been timely filed; (iii) all reports and information relating to each such Employee Plan/Agreement required to be disclosed or provided to participants or their beneficiaries have been timely disclosed or provided; (iv) each such Employee Plan/Agreement which is intended to qualify under Section 401 of the Code has received a favorable determination letter from the Internal Revenue Service with respect to such qualification, its related trust has been determined to be exempt from taxation under Section 501(a) of the Code, and nothing has occurred since the date of such letter that has or is likely to adversely affect such qualification or exemption; (v) there are no actions, suits or claims pending (other than routine claims for benefits) or threatened with respect to such Employee Plan/Agreement or against the assets of such Employee Plan/Agreement; and (vi) no Employee Plan/Agreement is a plan which is established and maintained outside the United States primarily for the benefit of individuals substantially all of whom are nonresident aliens. 3.15.(g) Post-Retirement Benefits. Other than such continuation of benefit coverage under group health plans as is required by applicable law, TCS does not maintain and has not maintained retiree life or retiree health plans providing for continuing coverage for any employee or any beneficiary of an employee after the employee's termination of employment. 3.15.(h) No Triggering of Obligations. The consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee of TCS to severance pay, unemployment compensation or any other payment, 16 21 except as expressly provided in this Agreement or in any of the Ancillary Instruments, (ii) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee or (iii) result in any prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code for which an exemption is not available. 3.15.(i) Delivery of Documents. There has been delivered to Buyer, with respect to each Employee Plan/Agreement: (i) a copy of the annual report, if required under ERISA, with respect to each such Employee Plan/Agreement for the last two years; (ii) a copy of the summary plan description, together with each summary of material modifications, required under ERISA with respect to such Employee Plan/Agreement, all material employee communications relating to such Employee Plan/Agreement, and, unless the Employee Plan/Agreement is embodied entirely in an insurance policy to which TCS is a party, a true and complete copy of such Employee Plan/Agreement; (iii) if the Employee Plan/Agreement is funded through a trust or any third party funding vehicle (other than an insurance policy), a copy of the trust or other funding agreement and the latest financial statements thereof; and (iv) the most recent determination letter received from the Internal Revenue Service with respect to each Employee Plan/Agreement that is intended to be a "qualified plan" under Section 401 of the Code. With respect to each Employee Plan/Agreement for which an annual report has been filed and delivered to Buyer pursuant to clause (i) of this Section 3.15.(i), no material adverse change has occurred with respect to the matters covered by the latest such annual report since the date thereof. 3.15.(j) Future Commitments. TCS has no announced plan or legally binding commitment to create any additional Employee Plans/Agreements or to amend or modify any existing Employee Plan/Agreement except as contemplated herein or in the Employment and Noncompetition Agreements. 3.16. Employment Compensation. A true and correct list has been provided to Buyer of all employees to whom TCS is paying compensation, and, in the case of salaried employees, such list identifies the current annual rate of compensation for each employee and, in the case of hourly or commission employees, identifies certain reasonable ranges of rates and the number of employees falling within each such range. 17 22 3.17. Trade Rights. Schedule 3.17 lists all Trade Rights (as defined below) in which TCS now has any interest, specifying whether such Trade Rights are owned, controlled, used or held (under license or otherwise) by TCS, and also indicating which of such Trade Rights are registered. All Trade Rights shown as registered in Schedule 3.17 have been properly registered, all pending registrations and applications have been properly made and filed and all annuity, maintenance, renewal and other fees relating to registrations or applications are current. In order to conduct its Business, as such is currently being conducted, TCS does not require any Trade Rights that it does not already have. TCS is not infringing and has not infringed any Trade Rights of another in the operation of its Business, nor to the best of the knowledge of TCS or the Shareholder is any other person infringing the Trade Rights of TCS. TCS has not granted any license or made any assignment of any Trade Right listed on Schedule 3.17, nor does TCS pay any royalties or other consideration for the right to use any Trade Rights of others. There is no Litigation pending or threatened to challenge TCS's right, title and interest with respect to its continued use and right to preclude others from using any Trade Rights of TCS. The consummation of the transactions contemplated hereby will not alter or impair any Trade Rights owned or used by TCS. As used herein, "Trade Rights" shall mean and include: (i) all trademark rights, business identifiers, trade dress, service marks, trade names and brand names, all registrations thereof and applications therefor and all goodwill associated with the foregoing; (ii) all copyrights, copyright registrations and copyright applications, and all other rights associated with the foregoing and the underlying works of authorship; (iii) all patents and patent applications, and all international proprietary rights associated therewith; (iv) all contracts or agreements granting any right, title, license or privilege under the intellectual property rights of any third party; (v) all inventions, mask works and mask work registrations, know-how, discoveries, improvements, designs, trade secrets, shop and royalty rights, employee covenants and agreements respecting intellectual property and non-competition and all other types of intellectual property; and (vi) all claims for infringement or breach of any of the foregoing. 3.18. Major Customers. Schedule 3.18 contains a list of the fifteen (15) largest customers of TCS for each of the two (2) most recent fiscal years (determined on the basis of the total dollar amount of net revenues attributable thereto) showing the total dollar amount of net revenues attributable thereto during each such year. Neither TCS nor the Shareholder has any knowledge or information of any facts indicating, nor any other reason to believe, that any of the customers listed on Schedule 3.18 will not continue to be customers of TCS after the Closing at substantially the same level as heretofore. 3.19. Bank Accounts. Schedule 3.19 sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the TCS maintains a safe deposit box, lock box or checking, savings, custodial or other account of any nature, the type and number of each such account and the signatories therefore, a description of any compensating balance arrangements, and the names of all persons authorized to draw thereon, make withdrawals therefrom or have access thereto. 18 23 3.20. Shareholder Affiliates' Relationships to TCS. No Shareholder Affiliate has any direct or indirect interest in (i) any entity which does business with TCS (except for TERS) or is competitive with TCS's Business, or (ii) any property, asset or right which is used by TCS in the conduct of its Business. 3.21. No Brokers or Finders. Neither TCS nor any of its directors, officers, employees, the Shareholder or agents have retained, employed or used any broker or finder in connection with the transaction provided for herein or in connection with the negotiation thereof. 3.22. Disclosure. No representation or warranty by TCS and/or the Shareholder in this Agreement, nor any certificate, schedule, document or exhibit hereto furnished or to be furnished by or on behalf of TCS or the Shareholder pursuant to this Agreement contains any untrue statement of material fact or omits a material fact necessary to make the statements contained therein not misleading. 4. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer makes the following representations and warranties to the Shareholder, each of which is true and correct on the date hereof, is or shall be unaffected by any investigation heretofore or hereafter made by the Shareholder or any notice to the Shareholder, and shall survive the Closing of the transactions provided for herein. 4.1. Corporate. 4.1.(a) Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. 4.1.(b) Corporate Power. Buyer has all requisite corporate power to enter into this Agreement and the Ancillary Instruments and to carry out the transactions contemplated hereby and thereby. 4.2. Authority. The execution and delivery of this Agreement and each Ancillary Instrument that provides for its execution by Buyer and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of Buyer. No other corporate act or proceeding on the part of Buyer or its shareholders is necessary to authorize this Agreement or the Ancillary Instruments or the consummation of the transactions contemplated hereby and thereby. This Agreement and each Ancillary Instrument that provides for its execution by Buyer is the legal, valid and binding obligation of Buyer, enforceable in accordance with their respective terms, subject to the limitations contained herein, except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally, and by general equitable principles. 19 24 4.3. No Brokers or Finders. Except for the engagement of Broadview Associates, L.P. by Buyer, neither Buyer nor any of its directors, officers, employees or agents have retained, employed or used any broker or finder in connection with the transaction provided for herein or in connection with the negotiation thereof. Buyer has agreed to pay all fees and expenses of Broadview Associates, L.P. in connection with the transactions contemplated hereby. 4.4. Disclosure. No representation or warranty by Buyer in this Agreement, nor any statement, certificate, schedule, document or exhibit hereto furnished or to be furnished by or on behalf of Buyer pursuant to this Agreement or in connection with transactions contemplated hereby, contains any untrue statement of material fact or omits a material fact necessary to make the statements contained therein not misleading. 4.5. Investment Intent. The TCS Shares are being acquired by Buyer for investment only and not with the view to resale or other distribution. 4.6. Approvals and Filings. No governmental approval or filing with any federal, state or local agency is required of Buyer in order to consummate the transactions contemplated herein; provided, however, that Buyer shall comply with the applicable Federal securities laws and regulations of the Securities and Exchange Commission or The Nasdaq Stock Market with respect to the public disclosure of the consummation of these transactions and any related filings. 5. POST-CLOSING COVENANTS 5.1. Noncompetition; Confidentiality. As an inducement to Buyer to execute this Agreement and complete the transactions contemplated hereby, and in order to preserve the goodwill associated with TCS's Business being acquired pursuant to this Agreement, and in addition to and not in limitation of any covenants contained in any agreement executed and delivered pursuant to Section 7.1.(c) hereof, the Shareholder hereby covenants and agrees as follows: 5.1.(a) Covenant Not to Compete. For a period of five (5) years from the Closing Date, the Shareholder will not directly or indirectly: (i) engage in, continue in or carry on any business which competes with, or intends to compete with, TCS or Buyer in any aspect with respect to TCS's Business or is substantially similar thereto, including owning or controlling any financial interest in any person, corporation, partnership, firm or other form of business organization which is so engaged (a "Competing Business"); (ii) consult with, advise or assist in any way, whether or not for consideration, any Competing Business, including, but not limited to, advertising or otherwise endorsing the products of any Competing Business; soliciting customers or otherwise serving as an intermediary for any Competing Business; 20 25 loaning money or rendering any other form of financial assistance to or engaging in any form of business transaction on other than an arm's length basis with any Competing Business; (iii) offer employment to or solicit the employment of an employee of TCS or Buyer, without the prior written consent of Buyer; or (iv) engage in any practice the purpose of which is to evade the provisions of this covenant not to compete or to commit any act which adversely affects TCS's Business; provided, however, that the foregoing shall not prohibit the ownership of securities of corporations which are listed on a national securities exchange or traded in the national over-the-counter market in an amount which shall not exceed 5% of the outstanding shares of any such corporation. The parties agree that the geographic scope of this covenant not to compete shall extend to all areas in which TCS or Buyer conducts TCS's Business. The parties agree that Buyer may sell, assign or otherwise transfer this covenant not to compete, in whole or in part, to any Business that purchases all or part of TCS's Business or Buyer. 5.1.(b) Covenant of Confidentiality. The Shareholder shall not at any time after the Closing, except as explicitly requested by Buyer or required by applicable Law or Order, and except in the course of employment by TCS, (i) use for any purpose, (ii) disclose to any person, or (iii) keep or make copies of documents, tapes, discs or programs containing, any Confidential Information concerning TCS. For purposes of this Agreement, "Confidential Information" shall mean and include, without limitation, all Trade Rights in which TCS has an interest, all customer lists and customer information, and all other information concerning the finances, operations, processes, apparatus, equipment, packaging, services, marketing and distribution methods of TCS not previously disclosed to the public directly by TCS. This covenant shall not preclude the Shareholder from disclosing to his advisors or Government Entities financial information of TCS necessary to prepare, file or defend any tax return or report of TCS or the Shareholder. The parties agree that this covenant of confidentiality shall have no geographic or temporal limitations. 5.1.(c) Equitable Relief for Violations. The Shareholder agrees that the provisions and restrictions contained in this Section 5.1 are necessary to protect the legitimate continuing interests of Buyer in acquiring the TCS Shares, and that any violation or breach of these provisions will result in irreparable injury to Buyer for which a remedy at law would be inadequate and that, in addition to any relief at law which may be available to Buyer for such violation or breach and regardless of any other provision contained in this Agreement, Buyer shall be entitled to injunctive and other equitable relief as a court may grant after considering the intent of this Section 5.1. 21 26 5.1.(d) Total Employee Relations Services, Inc. For purposes of this Section 5.1, the business of Total Employee Relations Services, Inc., as described on Schedule 5.1.(d), shall not be deemed to be in competition with TCS, Buyer or TCS's Business. 5.2. Confidentiality of Shareholder Information. Buyer shall promptly after Closing return to the Shareholder all originals and copies of the personal financial statements and tax returns of the Shareholder in its possession. Buyer has not given a copy of such statements or returns, or disclosed the contents thereof, to any third party (other than Buyer's independent accountants) and will continue to hold all information disclosed thereon as strictly confidential. 5.3. Income Tax Returns and Allocation of Tax. The Shareholder shall be responsible for the payment by TCS of all Taxes of TCS due on the cash basis on or before the Closing Date. Buyer shall be responsible for the payment by TCS of all Taxes of TCS accruing after the Closing Date. The Shareholder shall cause to be prepared and timely and properly filed on behalf of the Shareholder and TCS, all returns and filings with respect to federal, California Taxes, or any other state with respect to which a return or filing is required under applicable law accruing on or before the Closing Date consistent with this Agreement. Such Taxes, returns, and filings shall be determined by closing TCS's books and records as of and including the Closing Date, or if the allocation of an item of income, loss, deduction, or credit cannot be definitely allocated to an ascertainable date, such item shall be pro rated on a daily basis. The Shareholder, TCS and Buyer shall cooperate, and shall cause their respective affiliates, officers, employees, agents, auditors and representatives to cooperate, in preparing and filing all returns, reports, and forms relating to Taxes, including maintaining and making available to each other all records necessary in connection with Taxes and in resolving all disputes and audits with respect to all taxable periods relating to Taxes. 5.4. Resale Restriction. For a period of two (2) years after the Closing Date, the Shareholder shall not, directly or indirectly, offer, sell, transfer, pledge, contract to sell, transfer or pledge, or cause or in any way permit to be sold, transferred, pledged or otherwise disposed of, any of the Buyer Shares without the prior written consent of Buyer. In connection herewith, the Shareholder agrees that during the two (2) year period, the Buyer may place stop transfer instructions with the Company's transfer agent for the securities. 5.5. Rule 144 Compliance. Buyer shall file such information, documents and reports as shall hereafter be required by the Securities and Exchange Commission as a condition to the availability of Rule 144 under the Securities Act of 1933, as amended, with respect to the Buyer Shares. 6. INDEMNIFICATION 6.1. By the Shareholder. Subject to the terms and conditions of this Article 6, the Shareholder hereby agrees to indemnify, defend and hold harmless Buyer, its directors, officers and employees (hereinafter "Buyer's Affiliates") and TCS, its directors, officers and employees 22 27 from and against all Claims (as hereinafter defined) asserted against, resulting to, imposed upon, or incurred by Buyer, Buyer's Affiliates or TCS, directly or indirectly, by reason of, arising out of or resulting from (a) the inaccuracy or breach of any representation or warranty of the Shareholder contained in this Agreement, (b) the breach of any covenant by the Shareholder contained in this Agreement, (c) any dispute involving, or Claim made by, any current or former shareholder of TCS (other than the Shareholder), or (d) any matter disclosed in Schedule 3.9. As used in this Article 6, "Claim" shall mean and include (i) all debts, liabilities and obligations; (ii) all losses, damages (but excluding consequential damages), judgments, awards, settlements, costs and expenses (including, without limitation, interest (including prejudgment interest in any litigated matter), penalties, court costs and attorneys' fees and expenses); and (iii) all demands, claims, suits, actions, costs of investigation, causes of action, proceedings and assessments, in each case after deduction of any insurance recovery that is remitted to the Indemnified Party (as hereinafter defined) as a result of any of the foregoing. 6.2. By Buyer. Subject to the terms and conditions of this Article 6, Buyer hereby agrees to indemnify, defend and hold harmless the Shareholder and his heirs and personal representatives from and against all Claims asserted against, resulting to, imposed upon or incurred by any such person, directly or indirectly, by reason of or resulting from (a) the inaccuracy or breach of any representation or warranty of Buyer contained in or made pursuant to this Agreement, or (b) the breach of any covenant of Buyer contained in this Agreement. 6.3. Indemnification of Third-Party Claims. The obligations and liabilities of any party to indemnify any other under this Article 6 with respect to Claims relating to third parties shall be subject to the following terms and conditions: 6.3.(a) Notice and Defense. The party or parties to be indemnified (whether one or more, the "Indemnified Party") will give the party or parties from whom indemnification is sought (whether one or more, the "Indemnifying Party") prompt written notice of any Claim, and the Indemnifying Party will have the right to undertake the defense thereof by representatives chosen by it. The Indemnified Party shall make available to the Indemnifying Party or its representatives all records and other materials required by the Indemnifying Party in connection with such Claim and in the possession or under the control of the Indemnified Party, for the use of the Indemnifying Party and its representatives in prosecuting the defense of any such Claim, and the Indemnified Party shall be entitled to participate in the defense of such Claim. Subject to the provisions of Sections 6.3.(b) and 6.3.(c) hereof, if the defense of such Claim is assumed by the Indemnifying Party, and (except for a Claim based upon any matter disclosed in Schedule 3.9 in which case no such approval shall be necessary) upon approval by the Indemnified Party of counsel selected by the Indemnifying Party, the Indemnifying Party shall have no liability for any compromise or settlement of such Claim without its written consent. 6.3.(b) Failure to Defend. If the Indemnifying Party, within a reasonable time after notice of any such Claim, fails to assume the defense of such Claim actively 23 28 and in good faith, the Indemnified Party will (upon further notice) have the right to undertake the defense, compromise or settlement of such Claim or consent to the entry of a judgment with respect to such Claim, on behalf of and for the account of and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party's defense, compromise, settlement or consent to judgment therein. 6.3.(c) Indemnified Party's Rights. Anything in this Article 6 to the contrary notwithstanding, (i) except for a Claim based upon any matter disclosed in Schedule 3.9, if there is a reasonable probability that a Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, the Indemnified Party shall have the right to defend and, with the consent of the Indemnifying Party (which shall not be unreasonably withheld), to compromise or settle such Claim, and (ii) the Indemnifying Party shall not, without the written consent of the Indemnified Party, settle or compromise any Claim or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such Claim. 6.4. Payment. The Indemnifying Party shall promptly pay the Indemnified Party any amount due under this Article 6. Upon judgment, determination, settlement or compromise of any third party Claim, the Indemnifying Party shall pay promptly on behalf of the Indemnified Party, and/or to the Indemnified Party in reimbursement of any amount theretofore required to be paid by it, the amount so determined by judgment, determination, settlement or compromise and all other Claims of the Indemnified Party with respect thereto, unless in the case of a judgment an appeal is made from the judgment, provided that any such amount is required to be paid by the Indemnifying Party under this Article 6. If the Indemnifying Party desires to appeal from an adverse judgment, then the Indemnifying Party shall post and pay the cost of the security or bond to stay execution of the judgment pending appeal. Upon the payment in full by the Indemnifying Party of such amounts, the Indemnifying Party shall succeed to the rights of such Indemnified Party, to the extent not waived in settlement, against the third party who made such third party Claim. 6.5. No Waiver. The closing of the transactions contemplated by this Agreement shall not constitute a waiver by any party of its rights to indemnification hereunder, regardless of whether the party seeking indemnification has knowledge of the breach, violation or failure of condition constituting the basis of the Claim at or before the Closing. 6.6. Limitations on Indemnification. Except for any willful and knowing breach or misrepresentation, as to which a claim for indemnification hereunder may be brought without limitation as to time or amount: 6.6.(a) Time Limitation. No claim for indemnification shall be brought under Section 6.1 of this Article 6 for the inaccuracy or breach of a representation or warranty, 24 29 or the breach of any covenant, contained in or made pursuant to this Agreement unless the nature of such claim for indemnification has been described in reasonable detail in a written notice provided by an Indemnified Party to an Indemnifying Party prior to the second anniversary of the Closing Date; provided, however, that with respect to any Claim that arises out of or is related to any dispute involving, or Claim made by, any current or former shareholder of TCS (other than the Shareholder), or Sections 3.1 (Corporate), 3.2 (The Shareholder), 3.5 (Tax Matters), 3.9 (Litigation), 3.15 (Employee Benefit Plans), 5.1 (Noncompetition; Confidentiality) and 5.3 (Income Tax Returns and Allocation of Tax) hereof, such time shall extend to the expiration of the applicable statute of limitations for any such Claim, and with respect to any Claim that arises out of or is related to Section 3.10(c) (Environmental Matters), such Claim shall be made or described in reasonable detail in a written notice provided by an Indemnified Party to an Indemnifying Party prior to the fifth anniversary of the Closing Date. 6.6.(b) Amount Limitation. An Indemnified Party shall be entitled to indemnification under Section 6.1 of this Article 6 for the inaccuracy or breach of a representation or warranty, or breach of a covenant, contained in or made pursuant to this Agreement, unless the aggregate of all of the Indemnifying Parties' indemnification obligations to the Indemnified Party pursuant to this Article 6 (but for this Section 6.6.(b)) exceeds $40,000; provided, that in the event of aggregate indemnification obligations in excess of such amount, the Indemnified Party shall be entitled to indemnification in full under this Agreement, and provided, further, that any indemnification payment made with respect to any dispute involving, or Claim made by, any current or former shareholder of TCS (other than the Shareholder) or any matter disclosed in Schedule 3.9 shall not be included in such $40,000 threshold. Notwithstanding the preceding sentence, the limitation on indemnification under this Section 6.6.(b) shall not apply to any dispute involving, or Claim made by, any current or former Shareholder of TCS (other than the Shareholder), or matter disclosed in Schedule 3.9. 6.6.(c) Aggregate Amount Limitation for the Shareholder. Notwithstanding any provision of this Article 6 to the contrary, the aggregate amount of the indemnification obligations of the Shareholder pursuant to Section 6.1 of this Article 6 shall not exceed the lesser of (i) $3,800,000 or (ii) the Buyer Shares including, if sold, the proceeds received from the sale of the Buyer Shares. 6.7. Indemnification - Exclusive Remedy. The provisions of this Article 6 shall constitute the exclusive remedy for any claim based upon the subject matter of the indemnification undertakings in Section 6.1 and 6.2. 7. CLOSING The closing of this transaction ("the Closing") shall occur concurrent with the execution of this Agreement effective as of 12:01 A.M. on February 1, 1996. Such date is referred to in this Agreement as the "Closing Date". 25 30 7.1. Documents Delivered by TCS and the Shareholders. At the Closing, TCS and the Shareholder shall deliver to Buyer the following documents, in each case duly executed or otherwise in proper form: 7.1.(a) Stock Certificates. Stock certificates representing the TCS Shares, duly endorsed for transfer or with duly executed stock powers attached. 7.1.(b) Opinion of Counsel. A written opinion of Joy & Associates, counsel to TCS and the Shareholder, dated as of the Closing Date, addressed to Buyer. 7.1.(c) Certified Resolutions. Certified copies of the resolutions of the Board of Directors and the shareholders of TCS, authorizing and approving this Agreement and the Ancillary Instruments, and the consummation of the transactions contemplated hereby and thereby. 7.1.(d) Articles; Bylaws. A copy of the Bylaws of TCS certified by its secretary, and a copy of the Certificate of Incorporation of TCS, certified as of a recent date by the Secretary of State of the state of incorporation of TCS, and good standing certificates, certified as of a recent date by the Secretary of State of such state and all other states in which TCS is qualified to do business. 7.1.(e) Incumbency Certificate. Incumbency certificates relating to each person executing (as a corporate officer or otherwise on behalf of another person) any document executed and delivered to Buyer pursuant to the terms hereof. 7.1.(f) Estoppel Certificates. An estoppel certificate from the landlord under each lease of Real Property which estoppel certificate certifies that: (i) the lease is valid and in full force and effect; (ii) the amounts payable by TCS under the lease and the date to which the same have been paid; (iii) whether there are, to the knowledge of said landlord, any defaults thereunder, and, if so, specifying the nature thereof; and (iv) a statement that the transactions contemplated by this Agreement will not constitute a default under the lease. 7.1.(g) Closing Date Balance Sheet. A balance sheet of TCS as of the Closing Date indicating that (i) the net worth of TCS set forth on Schedule 7.1.(g) based on the accrual method of accounting is at least $139,400, (ii) the cash in the general checking account is at least $4,200, (iii) the liabilities of TCS associated with COBRA payables are equal to or less than the cash and cash equivalents of TCS, and (iv) the Shareholder and any Shareholder Affiliate do not have any outstanding indebtedness owed to TCS. 7.2. Documents Delivered by Buyer. At the Closing, Buyer shall deliver to the Shareholder the following, in each case duly executed or otherwise in proper form: 26 31 7.2.(a) Stock Certificates. A letter addressed to the Buyer's Transfer Agent authorizing the Transfer Agent to issue and deliver the Buyer Shares to the Shareholder. 7.2.(b) Opinion of Counsel. A written opinion of Foley & Lardner, counsel to Buyer, dated as of the Closing Date, addressed to TCS. 7.2.(c) Certified Resolutions. A certified copy of the resolutions of the Board of Directors of Buyer authorizing and approving this Agreement and the consummation of the transactions contemplated hereby. 7.2.(d) Incumbency Certificate. Incumbency certificates relating to each person executing any document executed and delivered to TCS or the Shareholder by Buyer pursuant to the terms hereof. 8. RESOLUTION OF DISPUTES 8.1. Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, any Ancillary Instrument or any contract or agreement entered into pursuant hereto, or arising out of or relating to the performance by the parties of its or their terms, shall be settled by binding arbitration held in the county and state of the party defending any such action in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, except as specifically otherwise provided in this Article 8. Notwithstanding the foregoing, Buyer may, in its discretion, apply to a court of competent jurisdiction for equitable relief from any violation or threatened violation of the covenants of the Shareholder under Article 5 of this Agreement, or any covenants not to compete contained in the Consulting and Noncompetition Agreement. 8.2. Arbitrators. The panel to be appointed shall consist of three neutral arbitrators. 8.3. Procedures; No Appeal. The arbitrators shall allow such discovery as the arbitrators determine appropriate under the circumstances and shall resolve the dispute as expeditiously as practicable, and if reasonably practicable, within 120 days after the selection of the arbitrators. The arbitrators shall give the parties written notice of the decision, with the reasons therefor set out, and shall have 30 days thereafter to reconsider and modify such decision if any party so requests within 10 days after the decision. Thereafter, the decision of the arbitrators shall be final, binding, and nonappealable with respect to all persons, including (without limitation) persons who have failed or refused to participate in the arbitration process. 8.4. Authority. The arbitrators shall have authority to award relief under legal or equitable principles, including interim or preliminary relief. Unless the arbitrators find that exceptional circumstances require otherwise, the arbitrators will include in the award the prevailing party's costs of arbitration and reasonable attorneys' fees. 27 32 8.5. Entry of Judgment. Judgment upon the award rendered by the arbitrators may be entered in any court having in personam and subject matter jurisdiction. Buyer and the Shareholder hereby submit to the in personam jurisdiction of the Federal and State courts in California and Florida, for the purpose of confirming any such award and entering judgment thereon. 8.6. Confidentiality. All proceedings under this Article 8, and all evidence given or discovered pursuant hereto, shall be maintained in confidence by all parties. 8.7. Continued Performance. The fact that the dispute resolution procedures specified in this Article 8 shall have been or may be invoked shall not excuse any party from performing its obligations under this Agreement and during the pendency of any such procedure all parties shall continue to perform their respective obligations in good faith. 8.8. Tolling. All applicable statutes of limitation shall be tolled while the procedures specified in this Article 8 are pending. The parties will take such action, if any, required to effectuate such tolling. 9. MISCELLANEOUS 9.1. Disclosure Schedule. The Schedules described herein have been compiled in a bound volume (the "Disclosure Schedule"), executed by TCS and the Shareholder and dated and delivered to Buyer on the Closing Date. The Disclosure Schedule includes a table of contents and/or index to all of the information and documents contained therein. The Disclosure Schedule shall not vary, change or alter the language of the representations and warranties contained in this Agreement and, to the extent the language in the Disclosure Schedule does not conform in every respect to the language of such representations and warranties, such language in the Disclosure Schedule shall be disregarded and be of no force or effect. 9.2. Further Assurance. From time to time, at Buyer's request and without further consideration, TCS and the Shareholder will execute and deliver to Buyer such documents and take such other action as Buyer may reasonably request in order to consummate more effectively the transactions contemplated hereby. 9.3. Disclosures and Announcements. Announcements concerning the transactions provided for in this Agreement by Buyer, TCS or the Shareholder shall be subject to the approval of the other parties in all essential respects, except that approval of TCS or the Shareholder shall not be required as to any statements and other information which Buyer may submit to the Securities and Exchange Commission, The Nasdaq Stock Market ("Nasdaq") or Buyer's shareholders as required pursuant to any rule or regulation of the Securities and Exchange Commission, Nasdaq or applicable law. 28 33 9.4. Assignment; Parties in Interest. 9.4.(a) Assignment. Except as expressly provided herein, the rights and obligations of a party hereunder may not be assigned, transferred or encumbered without the prior written consent of the other parties. Notwithstanding the foregoing, Buyer may, without consent of any other party, cause one or more subsidiaries of Buyer to carry out all or part of the transactions contemplated hereby; provided, however, that Buyer shall, nevertheless, remain liable for all of its obligations, and those of any such subsidiary, to the Shareholder hereunder. 9.4.(b) Parties in Interest. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and permitted assigns of the parties hereto. Nothing contained herein shall be deemed to confer upon any other person (besides the parties hereto) any right or remedy under or by reason of this Agreement. 9.5. Law Governing Agreement. This Agreement may not be modified or terminated orally, and shall be construed and interpreted according to the laws of the State of Florida, excluding its conflicts of law rules. 9.6. Amendment and Modification. Buyer and the Shareholder may amend, modify and supplement this Agreement in such manner as may be agreed upon in writing between Buyer and the Shareholder. 9.7. Notice. All notices, requests, demands and other communications hereunder shall be given in writing and shall be: (a) personally delivered; (b) sent by telecopier, facsimile transmission or other electronic means of transmitting written documents; or (c) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective addresses to be used for all such notices, demands or requests are as follows: (a) If to Buyer, to: ABR Information Services, Inc. 34125 U.S. Highway 19, North Palm Harbor, FL 34684-2116 Attention: Mr. Vincent Addonisio, Senior Vice President and Chief Financial Officer Facsimile: (813) 789-3854 29 34 (with a copy to) Foley & Lardner 100 North Tampa Street Suite 2700 Tampa, Florida 33602 Attn: Kenneth J. Meister, Esq. Facsimile: (813) 221-4210 or to such other person or address as Buyer shall furnish to the Shareholder in writing. (b) If to the Shareholder, to: John M. Hermann 13312 Tiburon Way Tustin, California 92680 Facsimile: (714) 730-1509 (with a copy to) Joy & Associates 18400 Von Karman Avenue Suite 580 Irvine, California 92715 Attn: Jeffrey C. Joy, Esq. Facsimile: (714) 252-8959 or to such other person or address as the Shareholder shall designate in writing. (c) If to TCS, to Buyer as specified above. If personally delivered, such communication shall be deemed delivered upon actual receipt; if electronically transmitted pursuant to this paragraph, such communication shall be deemed delivered the next business day after transmission (and sender shall bear the burden of proof of delivery); if sent by overnight courier pursuant to this paragraph, such communication shall be deemed delivered upon receipt; and if sent by U.S. mail pursuant to this paragraph, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. Any party to this Agreement may change its address for the purposes of this Agreement by giving notice thereof in accordance with this Section. 30 35 9.8. Expenses. 9.8.(a) Brokerage. Except as provided in Section 4.3 hereof, the Shareholder and Buyer each represent and warrant to each other that there is no broker involved or in any way connected with the transfer provided for herein on their behalf respectively (and the Shareholder represents and warrants that there is no broker involved on behalf of TCS) and each agrees to hold the other harmless from and against all other claims for brokerage commissions or finder's fees in connection with the execution of this Agreement or the transactions provided for herein. 9.8.(b) Expenses to be Paid by the Shareholder. The Shareholder shall pay, and shall indemnify, defend and hold Buyer and TCS harmless from and against, each of the following: (i) Transfer Taxes. Any sales, use, excise, transfer or other similar tax imposed with respect to the transactions provided for in this Agreement, and any interest or penalties related thereto. (ii) Professional Fees. All fees and expenses of his own, as well as TCS's, legal, accounting, investment banking and other professional counsel in connection with the transactions contemplated hereby; provided, however, that TCS and Buyer shall be obligated to pay fees incurred by the Shareholder's professional advisors up to $9,000 in the aggregate. 9.8.(c) Other. Except as otherwise provided herein, each of the parties shall bear its own expenses and the expenses of its counsel and other agents in connection with the transactions contemplated hereby. 9.8.(d) Costs of Litigation or Arbitration. The parties agree that (subject to the discretion, in an arbitration proceeding, of the arbitrators as set forth in Section 8.4) the prevailing party in any action brought with respect to or to enforce any right or remedy under this Agreement shall be entitled to recover from the other party or parties all reasonable costs and expenses of any nature whatsoever incurred by the prevailing party in connection with such action, including, without limitation, reasonable attorneys' fees and prejudgment interest. 9.9. Entire Agreement. This instrument embodies the entire agreement between the parties hereto with respect to the transactions contemplated herein, and there have been and are no prior or contemporaneous agreements, representations or warranties between the parties other than those set forth or provided for herein. 9.10. Severability. In the event that any provision of this Agreement shall be held to be invalid or unenforceable for any reason by a court of competent jurisdiction, the remaining provisions of this Agreement shall continue in full force and effect as though the invalid or 31 36 unenforceable provisions had not been included herein. Notwithstanding the foregoing, in the event that any provision relating to the duration or scope of any covenant or restriction contained herein shall be declared by a court of competent jurisdiction to exceed the maximum time period and/or scope of restriction, such provision shall be deemed to become, and thereafter shall be equal to, the maximum duration and/or scope of restriction deemed enforceable by said court. 9.11. Gender. Whenever the context requires, words used in the singular shall be construed to mean or include the plural and vice versa, and pronouns of any gender shall be deemed to include and designate the masculine, feminine or neuter gender. 9.12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.13. Headings. The headings in this Agreement are inserted for convenience only and shall not constitute a part hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. BUYER: ABR INFORMATION SERVICES, INC. By: /s/ Vincent Addonisio ------------------------------------------ Vincent Addonisio, Senior Vice President and Chief Financial Officer THE SHAREHOLDER: /s/ John M. Hermann ------------------------------------------ John M. Hermann TCS: TOTAL COBRA SERVICES By: /s/ John M. Hermann ------------------------------------------ John M. Hermann President 32 EX-10.13 4 AGREEMENT & PLAN OF REORGANIZATION 1 EXHIBIT 10.13 AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF JUNE 28, 1996 BY AND AMONG ABR INFORMATION SERVICES, INC. ("ABR"), LP BAIER COMPANY ("LP BAIER"), AND LP BAIER'S SHAREHOLDERS (THE "SHAREHOLDERS"). 2 TABLE OF CONTENTS 1. TRANSFER AND ISSUANCE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1. Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2. Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. SECURITIES ACT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1. Restrictions on Disposition of ABR Shares . . . . . . . . . . . . . . . . . . 2 2.2. Evidence of Compliance with Private Offering Exemption . . . . . . . . . . . . 2 2.3. Notice of Limitation Upon Disposition . . . . . . . . . . . . . . . . . . . . 3 3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF LP BAIER AND THE SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.1. Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2. The Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.3. No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.4. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.5. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.6. Accounts Receivable and COBRA Payables . . . . . . . . . . . . . . . . . . . . 7 3.7. Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.8. Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . 8 3.9. No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.10. Compliance With Laws and Orders . . . . . . . . . . . . . . . . . . . . . . . 9 3.11. Title to and Condition of Properties . . . . . . . . . . . . . . . . . . . . . 10 3.12. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.13. Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.14. Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.15. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.16. Employment Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.17. Trade Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.18. Major Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.19. Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.20. Shareholder Affiliates' Relationships to LP Baier . . . . . . . . . . . . . . 18 3.21. No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.22. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4. REPRESENTATIONS AND WARRANTIES OF ABR . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1. Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.2. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3. No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.4. Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.5. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.6. Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.7. Approvals and Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
i 3 5. POST-CLOSING COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.1. Noncompetition; Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 20 5.2. Income Tax Returns and Allocation of Tax . . . . . . . . . . . . . . . . . . . 21 5.3. Restriction on Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.4. Rule 144 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.1. By the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.2. By ABR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.3. Indemnification of Third-Party Claims . . . . . . . . . . . . . . . . . . . . 23 6.4. Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.5. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.6. Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 24 6.7. Indemnification - Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . 25 7. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.1. Documents Delivered by LP Baier and the Shareholders . . . . . . . . . . . . . 25 7.2. Documents Delivered by ABR . . . . . . . . . . . . . . . . . . . . . . . . . . 26 8. RESOLUTION OF DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.1. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.2. Arbitrators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.3. Procedures; No Appeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.4. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.5. Entry of Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.6. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.7. Continued Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.8. Tolling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.1. Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.2. Further Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.3. Disclosures and Announcements . . . . . . . . . . . . . . . . . . . . . . . . 28 9.4. Assignment; Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . 28 9.5. Law Governing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.6. Amendment and Modification . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.7. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.8. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.9. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.10. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.11. Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.12. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.13. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ii 4 DISCLOSURE SCHEDULES -------------------- Schedule 3.1.(c) - Foreign Corporation Qualification Schedule 3.1.(e) - Director/Officer List Schedule 3.1.(f) - Capitalization Schedule 3.3 - Violation, Conflict, Default Schedule 3.5.(a) - Provision for Taxes Schedule 3.5.(b) - Tax Returns (Exceptions to Representations) Schedule 3.5.(c) - Tax Audits Schedule 3.6 - Accounts Receivable (Aged Schedule) Schedule 3.7 - Certain Changes Schedule 3.8 - Off-Balance Sheet Liabilities Schedule 3.9 - Litigation Matters Schedule 3.10.(a) - Non-Compliance with Laws Schedule 3.10.(b) - Licenses and Permits Schedule 3.10.(c) - Environmental Matters (Exceptions to Representations) Schedule 3.11.(a) - Liens Schedule 3.11.(c) - Real Property Occupied Schedule 3.12 - Insurance Schedule 3.13.(b) - Personal Property Leases Schedule 3.13.(e) - Powers of Attorney Schedule 3.13.(f) - Collective Bargaining Agreements Schedule 3.13.(g) - Loan Agreements, etc. Schedule 3.13.(h) - Guarantees Schedule 3.13.(k) - Material Contracts Schedule 3.14 - Labor Matters Schedule 3.15.(a) - Employee Plans/Agreements Schedule 3.17 - Trade Rights Schedule 3.18 - Major Customers Schedule 3.19 - Bank Accounts Schedule 3.20 - Shareholder Affiliates' - Relationships to LP Baier Schedule 7.1.(g) - Closing Date Balance Sheet EXHIBITS -------- Exhibit A - Employment Agreement Exhibit B - Registration Rights Agreement
iii 5 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") dated as of June 28, 1996, is by and among ABR INFORMATION SERVICES, INC, a Florida corporation ("ABR"), THE LP BAIER COMPANY, a Virginia corporation ("LP Baier"), and the shareholders whose signatures appear on the signature page(s) hereto (the "Shareholders"). RECITALS 1. LP Baier is engaged in the business of providing employee benefits administration services, including, without limitation, administration, record-keeping and compliance of flexible spending accounts, qualified plans, payroll processing and other employee benefit programs and compliance with COBRA health benefits (the "Business"). 2. The Shareholders other than Rick Snyder have been granted rights to acquire capital stock of LP Baier upon the sale of LP Baier, which capital stock shall be issued to such Shareholders in connection with and immediately prior to the transaction contemplated hereby and shall be deemed to be issued and outstanding for the purposes of this Agreement. 3. The Shareholders own all of the issued and outstanding shares of capital stock of LP Baier (the "Shares"). 4. ABR desires to acquire all of the Shares from the Shareholders solely in exchange for shares of voting common stock, $.01 par value per share, of ABR (the "Common Stock"), upon the terms and conditions herein set forth. 5. For federal income tax purposes, it is intended that the transaction contemplated hereby will constitute a reorganization within the meaning of Section 368(a)(1)(B) (a "B Reorganization") of the Internal Revenue Code of 1986, as amended (the "Code"). 6. For financial accounting purposes, it is intended that the transaction contemplated hereby be accounted for as a "pooling." AGREEMENT NOW THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants, agreements and conditions hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: 6 1. TRANSFER AND ISSUANCE OF SHARES 1.1. Transfer of Shares. Subject to the terms and conditions of this Agreement, at the Closing (as defined in Section 7), the Shareholders shall transfer to ABR all of the Shareholders' right, title and interest in and to all of the Shares. 1.2. Issuance of Shares. At the Closing and in exchange for the Shares, ABR shall issue and deliver to the Shareholders a number of validly issued, fully paid and nonassessable shares of Common Stock which, when multiplied by the average closing per share sales price of the Common Stock on The Nasdaq Stock Market for the thirty (30) trading days prior to the day before the Closing Date (as defined herein) (the "Issue Price"), results in an aggregate value of $8.0 million (the "ABR Shares"). In the event that the issued and outstanding shares of Common Stock shall have been changed into a different number of shares as a result of a stock split, reverse stock split, stock dividend, recapitalization, reclassification, reorganization, merger or other similar transaction with a record date within the 30 trading day period described above, the average closing per share sales price to calculate the Issue Price shall be adjusted accordingly in order for the ABR Shares, if delivered after such record date, to be adjusted accordingly. Any fractional shares resulting from such computation shall be eliminated by rounding upward to the nearest whole share. 2. SECURITIES ACT PROVISIONS 2.1. Restrictions on Disposition of ABR Shares. Each of the Shareholders covenants and warrants that the ABR Shares to be received pursuant to this Agreement are acquired for each of their own account and not with the present view towards the distribution thereof and he or she will not dispose of the ABR Shares except (i) pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Act"), or (ii) in any other transaction which, in the reasonable opinion of counsel acceptable to ABR, is exempt from registration under the Act or the rules and regulations of the Securities and Exchange Commission thereunder, including, without limitation, Rule 144 under the Act. In order to effectuate the covenants of this subsection 2.1, an appropriate endorsement will be placed on the certificate evidencing the ABR Shares at the time of distribution of such shares by ABR pursuant to this Agreement, and stop transfer instructions shall be placed with the transfer agent for the securities. A substitute certificate shall be promptly delivered to the Shareholders removing such endorsement from those ABR Shares which have been registered pursuant to an effective registration statement under the Act and ABR shall remove any stop transfer instructions with the transfer agent regarding such ABR Shares. 2.2. Evidence of Compliance with Private Offering Exemption. Each of the Shareholders represents to ABR that he or she or his or her representative has the financial sophistication to assess the merits and risks of the transaction contemplated hereby and agrees to supply ABR with such items as counsel for ABR may require in order to evidence the private offering character of the distribution of the ABR Shares made pursuant to this Agreement. 2 7 2.3. Notice of Limitation Upon Disposition. The Shareholders are aware that the ABR Shares distributed to them will not have been registered pursuant to the Securities Act of 1933, as amended; therefore, under current interpretations and applicable rules, except as provided in the Registration Rights Agreement (as defined in Section 7.2(e) hereof), the Shareholders will be required to retain such shares for a period of at least two (2) years following the Closing Date and, at the expiration of such two (2) year period, sales of the ABR Shares may be confined to brokerage transactions of limited amounts requiring certain notification filings with the Securities and Exchange Commission and such disposition may be available only if ABR is current in its filings with the Securities and Exchange Commission under the Act, and the other limitations imposed by the rules of the Securities and Exchange Commission on the disposition of the ABR Shares. 3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF LP BAIER AND THE SHAREHOLDERS LP Baier and the Shareholders make the following representations and warranties to ABR with respect or related to, or concerning, LP Baier, each of which is true and correct on the date hereof, is or shall be unaffected by any investigation heretofore or hereafter made by ABR, or any of ABR's agents or representatives, or any knowledge of ABR, its agents or representatives other than as specifically disclosed in the Disclosure Schedules delivered to ABR at the time of the execution of this Agreement, and shall survive the Closing of the transactions provided for herein. The representations and warranties of LP Baier and the Shareholders hereunder shall be joint and several except for the representations in Section 3.2. with respect solely to each of the Shareholders, and any representations to the "knowledge" of LP Baier or the Shareholders, which shall be deemed made separately by LP Baier or the Shareholders, as the case may be. For purposes of this Agreement including without limitation Section 4, each of LP Baier, the Shareholders and ABR shall be deemed to have knowledge of the subject matter of any representation or warranty if the Shareholders has actual knowledge thereof. 3.1. Corporate. 3.1.(a) Organization. LP Baier is a corporation duly organized, validly existing and in good standing under the laws of the State of Virginia. 3.1.(b) Corporate Power; Validity. LP Baier has all requisite corporate power and authority to own, operate and lease its properties and to carry on the Business as and where such is now being conducted. LP Baier has full power, legal right and authority to enter into, execute and deliver this Agreement and the other agreements, instruments and documents contemplated hereby and delivered on the date hereof (such other documents are sometimes referred to herein as "Ancillary Instruments"), and to carry out the transactions contemplated hereby and thereby. This Agreement and each Ancillary Instrument that provides for its execution by LP Baier has been duly and validly executed and delivered by LP Baier. 3 8 3.1.(c) Qualification. LP Baier is duly licensed or qualified to do business as a foreign corporation, and is in good standing, in each jurisdiction wherein the character of the properties owned or leased by it, or the nature of the Business, makes such licensing or qualification necessary except where failure to be so qualified or licensed would not have a material adverse effect on the financial condition or results of operations of LP Baier. The states in which LP Baier is licensed or qualified to do business are listed in Schedule 3.1.(c). 3.1.(d) No Subsidiaries. LP Baier does not own, directly or indirectly, any capital stock or other equity securities of any corporation or maintain any direct or indirect equity or other ownership interest in any entity or business. 3.1.(e) Corporate Documents, etc. The copies of the articles or certificate of incorporation and bylaws of LP Baier, as amended or restated (hereinafter, "Certificate of Incorporation" and "Bylaws," respectively), which have been delivered to ABR are true, correct and complete copies of such instruments as presently in effect. The corporate minute books and stock record books of LP Baier which have been furnished to ABR for inspection are true, correct and complete and accurately reflect all meetings held of, and corporate action taken by, the shareholders and Board of Directors of LP Baier. The duly elected and qualified directors and officers of LP Baier are listed in Schedule 3.1.(e). 3.1.(f) Capitalization. The authorized capital stock of LP Baier consists entirely of 5,000 shares of Common Stock. No shares of such capital stock are issued or outstanding except for 1,851.85 shares of voting Common Stock which are owned of record and beneficially by the Shareholders as set forth on Schedule 3.1.(f). All such shares of capital stock of LP Baier are validly issued, fully paid and nonassessable. There are no (a) securities convertible into or exchangeable for any of LP Baier's capital stock or other securities, (b) options, warrants or other rights to purchase or subscribe to capital stock or other securities of LP Baier or securities which are convertible into or exchangeable for capital stock or other securities of LP Baier, or (c) contracts, commitments, agreements, understandings or arrangements of any kind relating to the issuance, sale or transfer of any capital stock or other equity securities of LP Baier, any such convertible or exchangeable securities or any such options, warrants or other rights. 3.2. The Shareholders. 3.2.(a) Power. Each of the Shareholders has full power, legal right and authority to enter into, execute and deliver this Agreement and the Ancillary Instruments to which the Shareholders are a party and to carry out the transactions contemplated hereby and thereby. 3.2.(b) Validity. This Agreement and each Ancillary Instrument that provides for its execution by the Shareholders have been duly and validly executed and 4 9 delivered by the Shareholders and is the legal, valid and binding obligation of the Shareholders, enforceable in accordance with their terms, subject to the limitations contained herein, and except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally, and by general equitable principles. 3.2.(c) Title. The Shareholders are transferring good and valid title to the Shares to be transferred by the Shareholders hereunder, free and clear of all Liens (as defined in Section 3.12), including, without limitation, voting trusts or agreements, proxies, marital or community property interests. 3.3. No Violation. Except as set forth on Schedule 3.3, neither the execution and delivery of this Agreement or the Ancillary Instruments nor the consummation by LP Baier and the Shareholders of the transactions contemplated hereby and thereby (a) violates in any material respect any currently existing statute, law, ordinance, rule or regulation (collectively, "Laws") or any currently existing order, writ, injunction, judgment, plan or decree (collectively, "Orders") of any court, arbitrator, department, commission, board, bureau, agency, authority, instrumentality or other body, whether federal, state, municipal, foreign or other (collectively, "Government Entities"), (b) requires any authorization, consent, approval, exemption or other action by or notice to any Government Entity (including, without limitation, under any "plant-closing" or similar law assuming, for this purpose, that ABR will cause LP Baier after the Closing not to take any action that would result in a violation of such law), or (c) subject to obtaining the consents referred to in Schedule 3.3, violates or conflicts with, or constitutes a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or results in the termination of, or accelerates the performance required by, or results in the creation of any Lien upon any of the assets of LP Baier (or the Shares) under, any term or provision of the Certificate of Incorporation or Bylaws of LP Baier, or of any material contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which LP Baier or the Shareholders is a party or by which LP Baier or the Shareholders or any of its, his or her assets or properties may be bound or affected. 3.4. Financial Statements. True and complete copies have been delivered to ABR of the financial statements of LP Baier consisting of the balance sheets of LP Baier as of December 31, 1995, 1994, 1993, 1992 and 1991, (the December 31, 1995 balance sheet is referred to herein as the "Recent Balance Sheet"), and the related statement of income for each of the years then ended (including the notes contained therein or annexed thereto), all of which financial statements have been audited by independent accountants for LP Baier for such years and periods. All of such LP Baier financial statements (including all notes and schedules contained therein or annexed thereto) and the Closing Balance Sheet (as required pursuant to Section 7.1.(g) hereof), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, have been prepared in accordance with the books and records of LP Baier, and fairly present, in accordance with generally accepted accounting principles, the financial position, the results of operations and cash flows of LP Baier as of the dates and for the years and periods indicated. True and correct copies have been delivered to ABR of all 5 10 written reports submitted to LP Baier or the Shareholders by LP Baier's accountants related to the books and records of LP Baier. 3.5. Tax Matters. 3.5.(a) Provision For Taxes. Except as set forth on Schedule 3.5.(a), the provision made for taxes on the Closing Balance Sheet is sufficient for the payment of all federal, state, foreign, county, local and other income, ad valorem, excise, profits, franchise, occupation, property, payroll, sales, use, gross receipts and other taxes (and any interest and penalties) and assessments ("Taxes"), whether or not disputed, that were unpaid and owed by LP Baier as of the date of the Closing Balance Sheet. Since the date of the Recent Balance Sheet and excluding the effect of the transactions contemplated herein, LP Baier has not incurred any taxes other than taxes incurred in the ordinary course of business consistent in type and amount with past practices. 3.5.(b) Tax Returns Filed. Except as set forth on Schedule 3.5.(b), all federal, state, foreign, county, local and other tax returns required to be filed by or on behalf of LP Baier have been timely filed and when filed were true and correct, and the taxes shown as due thereon were paid or adequately accrued. True and complete copies of all tax returns or reports filed by LP Baier for each of its three (3) most recent tax years have been delivered to ABR. LP Baier has duly withheld and paid all Taxes which it was required to withhold and pay in connection with amounts heretofore paid to any employee, independent contractor, creditor or shareholder of LP Baier. 3.5.(c) No Tax Audits. Except as set forth on Schedule 3.5.(c), the federal and state income tax returns of LP Baier have not been audited by the Internal Revenue Service or any state taxing authorities, and neither LP Baier nor the Shareholders has received from the Internal Revenue Service or from the income tax authorities of any state, county, local or other jurisdiction any notice of underpayment of income taxes by LP Baier or other deficiency with respect to LP Baier's taxes which has not been paid nor any objection to any return or report filed by LP Baier. There are no outstanding agreements or waivers extending the statutory period of limitations applicable to any tax return or report. 3.5.(d) No Consolidated Group. LP Baier has never been a member of an affiliated group of corporations that filed a consolidated tax return. 3.5.(e) Other. LP Baier has not (i) filed any consent or agreement under Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) applied for any tax ruling, (iii) entered into a closing agreement with any taxing authority, (iv) filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election under Section 338(e) of the Code occurred), or (v) been a party to any tax allocation or tax sharing agreement. LP Baier is not a "United States real property holding company" within the meaning of Section 897 of the Code. 6 11 3.6. Accounts Receivable and COBRA Payables. All accounts receivable of LP Baier reflected on the Recent Balance Sheet and as incurred in the normal course of business since the date thereof, represent arm's length sales actually made in the ordinary course of business. To the best knowledge of the Shareholders, no portion of the accounts receivable is or will be (i) subject to counterclaim or set-off, or (ii) otherwise in dispute, in an aggregate amount which exceeds $10,000. To the best knowledge of the Shareholders, all of the accounts receivable are and as of the Closing Date will be good and collectible in full within 120 days following the Closing Date. Schedule 3.6 contains an aged schedule of accounts receivable included in the Closing Balance Sheet. The cash and cash equivalents held by LP Baier related to insurance premiums collected on behalf of customers as of the Closing Date are equal to or greater than any insurance premiums payable relating to providing COBRA compliance services (the "COBRA Business"). 3.7. Absence of Certain Changes. Except as and to the extent set forth in Schedule 3.7, or as reflected in the Recent Balance Sheet and excluding the transactions contemplated herein, since December 31, 1995 there has not been: 3.7.(a) No Adverse Change. Any material adverse change in the financial condition, assets, liabilities, business or operations of LP Baier; 3.7.(b) No Damage. Any material loss, damage or destruction, whether covered by insurance or not, affecting the Business or the properties of LP Baier; 3.7.(c) No Increase in Compensation. Any increase in the compensation, salaries or wages payable or to become payable to any employee or agent of LP Baier (including, without limitation, any increase or change pursuant to any bonus, pension, profit sharing, retirement or other plan or commitment), or any bonus or other employee benefit granted, made or accrued, other than in the ordinary course of business; 3.7.(d) No Labor Disputes. Any labor disputes, union organization attempts or any work stoppage due to labor disagreements , other than routine individual grievances which are not material to the Business, financial condition or the results of operations of LP Baier; 3.7.(e) No Commitments. Any loan commitment or related financial transaction by LP Baier (including, without limitation, any borrowing or capital expenditure) other than in the ordinary course of business consistent with past practice; 3.7.(f) No Dividends. Any declaration, setting aside, or payment of any dividend or any other distribution in respect of the capital stock of LP Baier; any redemption, purchase or other acquisition by LP Baier of any shares of its capital stock, or any security relating thereto; or any other payment to any shareholder of LP Baier as such a shareholder; 7 12 3.7.(g) No Disposition of Property. Any sale, lease or other transfer or disposition of any properties or assets of LP Baier; 3.7.(h) No Indebtedness. Any indebtedness for borrowed money incurred, assumed or guaranteed by LP Baier; 3.7.(i) No Liens. Any mortgage, pledge, lien or encumbrance made on any of the properties or assets of LP Baier; 3.7.(j) No Amendment of Contracts. Any amendment or termination of any contract or agreement of LP Baier, or any waiver of material rights thereunder, other than in the ordinary course of business, which would have a material adverse effect on the Business, financial condition or results of operations of LP Baier; 3.7.(k) Loans and Advances. Any loan or advance (other than advances to employees in the ordinary course of business for travel and entertainment in accordance with past practice) from LP Baier to any person including, but not limited to, any Shareholder Affiliate (as defined in Section 3.13(d)); or 3.7.(l) Credit. Any grant of credit from LP Baier to any customer on terms or in amounts more favorable than those which have been extended to such customer in the past, any other change in the terms of any credit heretofore extended, or any other change of policies or practices with respect to the granting of credit. 3.8. Absence of Undisclosed Liabilities. Except as and to the extent specifically disclosed in the Recent Balance Sheet or in Schedule 3.8, LP Baier has no liabilities (secured or unsecured, and whether accrued, absolute, contingent, direct, indirect or otherwise, and whether known or unknown), other than liabilities incurred since the date of the Recent Balance Sheet in the ordinary course of business and consistent with past practice and liabilities which will not have an adverse effect on the Business, financial condition or results of operations of LP Baier. 3.9. No Litigation. Except as set forth in Schedule 3.9, there is no action, suit, arbitration, proceeding, investigation or inquiry, whether civil, criminal or administrative ("Litigation"), pending or, to the best knowledge of the Shareholders, threatened, against LP Baier, its officers and directors (in such capacity), the Business or any of its assets. Except as set forth in Schedule 3.9, neither LP Baier, the Business or its assets is subject to any Order of any Government Entity. 3.10. Compliance With Laws and Orders. 3.10.(a) Compliance. Except as set forth in Schedule 3.10.(a), LP Baier has not received notice that it (including its operations, practices, properties and assets) is not in compliance with all applicable material Laws and Orders of all Government 8 13 Entities, including, without limitation, those applicable to discrimination in employment, occupational safety and health, trade practices, competition and pricing, zoning, building and sanitation, employment, retirement and labor relations, product advertising and the Environmental Laws (as hereinafter defined). All reports and returns required to be filed by LP Baier with any Government Entity have been filed, and were accurate and complete when filed. Without limiting the generality of the foregoing: (i) LP Baier has made all required payments pursuant to the required percentage to its unemployment compensation reserve accounts with the appropriate governmental departments of the states where it is required to maintain such accounts; and (ii) LP Baier has not received any report for the past five (5) years required under the federal Occupational Safety and Health Act of 1970, as amended, and under all other applicable health and safety laws and regulations. 3.10.(b) Licenses and Permits. LP Baier has all material licenses, permits, approvals, authorizations and consents of all Government Entities and all certifications required for the conduct of the Business (as presently conducted) and operation of any of the facilities at which the Business is conducted. All such licenses, permits, approvals, authorizations and consents are described in Schedule 3.10.(b), are in full force and effect and will not be affected or made subject to loss, limitation or any obligation to reapply as a result of the transactions contemplated hereby. Except as set forth in Schedule 3.10.(b), to the best knowledge of the Shareholders, LP Baier (including its operations, practices, properties and assets) is and has been in compliance with all such permits and licenses, approvals, authorizations and consents. 3.10.(c) Environmental Matters. The applicable Laws relating to pollution or protection of the environment, including Laws relating to emissions, discharges, generation, storage, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic, hazardous or petroleum or petroleum-based substances or wastes ("Waste") into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Waste including, without limitation, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act and the Comprehensive Environmental Response Compensation Liability Act ("CERCLA"), as amended, and their state and local counterparts are herein collectively referred to as the "Environmental Laws." Without limiting the generality of the foregoing provisions of this Section 3.10, to the best knowledge of the Shareholders, LP Baier is in full compliance with all material limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any regulations, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder. Except as set 9 14 forth in Schedule 3.10.(c), there is no Litigation nor any demand, claim, hearing or notice of violation pending or threatened against LP Baier relating in any way to the Environmental Laws or any Order issued, entered, promulgated or approved thereunder. Except as set forth in Schedule 3.10.(c), to the best knowledge of the Shareholders, there are no past or present events, conditions, circumstances, activities, practices, incidents, actions, omissions or plans which will interfere with or prevent compliance or continued compliance with the Environmental Laws or with any Order issued, entered, promulgated or approved thereunder, or which will give rise to any liability, including, without limitation, liability under CERCLA or similar state or local Laws, or otherwise form the basis of any Litigation, hearing, notice of violation, study or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release or threatened release into the environment, of any Waste. 3.10.(d) COBRA Compliance. With respect to the conduct of the COBRA Business, LP Baier has not received notice of, nor has LP Baier (through its acts or omissions) created circumstances which would give of any law related to the continuation of health care coverage, including, without limitation, the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"). 3.11. Title to and Condition of Properties. 3.11.(a) Title. LP Baier has good and valid title to all of its assets and properties that it purports to own, including, without limitation, all such properties (tangible and intangible) reflected in the Recent Balance Sheet (except for assets held under capitalized leases and property sold since the date of the Recent Balance Sheet in the ordinary course of business), free and clear of all mortgages, liens, (statutory or otherwise) security interests, claims, pledges, licenses, equities, options, conditional sales contracts, assessments, levies, easements, covenants, reservations, restrictions, rights-of-way, exceptions, limitations, charges or encumbrances of any nature whatsoever (collectively, "Liens"), except those Liens that are described in Schedule 3.11(a). Except as described in Schedule 3.11(a), LP Baier's assets or properties are not subject to any restrictions with respect to the transferability thereof. 3.11.(b) Condition. All tangible personal property and assets owned or utilized by LP Baier are in good operating condition, and have been maintained consistent with the standards generally followed in the industry. 3.11.(c) Real Property. LP Baier does not own any real property. Schedule 3.11.(c) sets forth all real property used or occupied by LP Baier (the "Real Property"), true and correct copies of leases for the Real Property have heretofore been delivered to ABR. There are no oral terms or past practice inconsistent with the written terms thereof. All such leases are valid and binding agreements, enforceable in accordance 10 15 with their respective terms, and are in full force and effect. LP Baier has performed all obligations required to be performed by it to date under each such lease and is not in breach or default in any respect thereunder, and there has been no event which, with the giving of notice or the lapse of time or both, would become a breach or default thereunder. To the best knowledge of LP Baier and the Shareholders, no lessor or landlord to any of such leases is in breach or default thereunder. There are now in full force and effect duly issued certificates of occupancy permitting the Real Property and improvements located thereon to be legally used and occupied by LP Baier as the same are now constituted. 3.12. Insurance. Set forth in Schedule 3.12 is a complete and accurate list and description of all policies of fire, liability, professional liability, general liability, business interruption, workers compensation, health and other forms of insurance presently in effect with respect to the Business and the properties of LP Baier, true and correct copies of which have heretofore been delivered to ABR. Schedule 3.12 includes, without limitation, the carrier, the description of coverage, the limits of coverage, retention or deductible amounts, amount of annual premiums, date of expiration and the date through which premiums have been paid with respect to each such policy, and any pending claims in excess of $5,000, whether or not covered by insurance. Schedule 3.12 indicates each policy as to which (a) the coverage limit has been reached or (b) the total incurred losses to date equal 75% or more of the coverage limit. No notice of cancellation or termination has been received with respect to any such policy. Each policy is in full force and effect and all premiums with respect thereto covering all periods up to and including the date hereof have been paid. LP Baier has not been refused any insurance with respect to any aspect of the operations of the Business nor has its coverage been limited by any insurance carrier to which it has applied for insurance or with which it has carried insurance during the last three (3) years. LP Baier has not received any written notice from or on behalf of any insurance carrier issuing any such policy that insurance rates therefor will hereafter be substantially increased (except to the extent that insurance rates may be increased for all similarly situated risks) or that there will hereafter be a cancellation or an increase in a deductible (or an increase in premiums in order to maintain an existing deductible) or nonrenewal of any such policy. Such policies are sufficient in all material respects for compliance by LP Baier with all requirements of all contracts to which LP Baier is a party. None of such policies will in any way be affected by, or terminate or lapse by reason of, the transactions contemplated hereby, unless terminated by ABR subsequent hereto. 3.13. Contracts and Commitments. 3.13.(a) Real Property Leases. Except as set forth in Schedule 3.13.(a), LP Baier has no leases of real property. 3.13.(b) Personal Property Leases. Except as set forth in Schedule 3.13.(b), LP Baier has no leases of personal property involving consideration or other expenditure in excess of $5,000. 11 16 3.13.(c) Sales Commitments. True and complete copies of all contracts or commitments with respect to those customers set forth on Schedule 3.18 have been delivered by LP Baier to ABR. LP Baier has no sales contracts or commitments except those made in the ordinary course of business, at arm's length. 3.13.(d) Contracts With Affiliates and Certain Others. Except as set forth in Schedule 3.13.(d) and except for this Agreement and the Ancillary Instruments, LP Baier has no agreement, understanding, contract or commitment (written or oral) with any Shareholder Affiliate (as defined herein) or any employee, agent, consultant, dealer or franchisee that is not cancelable by LP Baier, on notice of not longer than 30 days without liability, penalty or premium of any nature or kind whatsoever. For purposes of this Agreement, "Shareholder Affiliate" shall mean and include the Shareholders, the Shareholders' spouse, any person who would be the heir or descendant of any such person if he or she were not living, and any entity in which any of the foregoing has a direct or indirect interest, except through the ownership of less than 5% of the outstanding shares of any entity whose securities are listed on a national securities exchange or traded in the national over-the-counter market. 3.13.(e) Powers of Attorney. Except as set forth on Schedule 3.13.(e), LP Baier has not given a power of attorney, which is currently in effect, to any person, firm or corporation for any purpose whatsoever. 3.13.(f) Collective Bargaining Agreements. Except as set forth in Schedule 3.13.(f), LP Baier is not a party to any collective bargaining agreements with any unions, guilds, shop committees or other collective bargaining groups. 3.13.(g) Loan Agreements. Except as set forth in Schedule 3.13.(g), LP Baier is not obligated under any loan agreement, promissory note, letter of credit, or other evidence of indebtedness as a signatory, guarantor or otherwise. Copies of all such agreements have heretofore been delivered by LP Baier to ABR. 3.13.(h) Guarantees. Except as set forth in Schedule 3.13.(h) and except for indemnification undertakings set forth in LP Baier's agreements with its customers, LP Baier has not guaranteed the payment or performance of any person, firm or corporation, agreed to indemnify any person or act as a surety, or otherwise agreed to be contingently or secondarily liable for the obligations of any person. 3.13.(i) Contracts Subject to Renegotiation. LP Baier is not a party to any contract with any governmental body which by its terms allows any governmental body to reduce the rate of fees payable to LP Baier thereunder. 3.13.(j) Burdensome or Restrictive Agreements. LP Baier is not a party to nor is it bound by any agreement requiring it to assign any interest in any trade secret or proprietary information, or prohibiting or restricting it from competing in any business 12 17 or geographical area or soliciting customers or otherwise restricting it from carrying on the Business anywhere in the world. 3.13.(k) Other Material Contracts. Except as set forth in Schedule 3.13.(k), LP Baier is not a party or subject to any lease, contract or commitment of any nature involving consideration or other expenditure in excess of $5,000. 3.13.(l) No Default. LP Baier is not in default under any lease, contract or commitment to which it is a party or is otherwise bound, nor has any event or omission occurred which through the passage of time or the giving of notice, or both, would constitute a default thereunder or cause the acceleration of any of LP Baier's obligations or result in the creation of any Lien on any of the assets owned, used or occupied by LP Baier. 3.14. Labor Matters. Except as set forth in Schedule 3.14, within the last five (5) years LP Baier has not experienced any labor disputes, union organization attempts or any work stoppage due to labor disagreements in connection with the Business. Except to the extent set forth in Schedule 3.14, to the knowledge of the Shareholders, (a) LP Baier is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice; (b) there is no unfair labor practice charge or complaint actually pending or threatened against LP Baier; (c) there is no labor strike, dispute, request for representation, slowdown or stoppage actually pending or threatened against or affecting LP Baier nor any secondary boycott with respect to products of LP Baier; (d) no question concerning representation has been raised or is threatened respecting the employees of LP Baier; (e) no grievance which might have a material adverse effect on LP Baier, nor any arbitration proceeding arising out of or under collective bargaining agreements, is pending and no such claim therefor exists; and (f) there are no administrative charges or court complaints against LP Baier concerning alleged employment discrimination or other employment related matters pending or threatened before the U.S. Equal Employment Opportunity Commission or any Government Entity. 3.15. Employee Benefit Plans. 3.15.(a) Disclosure. Schedule 3.15.(a) sets forth all pension, thrift, savings, profit sharing, retirement, incentive bonus or other bonus, medical, dental, life, accident insurance, employee welfare, disability, group insurance, stock purchase, stock option, stock appreciation, stock bonus, executive or deferred compensation, hospitalization and other similar fringe or employee benefit plans, programs and arrangements, and any employment or consulting contracts, collective bargaining agreements, severance agreements or plans, vacation and sick leave plans, programs, arrangements and policies, including, without limitation, all "employee benefit plans" (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all employee manuals, and all written statements of policies, practices or understandings relating to employment, which are provided to, for the benefit of, or relate to, any 13 18 persons employed by LP Baier. The items described in the foregoing sentence are hereinafter sometimes referred to collectively as "Employee Plans/Agreements," and each individually as an "Employee Plan/Agreement." True and correct copies of all the Employee Plans/Agreements, including all amendments thereto, have heretofore been provided by LP Baier to ABR. Each of the Employee Plans/Agreements is identified on Schedule 3.15.(a), to the extent applicable, as one or more of the following: an "employee pension benefit plan" (as defined in Section 3(2) of ERISA), a "defined benefit plan" (as defined in Section 414 of the Code), an "employee welfare benefit plan" (as defined in Section 3(1) of ERISA), and/or as a plan intended to be qualified under Section 401 of the Code. No Employee Plan/Agreement is a "multiemployer plan" (as defined in Section 4001 of ERISA), and LP Baier has never contributed nor been obligated to contribute to any such multiemployer plan. 3.15.(b) Terminations, Proceedings, Penalties, etc. With respect to each Employee Plan/Agreement that is subject to the provisions of Title IV of ERISA and with respect to which LP Baier, or any of its assets may, directly or indirectly, be subject to any Liability, contingent or otherwise, or the imposition of any Lien (whether by reason of the complete or partial termination of any such plan, the funded status of any such plan, any "complete withdrawal" (as defined in Section 4203 of ERISA) or "partial withdrawal" (as defined in Section 4205 of ERISA) by any person from any such plan, or otherwise): (i) no such plan has been terminated so as to subject, directly or indirectly, any assets of LP Baier to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA; (ii) no proceeding has been initiated or threatened by any person (including the Pension Benefit Guaranty Corporation ("PBGC")) to terminate any such plan; (iii) no condition or event currently exists or currently is expected to occur that could subject, directly or indirectly, any assets of LP Baier to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA, whether to the PBGC or to any other person or otherwise on account of the termination of any such plan; (iv) if any such plan were to be terminated as of the Closing Date, no assets of LP Baier would be subject, directly or indirectly, to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA; (v) no "reportable event" (as defined in Section 4043 of ERISA) has occurred with respect to any such plan; 14 19 (vi) no such plan which is subject to Section 302 of ERISA or Section 412 of the Code has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code, respectively), whether or not waived; and (vii) no such plan is a multiemployer plan or a plan described in Section 4064 of ERISA. 3.15.(c) Prohibited Transactions, etc. To the best of the knowledge of the Shareholders, there have been no "prohibited transactions" within the meaning of Section 406 of ERISA or Section 4975 of the Code for which a statutory or administrative exemption does not exist with respect to any Employee Plan/Agreement, and to the best of the knowledge of the Shareholders, no event or omission has occurred in connection with which LP Baier or its assets or any Employee Plan/Agreement, directly or indirectly, could be subject to any material liability under ERISA, the Code or any other Law or Order applicable to any Employee Plan/Agreement, or under any agreement, instrument, Law or Order pursuant to or under which LP Baier has agreed to indemnify or is required to indemnify any person against liability incurred under any such Law or Order. 3.15.(d) Full Funding. The funds available under each Employee Plan/Agreement which is intended to be a funded plan equal or exceed the amounts required to be paid, or which would be required to be paid if such Employee Plan/Agreement were terminated, on account of rights vested or accrued as of the Closing Date (using the actuarial methods and assumptions then used by LP Baier in connection with the funding of such Employee Plan/Agreement). 3.15.(e) Controlled Group; Affiliated Service Group; Leased Employees. No organization is or has been: (i) a member of a controlled group of corporations as defined in Section 414(b) of the Code, of which LP Baier was a member, or (ii) under common control, as determined under Section 414(c) of the Code, with LP Baier. LP Baier has never been a member of an "affiliated service group" within the meaning of Section 414(m) of the Code. There are not and never have been any leased employees within the meaning of Section 414(n) of the Code who perform services for LP Baier. 3.15.(f) Payments and Compliance. With respect to each Employee Plan/Agreement, (i) all payments due from LP Baier to date have been made and all amounts properly accrued to date as liabilities of LP Baier which have not been paid have been properly recorded on the books of LP Baier (as appropriate) and, to the extent such liabilities were due and payable but were not paid as of the date of the Closing Balance Sheet, are reflected in the Closing Balance Sheet; (ii) LP Baier has complied with, and each such Employee Plan/Agreement conforms in form and operation to, all applicable laws and regulations, including but not limited to ERISA and the Code, in all material respects and all reports and information relating to such Employee 15 20 Plan/Agreement required to be filed with any governmental entity have been timely filed; (iii) all reports and information relating to each such Employee Plan/Agreement required to be disclosed or provided to participants or their beneficiaries have been timely disclosed or provided; (iv) each such Employee Plan/Agreement which is intended to qualify under Section 401 of the Code has received a favorable determination letter from the Internal Revenue Service with respect to such qualification, its related trust has been determined to be exempt from taxation under Section 501(a) of the Code, and nothing has occurred since the date of such letter that has or is likely to adversely affect such qualification or exemption; (v) there are no actions, suits or claims pending (other than routine claims for benefits) or threatened with respect to such Employee Plan/Agreement or against the assets of such Employee Plan/Agreement; and (vi) no Employee Plan/Agreement is a plan which is established and maintained outside the United States primarily for the benefit of individuals substantially all of whom are nonresident aliens. 3.15.(g) Post-Retirement Benefits. Other than such continuation of benefit coverage under group health plans as is required by applicable law, LP Baier does not maintain and has not maintained retiree life or retiree health plans providing for continuing coverage for any employee or any beneficiary of an employee after the employee's termination of employment. 3.15.(h) No Triggering of Obligations. The consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee of LP Baier to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement or in any of the Ancillary Instruments, (ii) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee or (iii) result in any prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code for which an exemption is not available. 3.15.(i) Delivery of Documents. There has been delivered to ABR, with respect to each Employee Plan/Agreement: (i) a copy of the annual report, if required under ERISA, with respect to each such Employee Plan/Agreement for the last two years; (ii) a copy of the summary plan description, together with each summary of material modifications, required under ERISA with respect to such Employee Plan/Agreement, all material employee communications relating to such Employee Plan/Agreement, and, unless the Employee Plan/Agreement is embodied entirely in an insurance policy to which LP Baier is a party, a true and complete copy of such Employee Plan/Agreement; 16 21 (iii) if the Employee Plan/Agreement is funded through a trust or any third party funding vehicle (other than an insurance policy), a copy of the trust or other funding agreement and the latest financial statements thereof; and (iv) the most recent determination letter received from the Internal Revenue Service with respect to each Employee Plan/Agreement that is intended to be a "qualified plan" under Section 401 of the Code. With respect to each Employee Plan/Agreement for which an annual report has been filed and delivered to ABR pursuant to clause (i) of this Section 3.15.(i), no material adverse change has occurred with respect to the matters covered by the latest such annual report since the date thereof. 3.15.(j) Future Commitments. LP Baier has no announced plan or legally binding commitment to create any additional Employee Plans/Agreements or to amend or modify any existing Employee Plan/Agreement except as contemplated herein or in the Employment Agreement (as defined in Section 7.1(h) hereof). 3.16. Employment Compensation. A true and correct list has been provided to ABR of all employees to whom LP Baier is paying compensation, and, in the case of salaried employees, such list identifies the current annual rate of compensation for each employee and, in the case of hourly or commission employees, identifies certain reasonable ranges of rates and the number of employees falling within each such range. 3.17. Trade Rights. Schedule 3.17 lists all Trade Rights (as defined below) in which LP Baier now has any interest, specifying whether such Trade Rights are owned, controlled, used or held (under license or otherwise) by LP Baier, and also indicating which of such Trade Rights are registered. All Trade Rights shown as registered in Schedule 3.17 have been properly registered, all pending registrations and applications have been properly made and filed and all annuity, maintenance, renewal and other fees relating to registrations or applications are current. In order to conduct the Business, as such is currently being conducted, LP Baier does not require any Trade Rights that it does not already have. LP Baier is not infringing and has not infringed any Trade Rights of another in the operation of the Business, nor to the best of the knowledge of LP Baier or the Shareholders, is any other person infringing the Trade Rights of LP Baier. LP Baier has not granted any license or made any assignment of any Trade Right listed on Schedule 3.17, nor does LP Baier pay any royalties or other consideration for the right to use any Trade Rights of others. Except as set forth on Schedule 3.9, there is no Litigation pending or threatened to challenge LP Baier's right, title and interest with respect to its continued use and right to preclude others from using any Trade Rights of LP Baier. The consummation of the transactions contemplated hereby will not alter or impair any Trade Rights owned or used by LP Baier. As used herein, "Trade Rights" shall mean and include: (i) all trademark rights, business identifiers, trade dress, service marks, trade names and brand names, all registrations thereof and applications therefor and all goodwill associated with the foregoing; (ii) all copyrights, copyright registrations and copyright applications, and all other rights 17 22 associated with the foregoing and the underlying works of authorship; (iii) all patents and patent applications, and all international proprietary rights associated therewith; (iv) all contracts or agreements granting any right, title, license or privilege under the intellectual property rights of any third party; (v) all inventions, mask works and mask work registrations, know-how, discoveries, improvements, designs, trade secrets, shop and royalty rights, employee covenants and agreements respecting intellectual property and non-competition and all other types of intellectual property; and (vi) all claims for infringement or breach of any of the foregoing. 3.18. Major Customers. Schedule 3.18 contains a list of the ten (10) largest customers of LP Baier for each of the two (2) most recent fiscal years (determined on the basis of the total dollar amount of net revenues attributable thereto) showing the total dollar amount of net revenues attributable thereto during each such year. Neither LP Baier nor the Shareholders have any knowledge or information of any facts indicating, nor any other reason to believe, that any of the customers listed on Schedule 3.18 will not continue to be customers of LP Baier after the Closing at substantially the same level as heretofore. 3.19. Bank Accounts. Schedule 3.19 sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the LP Baier maintains a safe deposit box, lock box or checking, savings, custodial or other account of any nature, the type and number of each such account and the signatories therefore, a description of any compensating balance arrangements, and the names of all persons authorized to draw thereon, make withdrawals therefrom or have access thereto. 3.20. Shareholder Affiliates' Relationships to LP Baier. Except as set forth on Schedule 3.20, no Shareholder Affiliate has any direct or indirect interest in (i) any entity which does business with LP Baier or is competitive with the Business, or (ii) any property, asset or right which is used by LP Baier in the conduct of the Business. 3.21. No Brokers or Finders. Neither LP Baier nor any of its directors, officers, employees, shareholders or agents have retained, employed or used any broker or finder in connection with the transaction provided for herein or in connection with the negotiation thereof. 3.22. Disclosure. No representation or warranty by LP Baier and/or the Shareholders in this Agreement, nor any certificate, schedule, document or exhibit hereto furnished or to be furnished by or on behalf of LP Baier or the Shareholders pursuant to this Agreement contains any untrue statement of material fact or omits a material fact necessary to make the statements contained therein not misleading. 4. REPRESENTATIONS AND WARRANTIES OF ABR ABR makes the following representations and warranties to the Shareholders, each of which is true and correct on the date hereof, is or shall be unaffected by any investigation heretofore or hereafter made by the Shareholders, or any of the Shareholders' agents or 18 23 representatives, or any knowledge to the Shareholders, their agents or representatives, and shall survive the Closing of the transactions provided for herein. 4.1. Corporate. 4.1.(a) Organization. ABR is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. 4.1.(b) Corporate Power. ABR has all requisite corporate power to enter into this Agreement and the Ancillary Instruments and to carry out the transactions contemplated hereby and thereby. 4.2. Authority. The execution and delivery of this Agreement and each Ancillary Instrument that provides for its execution by ABR and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of ABR. No other corporate act or proceeding on the part of ABR or its shareholders is necessary to authorize this Agreement or the Ancillary Instruments or the consummation of the transactions contemplated hereby and thereby. This Agreement and each Ancillary Instrument that provides for its execution by ABR is the legal, valid and binding obligation of ABR, enforceable in accordance with their respective terms, subject to the limitations contained herein, except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally, and by general equitable principles. 4.3. No Brokers or Finders. Except for the engagement of Broadview Associates, L.P. by ABR, neither ABR nor any of its directors, officers, employees or agents have retained, employed or used any broker or finder in connection with the transaction provided for herein or in connection with the negotiation thereof. ABR has agreed to pay all fees and expenses of Broadview Associates, L.P. in connection with the transactions contemplated hereby. 4.4. Prospectus. The Prospectus dated March 21, 1996 relating to the public offering by ABR of 3,452,500 shares of Common Stock does not contain any untrue statement of material fact or omits a material fact necessary to make the statements contained therein not misleading as of the date hereof (except for certain market information relating to the Common Stock). 4.5. Disclosure. No representation or warranty by ABR in this Agreement, nor any statement, certificate, schedule, document or exhibit hereto furnished or to be furnished by or on behalf of ABR pursuant to this Agreement or in connection with transactions contemplated hereby, contains any untrue statement of material fact or omits a material fact necessary to make the statements contained therein not misleading. 4.6. Investment Intent. The Shares are being acquired by ABR for investment only and not with the view to resale or other distribution. 19 24 4.7. Non-Taxable Event. To the best knowledge and belief of ABR, the consummation of the transactions contemplated herein shall constitute a B Reorganization. 4.8. Approvals and Filings. No governmental approval or filing with any federal, state or local agency is required of ABR in order to consummate the transactions contemplated herein; provided, however, that ABR shall comply with the applicable Federal securities laws and regulations of the Securities and Exchange Commission or The Nasdaq Stock Market with respect to the public disclosure of the consummation of these transactions and any related filings. 5. POST-CLOSING COVENANTS 5.1. Noncompetition; Confidentiality. As an inducement to ABR to execute this Agreement and complete the transactions contemplated hereby, and in order to preserve the goodwill associated with Business being acquired pursuant to this Agreement, and in addition to and not in limitation of any covenants contained in any agreement executed and delivered pursuant to Section 7.1.(c) hereof, the Shareholders hereby covenant and agree as follows: 5.1.(a) Covenant Not to Compete. For a period of five (5) years from the Closing Date, the Shareholders will not directly or indirectly: (i) engage in, continue in or carry on any business which competes with, or intends to compete with, LP Baier or ABR in any aspect with respect to the Business or is substantially similar thereto, including owning or controlling any financial interest in any person, corporation, partnership, firm or other form of business organization which is so engaged (a "Competing Business"); (ii) consult with, advise or assist in any way, whether or not for consideration, any Competing Business, including, but not limited to, advertising or otherwise endorsing the products of any Competing Business; soliciting customers or otherwise serving as an intermediary for any Competing Business; loaning money or rendering any other form of financial assistance to or engaging in any form of business transaction on other than an arm's length basis with any Competing Business; (iii) offer employment to or solicit the employment of an employee of LP Baier or ABR, without the prior written consent of ABR; or (iv) engage in any practice the purpose of which is to evade the provisions of this covenant not to compete or to commit any act which adversely affects the Business; provided, however, that the foregoing shall not prohibit the ownership of securities of corporations which are listed on a national securities exchange or traded in the national 20 25 over-the-counter market in an amount which shall not exceed 5% of the outstanding shares of any such corporation. The parties agree that the geographic scope of this covenant not to compete shall extend to all areas in which LP Baier or ABR conducts the Business. The parties agree that ABR may sell, assign or otherwise transfer this covenant not to compete, in whole or in part, to any entity that purchases all or part of the Business or ABR as long as the Employment Agreement is assumed by such entity. 5.1.(b) Covenant of Confidentiality. The Shareholders shall not at any time after the Closing, except as explicitly requested by ABR or required by applicable Law or Order, and except in the course of employment by LP Baier, (i) use for any purpose, (ii) disclose to any person, or (iii) keep or make copies of documents, tapes, discs or programs containing, any Confidential Information concerning LP Baier. For purposes of this Agreement, "Confidential Information" shall mean and include, without limitation, all Trade Rights in which LP Baier has an interest, all customer lists and customer information, and all other information concerning the finances, customer lists, operations, processes, apparatus, equipment, packaging, services, marketing and distribution methods of LP Baier not previously disclosed to the public directly by LP Baier or otherwise available to the public. This covenant shall not preclude the Shareholders from disclosing to their advisors or Government Entities financial information of LP Baier necessary to prepare, file or defend any tax return or report of LP Baier or the Shareholders. The parties agree that this covenant of confidentiality shall have no geographic or temporal limitations. 5.1.(c) Equitable Relief for Violations. Each of the Shareholders agrees that the provisions and restrictions contained in this Section 5.1 are necessary to protect the legitimate continuing interests of ABR in acquiring the Shares, and that any violation or breach of these provisions will result in irreparable injury to ABR for which a remedy at law would be inadequate and that, in addition to any relief at law which may be available to ABR for such violation or breach and regardless of any other provision contained in this Agreement, ABR shall be entitled to injunctive and other equitable relief as a court may grant after considering the intent of this Section 5.1. 5.1.(d) Breach by ABR. The covenants of the Shareholders contained in this Section 5.1 shall be suspended during any period in which ABR is in material breach of this Agreement, the Employment Agreement or the Registration Rights Agreement. 5.2. Income Tax Returns and Allocation of Tax. The Shareholders shall be responsible for the payment by LP Baier of all Taxes of LP Baier due on the accrual basis on or before the Closing Date and the Shareholders shall not be responsible for any liability arising from the transactions described in the Recitals occurring on the Closing Date. ABR shall be responsible for the payment by LP Baier of all Taxes of LP Baier accruing on and after the Closing Date including any liability arising from the transaction described in the Recitals occurring on the Closing Date. The Shareholders shall cause to be prepared and timely and properly filed on behalf of the Shareholders and LP Baier, all returns and filings with respect to federal, Virginia 21 26 Taxes, or any other state with respect to which a return or filing is required under applicable law accruing on or before the Closing Date consistent with this Agreement. Such Taxes, returns, and filings shall be determined by closing LP Baier's books and records as of and including the Closing Date, or if the allocation of an item of income, loss, deduction, or credit cannot be definitely allocated to an ascertainable date, such item shall be pro rated on a daily basis. The Shareholders, LP Baier and ABR shall cooperate, and shall cause their respective affiliates, officers, employees, agents, auditors and representatives to cooperate, in preparing and filing all returns, reports, and forms relating to Taxes, including maintaining and making available to each other all records necessary in connection with Taxes and in resolving all disputes and audits with respect to all taxable periods relating to Taxes. 5.3. Restriction on Sales. The Shareholders shall not dispose of the ABR shares in any manner until ninety (90) days after ABR has first reported thirty (30) days of combined operations of ABR and LP Baier and only pursuant to the Registration Rights Agreement or pursuant to Rule 144 under the Act. 5.4. Rule 144 Compliance. ABR shall file such information, documents and reports and take such other action as shall hereafter be required by the Securities and Exchange Commission as a condition to the availability of Rule 144 under the Act with respect to the ABR Shares. 6. INDEMNIFICATION 6.1. By the Shareholders. Subject to the terms and conditions of this Article 6, the Shareholders, severally (in proportion to each such Shareholder's percentage ownership of the Shares) and not jointly, hereby agree to indemnify, defend and hold harmless ABR, its directors, officers and employees (hereinafter "ABR's Affiliates") and LP Baier, its directors, officers and employees from and against all Claims (as hereinafter defined) asserted against, resulting to, imposed upon, or incurred by ABR, ABR's Affiliates or LP Baier, directly or indirectly, by reason of, arising out of or resulting from (a) the inaccuracy or breach of any representation or warranty of the Shareholders contained in this Agreement, (b) the breach of any covenant by the Shareholders contained in this Agreement, (c) any dispute involving, or Claim made by, any current or former shareholder of LP Baier (other than the Shareholders), or (d) any matter disclosed in Schedule 3.9. As used in this Article 6, "Claim" shall mean and include (i) all debts, liabilities and obligations; (ii) all losses, damages (but excluding consequential damages), judgments, awards, settlements, costs and expenses (including, without limitation, interest (including prejudgment interest in any litigated matter), penalties, court costs and reasonable attorneys' fees and expenses); and (iii) all demands, claims, suits, actions, costs of investigation, causes of action, proceedings and assessments, in each case after deduction of any insurance recovery that is remitted to the Indemnified Party (as hereinafter defined) as a result of any of the foregoing. Notwithstanding anything contained in this Section 6.1 to the contrary, with respect to those matters susceptible to cure by the Shareholders, the liability of the Shareholders under this Section 6.1 shall be subject to notice of the breach, default or dispute at issue and an 22 27 opportunity to cure the matters addressed in the notice within thirty (30) days after such notice is given. 6.2. By ABR. Subject to the terms and conditions of this Article 6, ABR hereby agrees to indemnify, defend and hold harmless the Shareholders and their heirs and personal representatives from and against all Claims asserted against, resulting to, imposed upon or incurred by any such person, directly or indirectly, by reason of or resulting from (a) the inaccuracy or breach of any representation or warranty of ABR contained in or made pursuant to this Agreement, or (b) the breach of any covenant of ABR contained in this Agreement. 6.3. Indemnification of Third-Party Claims. The obligations and liabilities of any party to indemnify any other under this Article 6 with respect to Claims relating to third parties shall be subject to the following terms and conditions: 6.3.(a) Notice and Defense. The party or parties to be indemnified (whether one or more, the "Indemnified Party") will give the party or parties from whom indemnification is sought (whether one or more, the "Indemnifying Party") prompt written notice of any Claim, and the Indemnifying Party will have the right to undertake the defense thereof by representatives chosen by it. The Indemnified Party shall make available to the Indemnifying Party or its representatives all records and other materials required by the Indemnifying Party in connection with such Claim and in the possession or under the control of the Indemnified Party, for the use of the Indemnifying Party and its representatives in prosecuting the defense of any such Claim, and the Indemnified Party shall be entitled to participate in the defense of such Claim. Subject to the provisions of Sections 6.3.(b) and 6.3.(c) hereof, if the Indemnifying Party has acknowledged its liability for indemnification hereunder and the defense of such Claim is assumed by the Indemnifying Party, and (except for a Claim based upon any matter disclosed in Schedule 3.9 in which case no such approval shall be necessary) upon approval by the Indemnified Party of counsel selected by the Indemnifying Party, the Indemnifying Party shall be free to compromise or settle such Claim without the consent of the Indemnified Party and shall have no liability for any compromise or settlement of such Claim without its written consent. 6.3.(b) Failure to Defend. If the Indemnifying Party, within a reasonable time after notice of any such Claim, fails to assume the defense of such Claim actively and in good faith, the Indemnified Party will (upon further notice) have the right to undertake the defense, compromise or settlement of such Claim or consent to the entry of a judgment with respect to such Claim, on behalf of and for the account of and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party's defense, compromise, settlement or consent to judgment therein. 6.3.(c) Indemnified Party's Rights. Anything in this Article 6 to the contrary notwithstanding, (i) except for a Claim based upon any matter disclosed in 23 28 Schedule 3.9, if there is a reasonable probability that a Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, the Indemnified Party shall have the right to defend and, with the consent of the Indemnifying Party (which shall not be unreasonably withheld), to compromise or settle such Claim as to the non-monetary component of such compromise or settlement, and (ii) the Indemnifying Party shall not, without the written consent of the Indemnified Party, settle or compromise any Claim or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such Claim. 6.4. Payment. The Indemnifying Party shall promptly pay the Indemnified Party any amount due under this Article 6. Upon judgment, determination, settlement or compromise of any third party Claim, the Indemnifying Party shall pay promptly on behalf of the Indemnified Party, and/or to the Indemnified Party in reimbursement of any amount theretofore required to be paid by it, the amount so determined by judgment, determination, settlement or compromise and all other Claims of the Indemnified Party with respect thereto. If the Indemnifying Party desires to appeal from an adverse judgment, then the Indemnifying Party shall post and pay the cost of the security or bond to stay execution of the judgment pending appeal. Upon the payment in full by the Indemnifying Party of such amounts, the Indemnifying Party shall succeed to the rights of such Indemnified Party, to the extent not waived in settlement, against the third party who made such third party Claim. 6.5. No Waiver. The closing of the transactions contemplated by this Agreement shall not constitute a waiver by any party of its rights to indemnification hereunder, regardless of whether the party seeking indemnification has knowledge of the breach, violation or failure of condition constituting the basis of the Claim at or before the Closing. 6.6. Limitations on Indemnification. Except for any willful and knowing breach or misrepresentation and except for any action brought by any former employees and shareholders of LP Baier, as to which a claim for indemnification hereunder may be brought without limitation as to time or amount: 6.6.(a) Time Limitation. No claim for indemnification shall be brought under Section 6.1 of this Article 6 for the inaccuracy or breach of a representation or warranty, or the breach of any covenant, contained in or made pursuant to this Agreement unless the nature of such claim for indemnification has been described in reasonable detail and with identification to this Section 6 in a written notice provided by an Indemnified Party to an Indemnifying Party and which are determined during the period which ends on the date of issuance to ABR of the first independent audit report on the combined results of ABR and LP Baier. 6.6.(b) Aggregate Amount Limitation for the Shareholders. Notwithstanding any provision of this Article 6 to the contrary, the aggregate amount of the 24 29 indemnification obligations of the Shareholders pursuant to Section 6.1 of this Article 6 shall not exceed for the purposes of these indemnification provisions 10% of the value of the consideration received. Furthermore, each of the Shareholders may (but shall not be required to) elect to satisfy any liability for indemnification hereunder by transferring a number of ABR Shares which, when multiplied by the Issue Price, result in an aggregate value which equals or exceeds the dollar amount of such Shareholder's indemnification liability. 6.6.(c) Threshold Limitation. Notwithstanding any provision of this Article 6 to the contrary, no claim for indemnification may be brought by an Indemnified Party unless and until such party has become subject to, or incurred liability for, Claims totaling no less than Eighty Thousand Dollars ($80,000) in the aggregate (the "Indemnification Threshold"). Once an Indemnified Party has satisfied the Indemnification Threshold, such party shall be eligible to receive indemnification for all Claims in accordance with the terms and conditions of this Article 6. 6.7. Indemnification - Exclusive Remedy. The provisions of this Article 6 shall constitute the exclusive remedy for any claim based upon the subject matter of the indemnification undertakings in Section 6.1 and 6.2. 7. CLOSING The closing of this transaction ("the Closing") shall occur concurrent with the execution of this Agreement effective as of 12:01 A.M. on June 28, 1996. Such date is referred to in this Agreement as the "Closing Date." In the event that the ABR Shares cannot be issued and delivered to the Shareholders by 5:00 p.m. EST on the Closing Date, the Shares shall be delivered to Foley & Lardner to be held in escrow with instructions to release the Shares to ABR immediately upon the issuance and delivery of the ABR Shares hereunder. 7.1. Documents Delivered by LP Baier and the Shareholders. At the Closing, LP Baier and the Shareholders shall deliver to ABR the following documents, in each case duly executed or otherwise in proper form: 7.1.(a) Stock Certificates. Stock certificates representing the Shares, duly endorsed for transfer or with duly executed stock powers attached. 7.1.(b) Opinion of Counsel. A written opinion of Arter & Hadden, counsel to LP Baier and the Shareholders, dated as of the Closing Date, addressed to ABR. 7.1.(c) Certified Resolutions. Certified copies of the resolutions of the Board of Directors and the shareholders of LP Baier, authorizing and approving this Agreement and the Ancillary Instruments, and the consummation of the transactions contemplated hereby and thereby. 25 30 7.1.(d) Articles; Bylaws. A copy of the Bylaws of LP Baier certified by its secretary, and a copy of the Certificate of Incorporation of LP Baier, certified as of a recent date by the Secretary of State of the state of incorporation of LP Baier, and good standing certificates, certified as of a recent date by the Secretary of State of such state and all other states in which LP Baier is qualified to do business. 7.1.(e) Incumbency Certificate. Incumbency certificates relating to each person executing (as a corporate officer or otherwise on behalf of another person) any document executed and delivered to ABR pursuant to the terms hereof. 7.1.(f) [Intentionally Omitted.] 7.1.(g) [Intentionally Omitted.] 7.1.(h) Employment Agreement. An employment agreement between LP Baier and Rick Snyder, one of the Shareholders, dated as of the Closing Date, substantially in the form of Exhibit A attached hereto and incorporated herein (the "Employment Agreement"). 7.2. Documents Delivered by ABR. At the Closing, ABR shall deliver to the Shareholders the following, in each case duly executed or otherwise in proper form: 7.2.(a) Stock Certificates. A letter addressed to ABR's Transfer Agent authorizing the Transfer Agent to issue and deliver the ABR Shares to the Shareholders. 7.2.(b) Opinion of Counsel. A written opinion of Foley & Lardner, counsel to ABR, dated as of the Closing Date, addressed to LP Baier. 7.2.(c) Certified Resolutions. A certified copy of the resolutions of the Board of Directors of (i) ABR authorizing and approving this Agreement and the consummation of the transactions contemplated hereby and (ii) LP Baier ratifying the Employment Agreement (subsequent to the newly appointed Board of Directors of LP Baier). 7.2.(d) Incumbency Certificate. Incumbency certificates relating to each person executing any document executed and delivered to LP Baier or the Shareholders by ABR pursuant to the terms hereof. 26 31 7.2.(e) Registration Rights Agreement. A registration rights agreement between ABR and the Shareholders, dated as of the Closing Date, substantially in the form of Exhibit B attached hereto and incorporated herein. 7.2.(f) Employment Agreement. The Employment Agreement, dated as of the Closing Date. 8. RESOLUTION OF DISPUTES 8.1. Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, any Ancillary Instrument (except the Employment Agreement and Registration Rights Agreement) or any contract or agreement entered into pursuant hereto, or arising out of or relating to the performance by the parties of its or their terms, shall be settled by binding arbitration held in the county and state of the party defending any such action in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, except as specifically otherwise provided in this Article 8. Notwithstanding the foregoing, ABR may, in its discretion, apply to a court of competent jurisdiction for equitable relief from any violation or threatened violation of the covenants under Article 5 of this Agreement. 8.2. Arbitrators. The panel to be appointed shall consist of three neutral arbitrators. 8.3. Procedures; No Appeal. The arbitrators shall allow such discovery as the arbitrators determine appropriate under the circumstances and shall resolve the dispute as expeditiously as practicable, and if reasonably practicable, within 120 days after the selection of the arbitrators. The arbitrators shall give the parties written notice of the decision, with the reasons therefor set out, and shall have 30 days thereafter to reconsider and modify such decision if any party so requests within 10 days after the decision. Thereafter, the decision of the arbitrators shall be final, binding, and nonappealable with respect to all persons, including (without limitation) persons who have failed or refused to participate in the arbitration process. 8.4. Authority. The arbitrators shall have authority to award relief under legal or equitable principles, including interim or preliminary relief. Unless the arbitrators find that exceptional circumstances require otherwise, the arbitrators will include in the award the prevailing party's costs of arbitration and reasonable attorneys' fees. 8.5. Entry of Judgment. Judgment upon the award rendered by the arbitrators may be entered in any court having in personam and subject matter jurisdiction. ABR and the Shareholders hereby submit to the in personam jurisdiction of the Federal and State courts in Virginia and Florida, for the purpose of confirming any such award and entering judgment thereon. 8.6. Confidentiality. All proceedings under this Article 8, and all evidence given or discovered pursuant hereto, shall be maintained in confidence by all parties. 27 32 8.7. Continued Performance. The fact that the dispute resolution procedures specified in this Article 8 shall have been or may be invoked shall not excuse any party from performing its obligations under this Agreement and during the pendency of any such procedure all parties shall continue to perform their respective obligations in good faith. 8.8. Tolling. All applicable statutes of limitation shall be tolled while the procedures specified in this Article 8 are pending. The parties will take such action, if any, required to effectuate such tolling. 9. MISCELLANEOUS 9.1. Disclosure Schedule. The Schedules described herein have been compiled in a bound volume (the "Disclosure Schedule"), executed by LP Baier and the Shareholders and dated and delivered to ABR on the Closing Date. The Disclosure Schedule includes a table of contents and/or index to all of the information and documents contained therein. The Disclosure Schedule shall not vary, change or alter the language of the representations and warranties contained in this Agreement and, to the extent the language in the Disclosure Schedule does not conform in every respect to the language of such representations and warranties, such language in the Disclosure Schedule shall be disregarded and be of no force or effect. 9.2. Further Assurance. From time to time, each of the parties hereto will execute and deliver such documents and take such other action as any one of the other parties hereto may reasonably request in order to consummate more effectively the transactions contemplated hereby. 9.3. Disclosures and Announcements. Announcements concerning the transactions provided for in this Agreement by ABR, LP Baier or the Shareholders shall be subject to the approval of the other parties in all essential respects, except that approval of LP Baier or the Shareholders shall not be required as to any statements and other information which ABR may submit to the Securities and Exchange Commission, The Nasdaq Stock Market ("Nasdaq") or ABR's shareholders as required pursuant to any rule or regulation of the Securities and Exchange Commission, Nasdaq or applicable law. 9.4. Assignment; Parties in Interest. 9.4.(a) Assignment. Except as expressly provided herein, the rights and obligations of a party hereunder may not be assigned, transferred or encumbered without the prior written consent of the other parties. Notwithstanding the foregoing, ABR may, without consent of any other party, cause one or more controlled subsidiaries of ABR to carry out all or part of the transactions contemplated hereby; provided, however, that ABR shall, nevertheless, remain liable for all of its obligations, and those of any such subsidiary, to the Shareholders hereunder. 28 33 9.4.(b) Parties in Interest. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and permitted assigns of the parties hereto. Nothing contained herein shall be deemed to confer upon any other person (besides the parties hereto) any right or remedy under or by reason of this Agreement. 9.5. Law Governing Agreement. This Agreement may not be modified or terminated orally, and shall be construed and interpreted according to the laws of the State of Florida, excluding its conflicts of law rules. 9.6. Amendment and Modification. ABR and the Shareholders may amend, modify and supplement this Agreement in such manner as may be agreed upon in writing signed by ABR and the Shareholders. 9.7. Notice. All notices, requests, demands and other communications hereunder shall be given in writing and shall be: (a) personally delivered; or (b) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective addresses to be used for all such notices, demands or requests are as follows: (a) If to ABR, to: ABR Information Services, Inc. 34125 U.S. Highway 19, North Palm Harbor, FL 34684-2116 Attention: Mr. Vincent Addonisio, Senior Vice President and Chief Financial Officer (with a copy to) Foley & Lardner 100 North Tampa Street Suite 2700 Tampa, Florida 33602 Attn: Kenneth J. Meister, Esq. or to such other person or address as ABR shall furnish to the Shareholders in writing. 29 34 (b) If to the Shareholders, to: [to each Shareholder individually] c/o The L.P. Baier Company 3966 Pender Drive Fairfax, VA 22030 (with a copy to) Arter & Hadden 1801 K Street NW 4th Floor Washington, DC 20006 Attn: Larry Bensignor or to such other person or address as the Shareholders shall designate in writing. (c) If to LP Baier, to ABR as specified above. If personally delivered, such communication shall be deemed delivered upon actual receipt; if sent by overnight courier pursuant to this paragraph, such communication shall be deemed delivered upon receipt; and if sent by U.S. mail pursuant to this paragraph, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. Any party to this Agreement may change its address for the purposes of this Agreement by giving notice thereof in accordance with this Section and any such notice of change of address shall be effective only upon receipt. 9.8. Expenses. 9.8.(a) Brokerage. Except as provided in Section 4.3 hereof, the Shareholders and ABR each represent and warrant to each other that there is no broker involved or in any way connected with the transfer provided for herein on their behalf respectively (and the Shareholders represents and warrants that there is no broker involved on behalf of LP Baier) and each agrees to hold the other harmless from and against all other claims for brokerage commissions or finder's fees in connection with the execution of this Agreement or the transactions provided for herein. 9.8.(b) Expenses to be Paid by the Shareholders. The Shareholders shall pay, and shall indemnify, defend and hold ABR and LP Baier harmless from and against, each of the following: 30 35 (i) Transfer Taxes. Any sales, use, excise, transfer or other similar tax imposed with respect to the transactions provided for in this Agreement, and any interest or penalties related thereto. (ii) Professional Fees. All fees and expenses of their own, as well as LP Baier's, legal, accounting (except fees and expenses related to an audit of LP Baier's financial statements as requested by ABR), investment banking and other professional counsel in connection with the transactions contemplated hereby. 9.8.(c) Other. Except as otherwise provided herein, each of the parties shall bear its own expenses and the expenses of its counsel and other agents in connection with the transactions contemplated hereby. 9.8.(d) Costs of Litigation or Arbitration. The parties agree that (subject to Section 6.6 and to the discretion, in an arbitration proceeding, of the arbitrators as set forth in Section 8.4) the prevailing party in any action brought with respect to or to enforce any right or remedy under this Agreement shall be entitled to recover from the other party or parties all reasonable costs and expenses of any nature whatsoever incurred by the prevailing party in connection with such action, including, without limitation, reasonable attorneys' fees and prejudgment interest. 9.9. Entire Agreement. This Agreement, the Employment Agreement and the Registration Rights Agreement embody the entire agreement between the parties hereto with respect to the transactions contemplated herein, and there have been and are no prior or contemporaneous agreements, representations or warranties between the parties other than those set forth or provided for herein or therein. 9.10. Severability. In the event that any provision of this Agreement shall be held to be invalid or unenforceable for any reason by the arbitrators or a court of competent jurisdiction (as the case may be), the remaining provisions of this Agreement shall continue in full force and effect as though the invalid or unenforceable provisions had not been included herein. Notwithstanding the foregoing, in the event that any provision relating to the duration or scope of any covenant or restriction contained herein shall be declared by a court of competent jurisdiction to exceed the maximum time period and/or scope of restriction, such provision shall be deemed to become, and thereafter shall be equal to, the maximum duration and/or scope of restriction deemed enforceable by said court. 9.11. Gender. Whenever the context requires, words used in the singular shall be construed to mean or include the plural and vice versa, and pronouns of any gender shall be deemed to include and designate the masculine, feminine or neuter gender. 9.12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 31 36 9.13. Headings. The headings in this Agreement are inserted for convenience only and shall not constitute a part hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. ABR: ABR INFORMATION SERVICES, INC. By: /s/ Vincent Addonisio ----------------------------------------- Vincent Addonisio, Senior Vice President and Chief Financial Officer THE SHAREHOLDERS: /s/ Rick Snyder -------------------------------------------- Rick Snyder /s/ Tina McIntosh -------------------------------------------- Tina McIntosh /s/ Rhonda E. Reeves -------------------------------------------- Rhonda E. Reeves /s/ Christine Erickson -------------------------------------------- Christine Erickson /s/ Michael McRoberts -------------------------------------------- Michael McRoberts /s/ Victoria J. Baldwin -------------------------------------------- Victoria J. Baldwin 32 37 [Continuation of Signature Page of Agreement and Plan of Reorganization with ABR Information Services, Inc.] LP BAIER: LP BAIER COMPANY By: /s/ Rick Snyder ------------------------------------------ President 33 38 EXHIBIT A EMPLOYMENT AND NONCOMPETITION AGREEMENT [Note: Exhibit A was filed separately as Exhibit 10.14 to the Company's Form 10-K for the fiscal year ended 7/31/96] 39 EXHIBIT B REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of the 28th day of June, 1996, by and between ABR Information Services, Inc., a Florida corporation ("ABR"), and the shareholders listed on the signature page (collectively referred to as the "Holders"). RECITALS WHEREAS, ABR, The L.P. Baier Company, a Virginia corporation ("LP Baier"), and the Holders are parties to that certain Agreement and Plan of Reorganization dated as of June 28, 1996 (the "Agreement") pursuant to which ABR will acquire all of the capital stock of LP Baier from the Holders; WHEREAS, the closing of the transactions contemplated by the Agreement (the "Closing") is occurring on the date hereof and, in connection therewith, ABR has issued to the Holders that number of its shares (the "Shares") of Common Stock, $.01 par value per share (the "Common Stock"), with a fair market value of $8.0 million based on the average closing price of the Common Stock for the thirty (30) trading days prior to the day before the Closing; WHEREAS, the parties hereto have agreed to certain registration rights with respect to the Shares in accordance with the terms and conditions hereinafter set forth. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Purchase Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Purchase Agreement, the parties hereto agree as follows: 1. DEMAND REGISTRATION RIGHTS. (a) Subject to the other terms and conditions contained herein, commencing three (3) months after the Closing and continuing for a period of two (2) years after the Closing, if the Holders have not registered for sale fifty percent (50%) of the Shares pursuant to Section 2, the Holders collectively holding more than fifty-percent (50%) of the Shares may demand in writing (a "demand registration request") that ABR file a registration statement (a "demand registration statement") under the Securities Act of 1933, as amended (the "Act"), covering the proposed sale to the public of up to 50% of the Shares as specified therein. If the demand registration request is made on behalf of the Holders holding less than 100% of the Shares then still held by all Holders, then ABR shall send written notice of such demand registration request to the remaining Holders within ten (10) days of receipt thereof. Unless a remaining Holder shall deliver a written request for inclusion in the demand registration statement of a specified 40 number of his or her Shares to ABR within twenty (20) days of the date of such notice by ABR, all rights of such remaining Holder to participate in such demand registration statement shall be automatically terminated. (b) Subject to Section 3, upon receipt of a demand registration request in compliance with Section 1(a) from the of Holders (or, if such request is initially made on behalf of Holder less than 100% of the Shares as described above, upon expiration of the 20-day period in which the remaining Holders must request registration), ABR will, as promptly as practicable and in any event within thirty (30) days, prepare and file with the Securities and Exchange Commission ("Commission") (and all applicable state securities authorities) a registration statement, on such form as it may determine in its discretionary judgment to be appropriate, covering such proposed sale of the Shares requested to be registered pursuant to the demand registration request. ABR shall only be required to register 50% of the Shares pursuant to this Section 1 and, in the event Holders desire to register in the aggregate more than 50% of the Shares, the excess number of Shares requested to be registered shall be reduced on a pro rata basis based on the number of Shares owned by each Holder requesting registration. The public offering of the Shares to be covered by the demand registration statement shall be effected through a "shelf offering" under Rule 415 of the Act on a Form S-1, Form S-2 or Form S-3 (or successor or similar forms) registration statement, with sales of all the Shares registered thereunder to be effected through normal brokers' transactions or in transactions in the over-the-counter market or on any other national securities exchange or market on which the Common Stock is listed or traded or in a privately negotiated transaction. (c) Subject to Section 3, ABR will use its continuing best efforts to have the demand registration statement declared effective under the Act by the Commission (and under applicable state securities laws by all applicable state securities authorities) as soon as practicable after the filing thereof and to maintain the effectiveness thereof for a period of no longer than six months (or until all of the Shares covered thereby have been sold if such sales are completed before the end of such 6-month period); provided, however, ABR shall only be required to have the demand registration statement be declared effective and maintain the effectiveness thereof commencing three (3) months after the Closing and no later than two (2) years after the Closing. ABR shall obtain customary opinions of legal counsel, comfort letters from ABR's independent public accountants and take such other action as is necessary and customary to have the demand registration statement declared effective under the Act by the Commission and to maintain the effectiveness for the period described above. (d) ABR shall only be required to file one demand registration statement for the benefit of the Holders pursuant to this Section 1; provided, however, a demand registration statement filed by ABR pursuant to this Section 1 shall not count as the one allowed demand registration statement until it has become effective under the Act and has been maintained effective for a period of six months (or until all shares covered thereby have been sold if such sales are completed before the end of such 6-month period). -2- 41 (e) ABR shall be entitled to include, as part of the demand registration statement filed pursuant to a demand registration request, additional shares of Common Stock proposed to be sold by ABR and/or other shareholders of ABR; provided, however, the rights of ABR and/or such other shareholders to include Common Stock under such demand registration statement shall be subordinate in all respects to the prior rights of Holders to include the Shares thereunder if a conflict of interests thereunder shall occur among such parties. 2. PIGGYBACK REGISTRATION RIGHTS. (a) If, at any time and from time to time, ABR and/or other shareholders of ABR shall determine to register shares of Common Stock under the Act for the purpose of effecting a firmly underwritten public offering thereof for cash, ABR shall give prompt written notice thereof to all Holders who then hold Shares describing the material terms of the proposed public offering; provided, however, that ABR shall not be required to give such notice to the Holders if: (i) the proposed registration is not to be made on Commission Form S-1, S-2 or S-3 (or the successors to such forms); or (ii) is (A) a registration of securities other than Common Stock, (B) a registration of a stock option, incentive compensation, profit sharing or other employee benefit plan or securities issued or issuable pursuant to any such plan, or (C) a registration of securities proposed to be issued in exchange for securities or assets of, or in connection with a merger, share exchange, consolidation or other business combination involving, another corporation or entity. (b) Subject to subsection (c) of this Section 2, upon receiving any notice required under subsection (a) of Section 2, any Holder desiring to participate in such a registration statement (a "piggyback registration") shall provide written notice of such intent to ABR (a "piggyback registration request") within twenty (20) days after the date of ABR's notice. Such piggyback registration request shall be accompanied by: (i) a Power of Attorney in form reasonably satisfactory to ABR, duly executed by such Holder; (ii) a Letter of Transmittal and Custody Agreement in form reasonably satisfactory to ABR, duly executed by such Holder; (iii) the stock certificates representing the Shares to be registered by such Holder (or a letter from the pledgee of any Shares agreeing to deliver the stock certificates upon payment of the amount specified therein) accompanied by stock powers' duly executed in blank by or on behalf of such Holder; and (iv) any other documents necessary in ABR's reasonable opinion to facilitate the Holder's participation in such registration (collectively, the "Registration Documents"). ABR shall use its best efforts to register all of the Shares requested to be registered by each Holder on his or her piggyback registration request concurrently with the registration of the Common Stock by ABR on its own behalf and on the same terms and conditions of the offering and sale as contemplated and agreed to by ABR. Holders requesting to participate in any piggyback registration must sell their Shares subject thereto on the same terms and conditions of the offering and sale (including, without limitation, purchase price and underwriting discount per share, but excluding any differing allocation agreed to by ABR with respect to any over-allotment option granted) as agreed to by ABR in connection with its sale of Common Stock thereunder. ABR shall promptly deliver to all Holders requesting to participate in any piggyback registration copies of any preliminary and final prospectuses relating to the public offering. -3- 42 (c) ABR shall not be required to include any Shares which have been requested to be registered by a Holder in any piggyback registration under this Section 2 if ABR or the underwriters believe that, in their opinion, the inclusion of the Shares proposed to be included by the Holders would interfere with the timing, pricing or marketing of the Common Stock being offered by ABR; provided, however, any reduction in the number of Shares requested to be included by Holders in any such piggyback registration will be made on a pro rata basis (based on the number of Shares requested to be included therein) among the Holders (with any reduction in the number of Shares requested to be included by Holders made on a pro rata basis based on the number of Shares owned by each Holder requesting registration) and any other holders of Common Stock also requesting participation in such piggyback registration. ABR may, in its sole discretion, withdraw any such registration statement and abandon any proposed piggyback registration in which the Holders have requested to participate, in which case the Holders shall retain their rights under Sections 1 and 2 hereof. 3. DENIAL, POSTPONEMENT OR SUSPENSION OF DEMAND REGISTRATION. (a) If ABR receives a demand registration request in compliance with Section l(a) and is then contemplating filing with the Commission within the next thirty (30) days a registration statement which would otherwise trigger the application of piggyback registration rights of Holders under Section 2 hereof, then ABR may deny the demand registration request. ABR agrees that it shall not be permitted to deny any request for the demand registration statement until nine (9) months after the Closing. ABR shall give prompt written notice to the Holders of any such denial and permit the Holders the opportunity to register for sale the Shares in a piggyback registration. (b) ABR shall be entitled, in its sole discretion, to postpone one-time for up to 150 days, including, without limitation, ABR's determination that the demand registration statement would have an adverse effect on any proposal or plan by ABR to engage in any acquisition of assets or any merger, consolidation, tender offer or similar transaction (or, if longer, 180 days from the effective date with the Commission of any ABR registration statement relating to a public offering or distribution of Common Stock or other securities in which the Holders were granted piggyback registration rights), the filing with the Commission of the demand registration statement, and to suspend sales under the demand registration statement for up to 150 days (or, if longer, 180 days from the effective date with the Commission of any then pending ABR registration statement relating to a public offering or distribution of Common Stock or other securities); provided, however, that in computing the 6-month period for which ABR is required to maintain effectiveness of the demand registration statement, the period of any such suspension shall not be included. ABR shall give prompt written notice to the Holders of any such postponement or suspension and shall likewise give prompt written notice to the Holders of termination of such postponement or suspension. Each Holder thereby agrees to postpone the sale of any Shares registered pursuant to the demand registration statement during any postponement or suspension of sales of Common Stock thereunder by ABR. -4- 43 4. EXPENSES. Holders participating in the demand registration statement or any piggyback registration shall pay (a) the expenses of any attorneys, accountants or other advisors or professionals which any of them engage in connection with their sale of Shares pursuant to the demand registration statement or any piggyback registration, (b) all underwriting or brokers' commission and discounts, if any, associated with the Shares being sold by them pursuant to the demand registration statement or any piggyback registration, and (c) all additional registration and qualification fees and expenses related to the Shares being sold by them pursuant to the demand registration statement or any piggyback registration. ABR shall pay all other expenses involved in registering the Shares, including, without limitation, attorneys' fees and accounting fees for ABR. 5. HOLDBACK AGREEMENT: FURTHER COOPERATION: CONFIDENTIALITY. (a) By execution of this Agreement, each Holder hereby agrees that he or she will not for a period commencing nine 99) months and ending two (2) years after the Closing offer, sell or otherwise dispose of any Shares owned by such Holder, in the open market or otherwise, during the period when he or she has knowledge that an ABR registration statement (other than those, such as Form S-8, as to which notice need not be given to Holders by ABR under Section 1(a) hereof) is contemplated or pending or within 180 days after the effective date with the Commission of any such registration statement relating to a public offering or distribution of Common Stock, other than as permitted hereunder. (b) In connection with the demand registration statement or any piggyback registration, Holders will furnish or cause to be furnished such other information with respect thereto and render such further cooperation to ABR, any underwriter and any broker/dealer as ABR, such underwriter or broker/dealer may reasonably request. Holders participating in any such registration statement hereby agree to execute and enter into customary underwriting documents in connection therewith as are requested by the managing underwriter of such offering or ABR; provided, however, that the Holders' obligation to indemnify any persons in connection with such registration statement shall be limited to the matters set forth in Section 6 hereof and that such documents shall include the indemnification of the Holders by ABR provided for in Section 6 hereof. (c) Upon receiving any notice from ABR hereunder respecting any contemplated or pending registration statement of ABR, each Holder shall strictly maintain the confidentiality of such contemplated or pending registration statement and shall make no public disclosures or comments with respect thereto, and shall not otherwise trade in any securities of ABR during such period. 6. INDEMNIFICATION. In the event that any Shares are included in a registration referred to herein: (a) Each Holder participating in a registration hereunder will severally indemnify, defend and hold harmless ABR and the underwriter (and their affiliates, and their -5- 44 respective directors, officers, stockholders, representatives and employees), from and against all loss, claim, damage and expense whatsoever reasonably incurred (including attorneys' fees and expenses) (collectively, "Losses"), based upon, incurred in connection with, arising out of or otherwise in respect of any such Holder's (i) untrue statement or alleged untrue statement of any material fact contained in the registration statement relating thereto, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or (ii) omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement in reliance upon and in conformity with written information furnished to ABR by such Holder and stated to be specifically for use therein. (b) ABR agrees to indemnify, defend and hold harmless each Holder participating in a registration hereunder (and their affiliates, and their directors, officers, stockholders, representatives and employees) from and against all Losses based upon, incurred in connection with, arising out of or otherwise in respect of ABR's (i) untrue statement or alleged untrue statement of any material fact contained in the registration statement relating thereto, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or (iii) omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) The obligations and liabilities of any party to indemnify any other under this Article 6 with respect to claims shall be subject to the following terms and conditions: (i) Notice and Defense. The party or parties to be indemnified (whether one or more, the "Indemnified Party") will give the party or parties from whom indemnification is sought (whether one or more, the "Indemnifying Party") prompt written notice of any claim, and the Indemnifying Party will have the right to undertake the defense thereof by representatives chosen by it. The Indemnified Party shall make available to the Indemnifying Party or its representatives all records and other materials required by the Indemnifying Party in connection with such claim and in the possession or under the control of the Indemnified Party, for the use of the Indemnifying Party and its representatives in prosecuting the defense of any such claim, and the Indemnified Party shall be entitled to participate in the defense of such claim. Subject to the provisions of Sections 6(c)(ii) and 6(c)(iii) hereof, if the Indemnifying Party has acknowledged its liability for indemnification hereunder and the defense of such claim is assumed by the Indemnifying Party, and upon approval by the Indemnified Party of counsel selected by the Indemnifying Party, the Indemnifying Party shall be free to compromise or settle such claim without the consent of the Indemnified Party and shall have no liability for any compromise or settlement of such claim without its written consent. -6- 45 (ii) Failure to Defend. If the Indemnifying Party, within a reasonable time after notice of any such claim, fails to assume the defense of such claim actively and in good faith, the Indemnified Party will (upon further notice) have the right to undertake the defense, compromise or settlement of such claim or consent to the entry of a judgment with respect to such claim, on behalf of and for the account of and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party's defense, compromise, settlement or consent to judgment therein. (iii) Indemnified Party's Rights. Anything in this Section 6(c) to the contrary notwithstanding, (i) if there is a reasonable probability that a claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, the Indemnified Party shall have the right to defend and, with the consent of the Indemnifying Party (which shall not be unreasonably withheld), to compromise or settle such claim as to the non-monetary component of such compromise or settlement, and (ii) the Indemnifying Party shall not, without the written consent of the Indemnified Party, settle or compromise any claim or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such claim. 7. DAMAGES. No Holder shall have any right to take any action to restrain, enjoin or other delay any registration statement as the result of any controversy that might arise with respect to the interpretation or implementation of the registration rights afforded in this Agreement; provided, however, that such Holder shall not be prohibited from exercising any other remedies available to such Holder. 8. NOTICES. All notices, requests, demands and other communications hereunder shall be given in writing and shall be: (a) personally delivered; or (b) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective addresses to be used for all such notices, demands or request are as follows: (i) If to ABR: ABR Information Services, Inc. 34125 U.S. Highway 19 North Palm Harbor, FL 34684 Attn: Vincent Addonisio with a required copy to: Foley & Lardner 100 N. Tampa Street Suite 2700 P.O. Box 3391 Tampa, FL 33601-3391 Attn: Kenneth J. Meister, Esq. -7- 46 (ii) If to Holders: [Each Holder Individually] c/o The L.P. Baier Company 3955 Pender Drive Fairfax, VA 22030 with a required copy to: Arter & Hadden 1801 K Street NW 4th Floor Washington, DC 2006 Attn: Laurence E. Bensignor, Esq. If personally delivered, such communication shall be delivered upon actual receipt; if sent by overnight courier pursuant to this Section, such communication shall be deemed delivered upon receipt; and if sent by U.S. mail pursuant to this Section, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postage service or if the addressee fails or refuses to accept deliver, as of the date of such failure or refusal. Any party to this Agreement may change its address for the purposes of this Agreement by giving notice thereof in accordance with this Section, with any notice of change of address effective only upon receipt. 9. ENTIRE AGREEMENT. This instrument embodies the entire agreement between the parties hereto with respect to the transactions contemplated herein, and there has been and are no agreements, representations and warranties between the parties other than those set forth or provided for herein. 10. FURTHER ASSURANCES. Each of the parties shall execute such agreements and documents and take such further actions as may be reasonable required or desirable to carry out the provisions hereof and the transactions contemplated hereby. 11. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Florida without regard to principles of conflicts of law or any rule of interpretation or construction as to which party drafted this Agreement. 12. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of ABR, its successors and assigns, and each of the Holders and his or her heirs, executors, administrators and legal representatives. 14. NO WAIVER. No waiver by any party hereto of any breach of, or compliance with, any condition or provision of this Agreement by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. -8- 47 No such waiver shall be enforceable unless expressed in a written instrument executed by the party against whom enforcement is sought. 15. SEVERABILITY. If a court of competent jurisdiction should decide that any of the provisions of this Agreement are not enforceable, in whole or in part, the parties declare it is their intention that such unenforceable provisions be deemed reformed so that they apply only to the maximum extent to which they can be enforced. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. ABR INFORMATION SERVICES, INC. By: /s/ Vincent Addonisio ----------------------------------- HOLDERS /s/ Rick Snyder -------------------------------------------- Rick Snyder /s/ Tina McIntosh -------------------------------------------- Tina McIntosh /s/ Rhonda E. Reeves -------------------------------------------- Rhonda E. Reeves /s/ Christine Erickson -------------------------------------------- Christine Erickson /s/ Michael McRoberts -------------------------------------------- Michael McRobets /s/ Victoria J. Baldwin -------------------------------------------- Victoria J. Baldwin -9- EX-10.14 5 EMPLOYMENT & NON-COMPETITION AGREEMENT 1 EXHIBIT 10.14 EMPLOYMENT AND NONCOMPETITION AGREEMENT THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT (this "Agreement") is made as of this 28th day of June, 1996 by and between The L.P. Baier Company, a Virginia corporation ("Employer"), and Rick Snyder ("Executive"). RECITALS WHEREAS, ABR Information Services, Inc., a Florida corporation ("ABR"), is this day acquiring all of the outstanding common stock of Employer for substantial consideration (the "Stock Exchange") pursuant to the terms and conditions of an Agreement and Plan of Reorganization by and among ABR, Employer, Executive and certain other parties (the "Acquisition Agreement"); WHEREAS, Executive is participating in the Stock Exchange by exchanging all of Executive's shares of Employer's common stock to ABR for a certain number of shares of ABR common stock; WHEREAS, ABR intends to maintain Employer as a wholly-owned subsidiary corporation; WHEREAS, the Executive has been employed by Employer as an executive officer, most recently as the President of Employer, and possesses an intimate knowledge of the business and affairs of Employer, its policies, operations, methods, procedures, personnel and customers (collectively, "Employer's Business"); WHEREAS, ABR and Employer recognize that Executive's contribution as an executive of Employer has been substantial and desire to assure Executive's continued employment with Employer; WHEREAS, because of, among other matters, Executive's intimate knowledge of Employer's Business and Executive's reputation and relationships with, among others, customers, suppliers, employees and other agents of Employer, Employer recognizes the detrimental effect on Employer's Business which will result if Executive were to enter into competition with Employer within a reasonable period after the date hereof; WHEREAS, it is a condition to ABR's obligation to acquire all of the outstanding common stock of Employer, and to Executive's obligation to transfer all of such common stock owned by Executive, under the Acquisition Agreement that Executive enter into this Agreement; WHEREAS, the parties acknowledge that each other is reasonably relying upon the execution of this Agreement and intend that each other so rely in connection with the Stock Exchange; and 2 WHEREAS, Employer desires to hire Executive on an exclusive basis, and Executive desires to be so hired by Employer, all in accordance with the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the covenants and agreements of the parties herein contained, and as an inducement to ABR the acquire the outstanding common stock of Employer (including those shares owned by Executive), the parties hereto, intending to be legally bound hereby, agree as follows: 1. EMPLOYMENT AND DUTIES. Employer hereby agrees to employ Executive as the President of Employer on the terms and conditions set forth herein, and Executive hereby agrees to remain in the employ of Employer on such terms and conditions. Executive shall serve as a director or in such additional offices of Employer or any of its affiliates to which Executive may be duly appointed or elected. Executive shall perform such duties as shall be assigned to him from time to time by, and Executive shall report directly to, the Board of Directors of Employer or by the Chairman of the Board of Directors of Employer, who is intended to be Mr. James MacDougald after the consummation of the Stock Exchange. Executive agrees to devote his full business time and effort on an exclusive basis to the diligent and faithful performance of such duties. Notwithstanding the foregoing, Executive shall not violate the provisions of this Section 1 by serving as a member of the board of directors of Electronic Transmission Corporation. Executive shall perform his duties for Employer from Employer's offices located within 30 miles of Employer's current location except for periodic travel that may be necessary in connection with the performance of Executive's duties hereunder. Executive acknowledges that under the applicable federal securities laws and regulations of the Securities and Exchange Commission ("SEC"), the Executive may be deemed to be an "executive officer" of ABR. During the Executive's employment by Employer, Executive agrees to comply with the SEC regulations applicable to executive officers of ABR, and to cooperate with ABR with respect to any disclosure or other requirements of such laws and SEC regulations. 2. TERM. The term of Executive's employment hereunder shall commence on the date hereof and shall continue until the third anniversary of the date hereof, unless earlier terminated in accordance with the terms hereof (the "Term"). After the expiration of the Term, the Executive's employment by Employer shall continue and be subject to termination pursuant to the terms of this Agreement. 3. COMPENSATION. As compensation for his performance of services as an employee and executive officer of Employer hereunder, Executive shall during the Term receive an annual salary at the rate of One Hundred Ten Thousand Dollars ($110,000) payable, as nearly as practicable, in equal semimonthly installments (less applicable taxes, deductions and withholding) payable by Employer. In addition to annual salary compensation, Executive shall be entitled to receive bonus compensation to the extent (i) bonus compensation is made generally available by Employer to its officers and (ii) Executive meets any performance criteria established as a prerequisite to the payment of bonus compensation. After the Term, Executive's compensation 2 3 shall be as agreed between Employer and Executive. Executive shall not be entitled to receive any compensation or other benefits in addition to those expressly provided for in this Agreement. 4. OTHER BENEFITS AND EXPENSES. Executive shall be entitled to paid vacation in accordance with the existing vacation policies and practices of Employer with respect to Executive. Executive shall be eligible to participate in such employee benefits plans, if any, which Employer may from time to time make generally available to its officers, and such employee benefits plans and other benefits which ABR makes generally available to the executive officers of its subsidiaries. Employer shall reimburse Executive for all expenses reasonably incurred by Executive on behalf of Employer or in fulfilling his obligations hereunder, subject to the receipt of verifying documentation acceptable to Employer in accordance with Employer's policies regarding the reimbursement of employee business expenses. 5. CONFIDENTIAL INFORMATION--INVENTIONS. (a) Executive has acquired and will acquire information and knowledge respecting the intimate and confidential affairs of Employer in the various phases of Employer's Business, including, without limitation, confidential information with respect to finances, customer lists, operations, processes, apparatus, equipment, packaging, services, marketing and distribution methods. Accordingly, and provided that a material breach of the terms and conditions of this Agreement by Employer is not continuing, Executive agrees that he shall not, during the period of his employment with Employer or thereafter, use for his own benefit any such confidential information acquired during the term of his employment with Employer (whether or not such employment is or was pursuant to this Agreement). Further, during the period of his employment and thereafter, Executive shall not, without the written consent of the Board of Directors of Employer or a person duly authorized thereby, disclose to any person, other than an employee of Employer or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties hereunder, any confidential information obtained by him while in the employ of Employer (whether or not such employment is or was pursuant to this Agreement). (b) Executive agrees that all memoranda, notes, records, papers or other documents and all copies thereof relating to Employer's Business (some of which may be prepared by him) and all objects associated therewith (such as models and samples) in any way obtained by him shall at all times be and remain the property of Employer. Executive shall not, except for Employer's use, copy or duplicate any of the aforementioned documents or objects, nor remove them from Employer's facilities, nor use any information concerning them except for Employer's benefit, either during his employment or thereafter. Executive agrees that he will deliver the original and all copies of all of the aforementioned documents and objects, if any, that may be in his possession to Employer on termination of his employment, or at any other time on Employer's request. 3 4 (c) Executive agrees to disclose to Employer and to assign to Employer all of Executive's rights in any designs, discoveries, improvements and ideas, whether or not patentable, including, without limitation, novel or improved products, processes, promotional and advertising materials, business data processing programs and systems, and other marketing and sales techniques, which relate or result from (i) Employer's Business, (ii) Executive's actual or demonstrably anticipated research or development, or (iii) any work performed by Executive for Employer (hereinafter collectively "Inventions"), conceived or reduced to practice at any time during Executive's employment by Employer (whether or not such employment is or was pursuant to this Agreement) either solely or jointly with others and whether or not developed on Executive's own time or with the resources of Employer. Executive agrees that Inventions first reduced to practice within six (6) months after termination of Executive's employment by Employer (whether or not such employment is or was pursuant to this Agreement) shall be presumed to have been conceived during such employment. Further, Executive disclaims and will not assert any rights in Inventions as having been made, conceived or acquired prior to employment by Employer. (d) As used in this Section 5, Employer shall be deemed to include each and every corporation or other entity which is or may become a parent, subsidiary or otherwise an affiliate of Employer during the term hereof, including ABR. 6. NO COMPETITION. (a) Provided that a material breach of the terms and conditions of this Agreement by Employer is not continuing, Executive agrees that during his employment by Employer, the provisions regarding noncompetition set forth in Section 5 of the Acquisition Agreement (the "Noncompetition Provisions") are hereby incorporated herein by reference; provided, however, that for this purpose all references therein to the "Shareholders" shall be construed to mean Executive (it being understood that the intent of this provision is that the Noncompetition Provisions shall be incorporated herein only insofar as such provisions apply to Executive). (b) Executive acknowledges and agrees that the Noncompetition Provisions may require Executive to comply with such provisions for a period of time that is greater than the requirement set forth in this Section 6, and Executive hereby reaffirms his obligations to Employer and ABR under the Acquisition Agreement. (c) Executive further covenants and agrees that during his employment with Employer he shall not make preparations to engage in any activity which would be prohibited by the covenants contained in this Section 6. 4 5 7. TERMINATION OF EMPLOYMENT. (a) TERMINATION DURING THE TERM. Executive's employment shall terminate, or be subject to termination, prior to the expiration of the Term specified in Section 2 hereof, as follows: (i) DEATH. Executive's employment hereunder shall terminate upon his death. (ii) DISABILITY. In the event Executive becomes ill or injured so as to become unable, for a period of more than four (4) consecutive months or for more than 120 days within any six (6) month period, to perform his duties hereunder on substantially a full-time basis, Employer may, at its option, terminate Executive's employment hereunder upon not less than ten (10) days prior written notice. (iii) CAUSE. Employer may, at any time, terminate Executive's employment hereunder for cause. For the purposes of this Agreement, Employer shall have "cause" to terminate Executive's employment hereunder upon: (A) theft or embezzlement of Employer's funds; (B) conviction of (or guilty or no contest plea with respect to) any felony; (C) intentional violation of any express written direction or any written rule or regulation established by the Board and provided to Executive that is consistent with the terms of this Agreement and is otherwise reasonable, provided such violation is likely to adversely affect Employer and has not been substantially cured by Executive within thirty (30) days of receiving written notice of such violation by Employer; or (D) abuse of alcohol or other drugs that materially interferes with the performance by Executive of his duties. (b) TERMINATION AFTER THE TERM. Executive's employment shall terminate, or be subject to termination, after the expiration of the Term specified in Section 2 hereof, as follows: (i) upon the occurrence of any of the events specified in Section 7(a) above; or (ii) at the discretion of Employer or Executive, without cause and without the requirement of any reason or justification, upon not less than ninety (90) days prior written notice to the other party. (c) CESSATION OF SALARY AND BENEFITS AFTER TERMINATION. In the event of the termination of Executive's employment as provided in Section 7(a) or (b), all payments of salary and benefits under Section 3 hereof, and the reimbursement of expenses under Section 4 5 6 hereof, shall cease at the time of termination, and Executive shall not be entitled to receive any compensation or payment on account of such termination. (d) TERMINATION BY EXECUTIVE FOR GOOD REASON. Executive may terminate Executive's employment hereunder for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Executive's written consent, the occurrence of any of the following circumstances: (i) any material diminution in Executive's position, duties, responsibilities or authority (except during periods when Executive is unable to perform all or substantially all of Executive's duties or responsibilities on account of Executive's illness (either physical or mental) or other incapacity), or (ii) any other material breach by Employer or ABR of this Agreement, the Acquisition Agreement or that certain Registration Rights Agreement dated as of the date hereof between the former shareholders of LP Baier and ABR (the "Registration Rights Agreement"). A termination of Executive's employment pursuant to this Section 7(d) shall be effective on the date specified in the notice from Executive to Employer exercising Executive's right to terminate his employment hereunder for Good Reason, but in no event less than ten (10) days nor more than sixty (60) days from the date such notice is given. Within five (5) business days following any such termination, Employer shall make a lump sum payment to Executive in an amount equal to the amount of salary and benefits under Section 3 hereof that would otherwise be payable to Executive through the expiration of the Term, less applicable taxes, deductions and withholding. 8. NOTICES. All notices, requests, demands and other communications hereunder shall be given in writing and shall be: (a) personally delivered; or (b) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective addresses to be used for all such notices, demands or requests are as follows: If to Employer: The L.P. Baier 3955 Pender Drive Fairfax, VA 22030 Attn: Board of Directors and ABR Information Services, Inc. 34125 U.S. Highway 19, North Palm Harbor, FL 34684-2116 Attention: Mr. Vincent Addonisio, Senior Vice President and Chief Financial Officer 6 7 With a copy to: Foley & Lardner 100 North Tampa Street Suite 2700 Tampa, Florida 33602 Attn: Kenneth J. Meister, Esq. If to Executive: Rick Snyder 13225 Coral Berry Drive Fairfax, VA 22033 With a copy to: Arter & Hadden 1801 K Street NW 4th Floor Washington, DC 2006 Attn: Laurence E. Bensignor, Esq. or to such other address as either party may have furnished to the other in writing in accordance herewith, with any notice of change of address effective only upon receipt. 9. MISCELLANEOUS. (a) No provisions of this Agreement may be amended unless such amendment, modification or discharge is agreed to in writing signed by the parties hereto. (b) No waiver by any party hereto of any breach of, or compliance with, any condition or provision of this Agreement by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No such waiver shall be enforceable unless expressed in a written instrument executed by the party against whom enforcement is sought. (c) This Agreement, the Acquisition Agreement and the Registration Rights Agreement constitute the only agreements of the parties on the subject matter hereof and no agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement, the Acquisition Agreement or the Registration Rights Agreement. (d) If a court of competent jurisdiction should decide that any of the provisions of this Agreement are not enforceable, in whole or in part, the parties declare it is their intention that such unenforceable provisions be deemed reformed so that they apply only to the maximum extent to which they can be enforced. Executive acknowledges that his violation, or threatened violation, of the provisions of Section 5 or 6 would cause Employer irreparable injury and, in addition to any other remedies to which Employer may be entitled, Employer shall be entitled to injunctive relief. 7 8 (e) This Agreement shall be binding upon and inure to the benefit of Employer, its successors and assigns, and Executive and his heirs, executors, administrators and legal representatives. (f) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Virginia, notwithstanding its conflicts of law principles. (g) This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. Employer: LP BAIER COMPANY By: /s/ Vincent Addonisio --------------------------------- Name: Vincent Addonisio Title: Senior Vice President and Chief Financial Officer Executive: /s/ Rick Snyder ------------------------------------ Rick Snyder 8 EX-11.1 6 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS ABR INFORMATION SERVICES, INC.
Year ended July 31, ------------------------------------------ 1994 1995 1996 ---- ---- ---- Primary: Average shares outstanding 6,846,523 9,798,447 11,135,280 1993 stock options issued (1) 41,714 41,714 41,714 Net effect of dilutive stock options - based on the modified treasury stock method using average market price 594,224 160,584 356,533 TOTAL 7,482,461 10,000,745 11,533,527 $ 2,793,678 Net income per financial statements $1,610,495 $ 5,673,784 Deduct preferred stock dividends (10,073) -- -- Adjusted net income $1,600,422 $ 2,793,678 $ 5,673,784 ========== =========== =========== Per share amount $ .21 $ .28 $ .49 ========== =========== =========== Fully Diluted: Average shares outstanding 6,846,523 9,798,447 11,135,280 1993 stock options issued (1) 41,714 41,714 41,714 Net effect of dilutive stock options - based on the modified treasury stock method using the year period end price, higher than average market price 721,718 217,960 402,430 TOTAL 7,609,955 10,058,121 11,579,424 Net income per financial statements $1,610,495 $ 2,793,678 $ 5,673,784 Deduct preferred stock dividends (10,073) -- -- Adjusted net income $1,600,422 $ 2,793,678 $ 5,673,784 ========== =========== =========== Per share amount $ .21 $ .28 $ .49 ========== =========== ===========
(1) Stock options issued under the ISO Plans twelve months prior to January 31, 1994 assumed outstanding for all periods presented using the treasury stock method. EX-13.1 7 ANNUAL REPORT 1 EXHIBIT 13.1 - -------------------------------------------------------------1996 ANNUAL REPORT [PHOTOGRAPH ABR COMMONS BUILDING] [ABR LOGO] 2 ABR INFORMATION SERVICES, INC.-------------------------------------------------- A Brief History ABR has undergone a dramatic evolution since beginning 1987. Having proven itself in the most difficult area of benefits administration, ABR has leveraged its reputation, systems and procedures to provide a complete outsourcing solution for many health and welfare benefits. Initially, ABR defined itself as a COBRA compliance company through the operations of what is now ABR CobraServ (COBRA is a portable healthcare benefit mandated by a federal regulation known as COBRA -- the Consolidat-ed Omnibus Budget Reconciliation Act of 1985.) CobraServ has grown since then to become the nation's largest COBRA compliance administrator. ABR developed a long term strategy to add services and leverage its systems expertise in benefits and its large customer base. Coincidentally, our growing list of large clients began requesting our help in other areas of benefits administration. We introduced services related to healthcare benefits for inactive employees, retirees and open enrollment administration. In 1993, ABR began to explore the larger universe of services related to active employees. While COBRA participants represent 2% of the work force, active employees represent the other 98%, a significantly larger market. We found an extremely strong trend on the part of employers seeking to "outsource" such active employee administration functions. We also found that our systems and methodologies were ideal for performing such tasks. Much stronger, in fact, than other capabilities available in the marketplace. In May of 1994, ABR completed its Initial Public Offering (IPO) and raised $11 million to further expand its systems and capabilities. Through internal development and the acquisition of specialized benefits administrators, ABR has significantly expanded its capabilities to include a full range of services focusing on active and retired employees as well as COBRA services. In 1996 we completed a secondary offering raising over $151 million that significantly strengthens our financial position. We have successfully implemented "Total Benefits Outsourcing" services for active employees with one of the nation's most prestigious companies--and have taken on broad-based administration for other companies, including one with more than 200,000 employees. Today, ABR is the nation's leading administrator of employee health and welfare benefits. Over 21,000 companies, encompassing more than 10 million employees, dependents and retirees, rely on ABR's specialized services to administer their benefit programs. With the most enviable client list and service offerings in the industry, ABR is the leader in this unique but large emerging market. [GRAPHIC IMAGE OF ABR'S SERVICES AND CLIENTS TYPES] CONTENTS------------------------------------------------------------------------ 1 Financial Highlights 2 Letter to Shareholders 4 Company Overview 10 Selected Financial Data 11 Management's Discussion/Analysis 14 Statements of Income 15 Balance Sheets 16 Statements of Shareholders' Equity 17 Statements of Cash Flows 18 Notes to Financial Statements 27 Report of Independent CPA 28 Corporate and Shareholder Information 29 Directors and Officers 3 - -----------------------------------------------------------*FINANCIAL HIGHLIGHTS (In Thousands Except Per Share Data)
- --------------------------------------------------------------------------------- RESULTS OF OPERATIONS- YEAR ENDED JULY 31, 1995 1996 CHANGE - --------------------------------------------------------------------------------- Revenue $ 18,835 $ 31,162 66% Net income $ 2,794 $ 5,674 103% Net income per share $ .28 $ .49 75% Weighted average shares outstanding, primary 10,001 11,534 15% - --------------------------------------------------------------------------------- FINANCIAL POSITION - JULY 31, 1995 1996 CHANGE - --------------------------------------------------------------------------------- Cash and investments $ 24,377 $ 161,199 561% Total assets $ 33,191 $ 202,574 510% Working capital $ 14,192 $ 145,825 928% Long term debt $ -- $ -- $-- Total shareholders' equity $ 19,213 $ 181,150 843%
Revenues Net Income Net Income Total Per Share Shareholders' Equity (in millions) (in millions) (in dollars) (in millions) [GRAPH [GRAPH [GRAPH [GRAPH 1993 - 1996] 1993 - 1996] 1993 - 1996] 1993 - 1996] *Restated for the three-for-two stock splits completed on July 13, 1995 and February 19, 1996 and an acquisition by a pooling of interest. 1 4 [PHOTOGRAPH] James E. MacDougald Chairman of the Board President and Chief Executive Officer TO OUR SHAREHOLDERS------------------------------------------------------------- ABR's second full year as a public company was a truly remarkable one, as we exceeded all of our goals. For the year ended July 31, 1996, revenues increased 66% to $31.2 million compared with $18.8 million last year. Net income increased 103% to $5.7 million compared to $2.8 million last year. Net income per share increased to $.49 compared to $.28, despite an increase in the weighted average number of shares outstanding due to the Company's secondary offering in March, 1996. In that offer-ing, ABR attracted some of America's best-known growth investors, raising over $151 million (net). Our balance sheet continues to strengthen, with assets increasing six-fold to over $200 million. With cash and investments of over $160 million and no debt, we have the flexibility and resources to fuel our continued growth -- both internal and through acquisition opportunities. During the year, ABR continued to expand its infrastructure, client base and service offerings. We added more than 3,000 clients, boosting our client base to over 21,000, including many "Fortune/Forbes 500" employers across all industries. Even as our core business grew tremendously, we began transforming ABR into a multi-dimensional company through internal development and acquisitions. ABR broadened its reach in benefits administration outsourcing during the year, increasing its non-COBRA revenue from 8% of the total to 36%. We added a number of services including FSA (Flexible Spending Account) administration, QDRO (Qualified Domestic Relations Order) administration, Educational Benefits administration, and Total Benefits administration. Through the acquisitions of Bullock Associates (renamed ABR Benefits Services, Inc.) and Total Cobra Services, Inc., we added several new service offerings, increased our COBRA and Retiree Service market share, and established a presence on the West Coast. The acquisition of The L.P. Baier Company gave us an immediate entry into the fast-growing area of FSA administration. Late in fiscal 1996, ABR implemented "Total Benefits Outsourcing" services for a "Fortune/Forbes 100" company, performing central eligibility administration functions for all of their health and welfare benefit plans. To capitalize on these capabilities, which we believe are unmatched in the nation, we are marketing them to other large prospects through broad-based advertising and direct marketing efforts. Subsequent to year end ABR added Vincent Addonisio, Executive Vice President and Chief Financial Officer, to the Board of Directors to replace the retiring Stephen R. Hood. Steve, who has served ABR in various capacities during the last ten years, continues to be a friend to ABR, and we wish him continued good health and future success. With all of this year's accomplishments, we firmly believe that ABR's best is yet to come and look forward to another great year in '97. Thank you for your continued support. Cordially, [SIGNATURE] [PHOTOGRAPH OVERHEAD CONFERENCE] 2 5 1996: A YEAR OF ACCOMPLISHMENTS------------------------------------------------- - - Twelve consecutive record quarters of over 30% growth in revenues and earnings reported. - - Stock price up 263%. - - Stock split three-for-two on February 19, 1996. - - Completed a secondary public offering, raising over $151 million. - - Customer base increased from 18,000 to 21,000, involving more than 10 million covered employees, retirees and dependents. - - Acquired Bullock Associates, Inc. of Princeton, NJ (now called ABR Benefits Services, Inc.) to broaden our service offerings. - - Acquired Total Cobra Services, Inc. of Irvine, CA to increase COBRA and Retiree Services market share while establishing a geographic presence on the West Coast. - - Implemented "Total Benefits Outsourcing" operations for a high-profile Fortune 100 company. - - Extensive computer system upgrade and expansion proceeded on schedule. - - Cutting edge technologies implemented, including OCR (Optical Character Recognition), IVR (Interactive Voice Response) and EDI (Electronic Data Interchange). - - Acquired The L.P. Baier Company of Fairfax, VA and gained immediate entrance into the FSA administration market. - - Forbes Magazine named ABR one of the "200 Best Small Companies in America" for the second year in a row. TOTAL ASSETS [GRAPH 1992 - 1996] BOOK VALUE PER SHARE [GRAPH 1992 - 1996] MARKET CAP [GRAPH 1994 - 1996] [PHOTOGRAPH MAN AT CAPITAL BUILDING] 3 6 ABR INFORMATION SERVICES, INC. COMPANY PROFILE----------------------------------------------------------------- Created as a holding company in 1994, ABR Information Services, Inc. is recognized as the leader in the employee benefits administration field. The company provides benefits administration services on an "outsourcing" basis to employers of all sizes--offering them an "a la carte" menu of services from which to choose. They may also have ABR provide a "Total Benefits Outsourcing" solution. The company derives its revenue in 3 main areas of operation: [PRO FORMA WITH ACQUISITIONS PIE CHART] COBRA SERVICES--PORTABLE HEALTHCARE--------------------------------------------- ABR delivers employee health benefits "portability" administration services primarily through its ABR CobraServ subsidiary, the nation's largest independent "COBRA" compliance service bureau, as well as through other subsidiaries. With more than 21,000 clients, ABR helps employers adhere to strict and complex federal mandates that require employers to offer continuing healthcare coverage to employees and dependents who would otherwise lose their group health coverage due to termination of employment or other factors. 2 - - 21,000+ customers - - Prospective universe of more than 650,000 employers plus public sector - - ABR leads market with 3% market share - - Most employers, approximately 94%, administer in-house RETIREE AND INACTIVE EMPLOYEE SERVICES------------------------------------------ A natural extension of its COBRA operations, Retiree and Inactive Employee benefits administration assists employers with ex-employees and their dependents. This is a special subset of the employers' benefits administration activities. Employers desire to fulfill their promises and obligations to these individuals, but realize that their primary focus must be on their active operations -- and their active employees. ABR provides services such as retiree billing, vestee servicing, retiree services, open enrollment administration, FMLA (Family Medical Leave Act) services and general billing services for non-employees. - - 60 large clients - - Prospective universe of 12,000 employers - - Opportunity to cross-market to existing COBRA client base - - Government and accounting regulations make employer administration for retirees more difficult ACTIVE EMPLOYEE ADMINISTRATION-------------------------------------------------- Benefits administration for Active Employees and their dependents represents the most recent--and by far the largest--market opportunity for ABR. With the significant development and expansion of services such as "Total Benefits Outsourcing," and with our recent acquisitions of companies specializing in various aspects of active employee administration. ABR has something to offer virtually every employer-with services ranging from educational benefits administration to FSA administration, group health insurance plan open enrollments and maintaining, updating and servicing clients' central benefits eligibility data bases. - - 1000+ customers, including some of the nation's largest outsourcing arrangements - - Opportunity to cross-sell - - State of the art technology in place provides competitive advantage - - ABR positioned at the forefront of major outsourcing trend 4 7 [PHOTOGRAPH ABR COMMONS BUILDING] ABRCommons Current Headquarters [PHOTOGRAPH] ABRPlaza Available mid 1999 [PHOTOGRAPHIC RENDERING] ABRCenter Available mid 1997 [PHOTOGRAPHIC RENDERING] THE EXPANDING SCOPE OF ABR INFORMATION SERVICES, INC. ABR takes pride in its growth to date, both in terms of its business activities and its infrastructure. We continue to pave the way for future growth -- in a literal sense. In addition to our facilities in California, New Jersey, Virginia and Florida, we are developing expanded facilities (shown above) to supplement our headquarters location, and have secured land for our future expansion. Such planning is necessary to accommodate our projected rate of expansion over the coming five-year period, and illustrates the depth of our industry commitment. [PHOTOGRAPH ABR COMMONS BUILDING] 5 8 BENEFITS ADMINISTRATION OUTSOURCING -- AN EXPLODING TREND----------------------- Downsizing, streamlining and refocusing on core competencies are key elements of today's business trends. Such efforts promise to strengthen and continue into the foreseeable future. As a result, companies from the largest to the smallest are striving to outsource activities that are not crucial to their core business. The growing trend toward the outsourcing of employee benefits administration is a direct result of this overall business climate. It is estimated that the current market opportunity for benefits administration exceeds $10 billion annually. This figure is expected to grow as larger companies implement outsourcing arrangements and pave the way for others to follow. It has been our experience that the level of interest in outsourcing benefits administration services expressed by employers has increased over the past year. The explosive growth of the outsourcing trend creates tremendous opportunities for companies able to service outsourcing needs in a professional way. Only a limited number of companies can be considered potential providers of such services. Many of those who are attempting to provide such services are doing so in a "catch-up" or "follow the leader" mode--developing systems to match administrative needs they have not encountered in their previous business relationships. We feel that this is a significant handicap to such companies. ABR has been dedicated to benefits administration for 10 years. Our experience tells us that the systems required to deal with full-range benefits administration services are extremely complex, and would be very difficult to develop on an ad hoc basis. ABR's systems have undergone evolutionary development over many years of live application. As a result, they can anticipate and accommodate all of the permutations that comprehensive benefits administration entails--because such situations have already been encountered and dealt with. A full service benefits administrator must make significant capital investments, as well. In addition to being systems-intensive, benefits administration is also labor-intensive. A major commitment to staffing, rigorous training and proper facilities are prerequisites to being able to provide comprehensive, efficient services. ABR has made these commitments. ABR'S UNIQUE ROLE WITHIN THE OUTSOURCING INDUSTRY----------------------------------------------------------- ABR brings a number of unique characteristics to the benefits outsourcing industry and, in so doing, places itself in a position of considerable strength. As a service bureau, we are able to offer our clients the greatest possible return on their investment. We provide economies of scale, [PHOTOGRAPHIC COLLAGE OPERATORS/ CUSTOMER SERVICE] [PHOTOGRAPH MEETING IN OFFICE] 6 9 location and technology that cannot be found elsewhere. The size of our benefits administration client list establishes us as the true industry leader, by a wide margin. With more than 21,000 clients, we are able to invest in systems and technologies that are absolute state-of-the-art--and then spread out the cost and benefit across our entire client base. The result is an unparalleled level of service to our clients at minimum cost. With more than 600 employees dedicated entirely to benefits administration, we provide a level of expertise through specialization that is second to none. At this staffing level, we also reinforce our status as the industry leader. No other provider of benefits outsourcing services has an equivalent level of staff dedicated to this purpose. Benefits administration is our core business. It is not a sideline or a value-added service subjugated to other interests. This level of specialization and commitment is a tremendous client benefit not to be found elsewhere in our industry. OUR INDUSTRY - -----------------------------------------------------------------------APPROACH Armed with the advantage of a public company and resources of more than $160 million in cash, ABR is in the process of consolidating its position within the benefits outsourcing industry. We have invested in, and continue to invest in, cutting-edge technologies such as IVR (Interactive Voice Response), OCR (Optical Character Recognition), EDI (Electronic Data Interchange) and automated FAX technologies. We have also invested in computer systems which offer greater processing power and practically unlimited expandability. Investing in such capabilities enhances the level of service we can offer our clients and their employees and dependents. This distances us from our competition and creates significant barriers to entry into the industry. We have identified more than 30 categories of benefits outsourcing services that comprise the mix of benefits administration services that our customers require, and we are systematically expanding our capabilities in key areas. Among these areas are Central Eligibility Maintenance, Open Enrollment administration, FSA (Flexible Spending Account) administration, HMO administration, Tuition Reimbursement administration, QDRO administration, and others. We have expanded our capabilities in some of these areas through internal development and through acquisitions of specialized companies such as The L.P. Baier Company and Bullock Associates, Inc. We continue to evaluate acquisition opportunities which would enhance the depth of our service offerings and expand our market position. Being the best- capitalized company in our industry segment aids us in consolidating our industry position and provides the flexibility to fuel our growth. [PHOTOGRAPHIC COLLAGE COMPUTER EQUIPMENT] [PHOTOGRAPH PRESENTATION MEETING] 7 10 ABR'S BUSINESS STRATEGY------------------------------------------------------------------------ We are very conscious of the benefits of obtaining business that generates recurring revenue, and such an approach has played a critical role in ABR's growth to date. Our typical service, whether it is COBRA compliance administration, retiree benefits administration or general benefits administration, becomes an essential, ongoing element of our clients' day-to-day operations. We don't sell one-time solutions, but price our services based upon events that occur frequently and are common to all employers. The result is an ongoing revenue stream after the initial sales effort. We intend to structure our future new business efforts in a similar manner. We are also conscious of the benefits of expanding our capabilities through continued internal development and the acquisition of complementary businesses. We have the resources and expertise to develop additional services internally, as well. By acquiring complementary businesses, we are able to immediately expand our service offerings and our level of expertise in key benefits administration areas. At the same time, we expand our administrative capacity and our client base. It is our intent to continue with this dual approach in the future, as well. Our strategy for continued healthy growth is to aggressively capitalize on our financial strength, our capabilities and our role as an industry leader to maximize our share of the benefits administration outsourcing business while the trend is in its initial rapid growth phase. We will accomplish this objective by increasing market share in three key areas of operation--COBRAservices, Retiree and Inactive Employee benefits administration, and Active Employee benefits administration. COBRA SERVICES------------------------------------------------------------------ PROFILE: Although ABR possesses a share of the COBRA administration market equal to that of all of our competitors combined, we still have just over 3% of the total potential market of 650,000 employers who are required to comply with COBRA regulations. Our intention is to increase market share through intensified direct marketing efforts, an expanded sales force and increased sales through allied third parties such as insurance agents and brokers. SERVICES: The most comprehensive turnkey COBRA compliance service available. KEY ACCOMPLISHMENTS 1996: - Attained level of 21,000 clients; - Processed 600,000+ COBRA events; - Collected over $150,000,000 in COBRA premiums; - Acquired COBRA business of Bullock Associates, Total Cobra Services and [PHOTOGRAPH OVERHEAD DESK] [PHOTOGRAPH EXECUTIVE MEETING] 8 11 The L.P. Baier Company. GROWTH OPPORTUNITIES: From a current client base of 21,000 to a prospective universe of 650,000 employers required to comply with COBRA regulations, as well as public sector organizations. RETIREE AND INACTIVE EMPLOYEE BENEFITS - -----------------------------------------------------------------ADMINISTRATION PROFILE: Provider of benefits administration services for retirees, dependents, and others who are not considered "active" employees. ABR has most often been selected by existing clients to perform such services as an extension of services currently provided through other operations. Our intention is to increase market share by aggressively marketing inactive employee-related services to our existing client base and by targeting large non-client prospects. SERVICES: Retiree billing services, dependent billing, FMLA and other non-employee administration services. KEY ACCOMPLISHMENTS 1996: - Increased client base from 38 to 60; - Converted operations to new computer hardware/software platform to facilitate rapid growth; - Acquired retiree business of Bullock Associates and Total Cobra Services. GROWTH OPPORTUNITIES: More than 12,000 employers with over 1,000 employees are considered prime prospects for Retiree/Inactive Employee administration. ACTIVE EMPLOYEE BENEFITS - ------------------------------------------------------------------ADMINISTRATION PROFILE: Provider of wide-ranging general employee benefits administration services encompassing all aspects of Active Employee benefits. ABR offers such services either "a la carte" or on a "Total Benefits Outsourcing" basis. ABR's intention is to aggressively market its services to its largest clients and to Fortune 1000 level employers through direct and indirect marketing channels. SERVICES: Ranging from central eligibility maintenance to open enrollment administration, FSA (Flexible Spending Account) administration, HMOadministration, Educational Benefits administration, QDRO (Qualified Domestic Relations Order) administration, and others. KEY ACCOMPLISHMENTS 1996: - Increased client base from 1 to 1,000; - Developed "Total Benefits Outsourcing" services internally and expanded services such as QDRO and FSA through acquisition of Bullock Associates and The L.P. Baier Company; - "Total Benefits Outsourcing" services for a 100,000-employee client were fully implemented. GROWTH OPPORTUNITIES: More than 650,000 employers are considered prospects for various Active Employee benefits administration services. "Total Benefits Administration" is primarily targeted at employers with more than 5,000 employees. [PHOTOGRAPH OVERHEAD DESK] 9 12 SELECTED FINANCIAL DATA---------------------------------------------------------
Years ended July 31, ---------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------ ------ ------ ------ -------- (in thousands except per share data) Statement of Income Data (1): Revenue $7,334 $ 9,028 $13,465 $18,835 $ 31,162 Cost of services 4,348 5,232 7,320 10,035 17,645 Selling, general and administrative expenses 1,520 1,878 3,250 4,448 6,575 Other operating expenses 270 400 369 375 219 Acquisition costs -- -- -- -- 361 ------ ------- ------- ------- -------- Operating income 1,196 1,518 2,526 3,977 6,362 Interest income (expense), net (18) 4 65 572 2,872 ------ ------- ------- ------- -------- Income before extraordinary item and income taxes 1,178 1,522 2,591 4,549 9,234 Income taxes 435 570 981 1,755 3,560 ------ ------- ------- ------- -------- Income before extraordinary item 743 952 1,610 2,794 5,674 Extraordinary item (2) 273 -- -- -- -- ------ ------- ------- ------- -------- Net income $1,016 $ 952 $ 1,610 $ 2,794 $ 5,674 ====== ======= ======= ======= ======== Per share data: (3) Income before extraordinary item $ .11 $ .14 $ .22 $ .28 $ .49 Extraordinary item .04 -- -- -- -- ------ ------- ------- ------- -------- Net income $ .15 $ .14 $ .22 $ .28 $ .49 ====== ======= ======= ======= ======== Weighted average shares outstanding (4) 6,614 6,701 7,482 10,001 11,534 July 31, ---------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------ -------- -------- -------- --------- (in thousands) Balance Sheet Data (1): Working capital 1,238 $ 1,781 $13,676 $14,192 $ 145,825 Total assets 8,925 11,947 27,186 33,191 202,574 Total long term debt, excluding current portion 230 476 -- -- -- Redeemable preferred stock, excluding current portion 237 127 -- -- -- Total shareholders' equity 1,819 2,753 16,113 19,213 181,150
(1) Restated for an acquisition by a pooling of interest. (2) Tax benefit attributable to the utilization of the Company's net operating loss carryforwards. (3) Restated for the three-for-two stock splits completed on July 13, 1995 and February 19, 1996. (4) Includes Common Stock and Common Stock equivalents. 10 13 - ----------------------------------------------MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW The Company's revenues are currently generated from three sources. First, the Company generates revenues through its COBRA compliance services. Second, the Company generates revenue from providing administration services with respect to benefits provided to retirees and inactive employees. Third, the Company generates revenue from providing administration services with respect to benefits provided to active employees. The first source of revenue for the Company, COBRA compliance services, is generated primarily from its qualifying event agreements with employers and through capitation agreements with insurance companies. Through qualifying event agreements, the Company receives a fixed, per occurrence fee from its customers for each qualifying event. A qualifying event occurs when an employee or his or her dependents experience a loss of coverage under a group healthcare plan. The amount of the fixed fee varies depending on the method of the qualifying event notification mailing, which is selected by the customer. Through capitation agreements, insurance companies designate the Company as the administrator of COBRA compliance for their group insurance clients that are subject to COBRA. The Company is paid a monthly fee for each employee covered by the group plan. The revenue generated under a capitation agreement is not dependent on the triggering of a qualifying event, but is determined based on the number of employees covered by the group plan at the beginning of each month. The Company also receives an administrative fee typically equal to 2% of the monthly health insurance premium that is paid by or on behalf of each continuant. In addition, the Company generates revenues from customers for additional COBRA compliance and healthcare administration services, both on a one-time and continuous basis. These additional revenues include new account fees paid to the Company when it is retained by a new customer. During fiscal 1995 and fiscal 1996, 83.8% and 69.9%, respectively, of the Company's revenues were attributable to the Company's COBRA compliance services. The second source of the Company's revenue is administration services with respect to benefits provided to retirees and inactive employees, including retiree healthcare, disability, surviving dependent, family leave and severance benefits. During fiscal 1995 and fiscal 1996, 7.2% and 15.7%, respectively, of the Company's revenues were attributable to the Company's administration services for retirees and inactive employees. The third source of the Company's revenue is administration services with respect to benefits provided to active employees. Through this service, the Company provides benefits administration services for active employees, such as enrollment, eligibility verification, QDRO administration, Flexible Spending Account administration and pension services. During fiscal 1995 and fiscal 1996, 9.0% and 14.4%, respectively, of the Company's revenues were attributable to benefits administration services for active employees. The Company has experienced significant growth in recent years, with revenues increasing from $9.0 million in fiscal 1993 to $31.2 million in fiscal 1996, and net income increasing from $952,000 in fiscal 1993 to $5.7 million in fiscal 1996. Cost of services includes direct personnel, occupancy and other costs associated with providing services to customers, such as mailing and printing costs. Selling, general and administrative expenses include administrative, marketing and certain other indirect costs. Other operating expenses primarily consist of certain software development costs. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenue represented by certain items reflected in the Company's statements of income as restated to reflect the acquisition by a pooling of interest. - -----------------------------------------------------------------------------
1994 1995 1996 ---- ---- ---- Revenue 100.0% 100.0% 100.0% Cost of services 54.4 53.3 56.6 Selling, general & administrative expenses 24.1 23.6 21.1 Other operating expenses 2.7 2.0 .7 Acquisition costs -- -- 1.2 ----- ----- ----- Operating income 18.8 21.1 20.4 Interest income (net) 100.5 103.0 109.2 Income taxes 7.3 9.3 11.4 ----- ----- ----- Net income 12.0% 14.8% 18.2% ===== ===== ===== - -----------------------------------------------------------------------------
11 14 YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995 Revenues increased $12.3 million, or 65.5%, to $31.2 million during the year ended July 31, 1996 from $18.8 million in the year ended July 31, 1995. Of the $12.3 million increase in revenues, $6.0 million was attributable to increased revenues from COBRA compliance services, $3.5 million was attributable to increased revenues from retiree/inactive employee benefits administration and approximately $2.8 million was due to increased revenues from active employee benefits administration. The COBRA compliance revenues increased primarily as a result of the addition of new customers and as a result of the acquisitions. The increase in revenues from retiree/inactive employee benefits administration was primarily attributable to the addition of new customers obtained by the Company and as a result of the acquisitions during the year ended July 31, 1996. The increase in revenues from active employee benefits administration was primarily attributable to the addition of new customers obtained by the Company and as a result of an acquisition during the year ended July 31, 1996. Cost of services increased 75.8% to $17.6 million during the year ended July 31, 1996 from $10.0 million during the year ended July 31, 1995. The increase in cost of services was attributable to the addition of data processing, information systems and customer service personnel to support growth as well as the result of the acquisitions. As a percentage of revenues, cost of services increased to 56.6% from 53.3% for the same period. This increase as a percentage of revenues resulted from increasing the operating infrastructure to support the Company's growth. Selling, general and administrative expenses increased 47.8% to $6.6 million during the year ended July 31, 1996 from $4.5 million in the year ended July 31, 1995. The increase in selling, general and administrative expenses was primarily attributable to the addition of marketing, management and administrative personnel to support the Company's growth. As a percentage of revenues, selling, general and administrative expenses decreased to 21.1% from 23.6% for the same periods. The decrease as a percentage of revenues resulted primarily from operating efficiencies from the allocation of these expenses over a larger revenue base. Other operating expenses decreased 41.8% to $218,000 during the year ended July 31, 1996 from $375,000 in the year ended July 31, 1995. Interest income increased $2.4 million, or 426.3%, to $3.0 million during the year ended July 31, 1996 from $573,000 in the year ended July 31, 1995. This increase is a result of the investment of the proceeds from the secondary stock offering completed in March 1996. Income taxes increased 102.9% to $3.6 million during the year ended July 31, 1996 from $1.8 million during the year ended July 31, 1995. The Company's effective tax rate remained the same for both periods at 38.6%. As a result of the foregoing, the Company's net income increased 103.1% to $5.7 million during the year ended July 31, 1996 from $2.8 million in the year ended July 31, 1995. Net income per share was $.49 for the year ended July 31, 1996 compared to $.28 for the prior year. YEAR ENDED JULY 31, 1995 COMPARED TO YEAR ENDED JULY 31, 1994 Revenues increased $5.4 million, or 39.9%, to $18.8 million for the year ended July 31, 1995 from $13.5 million for the year ended July 31, 1994. Of the $5.4 million increase in revenues, $4.3 million was attributable to additional revenues from COBRA compliance services, $386,000 was due to additional revenues from retiree/inactive employee benefits administration and $655,000 was due to increased revenues from active employee benefits administration. COBRA compliance revenues increased primarily as a result of the addition of new customers, a higher rate of employee turnover experienced by the Company's customers and an increase in the average price for these services. These revenues also increased due to an increase in revenues from the 2% administration fee on monthly health insurance premiums collected from continuants during the year ended July 31, 1995 compared to the year ended July 31, 1994. The increases in revenues from retiree/inactive employee benefits administration and active employee benefits administration were primarily attributable to the addition of new customers obtained by the Company who were not customers of the Company during the year ended July 31, 1994. Cost of services increased 37.1% to $10.0 million for the year ended July 31, 1995 from $7.3 million for the year 12 15 ended July 31, 1994. As a percentage of revenues, however, cost of services decreased to 53.3% for the year ended July 31, 1995 from 54.4% for the year ended July 31, 1994. The increase in cost of services was attributable to the addition of data processing, information systems and customer service personnel to support growth and an increase in operating expenses to service the additional revenues. The decrease as a percentage of revenues resulted from economies of scale associated with spreading certain fixed costs over a larger revenue base. Selling, general and administrative expenses increased 36.9% to $4.5 million for the year ended July 31, 1995 from $3.3 million for the year ended July 31, 1994 and as a percentage of revenues, remained fairly constant. The increase in selling, general and administrative expenses was primarily attributable to the addition of management, marketing and administrative personnel to support the Company's growth. Other operating expenses remained fairly constant for the year ended July 31, 1995 compared to the year ended July 31, 1994 and as a percentage of revenues, decreased to 2.0% from 2.7% for the same periods. The decrease as a percentage of revenues resulted from operating efficiencies associated with the allocation of these expenses over a larger revenue base. Income taxes increased 79.0% to $1.8 million for the year ended July 31, 1995 from $981,000 for the year ended July 31, 1994. The Company's effective tax rate remained fairly constant, increasing slightly to 38.6% from 37.8%. In fiscal 1994, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The effect on the Company's consolidated financial statements of the adoption of SFAS No. 109 was insignificant. See Note B of notes to consolidated financial statements. As a result of the foregoing, the Company's net income increased 73.5% to $2.8 million for the year ended July 31, 1995 from $1.6 million for the year ended July 31, 1994. Net income per share was $.28 for the year ended July 31, 1995 compared to $.22 for the year ended July 31, 1994. LIQUIDITY AND CAPITAL RESOURCES In March 1996, the Company completed a secondary stock offering which provided, net cash after offering expenses, $151 million to its operations. Net cash provided by operating activities was $11.5 million for the year ended July 31, 1996 compared to $5.4 million for the same period of 1995. As of July 31, 1996 and 1995, the Company's working capital and current ratio were $145.8 million and 8.1-to-1 and $14.2 million and 2.1-to-1, respectively. The Company invests excess cash balances in short-term investment grade securities, such as money market investments, obligations of the U.S. government and its agencies and obligations of state and local government agencies. During the year ended July 31, 1996, the Company's capital expenditures were $15.8 million. The Company recently purchased a 110,000 square foot facility situated on 12.7 acres of land in Palm Harbor, Florida. The cost of improvements to be made by the Company to such facility has been estimated to be $5.8 million. Additionally during the past 12 months, the Company purchased 72 acres of land for $2.1 million in Tarpon Springs, Florida to hold for future expansion of operating facilities. Management estimates that as of July 31, 1996, approximately $12.0 million will be required in order for the Company to purchase equipment for and to upgrade the Company's information processing systems. The Company has a five-year, $15.0 million unsecured credit facility. The Company has agreed to maintain all of its assets free and clear of all liens, encumbrances and pledges, except purchase money security interests in specific equipment in an aggregate amount of less than $500,000 as long as the credit facility remains outstanding or any indebtedness thereunder remains unpaid. Interest on the principal balance outstanding under this line of credit accrues at a floating interest rate equal to the prime rate or, at the Company's option, to the 30-day London Interbank Offering Rate (LIBOR), plus an applicable interest rate margin between 1% and 2% based on certain financial ratios. The credit facility contains certain financial covenants requiring the maintenance of cash and cash equivalents and investments equal to or greater than customer account deposits, a funded debt to EBITDA ratio of a maximum of 2.25-to-1, a debt service coverage ratio of not less than 1.35-to-1, as well as the maintenance of a certain funded debt to tangible net worth ratio. As of July 31, 1996, the Company was in compliance with all such covenants and there were no amounts outstanding under the credit facility. The Company believes that its cash, investments, its cash flow from operations and the funds available from its credit facility will be adequate to meet the Company's expected capital requirements for the foreseeable future. 13 16 ABR INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME----------------------------------------------
Years ended July 31, ----------------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Revenue $13,464,797 $18,834,636 $31,162,181 Operating expenses: Cost of services 7,319,671 10,035,168 17,645,269 Selling, general and administrative 3,249,890 4,448,319 6,575,390 Other operating 368,873 375,029 218,319 Acquisition costs -- -- 361,198 ----------- ----------- ----------- 10,938,434 14,858,516 24,800,176 ----------- ----------- ----------- Operating income 2,526,363 3,976,120 6,362,005 Interest income (expense): Interest income 98,109 572,573 3,013,551 Interest expense (33,312) (4) (141,406) ----------- ----------- ----------- 64,797 572,569 2,872,145 ----------- ----------- ----------- Income before income taxes 2,591,160 4,548,689 9,234,150 Income taxes 980,665 1,755,011 3,560,366 ----------- ----------- ----------- Net income $ 1,610,495 $ 2,793,678 $ 5,673,784 =========== =========== =========== Net income per share $ .22 $ .28 $ .49 =========== =========== =========== Weighted average shares outstanding 7,482,461 10,000,745 11,533,527 =========== =========== ===========
The accompanying notes are an integral part of these statements. 14 17 ABR INFORMATION SERVICES, INC. - ---------------------------------------------------- CONSOLIDATED BALANCE SHEETS
ASSETS July 31, ------------------------------- 1995 1996 ----------- ------------ CURRENT ASSETS Cash and cash equivalents $19,403,090 $ 14,088,396 Investments 4,974,035 147,111,102 Accounts receivable, net of allowance for doubtful accounts of $26,202 and $38,894, respectively 2,507,956 3,870,539 Prepaid expenses and other 717,990 1,282,952 ----------- ------------ Total current assets 27,603,071 166,352,989 PROPERTY AND EQUIPMENT, net 2,447,119 14,539,898 SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $128,388 and $220,535, respectively 2,984,736 6,181,973 GOODWILL, INTANGIBLES AND OTHER ASSETS, net 155,766 15,498,745 ----------- ------------ TOTAL ASSETS $33,190,692 $202,573,605 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 278,040 $ 615,663 Accrued expenses 893,110 762,442 Customer accounts deposits 11,783,187 18,019,405 Unearned revenue 271,375 647,093 Income taxes payable 184,968 483,663 ----------- ------------ Total current liabilities 13,410,680 20,528,266 DEFERRED INCOME TAXES 567,041 895,555 SHAREHOLDERS' EQUITY Preferred Stock - authorized 2,000,000 shares of $.01 par value; no shares issued -- -- Common Stock - authorized 20,250,000 shares of $.01 par value; issued and outstanding, 6,640,814 and 13,588,194 shares, respectively 66,408 135,882 Additional paid in capital 13,686,162 169,879,717 Retained earnings 5,460,401 11,134,185 ----------- ------------ TOTAL SHAREHOLDERS' EQUITY 19,212,971 181,149,784 ----------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $33,190,692 $202,573,605 =========== ============
The accompanying notes are an integral part of these statements. 15 18 ABR INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--------------------------------- YEARS ENDED JULY 31, 1994, 1995 AND 1996
Common Stock Additional -------------------------- Paid-in Number Amount Capital ---------- -------- ------------ Balance at July 31, 1993 2,798,531 $ 27,985 $ 1,659,001 Exercise of stock options and warrants 438,524 4,385 896,814 Redeemable preferred stock dividends -- -- -- Purchase and retirement of common stock (383) (4) (3,548) Initial public offering, net of offering costs of $507,977 1,199,875 11,999 10,350,891 Tax benefit related to exercise of certain stock options -- -- 499,193 Net income -- -- -- ---------- -------- ----------- Balance at July 31, 1994 4,436,547 44,365 13,402,351 Common stock split 2,165,931 21,659 (22,364) Exercise of stock options 38,336 384 231,846 Tax benefit related to exercise of certain stock options -- -- 74,329 Net income -- -- -- ---------- -------- ----------- Balance at July 31, 1995 6,640,814 66,408 13,686,162 Common stock split 3,248,882 32,489 (33,917) Exercise of stock options 145,911 1,459 666,890 Tax benefit related to exercise of certain stock options -- -- 1,426,563 Shares issued in conjunction with acquisitions 132,712 1,327 3,048,848 Secondary stock offering, net of offering costs of $381,092 3,419,875 34,199 151,085,171 Net income -- -- -- ---------- -------- ----------- Balance at July 31, 1996 13,588,194 $135,882 $169,879,717 ========== ======== ============
Retained Earnings Total ----------- ------------ Balance at July 31, 1993 $ 1,066,301 $ 2,753,287 Exercise of stock options and warrants -- 901,199 Redeemable preferred stock dividends (10,073) (10,073) Purchase and retirement of common stock -- (3,552) Initial public offering, net of offering costs of $507,977 -- 10,362,890 Tax benefit related to exercise of certain stock options -- 499,193 Net income 1,610,495 1,610,495 ----------- ------------ Balance at July 31, 1994 2,666,723 16,113,439 Common stock split -- (705) Exercise of stock options -- 232,230 Tax benefit related to exercise of certain stock options -- 74,329 Net income 2,793,678 2,793,678 ----------- ------------ Balance at July 31, 1995 5,460,401 19,212,971 Common stock split -- (1,428) Exercise of stock options -- 668,349 Tax benefit related to exercise of certain stock options -- 1,426,563 Shares issued in conjunction with acquisitions -- 3,050,175 Secondary stock offering, net of offering costs of $381,092 -- 151,119,370 Net income 5,673,784 5,673,784 ----------- ------------ Balance at July 31, 1996 $11,134,185 $181,149,784 =========== ============
The accompanying notes are an integral part of these statements. 16 19 ABR INFORMATION SERVICES, INC. - -------------------------------------------CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31, ---------------------------------------------- 1994 1995 1996 --------- ---------- ---------- Cash flows from operating activities: Net income 1,610,495 $2,793,678 $5,673,784 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 511,444 621,602 1,642,754 Deferred income taxes 76,897 362,379 328,514 Tax benefit related to exercise of certain stock options 499,193 74,329 1,426,563 Increase in allowance for doubtful accounts 6,078 8,649 12,692 Change in operating assets and liabilities: Accounts receivable (494,690) (918,172) (771,537) Prepaid expenses and other (265,695) (173,240) (528,798) Income taxes recoverable (176,165) 176,165 -- Other assets (58,531) (61,942) (8,953) Accounts payable 14,875 8,660 (674,980) Accrued expenses 346,147 420,601 (130,668) Customer accounts deposits 2,392,100 1,704,471 4,228,527 Unearned revenue -- 271,375 23,931 Income taxes payable (95,591) 134,573 298,695 ----------- ----------- ------------ Net cash provided by operating activities 4,366,557 5,423,128 11,520,524 Cash flows from investing activities: Additions to investments (17,037,187) (5,445,720) (314,607,394) Maturities of investments -- 17,508,872 172,470,327 Additions to property and equipment (994,011) (1,135,622) (12,537,101) Additions to software development costs (397,652) (2,366,075) (3,292,648) Collection of note receivable 250,000 -- -- Acquisitions, net -- -- (10,656,020) ----------- ----------- ------------ Net cash provided by (used in) investing activities (18,178,850) 8,561,455 (168,622,836) Cash flows from financing activities: Proceeds from bank borrowings -- -- 6,000,000 Principal payments under bank borrowings (602,525) -- (6,000,000) Payments of redeemable preferred stock and dividends (263,561) -- -- Exercise of stock options/warrants 901,199 232,230 668,349 Public offerings, net of cost 10,362,890 -- 151,119,370 Other (3,552) (705) (101) ----------- ----------- ------------ Net cash provided by financing activities 10,394,451 231,525 151,787,618 ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents (3,417,842) 14,216,108 (5,314,694) Cash and cash equivalents at beginning of year 8,604,824 5,186,982 19,403,090 ----------- ----------- ------------ Cash and cash equivalents at end of year $ 5,186,982 $19,403,090 $ 14,088,396 =========== =========== ============
The accompanying notes are an integral part of these statements. 17 20 ABR INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS------------------------------------- JULY 31, 1994, 1995 AND 1996 NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS ABR Information Services, Inc. (the "Company") is a leading provider of comprehensive benefits administration, compliance and information services to employers seeking to outsource their benefits administration functions. The Company believes it is the leading provider of COBRA compliance services. COBRA is a federally mandated law related to the portability of employee group health insurance. The Company also provides benefits administration services with respect to benefits provided to retirees and inactive employees, including retiree healthcare, disability, surviving dependent, family leave and severance benefits. Additionally, the Company provides benefits administration services with respect to benefits provided to active employees, including enrollment, eligibility verification, QDRO administration, HMO consolidation and pension services. These services are offered on either an "a la carte" basis or a total outsourcing basis, allowing customers to outsource certain benefits administration tasks which they find too costly or burdensome to perform in-house, or to outsource the total benefits administration function. The financial statements have been restated to reflect the three-for-two stock splits completed July 1995 and February 1996 and an acquisition (see Note M) by a pooling of interest completed June 1996. The Company is headquartered in Palm Harbor, Florida and provides information and support services to more than 21,000 employers including Fortune 500 companies, insurance companies and other employers. The Company's operations are in a single business segment, the information services business. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Principles of Consolidation The financial statements include the accounts of ABR Information Services, Inc. and all of its subsidiaries. All material intercompany balances and transactions have been eliminated. 2. Revenue Recognition Revenues are recognized when the related services have been provided. Advance payments received from customers for services not provided are included in unearned revenue. Cost of services includes personnel, occupancy and other costs associated with providing services to customers, such as mailing and printing costs. 3. Customer Accounts Deposits As part of the services provided to customers, the Company bills and collects for its customers and maintains the funds in segregated accounts until the funds are remitted. For financial statement purposes the segregated funds are included in cash and investments (as the funds are not restricted) with the corresponding liability presented as customer accounts deposits. 4. Cash and Cash Equivalents The Company considers all highly liquid investments, with a maturity of 30 days or less when purchased, as cash equivalents. As of July 31, 1995 and 1996, substantially all of the Company's cash is invested in overnight repurchase agreements of mortgage-backed or government securities. The Company has a security interest in the specific investment underlying the repurchase agreements. 5. Investments Effective August 1, 1994, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The Company's investments are classified as held-to-maturity investment 18 21 ---------------------------- NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued debt securities. These are securities which the Company has the ability and positive intent to hold to maturity and are stated at cost, adjusted for amortization of premiums and accretion of discounts which are computed by the interest method. Gains and losses on the sale of investment securities are computed on the basis of specific identification of the adjusted cost of each security. 6. Contract Set-Up Costs Under certain contractual arrangements with customers, the Company incurs set-up costs. These costs are capitalized and amortized, over the contract period but no longer than twelve months, using the straight-line method. As of July 31, 1995 and 1996 unamortized set-up costs of $300,367 and $370,335, respectively, are included in prepaid expenses. During 1994, 1995 and 1996, amortization of set-up costs totalled $301,919, $405,299, and $569,755, respectively. 7. Property and Equipment Property and equipment is stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. 8. Software Development Costs Software development costs consist primarily of purchased software, consulting services, salaries and certain other expenses related to the development and modification of software capitalized in accordance with the provisions of SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of such cost begins only upon the establishment of technological feasibility as defined in SFAS No. 86. Such capitalized costs are amortized when the software is available to service customers using the straight-line method over an estimated life of four to five years or based on the ratio of current gross revenue to the anticipated gross revenue, whichever is greater, with amortization expense of $48,548, $52,217 and $95,411, for the years ended 1994, 1995 and 1996, respectively. Software development costs that were expensed and not capitalized under SFAS No. 86 totalled $967,033, $1,138,639 and $1,312,653, for the years ended 1994, 1995 and 1996, respectively. The Company estimates the cost to complete the current software projects will be $1.6 million. 9. Income Taxes Deferred income taxes principally result from expensing certain software development costs for income tax return purposes while capitalizing and amortizing certain of these costs for financial statement purposes. In addition, accelerated depreciation methods used for income tax return purposes create deferred taxes. Effective August 1, 1993, the Company implemented SFAS No. 109 "Accounting for Income Taxes" which requires an asset and liability method. The amounts calculated as a result of adopting SFAS No. 109 method had an insignificant effect on the Company's deferred income taxes and retained earnings, accordingly, no adjustment was required. 10. Net Income Per Share Net income per share has been computed using the weighted average of the outstanding Common Stock plus the dilutive Common Stock equivalents (stock options and warrants), using the treasury or the modified treasury stock method (see Note G). Primary and fully diluted calculations result in the same net income per share. 19 22 ABR INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS------------------------------------- JULY 31, 1994, 1995 AND 1996 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 11. Reclassifications Certain amounts have been reclassified to conform with the July 31, 1996 presentation. 12. Goodwill and Other Intangibles Amortization is based upon the allocation of the total purchase price (see Note M) and amortization periods, using the straight-line method, as follows:
Estimated Useful Allocation Lives ---------- --------- Non-competition agreements $ 600,000 5 years Contracts 2,000,000 10 years Goodwill 13,191,654 25 years
Amortization expense totalled $482,708 for the year ended July 31, 1996. The Company measures impairment of the goodwill and other intangibles based upon the net present value of the cash flows estimated to be generated by those assets, compared to the assets' carrying value. Based on this measurement, no impairment exists. 13. New Accounting Pronouncements In March 1995, the Financial Accounting Standards Board issued SFASNo. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This pronouncement requires impairment losses to be recorded on long-lived assets used in operations when impairment indicators are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The Company will adopt SFASNo. 121 in the first quarter of fiscal 1997 and based on current circumstances, management does not believe the effect of the adoption will be material to the financial statements. SFASNo. 123, "Accounting for Stock Based Compensation" was issued by the Financial Accounting Standards Board in October 1995. As it relates to stock options granted to employees, SFAS No. 123 permits companies to continue using the accounting method promulgated by the Accounting Principles Board Opinion No. 25 ("APB No. 25") "Accounting for Stock Issued to Employees" to measure compensation or to adopt the fair value based method prescribed by SFAS No. 123. If APB No. 25's method is continued, pro forma disclosures are required as if SFAS No. 123 accounting provisions were followed. SFAS No. 123's accounting recognition method can be adopted subsequent to the issuance of SFAS No. 123, with a mandatory implementation date of August 1, 1996, and would pertain to stock option awards granted or modified or settled for cash after August 1, 1995. If the Company elects to continue using the method under APB No. 25, SFAS No. 123's pro forma disclosures are required after August 1, 1996. Management has not completely analyzed the provisions of SFAS No. 123; accordingly, management has not determined whether or not SFAS No. 123's accounting recognition provisions will be adopted or APB No. 25's method will be continued. In addition, management has not yet determined the potential effect that SFAS No. 123's accounting provisions, if adopted, will have on the Company's financial statements. 14. Use of Estimates in Financial Statements In preparing financial statements in conformity with generally accepted accounting principles, management makes 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, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 20 23 ---------------------------- NOTE C - INVESTMENTS The amortized cost and estimated market value of held-to-maturity investment securities were as follows:
July 31, 1996 ------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Market Value ------------ ---------- --------- ------------ Commercial Paper $146,111,102 $ -- ($22,949) $146,088,153 Obligations of states and local government agencies 1,000,000 -- -- 1,000,000 ------------ ---------- --------- ------------ Total investment securities $147,111,102 $ -- ($22,949) $147,088,153 ============ ========== ========= ============
July 31, 1995 ------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Market Value ------------ ---------- --------- ------------ Obligations of states and local government agencies $4,886,166 $5,343 $ -- $4,891,509 ---------- ------ --------- ---------- Accrued interest 87,869 -- -- 87,869 ---------- ------ --------- ---------- Total investment securities $4,974,035 $5,343 $ -- $4,979,378 ========== ====== ========= ==========
As of July 31, 1995 and 1996, the maturities are within a twelve month time period. Actual maturities may differ from contractual maturities due to borrowers having the right to call or prepay obligations with or without call or prepayment penalties. Interest earned on investment securities and cash and cash equivalents was $399,942, $1,214,971 and $3,846,102 for the years ended July 31, 1994, 1995 and 1996, respectively. A portion of these amounts is included in revenues and the remainder is reported separately as interest income in the consolidated statements of income. NOTE D - PROPERTY AND EQUIPMENT
July 31, ------------------------------ Estimated 1995 1996 Life ---------- ----------- -------- Land and building $ -- $ 9,687,256 39 Years Equipment 2,978,671 6,518,977 5 Years Furniture and fixtures 512,784 732,394 10 Years Leasehold improvements 473,245 293,753 Life of Lease ---------- ----------- 3,964,700 17,232,380 Accumulated depreciation (1,517,581) (2,692,482) ---------- ----------- Total property and equipment, net $2,447,119 $14,539,898 ========== ===========
Depreciation for the years ended 1994, 1995 and 1996, was $462,896, $569,386 and $1,064,635, respectively. NOTE E - LINES OF CREDIT Prior to January 30, 1996, the Company had $6.0 million in credit facilities available to it. Of the total amount, $1.0 million is for working capital needs, collateralized by a blanket security interest in Company assets other than accounts receivable, proprietary software and customer accounts deposits. Interest on the principal balance outstanding under this line of credit accrues at a floating interest rate equal to the prime rate. This line of credit must be paid down to a minimum balance of $1,000 for 30 days during its term and is subject to renewal on November 30, 1995. The remaining $5.0 million provides the Company with capital equipment lines of credit collateralized by the equipment purchased with advances against the lines. Interest on $2.0 million of this credit line accrues at a fixed interest rate at the time of funding equal to the prime rate. Interest on $3.0 million 21 24 ABR Information Services, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS------------------------------------- July 31, 1994, 1995 and 1996 NOTE E - LINES OF CREDIT - CONTINUED of this credit line accrues at a fixed rate at the time of funding equal to the Treasury Note Rate plus 225 basis points. This facility contains financial covenants consisting of maintaining a debt service coverage ratio of not less than 1.75 to 1.0 and debt to tangible net worth of no more than .50 to 1.0. On January 30, 1996, the Company entered into a five year, $15.0 million unsecured credit facility. The Company has agreed to maintain all of its assets free and clear of all liens, encumbrances and pledges, except purchase money security interests in specific equipment in an aggregate amount of less than $500,000 as long as the credit facility remains outstanding or any indebtedness thereunder remains unpaid. Interest on the principal balance outstanding under this line of credit accrues at a floating interest rate equal to the prime rate or, at the Company's option, to the 30-day London Interbank Offering Rate (LIBOR), plus an applicable interest rate margin between 1% and 2% based on certain financial ratios. The credit facility contains certain financial covenants requiring the maintenance of cash and cash equivalents and investments equal to or greater than customer account deposits, a funded debt to EBITDA ratio of a maximum of 2.25-to-1, a debt service coverage ratio of not less than 1.35-to-1, as well as the maintenance of a certain funded debt to tangible net worth ratio. As of July 31, 1996, the Company was in compliance with all such covenants and there were no amounts outstanding under the credit facility. NOTE F - SHAREHOLDERS' EQUITY Common Stock The authorized Common Stock of the Company consists of 20,000,000 shares of voting Common Stock, and 250,000 shares of nonvoting Common Stock. The shares of nonvoting Common Stock have the same rights as the shares of voting Common Stock, except that the holders of nonvoting Common Stock are not entitled to vote on matters submitted to shareholders, except as required by applicable law. As of July 31, 1996, there were no shares of nonvoting Common Stock issued and outstanding. On July 13, 1995 and on February 19, 1996, the Company completed three-for-two stock splits and on June 28, 1996 the company completed an acquisition by a pooling of interest. The weighted average shares outstanding, earnings per share and stock options have been restated to reflect the stock splits and the acquisition by a pooling of interest. Preferred Stock The Board of Directors of the Company has the authority to issue up to 2,000,000 shares of Preferred Stock (par value of $.01 per share) in one or more series and to fix the number of shares constituting any such series and the rights and preferences thereof, including dividend rates, terms of redemption (including sinking fund provision), redemption price or prices, voting rights, conversion rights and liquidation preferences of the shares constituting such series. As of July 31, 1996, there were no shares of Preferred Stock issued and outstanding. NOTE G - WARRANTS AND STOCK OPTIONS The Company has established the 1987 and 1993 Stock Option Plans and the 1995 Non-Employee Director Stock Option Plan. Under the 1987 and 1993 Plans, 387,000 and 900,000 shares of Common Stock, respectively, have been authorized for issuance. Under the 1995 Plan, 75,000 shares of Common Stock have been authorized for issuance. During the years ended 1994, 1995 and 1996 all option prices at date of grant equaled or exceeded the estimated fair value of the Company's Common Stock as determined by the terms of the stock option plans.
Shares Range of ----------------------- Price Voting Nonvoting Per share ------ --------- --------- Warrants Warrants outstanding at July 31, 1993 7,139 428,099 $ .81 Warrants granted -- -- $ -- - ----------------------------- Warrants exercised (7,139) (252,675) $ .81 Warrants cancelled -- (175,424) $ .81 ----- ------- Warrants outstanding at July 31, 1994, 1995 and 1996 -- -- $ -- ===== =======
22 25 ------------------------------------------------ NOTE G - WARRANTS AND STOCK OPTIONS - Continued
Shares Range of --------------------- Price Voting Nonvoting Per share ------- --------- ------------ Options Options outstanding at July 31, 1993 968,337 -- $ .81-3.10 Options granted 136,017 -- $ 4.13 Options exercised (726,865) -- $ .83-3.10 Options cancelled (77,427) -- $ .81-4.13 ------- --------- Options outstanding at July 31, 1994 300,062 -- $ 1.24-4.13 Options granted 272,749 -- $ 8.17-12.97 Options exercised (86,313) -- $ 1.24-4.13 Options cancelled (19,697) -- $ 2.07-8.17 ------- --------- Options outstanding at July 31, 1995 466,801 -- $ 2.07-12.97 Options granted 285,188 -- $13.53-33.25 Options exercised (145,911) -- $ 2.07-8.17 Options cancelled (22,224) -- $ 4.13-13.53 ------- --------- Options outstanding at July 31, 1996 583,854 -- $ 4.13-33.25 ======= =========
As of July 31, 1996, all outstanding options were exercisable, except for options to purchase 278,933 shares at prices ranging from $12.97 to $33.25 per share. NOTE H - INCOME TAXES
Years ended July 31, -------------------------------------------- 1994 1995 1996 ---------- ---------- ---------- Currently payable: Federal $ 344,738 $1,112,399 $1,492,683 State 59,837 205,904 312,606 ---------- ---------- ---------- 404,575 1,318,303 1,805,289 Deferred 76,897 362,379 328,514 Tax benefit from the exercise of certain stock options 499,193 74,329 1,426,563 ---------- ---------- ---------- Total income tax provision $ 980,665 $1,755,011 $3,560,366 ========== ========== ==========
Reconciliation of the federal statutory income tax rate of 34.0% to the effective income tax rates are as follows:
Years ended July 31, ------------------------------------- 1994 1995 1996 ---- ---- ---- Federal statutory income tax rate 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit 3.6% 3.6% 3.6% Tax-exempt interest -- (2.2) (0.4) Acquisition costs -- --% 3.4% Other 0.2 3.2 (2.0) ---- ---- ---- Effective income tax rate 37.8% 38.6% 38.6% ==== ==== ====
23 26 ABR INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------- JULY 31, 1994, 1995 AND 1996 NOTE H - INCOME TAXES - Continued Deferred tax asset and liability components were as follows:
July 31, --------------------------- 1995 1996 ---------- ---------- Deferred tax assets: Net operating loss carryforward (1) $ -- $ 428,000 Reserve for doubtful accounts 9,856 35,900 ---------- ---------- 9,856 463,900 Deferred tax liabilities: Depreciation 86,366 199,900 Software development costs 473,940 1,159,555 Other 16,591 -- ---------- ---------- 576,897 1,359,455 ---------- ---------- Net deferred tax liability $ 567,041 $ 895,555 ========== ==========
(1) Relates to approximately $1.1 million of net operating losses of an acquired subsidiary, which expire in 2001. This transaction resulted in a stock ownership change for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. Consequently a portion of the acquired subsidiary's net operating loss carryforward is subject to a yearly limitation on its utilization which can only be applied against future income of the acquired subsidiary. The Company believes that it will obtain the future income to fully utilize the net operating loss, thus no valuation allowance has been recorded for the net operating loss carryforward. NOTE I - COMMITMENTS AND CONTINGENCIES The Company leases office space under noncancellable leases which are accounted for as operating leases. The leases are subject to an escalation clause using a CPI index. The leases expire between February 1997 through May 2005. Future minimum lease payments under noncancellable operating leases are as follows as of July 31, 1996:
July 31, ---------- 1997 $1,178,201 1998 773,126 1999 564,786 2000 196,031 2001 196,815 Thereafter 783,191
Rent expense for all operating leases for the years ending July 31, 1994, 1995 and 1996 was $613,106, $673,391 and $1,129,738 respectively. The Company has a commitment totalling $5.8 million for the cost of improvements to be made to an operating facility. The Company is engaged in litigation arising from the ordinary course of business. In the opinion of management, the ultimate outcome of litigation will not have a material impact on the Company's financial position. NOTE J - INCENTIVE BONUS PLAN AND SAVINGS PLAN Effective January 1, 1992, the Company established a defined contribution savings plan (the "Savings Plan") covering substantially all employees. The Savings Plan consists of an employee elective contribution and a company matching contribution for each eligible participant. The Company's matching contribution is determined by the Board of Directors on a discretionary basis. The Company's contributions under the Savings Plan in fiscal 1994, 1995 and 1996 were approximately $54,000, $124,500 and $167,969, respectively. 24 27 ----------------------------------- NOTE J - INCENTIVE BONUS PLAN AND SAVINGS PLAN - Continued Effective August 1, 1993, the Company adopted an incentive bonus plan (the "Incentive Bonus Plan"), which provides for the discretionary payment of annual incentive awards to key employees from a pool equal to 10% of the Company's pre-tax profits (income before income taxes), adjusted upward or downward based on the attainment of pre-established goals related to the Company's pre-tax margin (income before income taxes divided by revenues) and its revenue growth (based on annual increases in revenues). Payments under the Incentive Bonus Plan are discretionary, based on the determination of the Board of Directors of the Company and are subject to certain limitations as provided in the Incentive Bonus Plan. In fiscal 1994, 1995 and 1996, $462,047, $777,633 and $790,000, respectively, of incentive bonus was expensed. NOTE K - MAJOR CUSTOMER During fiscal 1996, one of the Company's customers accounted for approximately 15% of revenues. This customer became a client of the Company as a result of the New Jersey acquisition. Assuming the acquisition had occurred on August 1, 1995, approximately 21% of revenue would have been derived from this customer. In fiscal 1994 and 1995, no individual customer accounted for 10% or more of revenues. NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the quarterly periods of fiscal 1994, 1995 and 1996:
1994 First Second Third Fourth ----------- ---------- ---------- ---------- ---------- Revenue $2,959,352 $3,240,965 $3,488,320 $3,776,160 Operating income 534,337 603,701 672,371 715,954 Net income 333,013 370,698 416,313 490,471 Net income per share $ .05 $ .05 $ .06 $ .06 1995 ---------- Revenue $4,321,754 $4,493,809 $4,734,637 $5,284,436 Operating income 876,305 912,000 985,361 1,202,454 Net income 628,655 660,050 696,135 808,838 Net income per share $ .06 $ .07 $ .07 $ .08 1996 ---------- Revenue $5,614,304 $6,851,136 $9,067,901 $9,628,840 Operating income 1,138,977 1,597,305 1,768,907 1,856,816 Net income 783,436 1,047,632 1,645,273 2,197,443 Net income per share $ .08 $ .10 $ .14 $ .16
NOTE M - ACQUISITIONS New Jersey Acquisition On December 15 1995, the Company acquired all of the outstanding capital stock of Bullock Associates, Inc., which was subsequently renamed ABR Benefits Services, Inc. ("BSI"), for $12.5 million, with an additional $2.0 million payable upon the attainment of certain revenue requirements during 1996 and 1997. This acquisition was accounted for as a purchase. BSI is located in Princeton, New Jersey and provides COBRA administration, retiree insurance administration, insurance continuation billing and collection, pension benefits administration services, QDRO (Qualified Domestic Relations Order) administration and educational benefit administration services as well as administration for other employee benefits programs such as employee discount plans, adoption programs, program rebates and emergency loans. 25 28 ABR INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-------------------------------------- JULY 31, 1994, 1995 AND 1996 NOTE M - ACQUISITIONS - Continued California Acquisition Effective February 1, 1996, the Company acquired all of the outstanding capital stock of Total Cobra Services, Inc. ("TCS") for 132,712 shares of restricted Common Stock. This acquisition was accounted for as a purchase. TCS is located in Irvine, California and provides COBRA administration and retiree billing services. For the fiscal year ended December 31, 1995, TCS had revenues of less than $2 million. Pro forma information is not provided for TCS as it is not a significant acquisition. Virginia Acquisition On June 28, 1996, the Company completed a merger of The L.P. Baier Company ("LPB") where 143,010 shares of the Company's stock was exchanged for all of the outstanding stock of LPB. LPB is located in Fairfax, Virginia and provides primarily FSA (Flexible Spending Account) administrative services and COBRA administration. The merger was accounted for as a pooling of interest, and accordingly, the accompanying financial statements have been restated to include the accounts and operations of LPB for all periods prior to the merger, including restating the retained earnings at July 31, 1993 to reflect the difference between the par value of the Company stock issued and the total shareholders' equity of LPB. Separate results of the combining entities for previously reported periods are as follows:
Years ended July 31 --------------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Revenue ABR Information Services, Inc. $12,129,233 $16,692,376 $28,449,980 The L.P. Baier Company 1,335,564 2,142,260 2,712,201 ----------- ----------- ----------- $13,464,797 $18,834,636 $31,162,181 =========== =========== =========== Net Income ABR Information Services, Inc. $ 1,595,652 $ 2,641,788 $ 5,578,144 The L.P. Baier Company 14,843 151,890 95,640 ----------- ----------- ----------- $ 1,610,495 $ 2,793,678 $ 5,673,784 =========== =========== ===========
In connection with this merger, $361,198 of acquisition costs were incurred and have been charged to expense in the fourth quarter. The following pro forma balances have been derived from the historical financial statements of the Company and BSI and adjusts such information to give effect to the acquisition of BSI. The balances for the years ended July 31, 1994, 1995, and 1996 assume that the acquisition of BSI occurred on August 1, 1993. The unaudited pro forma financial information is not necessarily indicative of the results which would actually have occurred had the transaction been in effect on the dates and for the periods indicated or which may result in the future.
Years ended July 31 ------------------------------------- 1994 1995 1996 ------- ------- ------- (in thousands except per share data) Revenue $20,864 $27,819 $34,740 Operating income 4,430 5,840 7,245 Net income 2,339 3,483 6,015 Net income per share $ .31 $ .35 $ .52
26 29 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors ABR Information Services, Inc. We have audited the accompanying consolidated balance sheets of ABR Information Services, Inc. as of July 31, 1995 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended July 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ABR Information Services, Inc. as of July 31, 1995 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Tampa, Florida September 13, 1996 MARKET PRICE INFORMATION The following table sets forth the high and low sale price of the Company's Common Stock since its initial public offering on May 26, 1994 as reported by Nasdaq and restated for the three-for-two stock splits completed on July 13, 1995 and February 19, 1996:
1996 1995 1994 ------------------------- -------------------------- ------------------------- High Low High Low High Low --------- --------- -------- --------- -------- -------- First Quarter $19 53/64 $ 13 $7 7/32 $ 4 57/64 $ -- $ -- Second Quarter 32 53/64 19 21/64 9 35/64 6 7/64 -- -- Third Quarter 63 32 11/64 11 7/32 9 21/64 -- -- Fourth Quarter 65 38 15 43/64 10 25/32 5 53/64 4 35/64 Year 65 13 15 43/64 4 57/64 5 53/64 4 35/64
The Company has never declared nor paid any cash dividends on the Common Stock. The Company currently anticipates that all of its earnings will be retained for development and expansion of the Company's business and does not anticipate paying any cash dividends in the foreseeable future. 27 30 CORPORATE AND SHAREHOLDER INFORMATION------------------------------------------- CORPORATE HEADQUARTERS ABR Information Services, Inc. 34125 U.S. Highway 19 North Palm Harbor, FL 34684-2116 813-785-2819 INTERNET ADDRESS http://www.abr.com ANNUAL MEETING The Annual Meeting of ABR Information Services, Inc. will be held at 10:00 a.m. (EST) on December 6, 1996, at the Hyatt Regency Westshore in Tampa, Florida FORM 10-K A copy of the ABR Information Services, Inc. annual report to the Securities and Exchange Commission on Form 10-K may be obtained without cost by request from the Corporate Headquarters, Attention: Investor Relations LISTING The Company's Common Stock trades on The Nasdaq Stock Market under the symbol ABRX TRANSFER AGENT AND REGISTRAR First Union National Bank Shareholder Services Group 230 South Tryon Street, 11th Floor Charlotte, North Carolina 28288-1153 800-829-8432 LEGAL COUNSEL Foley & Lardner Tampa, Florida Proskauer Rose Goetz & Mendelsohn LLP New York, New York INDEPENDENT AUDITORS Grant Thornton LLP Tampa, Florida SHAREHOLDER INFORMATION ABR Information Services, Inc. 34125 U.S. Highway 19 North Attention: Investor Relations Palm Harbor, FL 34684-2116 813-785-2819 STOCK PRICE PERFORMANCE*------------------------------------------------------- [GRAPH] 5/26/94 - 7/31/96 *As restated for the three-for-two stock splits completed on July 13, 1995 and February 19, 1996. 28 31 - ----------------------------------------------------------DIRECTORS AND OFFICERS BOARD OF DIRECTORS JAMES E. MACDOUGALD Chairman of the Board, President and Chief Executive Officer ABR Information Services, Inc. VINCENT ADDONISIO Executive Vice President, Treasurer and Chief Financial Officer ABR Information Services, Inc. THOMAS F. COSTELLO Chairman and Chief Executive Officer The Costello Group MARK M. GOLDMAN Vice Chairman Phone Programs, Inc. SUZANNE M. MACDOUGALD Senior Vice President and Secretary ABR Information Services, Inc. OFFICERS OF ABR INFORMATION SERVICES, INC. JAMES E. MACDOUGALD Chairman of the Board, President and Chief Executive Officer VINCENT ADDONISIO Executive Vice President, Treasurer and Chief Financial Officer SUZANNE M. MACDOUGALD Senior Vice President and Secretary ROBERT H. PARISEAU Vice President REVA R. MASKEWITZ Controller SUBSIDIARY OFFICERS ABR COBRASERV, INC. DENNIS A. SWEENEY President RANDOLPH C. METCALFE Executive Vice President KIMBALL S. ANDERSON Senior Vice President-Sales and Marketing LAUREN M. RINGUETTE Senior Vice President ANDREW D. SWENSON Senior Vice President and Chief Information Officer BRIAN R. ANNIS Vice President SHARI N. ARZATE Vice President-New Major Accounts DAGMAR S. DE STEFANO Vice President-New Major Accounts JOHN DOYLE Vice President KARLENE K. DUNKELBERGER Vice President DENISE A. ELKO Vice President-New Major Accounts PATRICK R. MANDERS Vice President-Promotion and Communications REVA R. MASKEWITZ Vice President-Finance ABR BENEFITS SERVICES, INC. W. CARL BULLOCK President BARBARA A. BIASOTTI Vice President-Customer Relations NANCY L. CLARK Vice President-Finance THE L.P. BAIER COMPANY RICK L. SNYDER President TINA A. MCINTOSH Executive Vice President ABR NATIONAL SERVICE CENTER, INC. WILLIAM R. POVILUS President TOTAL COBRA SERVICES, INC. WILLIAM E. EVANS President ABR PROPERTIES, INC. JOSEPH C. LUKASON President 30 EX-21.1 8 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF ABR INFORMATION SERVICES, INC. 1. ABR CobraServ, Inc. (formerly known as Applied Benefits Research, Inc.) 2. ABR National Service Center, Inc. 3. ABR Properties, Inc. 4. ABR Benefits Services, Inc. (formerly known as Bullock Associates, Inc.) 5. Total Cobra Services, Inc. (formerly known as Total COBRA Services, Inc.) 6. The L.P. Baier Company EX-23.1 9 CONSENT OF GRANT THORTON LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated September 13, 1996, accompanying the consolidated financial statements and schedule of ABR Information Services, Inc. that are included in or incorporated by reference in the Company's Form 10-K for the year ended July 31, 1996. We hereby consent to the incorporation by reference of said reports in the Registration Statements of ABR Information Services, Inc. on Form S-3 (File No. 333-2706, effective March 21, 1996) and Form S-8 (File No. 33-86520, effective November 18, 1994). /s/ Grant Thorton LLP Tampa, Florida October 1, 1996 EX-27 10 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ABR INFORMATION SERVICES, INC. ANNUAL 10-K YEAR JUL-31-1996 AUG-01-1995 JUL-31-1996 14,088,396 147,111,102 3,909,433 38,894 0 166,352,989 17,232,380 2,692,482 202,573,605 20,528,266 0 0 0 135,882 181,013,902 202,573,605 31,162,181 31,162,181 17,645,269 6,575,390 579,517 0 (2,872,145) 9,234,150 3,560,366 5,673,784 0 0 0 5,673,784 .49 .49
-----END PRIVACY-ENHANCED MESSAGE-----