UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by
the Registrant
þ
Filed by a Party other than the Registrant
o
Check the appropriate box:
þ
|
|
Preliminary Proxy Statement
|
|
o
|
|
Confidential, For Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)
)
|
|
o
|
|
Definitive Proxy Statement
|
|
o
|
|
Definitive Additional Materials
|
|
o
|
|
Soliciting Material Pursuant to §240.14a-12
|
VERICHIP CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
o
|
|
No fee required.
|
|
þ
|
|
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
|
|
(1)
|
|
Title of each class of securities to which transaction applies: Common Stock, par value $0.01 per share
|
|
|
(2)
|
|
Aggregate number of securities to which transaction applies: 11,019,377
|
|
|
(3)
|
|
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11
(set forth the amount on which the filing fee is calculated and state how it was determined):
$45,000,000 (the aggregate amount to be received by the Registrant for the stock being sold)
|
|
|
(4)
|
|
Proposed maximum aggregate value of transaction: $45,000,000 (estimated and not including subsequent
transactions)
|
|
|
(5)
|
|
Total fee paid: $1,768.50
|
o
|
|
Fee paid previously with preliminary materials.
|
|
o
|
|
Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
|
|
(1)
|
|
Amount Previously Paid:
|
|
|
(2)
|
|
Form, Schedule or Registration Statement No.:
|
|
|
(3)
|
|
Filing Party:
|
|
|
(4)
|
|
Date Filed:
|
VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
June ,
2008
To the stockholders of VeriChip Corporation:
On behalf of the board of directors of VeriChip Corporation, or
VeriChip, we are pleased to deliver our proxy statement for the
sale of our wholly-owned subsidiary, Xmark Corporation, or
Xmark. Your board of directors has determined that it is in the
best interests of the stockholders to sell our holdings in Xmark.
At the special meeting, you will be asked to approve a Stock
Purchase Agreement, dated May 15, 2008, between VeriChip
and The Stanley Works, or Stanley, and the transactions
contemplated by the Stock Purchase Agreement. Under the terms of
the Stock Purchase Agreement, VeriChip will sell all of the
outstanding capital stock of Xmark to Stanley for an aggregate
purchase price of $45 million, subject to adjustment as is
further described in the accompanying proxy statement. We refer
to this transaction as the Xmark Transaction. Under the terms of
the Stock Purchase Agreement, $4.5 million of the proceeds
will be held in escrow for a period of 12 months. Following
the completion of the sale of Xmark to Stanley, VeriChip will
retire all of its outstanding debt. VeriChip expects to realize
net proceeds, after retiring its outstanding debt, paying
transaction related costs, and other contractual commitments, of
approximately $21.4 million.
As discussed in more detail in the accompanying proxy statement,
in the event VeriChip receives stockholder approval of and
consummates the Xmark Transaction, and subject to compliance
with Delaware law, VeriChip intends to use a portion of the
proceeds to fund an initial, special cash dividend to its
stockholders, the amount of which is currently estimated to be
in the range of $1.25 to $1.35 per share of VeriChip common
stock, to be paid sometime in the third quarter of 2008.
However, the actual amount may be lower than this range due to
uncertainties regarding the ultimate amount of our liabilities
following the Xmark Transaction. In addition, the payment of the
initial, special cash dividend could be delayed depending on
certain factors, including delays relating to the release of the
escrow required under Canadian law, which escrow is further
described in the accompanying proxy statement. Prior to making
the initial, special cash dividend, we will announce, at least
ten days in advance, the record date for such distribution. Only
holders of our common stock on the record date for the initial,
special cash dividend will be entitled to receive the initial,
special cash dividend. Please note that the record date for the
initial, special cash dividend will be after the closing date of
the Xmark Transaction and is different from the record date for
determining which holders of our common stock are entitled to
vote on the matters described in the accompanying proxy
statement.
On May 15, 2008, Applied Digital Solutions, Inc., doing
business as Digital Angel, or Digital Angel, and Scott R.
Silverman, VeriChips chairman and chief executive officer,
each entered into a voting agreement with Stanley under which
each of Digital Angel and Mr. Silverman agreed, unless our
board of directors changes its recommendation that our
stockholders approve the Xmark Transaction, to vote their shares
of VeriChip common stock to approve the Stock Purchase Agreement
and the transactions contemplated by the Stock Purchase
Agreement and against any other proposal or offer from a third
party to acquire VeriChip. The voting agreement limits the
ability of each of Digital Angel and Mr. Silverman to
transfer shares of stock held in VeriChip or vote for any
alternative transaction during the period prior to the
consummation of the Xmark Transaction and, in some cases, for a
period of seven months and fifteen days afterward. Digital Angel
and Mr. Silverman hold approximately 48.6% and 5.0%,
respectively, of VeriChips outstanding common stock. Thus,
because Digital Angel and Mr. Silverman own more than 50%
of our outstanding common stock, unless our board of directors
changes its recommendation that our stockholders approve the
Stock Purchase Agreement, stockholder approval of the Stock
Purchase Agreement and the transactions contemplated by the
Stock Purchase Agreement is assured.
After the closing of the Xmark Transaction, VeriChip will have
only one remaining business, the VeriMed Health Link business,
which accounted for less than 1% of our total sales and
approximately 19% of our total operating expenses for the year
ended December 31, 2007. VeriChip has retained the
investment banking firm of Kaufman Bros., L.P. to assist in the
sale of the VeriMed Health Link business
and/or
another transaction through which the remaining assets of
VeriChip would be acquired by, or combined with, a third party.
Stockholder approval of a transaction involving the VeriMed
Health Link business is not being sought at this point in time,
and will not be voted on at the special meeting. VeriChip
currently intends to fund a second, special cash dividend to its
stockholders consisting of all of the remaining distributable
cash then held by VeriChip following any sale of the VeriMed
Health Link business or VeriChip and the release of the escrowed
funds resulting from the sale of Xmark to Stanley. In connection
with such sale
and/or
other
transaction, uncertainties as to the ultimate amount of
liabilities for which VeriChip will remain responsible, the
amount of operating costs during the process, and the related
timing to complete make it impossible to predict with certainty
the actual net cash amount that will ultimately be available for
distribution to VeriChips stockholders or the timing of
any such dividend.
The board of directors of VeriChip unanimously recommends the
approval of the Stock Purchase Agreement and the transactions
contemplated by the Stock Purchase Agreement and believes the
sale of Xmark is advisable, fair to, and in the best interests
of VeriChips stockholders.
Accordingly, our board of
directors recommends that you vote FOR the approval
of the Stock Purchase Agreement and the transactions
contemplated by the Stock Purchase Agreement, and
FOR the transaction of such other business as may
properly come before the special meeting of stockholders or any
adjournment or postponement thereof, by (1) using the
toll-free number shown on your proxy card; (2) visiting the
website shown on your proxy card to vote via the internet;
(3) completing, signing, dating and returning the enclosed
proxy card in the enclosed postage-paid envelope;
(4) attending the special meeting and voting in person; or
(5) if your shares are held in street name by
your brokerage firm, bank, trust or other nominee, instructing
your brokerage firm, bank, trust or other nominee in accordance
with their procedures.
The accompanying notice of special meeting and proxy statement
provide information regarding the matters to be acted on at the
special meeting, including any adjournment or postponement
thereof. Please read these materials carefully.
The ability to have your vote counted at the meeting is an
important stockholder right. Regardless of the number of shares
you hold, and whether or not you plan to attend the meeting, we
urge you to cast your vote by one of the methods described
above. If your shares are held in street name, your
brokerage firm, bank, trust or other nominee will be unable to
vote your shares of common stock without instructions from you.
Sincerely,
Scott R. Silverman
Chairman of the Board of Directors and Chief Executive
Officer
This proxy statement is dated June , 2008 and is
being mailed to stockholders on or about June , 2008.
VeriChip
Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
JULY , 2008
To the stockholders of VeriChip Corporation:
You are cordially invited to attend the special meeting of the
stockholders of VeriChip Corporation, a Delaware corporation, or
VeriChip, to be held at , on July , 2008
at 9:00 a.m., Eastern Time.
The enclosed notice of meeting identifies each business proposal
for your action. The board of directors unanimously recommends
the following proposals:
|
|
|
|
1.
|
To approve the Stock Purchase Agreement, dated May 15,
2008, between VeriChip and The Stanley Works and the
transactions contemplated by the Stock Purchase
Agreement; and
|
|
|
2.
|
To transact such other business as may properly come before the
special meeting of stockholders or any adjournment or
postponement thereof.
|
Your attention is directed to the proxy statement accompanying
this notice for a more complete description of the matters to be
acted upon at the special meeting of stockholders. Stockholders
of record at the close of business on June , 2008 are
entitled to receive notice of, and to vote at, the special
meeting of stockholders and any adjournment or postponement
thereof.
The board
of directors has approved each of the proposals and recommends
that the holders of common stock vote FOR the
approval of each of the proposals.
The notice and proxy statement are first being mailed to our
stockholders on or about June , 2008. Please note
that attendance at the special meeting of stockholders will be
limited to stockholders of VeriChip as of the record date (or
their duly authorized representatives). If your shares are held
by a bank or broker, you must obtain and bring to the special
meeting of stockholders a proxy signed by your bank or broker
appointing you as the banks or brokers proxy to vote
the shares at the special meeting of stockholders.
Each stockholder is urged to vote promptly by (1) using
the toll-free number shown on your proxy card; (2) visiting
the website shown on your proxy card to vote via the internet;
(3) completing, signing, dating and returning the enclosed
proxy card in the enclosed postage-paid envelope;
(4) attending the special meeting and voting in person; or
(5) if your shares are held in street name by
your brokerage firm, bank, trust or other nominee, instructing
your brokerage firm, bank, trust or other nominee in accordance
with their procedures.
After voting by one of the methods described above, if you wish,
you may revoke your proxy by (1) sending in another signed
proxy card with a later date; (2) notifying our corporate
secretary in writing before the special meeting that you have
revoked your proxy; (3) attending the special meeting and
voting in person; or (4) if your shares are held in
street name by your brokerage firm, bank, trust or
other nominee, following the revocation or change-of-proxy
procedures of your brokerage firm, bank, trust or other nominee.
Please note, however, your attendance at the special meeting
will not automatically revoke your proxy.
By Order of the Board of Directors,
Scott R. Silverman
Chairman of the Board of Directors and Chief Executive
Officer
Delray Beach, Florida
June , 2008
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
8
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
10
|
|
|
|
|
10
|
|
|
|
|
10
|
|
|
|
|
10
|
|
|
|
|
11
|
|
|
|
|
11
|
|
|
|
|
11
|
|
|
|
|
11
|
|
|
|
|
12
|
|
|
|
|
12
|
|
|
|
|
12
|
|
|
|
|
12
|
|
|
|
|
13
|
|
|
|
|
13
|
|
|
|
|
13
|
|
|
|
|
14
|
|
|
|
|
15
|
|
|
|
|
24
|
|
|
|
|
24
|
|
|
|
|
30
|
|
|
|
|
31
|
|
|
|
|
39
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
44
|
|
|
|
|
49
|
|
|
|
|
54
|
|
i
|
|
|
|
|
|
|
|
55
|
|
|
|
|
58
|
|
|
|
|
63
|
|
|
|
|
78
|
|
|
|
|
80
|
|
Required Vote and Board Recommendation
|
|
|
80
|
|
|
|
|
81
|
|
|
|
|
81
|
|
|
|
|
81
|
|
|
|
|
82
|
|
|
|
|
82
|
|
APPENDIX A Stock Purchase Agreement
|
|
|
A-1
|
|
APPENDIX B Digital Angel Voting
Agreement
|
|
|
B-1
|
|
APPENDIX C Silverman Voting
Agreement
|
|
|
C-1
|
|
APPENDIX D Digital Angel Guarantee
|
|
|
D-1
|
|
APPENDIX E Form of Escrow Agreement
|
|
|
E-1
|
|
APPENDIX F Form of Section 116
Escrow Agreement
|
|
|
F-1
|
|
APPENDIX G Opinion of Merriman Curhan
Ford & Co.
|
|
|
G-1
|
|
APPENDIX H Form of Proxy Card
|
|
|
H-1
|
|
ii
SUMMARY
TERM SHEET
The following summary term sheet, together with the
Questions and Answers About the Special Meeting
following this summary term sheet, briefly summarizes the key
aspects of the Xmark Transaction, the special meeting and other
significant information contained in this proxy statement. It
may not contain all of the information that is important to you.
To understand the proposals more fully, and for a more complete
description of the terms of the Xmark Transaction, you should
read this entire proxy statement, including the Stock Purchase
Agreement and other documents attached as Appendices in their
entirety. We have included page references to direct you to more
complete information that appears elsewhere in this proxy
statement. This proxy statement is dated June , 2008
and is being mailed to stockholders on or about
June , 2008.
Overview
of Proposal No. 1 - The Xmark Transaction
The Stock
Purchase Agreement (see page 31)
On May 15, 2008, we and The Stanley Works, a Connecticut
corporation, or Stanley, entered into a Stock Purchase Agreement
pursuant to which we will, subject to certain terms and
conditions, including approval by our stockholders at the
special meeting, sell our Xmark business, by selling all of the
outstanding capital stock of Xmark Corporation, a corporation
governed under the laws of Canada and our wholly-owned
subsidiary. We call this transaction the Xmark Transaction. As
consideration for the Xmark Transaction, Stanley will pay us
$45 million in cash at the closing of the Xmark
Transaction, subject to adjustment as further described in this
proxy statement. We do not believe there will be a downward
adjustment to the purchase price (see
Proposal No. 1The Xmark
TransactionThe Stock Purchase Agreement).
You are being asked to approve the Stock Purchase Agreement with
Stanley and the transactions contemplated by the Stock Purchase
Agreement. If this proposal is approved, we will, after the
Xmark Transaction is completed, apply a portion of the proceeds
of the Xmark Transaction to satisfy certain of our liabilities
and obligations. We estimate that the amounts that will be paid
out of the proceeds of the Xmark Transaction to retire our
outstanding debt, and to pay transaction-related costs and other
contractual commitments, will be approximately
$23.1 million, including approximately $8.8 million in
contractual employee obligations, including severance,
change-in-control
and transaction bonus agreements payable to approximately
9 persons, including Mr. Silverman and other key
personnel at both VeriChip and Xmark.
In the event we consummate the Xmark Transaction, and subject to
compliance with Delaware law, we intend to use a portion of the
proceeds to fund an initial, special cash dividend to our
stockholders, the amount of which is currently estimated to be
in the range of $1.25 to $1.35 per share of VeriChip common
stock. However, the actual amount may be lower than this range
due to uncertainties regarding the ultimate amount of our
liabilities following the Xmark Transaction. In addition,
although we anticipate paying out the initial, special cash
dividend sometime in the third quarter of 2008, payment could be
delayed depending on certain factors, including delays relating
to the release of the escrow required under Canadian law, which
escrow is further described in this proxy statement. Prior to
making the initial, special cash dividend, we will announce, at
least ten days in advance, the record date for such
distribution. Only holders of our common stock on the record
date for the initial, special cash dividend will be entitled to
receive the initial, special cash dividend. Please note that the
record date for the initial, special cash dividend will be after
the closing date of the Xmark Transaction and is different from
the record date for determining which holders of our common
stock are entitled to vote on the matters described in this
proxy statement.
In addition, we currently intend to fund a second, special cash
dividend to our stockholders consisting of all of the remaining
distributable cash that we hold following any sale of our
VeriMed Health Link business or VeriChip in its entirety, as
well as the release of the funds escrowed in connection with the
Stock Purchase Agreement. In connection with such sale, other
transaction and release of escrow, uncertainties as to the
ultimate amount of claims, liabilities, operational expenses,
and the related timing for completion of any such sale make it
impossible to predict with certainty the actual net cash amount
that will ultimately be available for distribution to
VeriChips stockholders or the timing of a second, special
cash dividend. We anticipate paying out any second, special cash
dividend sometime after the first anniversary of the closing of
the Xmark Transaction.
1
Approval
by Our Board of Directors (see page 27)
On May 14, 2008, our board of directors approved the Stock
Purchase Agreement and the transactions contemplated by the
Stock Purchase Agreement. Our board of directors believes it
gave due and proper consideration to all matters and things that
are necessary or appropriate to enable it to evaluate and reach
an informed conclusion as to the fairness and reasonableness of
the Stock Purchase Agreement and the other documents entered
into in connection with the Stock Purchase Agreement. Our board
of directors unanimously recommends the approval of the Stock
Purchase Agreement and the transactions contemplated by the
Stock Purchase Agreement and believes the sale of Xmark is
advisable, fair to, and in the best interests of VeriChips
stockholders.
Our Plans
following the Closing of the Proposed Xmark Transaction (see
page 27)
After the closing of the Xmark Transaction, we will be
substantially smaller and have limited assets and revenue.
Accordingly, our focus will be on the sale of our remaining
business, the VeriMed Health Link business. For the year ended
December 31, 2007, the VeriMed Health Link business
accounted for less than 1% of our total sales and approximately
19% of our total operating expenses. We have retained the
investment banking firm of Kaufman Bros., L.P. to assist in the
sale of our VeriMed Health Link business
and/or
another transaction through which the remaining assets of
VeriChip would be acquired by, or combined with, a third party.
In the event that we are not able to sell the VeriMed Health
Link business, our board of directors will continue to evaluate
strategic alternatives for the VeriMed Health Link business and
VeriChip as a whole. Such alternatives may include, among other
things, the sale of the entire company, restructuring, the
distribution of assets to our stockholders, or the possible
dissolution of us and liquidation of our assets, the discharge
of any remaining liabilities, and the eventual distribution of
the remaining assets to our stockholders in the event we are
liquidated.
Material
Terms of the Stock Purchase Agreement
Representations
and Warranties (see page 32)
The Stock Purchase Agreement contains customary representations
and warranties from each of the parties, including
representations and warranties relating to their authority to
enter into the Stock Purchase Agreement and, in our case,
various aspects of Xmarks business. These representations
and warranties may be subject to important qualifications,
limitations and supplemental information agreed to in
negotiating the terms of the Stock Purchase Agreement.
Covenants
(see page 34)
The Stock Purchase Agreement contains customary covenants from
each of the parties, including agreements by us (1) to
cause Xmark to conduct its operations according to its ordinary
course of business consistent with past practice, (2) to
cause Xmark to refrain from certain actions between the time of
signing the Stock Purchase Agreement and the closing of the
Xmark Transaction, and (3) to obtain the requisite approval
of our stockholders.
Non-Competition
Provisions (see page 34)
From the closing date of the Xmark Transaction through four year
after such date, the Stock Purchase Agreement provides that we
shall not:
|
|
|
|
|
directly or indirectly participate with, control or own an
interest in any entity that is engaged in the business of
manufacturing, selling, financing, supplying, marketing or
distributing infant security systems, wander prevention systems,
asset/personnel location and identification systems, and
vibration monitoring instruments; or
|
|
|
|
encourage or attempt to persuade any Xmark employee to terminate
his employment relationship with Xmark, or offer to hire any
Xmark employee.
|
2
Superior
Proposals (see page 34)
The Stock Purchase Agreement provides that our board of
directors may, under certain circumstances, negotiate with third
parties regarding superior proposals.
Prior to obtaining the approval of our stockholders, if our
board of directors determines, after consultation with outside
counsel and in good faith, that an unsolicited written takeover
proposal, which was not received due to any breach of the Stock
Purchase Agreement, is reasonably likely to lead to a superior
proposal and that it is reasonably necessary to take such action
to comply with the boards fiduciary duties to our
stockholders, then we, after giving Stanley prompt written
notice of such determination, may furnish information about us
and Xmark under a confidentiality agreement and participate in
negotiations regarding a takeover proposal.
Our board of directors may withdraw or modify the recommendation
that our stockholders approve the Stock Purchase Agreement,
which recommendation we refer to as the Board Recommendation, if
our board of directors determines, after receiving the advice of
its outside counsel and in good faith, that it is reasonably
necessary to do so to comply with the boards fiduciary
duties to our stockholders. If our board of directors receives a
takeover proposal that it determines, in good faith, constitutes
a superior proposal, we or Xmark may enter into a definitive
written acquisition agreement with respect to such superior
proposal if our board of directors determines, after receiving
the advice of its outside counsel and in good faith, and after
five days pass following the date on which VeriChip provides
written notice to Stanley of VeriChips desire to terminate
the Stock Purchase Agreement, that it is reasonably necessary to
do so to comply with the boards fiduciary duties to our
stockholders and, concurrently with entering into such
agreement, terminates the Stock Purchase Agreement, in which
case we would be required to pay either $450,000 or $1,500,000
(depending on the circumstances surrounding such termination) to
Stanley concurrently with such termination. If we enter into an
acquisition agreement or make an Adverse Recommendation Change
(as defined below), we are required to give Stanley written
notice of such takeover proposal or Adverse Recommendation
Change.
Otherwise, our board of directors may not enter into, approve or
authorize us or Xmark to enter into any agreement for a takeover
proposal or make an Adverse Recommendation Change, which term we
use to refer to any of the following three scenarios:
|
|
|
|
|
withdraw or modify, in a manner adverse to Stanley, its approval
or adoption of the Stock Purchase Agreement, or its
recommendation that our stockholders approve the Stock Purchase
Agreement;
|
|
|
|
recommend to our stockholders, or approve or adopt, another
takeover proposal; or
|
|
|
|
in the event that any other takeover proposal is publicly
announced or any person commences a tender offer or exchange
offer for any outstanding shares of our common stock, within ten
business days of such announcement or commencement, fail to
issue a press release that reaffirms the recommendation of our
board of directors that our stockholders approve the Stock
Purchase Agreement, and, in the case of a tender offer or
exchange offer for any outstanding shares of our common stock,
recommend against acceptance of such tender offer or exchange
offer by our stockholders.
|
If we do make an Adverse Recommendation Change, we or Stanley
may terminate the Stock Purchase Agreement (see
Proposal No. 1 The Xmark
Transaction The Stock Purchase Agreement
Termination) and our stockholders who entered into voting
agreements may choose not to vote for the Xmark Transaction (see
Proposal No. 1 The Xmark
Transaction Ancillary Agreements to the Stock
Purchase Agreement Voting Agreements).
Indemnification
(see page 35)
The Stock Purchase Agreement provides that the parties will
indemnify each other for any losses and expenses incurred by,
among other things, breaches of representations, warranties and
covenants, subject to specified dollar and time limitations. We
have also agreed to indemnify Stanley for any losses and
expenses relating to, among other things, excluded liabilities
and stockholder litigation. To secure VeriChips indemnity
3
obligations, the Stock Purchase Agreement provides that
$4.5 million of the purchase price will be placed into
escrow for 12 months.
Conditions
to Closing (see page 36)
The obligations of the parties to consummate the Xmark
Transaction are subject to certain customary closing conditions,
including stockholder approval of the Stock Purchase Agreement
and the transactions contemplated by the Stock Purchase
Agreement. In addition, Stanleys obligation to consummate
the Xmark Transaction is subject to various conditions,
including:
|
|
|
|
|
one of our senior officers signing and delivering a certificate
to the effect that (i) our representations and warranties,
as of the applicable date, are true and correct and (ii) we
have performed and complied with, in all material respects, all
covenants and obligations required by the Stock Purchase
Agreement to be performed or complied with prior to or at the
closing of the Xmark Transaction; and
|
|
|
|
our delivering to Stanley certain items, as set forth in the
Stock Purchase Agreement, such as the shares of Xmark,
resignation letters and pay-off letters from our lenders.
|
Our obligation to consummate the Xmark Transaction is subject to
various conditions, including:
|
|
|
|
|
one of Stanleys officers signing and delivering a
certificate to the effect that (i) Stanleys
representations and warranties, as of the applicable date, are
true and correct and (ii) Stanley has performed and
complied with, in all material respects, all covenants and
obligations required by the Stock Purchase Agreement to be
performed or complied with prior to or at the closing of the
Xmark Transaction; and
|
|
|
|
Stanley delivering certain items to us, as set forth in the
Stock Purchase Agreement, such as the funds due upon closing of
the Xmark Transaction.
|
Termination
(see page 37)
The Stock Purchase Agreement can be terminated, under certain
circumstances, prior to closing of the Xmark Transaction.
Depending on the circumstances, the Stock Purchase Agreement
provides that VeriChip may be required to pay Stanley a
termination fee of either $450,000 or $1,500,000 (depending on
the circumstances surrounding such termination).
Ancillary
Agreements to the Stock Purchase Agreement (see
page 39)
Applied Digital Solutions, Inc., doing business as Digital
Angel, and Mr. Silverman, which hold approximately 48.6%
and 5.0%, respectively, of the outstanding shares of our common
stock, each entered into a voting agreement with Stanley in the
forms attached to this proxy statement as
Appendices B and C.
In the voting agreements, Digital Angel and
Mr. Silverman agreed to vote their shares of VeriChip in
favor of the approval of the Stock Purchase Agreement and the
transactions contemplated by the Stock Purchase Agreement,
unless (i) our board of directors has received a takeover
proposal that it determines, in good faith, constitutes a
superior proposal and (ii) our board of directors
determines, after receiving the advice of outside counsel and in
good faith, that it is reasonably necessary to withdraw or
modify the Board Recommendation to comply with the boards
fiduciary duties to our stockholders. The voting agreements
limit the ability of each of Digital Angel and
Mr. Silverman to transfer shares of stock held in VeriChip
or vote for any alternative transaction during the period prior
to the consummation of the Xmark Transaction and, in some cases,
for a period of seven months and fifteen days afterward. Thus,
because Digital Angel and Mr. Silverman own more than 50%
of our outstanding common stock, unless our board of directors
changes its Board Recommendation, stockholder approval of the
Xmark Transaction is assured.
Digital Angel has also executed a guarantee in favor of Stanley
in the form attached to this proxy statement as
Appendix D
, under which Digital Angel guaranteed
certain liabilities of VeriChip under the Stock Purchase
Agreement. In connection with the Xmark Transaction, Digital
Angel also entered into a non-competition agreement with
Stanley, and accordingly agreed that, for a period of three
years following the closing of the Xmark Transaction, it will
not compete in certain of the businesses in which Xmark is
currently
4
operating. In connection with the signing the Stock Purchase
Agreement, we and Digital Angel reached an agreement relating
to, among other things, Digital Angels ability to
designate after the closing of the Xmark Transaction three
members to our board of directors, the payment of $250,000 to
Digital Angel as consideration for the execution of the
guarantee plus the reimbursement of up to $250,000 for Digital
Angels expenses incurred in connection with the Xmark
Transaction, and Digital Angels right to access certain of
our financial information (see
Proposal No. 1 The Xmark
Transaction Interests of Certain Persons in the
Xmark Transaction Letter Agreement with Digital
Angel).
On the closing date of the Xmark Transaction, VeriChip, Stanley
and Citibank, N.A., as escrow agent, will enter into an escrow
agreement, in the form attached to this proxy statement as
Appendix E
, in connection with which
$4.5 million will be held in an escrow account for a period
of 12 months that will cover our indemnification
obligations under the Stock Purchase Agreement, as well as a
Section 116 escrow agreement, in the form attached to this
proxy statement as
Appendix F
, in connection with
Canadian withholding tax procedures, which require the
withholding and remittance to the Canadian Revenue Agency, or
CRA, of 25% of the purchase price unless a clearance certificate
is issued. We believe that the sale of Xmark is exempt from
Canadian income tax by virtue of the income tax treaty between
the U.S. and Canada. If we are unable to obtain the
clearance certificate prior to closing, the withheld amount will
be held in escrow and provided that, before the 29th day
following the end of the month in which the closing of the Xmark
Transaction occurs, we either (1) obtain the clearance
certificate or (2) a letter from the CRA authorizing the
escrow agent to continue to hold the funds in the trust account,
the withheld amount will be released to us after receipt by the
escrow agent of the clearance certificate. If the escrow agent
does not receive either items (1) or (2) above within
this timeframe, the escrow agent will remit the withheld amount
to the Receiver General of Canada.
Regulatory
Approvals (see page 41)
We do not require any regulatory approvals to complete the Xmark
Transaction.
Appraisal
Rights (see page 41)
Under Delaware law, our stockholders are not entitled to
appraisal rights for their shares in connection with the Xmark
Transaction.
Closing
of the Xmark Transaction Not Conditioned on Stanley Obtaining
Financing (see page 41)
Stanley has indicated that it has ready access to the cash
consideration required to close this Xmark Transaction and does
not require a financing condition.
Accounting
Treatment (see page 41)
As a result of the proposed Xmark Transaction, we will remove
the Xmark assets and liabilities from our consolidated balance
sheet and record a gain on the sale of Xmark equal to the
difference between the book value of our ownership interest in
Xmark and the purchase price received. For a twelve-month period
following the closing, $4.5 million of the purchase price
will be held in escrow to fund indemnification obligations under
the Stock Purchase Agreement, if any. The gain related to the
$4.5 million will be deferred until the escrow is settled.
See Unaudited Pro Forma Condensed Consolidated Financial
Statements for an estimated calculation and description of
the accounting gain.
Certain
Federal Tax Consequences (see page 41)
The Xmark Transaction will be a taxable transaction for us. We
will realize gain with respect to our Xmark stock equal to the
difference between the proceeds received by us on such sale and
our tax basis in the stock sold. For purposes of calculating the
amount of our tax gain, the proceeds received by us will include
the cash received, and any other consideration we receive for
our Xmark stock. It is anticipated that we will have sufficient
losses (including net operating loss carryforwards) to offset
the gain expected to be realized from the Xmark Transaction for
federal income tax purposes. It is anticipated that the Xmark
Transaction will not generate a significant federal alternative
minimum tax liability.
5
The intended initial, special cash dividend will not be a
taxable event to VeriChip. The initial, special cash dividend
will be treated as a taxable dividend to the extent of our
current or accumulated earnings and profits. Any amount in
excess of accumulated and current earnings and profits will be
treated as a non-taxable return of capital to the extent of the
stock holders adjusted tax basis in the holders
common stock and, thereafter, as capital gain. Individual
U.S. holders of our shares who have held their stock for
more than one year will generally be taxed at a rate of 15% on
any portion of the initial, special cash dividend that
represents the holders portion of earnings and profits and
any portion that is capital gain to the holder. Corporate
U.S. holders of VeriChip common stock will not be eligible
for taxation at the reduced capital gains rates noted above, but
may be eligible for the dividends-received deduction.
Non-U.S. stockholders
will either (i) be taxed on the gross amount of dividend
(30% or, if reduced by an applicable treaty, less), or, under
certain circumstances, (ii) be taxed on a net income basis
in the same manner as U.S. holders of VeriChip common
stock. In most cases,
non-U.S. holders
of VeriChip common stock will not be taxed on any portion of the
initial, special cash dividend that does not represent our
current or accumulated E&P. Additionally, a portion of the
initial, special cash dividend may constitute an
extraordinary dividend, which would require
individual U.S. holders of VeriChip common stock to treat
any loss on a sale of his or her shares of VeriChip common stock
as long-term capital loss to the extent of the extraordinary
dividend. Additionally, with regard to corporate holders
claiming a dividends-received deduction, the dividend may be an
extraordinary dividend if the corporate holder has not held its
shares of our common stock for more than 2 years prior to
the dividend announcement date as determined by the
tax law. In that case, the corporate holder must reduce its tax
basis by the amount of the dividend and may be required to
recognize current gain in respect of the shares of VeriChip
common stock that entitled the holder to the dividend.
Opinion
of Merriman to the Board of Directors (see
page 44)
On May 14, 2008, Merriman Curhan Ford & Co., or
Merriman, rendered its oral opinion, which confirmed its written
opinion dated May 13, 2008, that, as of the date of the
written opinion, based upon and subject to certain assumptions,
qualifications, limitations and factors described in
Merrimans opinion, the purchase price was fair, from a
financial point of view, to VeriChip.
Merrimans opinion was prepared solely for the information
of our board of directors for confidential use by the board of
directors. Merrimans opinion did not address the
underlying or relative merits of the Xmark Transaction or any
related transaction, and any other transactions or business
strategies discussed by our board of directors, or that might
have been available as alternatives to the Xmark Transaction, or
the decision of VeriChip to proceed with the Xmark Transaction
or any related transaction. The full text of Merrimans
opinion with respect to the Xmark Transaction, which sets forth
the assumptions made, procedures followed, matters considered
and limitations on the review undertaken in connection with such
opinion, is attached as
Appendix G
to this proxy
statement and is described more fully under
Proposal No. 1 The Xmark
Transaction Opinion of Merriman to the Board of
Directors.
Interests
of Certain Persons in the Xmark Transaction (see
page 49)
When considering the recommendation of our board of directors,
you should be aware that our executive officers, the members of
our board of directors and our stockholder, Digital Angel, which
owns approximately 48.6% of our stock, have interests in the
Xmark Transaction other than their interests as our stockholders
generally. These interests arise under certain of our existing
agreements. These interests may be different from, or in
conflict with, your interests as our stockholder. The members of
our board of directors were aware of these additional interests,
and considered them, when they approved the Xmark Transaction
and the Stock Purchase Agreement.
The interests of our executive officers, the members of our
board of directors and Digital Angel include, among others:
|
|
|
|
|
the following payments to Scott. R. Silverman, our chairman and
chief executive officer, under a separation agreement between
him and us: (i) a constructive termination payment of up to
$4,282,611 upon the closing of the Xmark Transaction and
(ii) a bonus payment in the amount of $1.2 million for
|
6
|
|
|
|
|
the closing of the Xmark Transaction, which is payable in two
installments. The first installment of $1,080,000 will be paid
upon the closing of the Xmark Transaction. The second
installment of $120,000 will be paid twelve months after the
closing of the Xmark Transaction, upon release of the funds
escrowed to cover our indemnification obligations under the
Stock Purchase Agreement;
|
|
|
|
|
|
a
change-in-control
payment to William J. Caragol, our president and chief financial
officer, of $1,131,400 upon the closing of the Xmark Transaction;
|
|
|
|
a transaction bonus payment of $600,000 to Daniel A. Gunther,
Xmarks chief executive officer and president, upon the
closing of the Xmark Transaction;
|
|
|
|
transaction bonuses to five members of Xmarks senior
management team, other than Mr. Gunther, totaling
$1,175,400 in the aggregate, upon the closing of the Xmark
Transaction;
|
|
|
|
a
change-in-control
payment to our senior vice president of operations of $535,500
upon the closing of the Xmark Transaction;
|
|
|
|
a payment of $25,000 to each member of our board of directors
(other than Mr. Silverman) to compensate them for their
extraordinary efforts in connection with the Xmark Transaction;
|
|
|
|
Digital Angels ability to designate up to three members of
our board of directors upon the closing of the Xmark Transaction;
|
|
|
|
Joseph J. Grillo, Digital Angels chief executive officer
and president, is expected to replace Mr. Silverman as
chairman of our board of directors upon the closing of the Xmark
Transaction;
|
|
|
|
the following payments to Digital Angel under a letter agreement
between them and us: (i) $250,000 as consideration for the
execution of the guarantee signed in connection with the Stock
Purchase Agreement and (ii) up to $250,000 for Digital
Angels expenses related to the Xmark Transaction;
|
|
|
|
the acceleration of the vesting of certain VeriChip equity
awards, including certain VeriChip equity awards held by our
current or former directors and executive officers, upon the
closing of the Xmark Transaction;
|
|
|
|
the acceleration of the vesting of certain VeriChip equity
awards held by Digital Angels directors and executive
officers upon the closing of the Xmark Transaction;
|
|
|
|
incentive compensation up to $200,000 in the aggregate,
contingent on the total distributed cash or equity value to
VeriChip stockholders equaling or exceeding $21.5 million,
for Mr. Caragols continued service to VeriChip for
the period after the closing of the Xmark Transaction; and
|
|
|
|
in the event that our VeriMed Health Link business is sold, all
of our stock is sold, or the public company is used for a
strategic transaction to a party other than Mr. Silverman,
on or before July 15, 2008, a success fee to
Mr. Silverman equal to twenty-five percent (25%) of the
total transaction value, as well as a one-time $500,000
assumption of liabilities bonus if the purchaser of the VeriMed
Health Link business assumes all related liabilities.
|
Required
Vote and Board Recommendation (see page 54)
All holders of our common stock as of the record date are
entitled to vote on Proposal No. 1. Approval of the
Stock Purchase Agreement and the transactions contemplated by
the Stock Purchase Agreement requires the affirmative vote of
the holders of a majority of the outstanding shares of our
common stock entitled to vote at the special meeting.
Abstentions and broker non-votes will have the same
effect as votes against Proposal No. 1.
Concurrently with the execution of the Stock Purchase Agreement,
Digital Angel and Mr. Silverman, which hold approximately
48.6% and 5.0%, respectively, of the outstanding shares of our
common stock, each entered into a voting agreement with Stanley
in the forms attached to this proxy statement as
Appendices B
and C.
In the voting agreements, Digital Angel and
Mr. Silverman agreed to vote their shares of VeriChip in
favor of the approval of the Stock Purchase Agreement and the
transactions contemplated by the Stock
7
Purchase Agreement, unless (i) our board of directors has
received a takeover proposal that it determines, in good faith,
constitutes a superior proposal and (ii) our board of
directors determines, after receiving the advice of outside
counsel and in good faith, that it is reasonably necessary to
withdraw or modify the Board Recommendation to comply with the
boards fiduciary duties to our stockholders. The voting
agreements limit the ability of each of Digital Angel and
Mr. Silverman to transfer shares of stock held in VeriChip
or vote for any alternative transaction during the period prior
to the consummation of the Xmark Transaction and, in some cases,
for a period of seven months and fifteen days afterward. Thus,
because Digital Angel and Mr. Silverman own more than 50%
of our outstanding common stock, unless our board of directors
changes its Board Recommendation, stockholder approval of the
Xmark Transaction is assured.
The board of directors has concluded that the Stock Purchase
Agreement and transactions contemplated by the Stock Purchase
Agreement are in the best interests of our stockholders and
recommends that you approve the Stock Purchase Agreement and
transactions contemplated by the Stock Purchase Agreement and
that you vote FOR the approval of
Proposal No. 1.
Overview
of Proposal No. 2 - Transaction of Other Proper
Business
We are asking our stockholders to vote on a proposal to transact
such other business as may properly come before the special
meeting of stockholders or any adjournment or postponement
thereof.
Although it is not currently expected (and assuming the
establishment of a quorum), the special meeting may be adjourned
or postponed for the purpose of soliciting additional proxies if
there are insufficient votes at the time of the special meeting
to approve the Stock Purchase Agreement and the transactions
contemplated by the Stock Purchase Agreement. Once a quorum is
present, the affirmative vote of a majority of the holders of
shares of our common stock representing such quorum shall be
required to approve this proposal to transact such other
business as may properly come before the special meeting of
stockholders or any adjournment or postponement thereof.
Before any adjournment or postponement of the special meeting,
our stockholders may revoke their previously-sent proxies.
Required
Vote and Board Recommendation (see page 80)
All holders of our common stock as of the record date are
entitled to vote on Proposal No. 2. Approval of the
transaction of such other business as may properly come before
the special meeting of stockholders or any adjournment or
postponement thereof requires the affirmative vote of the
holders of a majority of the outstanding shares of our common
stock entitled to vote at the special meeting. Abstentions and
broker non-votes will have the same effect as votes
against Proposal No. 2.
The board of directors recommends that you approve the
transaction of such other business as may properly come before
the special meeting of stockholders or any adjournment or
postponement thereof and that you vote FOR the
approval of Proposal No. 2.
8
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING
When
and where is the special meeting?
The special meeting of our stockholders will be held on
at , on July , 2008 at 9:00 a.m.,
Eastern Time.
Who is
soliciting my proxy?
Our board of directors on behalf of VeriChip.
What
is the purpose of the special meeting?
At the special meeting, stockholders will act upon the following
matters:
|
|
|
|
|
to approve the Stock Purchase Agreement, dated May 15,
2008, between us and Stanley and the transactions contemplated
by the Stock Purchase Agreement; and
|
|
|
|
to transact such other business as may properly come before the
special meeting of stockholders or any adjournment or
postponement thereof.
|
Who is
entitled to vote?
We have one class of voting shares outstanding: our common
stock. Only stockholders of record of our common stock at the
close of business on the record date, June , 2008,
are entitled to receive notice of the special meeting and to
vote the shares of common stock that they held on the record
date at the special meeting, or any adjournment or postponement
thereof. As of the close of business on the record date,
11,019,377 shares of our common stock were issued and
outstanding. Accordingly, as a class, our common stock is
entitled to 11,019,377 votes.
A list of stockholders entitled to vote will be available at the
special meeting. In addition, the list will be open to the
examination of any stockholder, for any purpose germane to the
special meeting, at our executive offices between the hours of
9:00 a.m. and 5:00 p.m., Eastern Time, on any business
day from June , 2008 up to the time of the special
meeting.
How
many votes do I have?
Each share of our common stock that you own entitles you to one
vote on each matter to be voted on at the special meeting.
What
vote is required?
A quorum of stockholders is necessary to hold a valid special
meeting. The presence in person or by proxy at the special
meeting of holders of shares of our outstanding common stock
representing a majority of the voting power of all outstanding
shares of our common stock entitled to vote constitutes a
quorum. Abstentions and broker non-votes are counted
as present for establishing a quorum. A broker
non-vote occurs on an item when a broker is not
permitted to vote on that item absent instruction from the
beneficial owner of the shares, and no instruction is given. The
following votes are required for Proposal No. 1 and
Proposal No. 2.
|
|
|
|
|
To approve the Stock Purchase Agreement, dated May 15,
2008, between us and Stanley and the transactions contemplated
by the Stock Purchase Agreement
. The affirmative vote
of the holders of a majority of the outstanding shares of our
common stock entitled to vote at the special meeting.
|
|
|
|
To transact such other business as may properly come before
the special meeting of stockholders or any adjournment or
postponement thereof
. The affirmative vote of the
holders of a majority of the outstanding shares of our common
stock entitled to vote at the special meeting.
|
9
Concurrently with the execution of the Stock Purchase Agreement,
Digital Angel and Mr. Silverman, which hold approximately
48.6% and 5.0%, respectively, of the outstanding shares of our
common stock, each entered into a voting agreement with Stanley
in the forms attached to this proxy statement as
Appendices B
and C.
In the voting agreements, Digital Angel and
Mr. Silverman agreed to vote their shares of VeriChip in
favor of the approval of the Stock Purchase Agreement and the
transactions contemplated by the Stock Purchase Agreement,
unless (i) our board of directors has received a takeover
proposal that it determines, in good faith, constitutes a
superior proposal and (ii) our board of directors
determines, after receiving the advice of outside counsel and in
good faith, that it is reasonably necessary to withdraw or
modify the Board Recommendation to comply with the boards
fiduciary duties to our stockholders. The voting agreements
limit the ability of each of Digital Angel and
Mr. Silverman to transfer shares of stock held in VeriChip
or vote for any alternative transaction during the period prior
to the consummation of the Xmark Transaction and, in some cases,
for a period of seven months and fifteen days afterward. Thus,
because Digital Angel and Mr. Silverman own more than 50%
of our outstanding common stock, unless our board of directors
changes its Board Recommendation, stockholder approval of the
Xmark Transaction is assured.
What
does it mean if I get more than one proxy card?
If your shares of common stock are registered differently and
are in more than one account, you will receive more than one
proxy card. If you do not sign and return one or more of your
proxy card(s), then your shares of common stock represented by
such unreturned proxy card(s) will not be voted. Sign and return
all proxy cards to ensure that all of your shares of common
stock are voted.
How do
I vote my shares?
You may vote before the special meeting in one of the following
ways:
|
|
|
|
|
complete, sign, date and return the enclosed proxy card in the
enclosed postage-paid envelope;
|
|
|
|
use the toll-free number shown on your proxy card; or
|
|
|
|
visit the website shown on your proxy card to vote via the
internet.
|
You may also cast your vote in person at the special meeting.
If your shares are held in street name, through a
broker, bank or other nominee, that institution will send you
separate instructions describing the procedure for voting your
shares. Street name stockholders who wish to vote at
the meeting will need to obtain a proxy form from the
institution that holds their shares.
What
if I do not vote on the proposals?
If you fail to vote, or fail to instruct your broker or other
nominee how to vote, on the proposal:
|
|
|
|
|
to approve the Stock Purchase Agreement, dated May 15,
2008, between us and Stanley and the transactions contemplated
by the Stock Purchase Agreement, it will have the same effect as
a vote against the proposal. If you respond with an
abstain vote, your proxy will have the same effect
as a vote against the proposal.
|
|
|
|
to transact such other business as may properly come before the
special meeting of stockholders or any adjournment or
postponement thereof, it will have the same effect as a vote
against the proposal. If you respond with an abstain
vote, your proxy will have the same effect as a vote against the
proposal.
|
How
will my proxy be voted?
All shares of our common stock entitled to vote and represented
by properly completed proxies received prior to our special
meeting, and not revoked, will be voted at our special meeting,
as instructed on the proxies. If you properly complete, sign and
return a proxy card, but do not indicate how your shares of our
10
common stock should be voted on a matter, the shares of our
common stock represented by your proxy will be voted as our
board of directors recommends and therefore:
|
|
|
|
|
FOR the proposal to approve the Stock Purchase
Agreement, dated May 15, 2008, between us and Stanley and
the transactions contemplated by the Stock Purchase
Agreement; and
|
|
|
|
FOR the proposal to transact such other business as
may properly come before the special meeting of stockholders or
any adjournment or postponement thereof.
|
May I
revoke my proxy?
You may revoke your proxy at any time before it is exercised at
the special meeting by any one of the following three ways:
|
|
|
|
|
sending in another signed proxy card with a later date;
|
|
|
|
notifying our corporate secretary in writing before the special
meeting that you have revoked your proxy; or
|
|
|
|
attending the special meeting and voting in person. Please note
that attending the special meeting alone will NOT revoke your
proxy.
|
If your shares of common stock are held in street
name, you should follow the instructions of your broker,
bank or other nominee regarding revocation or change of proxies.
If your broker, bank or other nominee allows you to submit a
proxy by telephone or via the internet, you may be able to
change your vote by submitting a new proxy by telephone or via
the internet.
Can I
still vote in person if I have already granted my
proxy?
All stockholders as of the record date, or their duly appointed
proxies, may attend the special meeting on July ,
2008. Granting your proxy will not affect your right to attend
the special meeting and vote in person. If you intend to attend
the special meeting and vote in person, we will give you a
ballot at the meeting. If your shares are held in the name of
your broker, bank or other nominee, you must bring a proxy
issued in your name from your broker, bank or other nominee
indicating that you were the beneficial owner of the shares on
the record date.
What
will happen if the Xmark Transaction is not
approved?
Concurrently with the execution of the Stock Purchase Agreement,
Digital Angel and Mr. Silverman, which hold approximately
48.6% and 5.0%, respectively, of the outstanding shares of our
common stock, each entered into a voting agreement with Stanley
in the forms attached to this proxy statement as
Appendices B
and C.
In the voting agreements, Digital Angel and
Mr. Silverman agreed to vote their shares of VeriChip in
favor of the approval of the Stock Purchase Agreement and the
transactions contemplated by the Stock Purchase Agreement,
unless (i) our board of directors has received a takeover
proposal that it determines, in good faith, constitutes a
superior proposal and (ii) our board of directors
determines, after receiving the advice of outside counsel and in
good faith, that it is reasonably necessary to withdraw or
modify the Board Recommendation to comply with the boards
fiduciary duties to our stockholders. The voting agreements
limit the ability of each of Digital Angel and
Mr. Silverman to transfer shares of stock held in VeriChip
or vote for any alternative transaction during the period prior
to the consummation of the Xmark Transaction and, in some cases,
for a period of seven months and fifteen days afterward. Thus,
because Digital Angel and Mr. Silverman own more than 50%
of our outstanding common stock, unless our board of directors
changes its Board Recommendation, stockholder approval of the
Xmark Transaction is assured.
Will I
receive any payment as a result of the Xmark
Transaction?
In the event we consummate the Xmark Transaction, and subject to
compliance with Delaware law, we intend to use a portion of the
proceeds to fund an initial, special cash dividend to our
stockholders, the amount of which is currently estimated to be
in the range of $1.25 to $1.35 per share of VeriChip common
stock, to
11
be made sometime in the third quarter of 2008. However, the
actual amount may be lower than this range due to uncertainties
regarding the ultimate amount of our liabilities following the
Xmark Transaction. In addition, the payment of the initial,
special cash dividend could be delayed depending on certain
factors, including delays relating to the release of the escrow
required under Canadian law. Prior to making the initial,
special cash dividend, we will announce, at least ten days in
advance, the record date for such distribution. Only holders of
our common stock on the record date for the initial, special
cash dividend will be entitled to receive the initial, special
cash dividend. Please note that the record date for the initial,
special cash dividend will be after the closing date of the
Xmark Transaction and is different from the record date for
determining which holders of our common stock are entitled to
vote on the matters described in this proxy statement.
In addition, we currently intend to fund a second, special cash
dividend to our stockholders consisting of all of the remaining
distributable cash that we hold following any sale of our
VeriMed Health Link business or VeriChip in its entirety, as
well as the release of the funds escrowed in connection with the
Stock Purchase Agreement. In connection with such sale, other
transaction and release of escrow, uncertainties as to the
ultimate amount of claims, liabilities, operational expenses,
and the related timing for completion of any such sale make it
impossible to predict with certainty the actual net cash amount
that will ultimately be available for distribution to
VeriChips stockholders or the timing of a second, special
cash dividend. We anticipate paying out any second, special cash
dividend sometime after the first anniversary of the closing of
the Xmark Transaction.
Can I
still sell my shares of VeriChip common stock after the
consummation of the Xmark Transaction?
Yes. We expect that after the consummation of the Xmark
Transaction our common stock will continue to be listed on the
Nasdaq Global Market.
What
if other matters are presented for determination at the special
meeting?
As of the date of this proxy statement, management knows of no
matters that will be presented for determination at the special
meeting other than those referred to herein. If any other
matters properly come before the special meeting calling for a
vote of stockholders, proxies in the enclosed form returned to
us will be voted in accordance with the recommendation of our
board of directors, or, in the absence of such a recommendation,
in accordance with the judgment of the proxy holders.
What
do I need to do now?
Please vote your shares of common stock as soon as possible, so
that your shares of common stock may be represented at the
special meeting. You may vote (1) by completing, signing
and dating your proxy card and mailing it in the enclosed
postage-paid return envelope, (2) by visiting the website
shown on your proxy card to vote via the internet, (3) by
using the toll-free number shown on your proxy card, or
(4) in person at the special meeting. If your shares of
common stock are held in street name by your broker,
bank or other nominee, you must provide instructions to your
broker, bank or other nominee to vote your shares of common
stock.
Who
pays the expenses incurred in connection with the solicitation
of proxies?
The cost of soliciting proxies will be borne by us. The
solicitation of proxies may be made by mail, telephone,
facsimile or telegraph or in person by directors, officers and
regular employees of ours, without additional compensation for
such services. Arrangements will be made with brokers, banks and
other custodians, nominees and fiduciaries to forward proxy
soliciting material to the beneficial owners of stock held of
record by such brokers, banks and other custodians, nominees and
fiduciaries, and we will reimburse them for reasonable
out-of-pocket expenses incurred by them in so doing. We have not
retained a proxy solicitor to solicit proxies; however, we may
choose to do so prior to the special meeting.
12
How
does our board of directors recommend that our stockholders
vote?
Our board of directors unanimously recommends that the holders
of our common stock vote:
|
|
|
|
|
FOR
the proposal to approve the Stock
Purchase Agreement, dated May 15, 2008, between us and
Stanley and the transactions contemplated by the Stock Purchase
Agreement; and
|
|
|
|
FOR
the proposal to transact such other
business as may properly come before the special meeting of
stockholders or any adjournment or postponement thereof.
|
Where
can I find more information?
You may obtain more information from various sources as
explained in the section Where You Can Find Additional
Information beginning on page 82.
Who
can answer my questions?
If you have any questions about the Xmark Transaction or how to
submit your proxy, or if you need additional copies of this
proxy statement, the enclosed proxy card or voting instructions,
you may contact us in writing at: VeriChip Corporation, 1690
South Congress Avenue, Suite 200, Delray Beach, Florida
33445, Attention: Jay McKeage or by calling Jay McKeage at
(561) 805-8008.
13
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. We base these forward-looking statements on its
expectations and projections about future events, which we have
derived from the information currently available to it. In
addition, from time to time, we or our representatives may make
forward-looking statements orally or in writing. Furthermore,
forward-looking statements may be included in our filings with
the Securities and Exchange Commission, or SEC, or press
releases or oral statements made by or with the approval of one
of our executive officers. For each of these forward-looking
statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
relate to future events or our future performance, including,
but not limited to:
|
|
|
|
|
expected closing and timing of the closing of the Xmark
Transaction;
|
|
|
|
expected cash to be received from the Xmark Transaction and cash
to be disbursed to settle our obligations and liabilities, both
known and unknown;
|
|
|
|
timing of the initial, special cash dividend;
|
|
|
|
expected expenses in connection with the Xmark Transaction;
|
|
|
|
possible or assumed future results of operations;
|
|
|
|
future revenue and earnings; and
|
|
|
|
future expectations regarding the sale of the remaining business.
|
Forward-looking statements are those that are not historical in
nature, particularly those that use terminology such as may,
could, will, should, likely, expects, anticipates, contemplates,
estimates, believes, plans, projected, predicts, potential or
continue or the negative of these or similar terms. The
statements contained in this proxy statement that are not purely
historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, including
statements regarding our expectations, beliefs, intentions or
strategies regarding the future. Forward-looking statements are
subject to certain known and unknown risks and uncertainties
that could cause actual results to differ materially from those
expressed in any forward-looking statements. These risks and
uncertainties include, but are not limited to, the following
important factors with respect to us:
|
|
|
|
|
the satisfaction of conditions to complete the Xmark Transaction;
|
|
|
|
the amount of costs, fees and expenses related to the Xmark
Transaction and interim operations prior to the closing of the
Xmark Transaction;
|
|
|
|
the uncertainty of general business and economic conditions;
|
|
|
|
the amount paid to settle our obligations and liabilities;
|
|
|
|
the impact of competition, both expected and unexpected;
|
|
|
|
adverse developments, outcomes and expenses in legal
proceedings; and
|
|
|
|
other risk factors as further described in this proxy statement.
|
Forward-looking statements are only predictions as of the date
they are made and are not guarantees of performance. All
forward-looking statements included in this document are based
on information available to us on the date of this proxy
statement. Readers are cautioned not to place undue reliance on
forward-looking statements. The forward-looking events discussed
in this proxy statement and other statements made from time to
time by us or our representatives may not occur, and actual
events and results may differ materially and are subject to
risks, uncertainties and assumptions about us, including,
without limitation, those discussed elsewhere in this proxy
statement and the risks discussed in our SEC filings. Except for
our ongoing obligations to disclose material information as
required by the federal securities laws, we are not obligated to
publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise. In
light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this proxy statement and in
other statements made from time to time by us or our
representatives might not occur.
14
RISK
FACTORS
In addition to the risks described in our
Forms 10-K
and
10-Q
relating to us as an independent business, you should carefully
consider the following matters in deciding whether to vote in
favor of the Xmark Transaction. If any of these risks actually
materialize, our business, financial condition or prospects may
be seriously harmed. In such case, the market price of our
common stock may decline and you may lose all or part of your
investment. See Cautionary Statement Concerning
Forward-Looking Statements on page 14.
Risks
Regarding the Approval of the Stock Purchase Agreement and the
Transactions Contemplated by the Stock Purchase
Agreement
The
amount of cash we receive in this transaction will vary,
depending on the result of certain post-closing adjustments, so
that we may not retain all of the cash paid to us at the closing
under the Stock Purchase Agreement.
Pursuant to the terms of the Stock Purchase Agreement, as
consideration for the Xmark Transaction, Stanley will pay us
approximately $45 million in cash at the closing of the
Xmark Transaction. In addition, within sixty calendar days
following the closing of the Xmark Transaction, and depending
whether the calculation yields a positive or a negative number,
Stanley or we will pay an additional amount to the other party,
which we refer to as the aggregate adjustment, equal
to the sum (i.e., an amount which may be a positive or a
negative number) of: (i) an amount, which may be a positive
or a negative number, obtained by subtracting $4.7 million
from the net tangible asset value, as more fully described on
Exhibit C to the Stock Purchase Agreement, as of the date
of closing of the Xmark Transaction, plus (ii) the net
indebtedness as of the closing date of the Xmark Transaction,
which may be a positive or a negative number. While we do not
currently expect that any reduction in the $45 million will
be required as a result of these adjustments, there can be no
assurance that we will not have to return a portion of the
$45 million to Stanley as a result of these adjustments.
The
failure to complete the Xmark Transaction may result in a
decrease in the market value of our common stock and limit our
ability to grow and implement our current business
strategies.
The completion of the Xmark Transaction is subject to a number
of contingencies, including approval by our stockholders and
other customary closing conditions. As a result, we cannot
assure you that the Xmark Transaction will be completed. If the
Xmark Transaction is not completed for any other reason, the
market price of our common stock may decline. In addition,
failure to complete the Xmark Transaction may substantially
limit our ability to grow and implement our current business
strategies.
We
will be unable to compete with Xmarks business for four
years from the date of closing.
We have agreed that, for a period of four years after the
closing of the Xmark Transaction, we will not (i) directly
or indirectly participate with, control or own an interest in
any entity that is engaged in the business of manufacturing,
selling, financing, supplying, marketing or distributing infant
security systems, wander prevention systems, asset/personnel and
identification systems, and vibration monitoring instruments
anywhere in the world or (ii) solicit, induce, encourage or
attempt to persuade any employee of Xmark to terminate his or
her employment relationship with Xmark, or offer to hire any
Xmark employee. Our remaining business, the VeriMed Health Link
business, is not deemed to compete with Xmarks business.
However, the non-compete provisions will restrict our ability to
engage in any business that competes with Xmarks business
for four years from the date of closing.
Although
our board of directors may, subject to compliance with the terms
of the Stock Purchase Agreement, terminate the Stock Purchase
Agreement in order to accept an unsolicited superior acquisition
proposal, the requirement that we pay a termination fee in order
to accept such a proposal may discourage the making of any such
proposal.
Our board of directors may, subject to compliance with the terms
of the Stock Purchase Agreement, terminate the Stock Purchase
Agreement in order to accept an unsolicited superior proposal.
However, the
15
requirement that we pay Stanley a termination fee of $1,500,000
in certain circumstances in order to accept an unsolicited
superior proposal may operate to discourage third-parties from
making any such proposal. For more information on termination
provisions in the Stock Purchase Agreement, see
Proposal No. 1 The Xmark Transaction
The Stock Purchase Agreement
Termination and Proposal No. 1
The Xmark Transaction The Stock Purchase
Agreement Termination Fee and Expenses below.
The
initial, special cash dividend to our stockholders could be
delayed depending on certain factors, including when the funds
are released from the Canadian escrow.
In the event we consummate the Xmark Transaction, and subject to
compliance with Delaware law, we intend to use a portion of the
proceeds to fund an initial, special cash dividend to our
stockholders, the amount of which is currently estimated to be
in the range of $1.25 to $1.35 per share of VeriChip common
stock. However, the actual amount may be lower than this range
due to uncertainties regarding the ultimate amount of our
liabilities following the Xmark Transaction. In addition,
although we anticipate paying out the initial, special cash
dividend sometime in the third quarter of 2008, payment could be
delayed depending on if and when the funds are released from the
Section 116 escrow agreement. Due to Canadian withholding
tax procedures, it is likely that our receipt of a portion of
the purchase price may be delayed while we await a clearance
certificate from the Minister of National Revenue (Canada). If
we are unable to obtain the clearance certificate prior to
closing, the withheld amount will be held in escrow and provided
that, before the 29th day following the end of the month in
which the closing of the Xmark Transaction occurs, we either
(1) obtain the clearance certificate or (2) a letter
from the CRA authorizing the escrow agent to continue to hold
the funds in the trust account, the withheld amount will be
released to us after receipt by the escrow agent of the
clearance certificate. If the escrow agent does not receive
either items (1) or (2) above within this timeframe,
the escrow agent will remit the withheld amount to the Receiver
General of Canada. Additionally, if we are not successful in
obtaining the clearance certificate, or if it is determined that
all or a portion of the withheld amount is owed to the Canadian
government, which we do not believe it will be, the amount of
the initial special cash dividend may be less than we originally
anticipated.
Assuming
that we consummate the Xmark Transaction, we currently intend to
fund a second, special cash dividend to our stockholders, the
amount and timing of which are subject to
uncertainties.
We currently intend to fund a second, special cash dividend to
our stockholders consisting of all of the remaining
distributable cash that we hold following any sale of our
VeriMed Health Link business or VeriChip in its entirety, as
well as the release of the funds escrowed in connection with the
Stock Purchase Agreement. In connection with such sale, other
transaction and release of escrow, uncertainties as to the
ultimate amount of claims, liabilities, operational expenses,
and the related timing for completion of any such sale make it
impossible to predict with certainty the actual net cash amount
that will ultimately be available for distribution to
VeriChips stockholders or the timing of a second, special
cash dividend. We anticipate paying out any second, special cash
dividend sometime after the first anniversary of the closing of
the Xmark Transaction. Claims, liabilities and operational
expenses (such as operating costs, salaries, directors and
officers insurance, payroll and local taxes, insurance,
payroll taxes, rent, utilities, claims processing fees, legal
and accounting fees and miscellaneous office expenses) will
continue to be incurred as we seek to close such a sale. In
addition, any unexpected claims, liabilities or expenses could
reduce the amount of cash available for ultimate distribution to
VeriChip stockholders. If available cash and amounts received
from any such sale or the release of the escrow are not adequate
to provide for our obligations, liabilities, expenses and
claims, we may not be able to distribute any cash to our
stockholders in the form of a second, special cash dividend.
Our
assumptions regarding the state, provincial and federal
consequences of the transaction may be inaccurate.
The proposed Xmark Transaction will be a taxable transaction to
us for U.S. federal income tax purposes. We do not expect
that the Xmark Transaction will result in Canadian federal
income tax consequences to our stockholders. If the Xmark
Transaction is completed, we will realize gain with respect to
our Xmark stock equal to the difference between the proceeds
received by us on such sale and our tax basis in the stock sold.
16
For purposes of calculating the amount of our tax gain, the
proceeds received by us will include the cash received, and any
other consideration we receive for our Xmark stock. We do not
believe, however, that there will be material tax payable by us.
Subject to the completion and outcome of certain tax analyses
currently in process, we believe we have sufficient usable net
operating losses to offset a majority of the income or gain
recognized by us for regular federal income tax
purposes as a result of the Xmark Transaction. We also expect
the Xmark Transaction will not generate a significant federal
alternative minimum tax liability. Therefore, we will not set
aside any material amounts of cash specifically for the payment
of any tax liability. These analyses include studies to assess
the potential impact of ownership changes on VeriChips net
operating losses under Internal Revenue Code Section 382.
We may also be subject to state income taxes to the extent that
gains exceed losses for state tax law purposes, but we do not
estimate that such taxes will be significant. However, there can
be no assurance that the Internal Revenue Service or relevant
state tax authorities will ultimately assent to our tax
treatment of the Xmark Transaction or the net operating losses.
To the extent the Internal Revenue Service or any relevant state
tax authorities ultimately prevail in re-characterizing the tax
treatment of the Xmark Transaction or the net operating losses,
there may be adverse tax consequences to us and our
stockholders, including that we could owe income taxes on up to
the entire purchase price and our common stockholders would not
receive an initial, special cash dividend or be required to
return any dividends they have received.
Our
executive officers, directors and stockholder of approximately
48.6% of our stock will receive compensation in addition to the
benefits they receive as stockholders due to the Xmark
Transaction.
Our executive officers, directors and 48.6% stockholder have
interests in the Xmark Transaction other than, or in addition
to, their interests as VeriChip stockholders generally. See
Proposal No. 1 The Xmark Transaction
Interests of Certain Persons in the Xmark
Transaction on page 49.
Industry
and Business Risks Relating to VeriChip if Xmark is
Sold
Our
business following the sale of Xmark will be entirely dependent
on the success of our VeriMed Health Link business, which in
2007 represented less than 1% of our gross sales.
After the closing of the Xmark Transaction, we will be
substantially smaller and have limited assets and revenue.
Accordingly, our focus will be on the sale of our remaining
business, the VeriMed Health Link business, which, as of
December 31, 2007, has generated only nominal revenues. For
the year ended December 31, 2007, our VeriMed Health Link
business accounted for less than 1% of our total revenues and
approximately 19% of our total operating expenses. Our net sales
for the foreseeable future will be substantially lower than they
are currently. We do not expect to generate more than nominal
revenue from our VeriMed Health Link business over the next 12
to 18 months, and we cannot assure you that our VeriMed
Health Link business will achieve profitability in the near
term. Our VeriMed Health Link business generated gross sales of
$76,000 in 2007 and $3,000 in the first quarter of 2008. If we
are not able to sell our VeriMed Health Link business, our
results of operations and financial condition could be
materially adversely affected, and our board of directors will
have to evaluate strategic alternatives available to us. Such
alternatives may include, among other things, the sale of the
entire company, restructuring, the distribution of assets to our
stockholders, or the possible dissolution of us and liquidation
of our assets, the discharge of any remaining liabilities, and
the eventual distribution of the remaining assets to our
stockholders in the event we are liquidated.
Loss
of key employees and key board members could hurt our
business.
We depend on a number of key executives. The loss of services of
any of our key executives could have a material adverse effect
on our business. In connection with the Xmark Transaction, on
May 15, 2008, we entered into a separation agreement, with
Scott R. Silverman, our chairman and chief executive officer,
which provides that upon the closing of the Xmark Transaction,
Mr. Silvermans employment will be constructively
terminated without cause. Mr. Silverman has also agreed to
resign from our board of directors upon the closing of the Xmark
Transaction.
17
We
will continue to incur the expenses of complying with public
company reporting requirements.
We have an obligation to continue to comply with the applicable
reporting requirements of the Exchange Act, which includes the
filing with the SEC of periodic reports, proxy statements and
other documents relating to our business, financial conditions
and other matters, even though compliance with such reporting
requirements is economically burdensome.
Risks
Related to Our VeriMed Health Link Business Which Utilizes the
Implantable Microchip
We are
endeavoring to create a market for our VeriMed Health Link
system. We may never achieve market acceptance or significant
sales of this system.
We have been in the process of endeavoring to create a market
for our VeriMed Health Link system since the U.S. Food and
Drug Administration, or FDA, cleared the VeriMed Health Link
system for use for patient identification and health information
purposes in October 2004. Through December 31, 2007, we had
generated nominal revenue from sales of the microchip inserter
kits. We may never achieve market acceptance or more than
nominal or modest sales of this system.
We attribute the modest number of people who, through
June , 2008, have undergone the microchip implant
procedure to the following factors:
|
|
|
|
|
Many people who fit the profile for which the VeriMed Health
Link system was designed may not be willing to have a microchip
implanted in their upper right arm.
|
|
|
|
Physicians may be reluctant to discuss the implant procedure
with their patients until a greater number of hospital emergency
rooms have adopted the VeriMed Health Link system as part of
their standard protocol.
|
|
|
|
Physicians may be reluctant to discuss the implant procedure
with their patients because of the cost to their patients.
|
|
|
|
The media has from time to time reported, and may continue to
report, on the VeriMed Health Link system in an unfavorable and,
on occasion, an inaccurate manner. For example, there have been
articles published asserting, despite at least one study to the
contrary, that the implanted microchip is not magnetic resonance
imaging, or MRI, compatible. There have also been articles
published asserting, despite numerous studies to the contrary,
that the implanted microchip causes malignant tumor formation in
laboratory animals.
|
|
|
|
Privacy concerns may influence individuals to refrain from
undergoing the implant procedure or dissuade physicians from
recommending the VeriMed Health Link system to their patients.
Misperceptions that a microchip-implanted person can be
tracked and that the microchip itself contains a
persons basic information, such as name, contact
information, and personal health records, may contribute to such
concerns.
|
|
|
|
Misperceptions
and/or
negative publicity may prompt legislative or administrative
efforts by politicians or groups opposed to the development and
use of human-implantable RFID microchips. In 2006 and 2007, a
number of states introduced, and at least three states
(Wisconsin, California and North Dakota) have enacted,
legislation that would prohibit any requirement that an
individual undergo a microchip-implant procedure. While we
support all pending and enacted legislation that would preclude
anything other than voluntary implantation, legislative bodies
or government agencies may determine to go further, and their
actions may have the effect, directly or indirectly, of
delaying, limiting or preventing the use of human-implantable
RFID microchips or the sale, manufacture or use of RFID systems
utilizing such microchips.
|
|
|
|
At present, the cost of the microchip implant procedure is not
covered by Medicare, Medicaid or private health insurance.
|
|
|
|
At present, no studies to assess the impact of the VeriMed
Health Link system on the quality of emergency department care
have been completed and publicly released.
|
18
In light of these factors, we have retained the investment
banking firm of Kaufman Bros., L.P. to assist in the sale of our
VeriMed Health Link business
and/or
another transaction through which the remaining assets of
VeriChip would be acquired by, or combined with, a third party.
If we are unable to sell the VeriMed Health Link business, our
board will have to evaluate other possible alternatives for
VeriChip, which may include, among other things, the sale of the
entire company, restructuring, the distribution of assets to our
stockholders, or the possible dissolution of us and liquidation
of our assets, the discharge of any remaining liabilities, and
the eventual distribution of the remaining assets to our
stockholders in the event we are liquidated.
We
believe that sales of our implantable microchip, and the extent
to which our VeriMed Health Link system achieves market
acceptance, will depend, in part, on the availability of
insurance reimbursement from third-party payers, including
federal and state governments under programs, such as Medicare
and Medicaid, and private insurance plans. Insurers may not
determine to cover the cost of the implant procedure, or it may
take a considerable period of time for this to
occur.
We believe that sales of our implantable microchip, and the
extent to which our VeriMed Health Link system achieves market
acceptance, will depend, in part, on the availability of
insurance reimbursement from third-party payers, including
federal and state government programs, such as Medicare and
Medicaid, private health insurers, managed care organizations
and other healthcare providers. Both governmental and private
third-party payers are increasingly challenging the coverage and
prices of medical products and services, and require proven
efficacy and cost effectiveness for reimbursement. If patients
undergoing the microchip implant procedure, or health
institutions and doctors using the VeriMed Health Link system,
are not able to obtain adequate reimbursement for the cost of
using these products and services, they may forego or reduce
their use. While we are in the process of facilitating and, in
one case, funding clinical studies that may demonstrate the
efficacy of the VeriMed Health Link system, which we believe
will make it more likely that government and private insurers
will cover the cost of the microchip implant process, it may
take a considerable period of time for this to occur, if, in
fact, it does occur. If government and private insurers do not
determine to reimburse the cost of the implant process, we would
not expect to realize the anticipated level of future sales of
our implantable microchip and the database subscription fees.
Our
sales of systems that incorporate our implantable microchip may
be enjoined by third parties who may have rights to the
intellectual property used in these systems and we may be
required to pay damages which would have an adverse effect on
our business.
We may face a claim that we are violating the intellectual
property rights of one or more third parties with respect to
U.S. Patent No. 5,211,129, Syringe-Implantable
Identification Transponders. If such a claim is
successful, we could be required to cease engaging in activities
to market our systems that utilize the implantable microchip and
to pay damages, which may be substantial.
We obtain the implantable microchip used in our VeriMed Health
Link system from a wholly-owned subsidiary of Digital Angel,
under the terms of a supply agreement. Digital Angel, in turn,
obtains the implantable microchip from a subsidiary of Raytheon
Company under a separate supply agreement. The technology
underlying our VeriMed Health Link system is covered, in part,
by U.S. Patent No. 5,211,129. In 1994, Destron/IDI,
Inc., a predecessor company to Digital Angel Corporation,
granted a co-exclusive license under this patent, other than for
certain specified fields of use retained by the predecessor
company, to Hughes Aircraft Company, or Hughes, and its then
wholly-owned subsidiary, Hughes Identification Devices, Inc., or
HID. The specified fields of use retained by the predecessor
company do not include human identification and security
applications. The rights licensed in 1994 to Hughes and HID were
freely assignable, and we do not know which party or parties
currently have these rights or whether these rights have been
assigned, transferred or conveyed to any third party. We source
the implantable microchip indirectly from a subsidiary of
Raytheon Company, with which Hughes, then known as HE Holdings,
Inc. was merged in 1997. However, we have no documentation that
establishes our right to use the patented technology for human
identification and security applications. Hughes, HID, any of
their respective successors in interest, or any party to whom
any of the foregoing parties may have assigned its rights under
the 1994 license agreement may commence a claim against us
asserting that we are violating its rights.
19
In October 2007, Digital Angel and the successor to HID executed
a cross-license which includes Digital Angel obtaining a royalty
free non-exclusive license to HIDs rights to the
implantable human applications of the 129 patent, for
which it purports certain ownership rights to. Digital Angel
has, in turn, sublicensed those rights to us. If such a claim is
successful, sales of our VeriMed Health Link system could be
enjoined, and we could have been required to cease our efforts
to create a market for these systems, until the patent expired
in April 2008. In addition, we could be required to pay damages,
which may be substantial. Regardless of whether any claimant is
successful, we would face the prospect of the expenditure of
funds in litigation, the diversion of management time and
resources, damage to our reputation and the potential impairment
in the marketability of our systems even after the expiration of
the patent, which could harm our business and negatively affect
our prospects.
Even
if our VeriMed Health Link system achieves some level of market
acceptance, the anticipated significant and growing recurrent
revenue from microchip-implanted persons subscribing to
our database may not be realized.
Our business model envisages that our VeriMed Health Link system
will achieve some level of penetration within our target market
for such system: the approximately 45 million at-risk
people in the U.S. with cognitive impairment, chronic
diseases and related conditions, or implanted medical devices.
The model also anticipates our deriving significant and growing
recurrent revenue from subscriptions to our database by persons
implanted with our microchip. However, a person implanted with
our microchip may decide not to subscribe to our database if,
for example, the hospital emergency room where he or she would
most likely be taken in an emergency maintains its own database.
We do not currently anticipate that a significant percentage of
VeriMed-adopting hospitals and other healthcare facilities will
choose to provide databases for this purpose. However, future
regulatory changes, such as in connection with the
U.S. governments efforts to address inefficiencies in
the U.S. healthcare system related to information
technology, could spur hospitals and other healthcare facilities
to establish systems to maintain electronic health records. This
might have the effect of reducing the number of people implanted
with our microchip who might otherwise subscribe to our database
which could, in turn, negatively affect the future revenue that
we anticipate we will derive from the VeriMed Health Link system.
Currently, individuals implanted with our microchip take
responsibility for inputting all of their information into our
database, including personal health records, as physicians
currently have little interest in being involved in this
process primarily because of liability concerns and
because they are generally not paid for this service. Over time,
we envision that persons implanted with our microchip may
prevail upon their physicians to assist them with the inputting
of information for which, by virtue of their medical training,
physicians are better equipped to handle. If this does not
occur, emergency room personnel and emergency medical
technicians may lack confidence in the accuracy and completeness
of implanted persons personal health records in the
database. This could negatively affect the revenue we anticipate
we will derive in the future from the VeriMed Health Link
system. We obtain the implantable microchip used in our VeriMed
Health Link system from a single supplier, making us vulnerable
to increased
per-unit
costs of production of the microchip.
At present, Digital Angel is our sole supplier of our
implantable microchip under the terms of an agreement we entered
into with Digital Angel in December 2005. Digital Angel, in
turn, sources the microchip from Raytheon Microelectronics
España, or RME, the actual manufacturer, under a supply
agreement between Digital Angel and RME. The term of that
agreement expires on June 30, 2010, subject to earlier
termination by either party if, among other things, the other
party breaches the agreement and does not remedy the breach
within 30 days of receiving notice. Digital Angel and RME
each own certain of the automated equipment and tooling used in
the manufacture of the microchip. Accordingly, it would be
difficult for Digital Angel to arrange for a third party other
than RME to manufacture the implantable microchip if for any
reason RME was unable to manufacture the implantable microchip
or RME did not manufacture sufficient implantable microchips for
Digital Angel to satisfy our requirements. Even if Digital Angel
were able to arrange to have the implantable microchip
manufactured in another facility, we currently believe making
such arrangements
20
and commencement of production could take at least three to six
months. In addition, the
per-unit
cost of production at another facility could be more than the
price per unit we pay to Digital Angel.
If we
do not meet the minimum purchase requirements under our
agreement with Digital Angel, Digital Angel may sell implantable
microchips for secure human identification applications to third
parties. Our loss of this exclusive supply arrangement may
result in our facing competition with respect to our implantable
microchip-based systems, which could have a material adverse
effect on the expected growth of our business.
Our agreement with Digital Angel, under which we source our
implantable microchip, includes a provision that Digital Angel
may not sell to parties other than us and our resellers the
implantable microchips, as well as the reader equipment, for
secure human identification applications, provided we meet
specified minimum purchase requirements. If we do not meet the
minimum purchase requirements, Digital Angel is free to sell to
other parties implantable microchips for secure human
identification applications.
The minimum purchase requirements for implantable microchips
under the agreement are as follows:
|
|
|
|
|
|
|
Minimum
|
|
|
|
Purchase
|
|
Year
|
|
Requirement
|
|
|
2007
|
|
$
|
0
|
|
2008
|
|
$
|
875,000
|
|
2009
|
|
$
|
1,750,000
|
|
2010
|
|
$
|
2,500,000
|
|
2011 and thereafter
|
|
$
|
3,750,000
|
|
For the years ended December 31, 2007, 2006 and 2005, the
aggregate amount of our purchases under our agreement with
Digital Angel were nil, $0.4 million and $0.7 million,
respectively. We do not expect to meet the minimum purchase
requirements this year.
If we lose the benefit of the exclusivity provision under our
agreement with Digital Angel, we may face competition in the
various target markets for our systems that use our implantable
microchip, such as VeriMed Health Link, or face such competition
at an earlier point in time than might otherwise have been the
case, which could negatively affect our revenue, cash flows from
operations, operating margins and profitability, as well as our
growth prospects.
If
Digital Angel were to terminate its agreement with us, we would
not be able to obtain our implantable microchip. This would make
it difficult to fulfill our expectations for future revenue and
revenue growth from the sale of systems that use the implantable
microchip.
Provided we meet our minimum purchase requirements, our
agreement with Digital Angel is scheduled to remain in force
until the last of the patents covering the supplied products
expire. However, Digital Angel can terminate the agreement upon
the occurrence of any of the following events:
|
|
|
|
|
our default in the performance of any of our obligations under
the agreement (e.g., our failure to take delivery and pay for
products) that is not cured within 90 days of receiving
written notice of the default;
|
|
|
|
either party to the agreement filing a petition in
bankruptcy; or
|
|
|
|
a petition in bankruptcy is filed against us and is not
discharged within 30 days.
|
If the agreement were to be terminated, we would not be able to
purchase our implantable microchip from Digital Angel. Further,
if the termination occurred while the patents covering our
implantable microchip remain in force, we could not obtain
implantable microchips for secure human identification
applications from any other source. As a result, we would not be
able to sell our VeriMed Health Link system or any other
products that incorporate our implantable microchip. This would
make it difficult for us to fulfill our expectations of future
revenue and revenue growth from sales of such systems.
21
Implantation
of our implantable microchip may be found to cause risks to a
persons health, which could adversely affect sales of our
systems which incorporate the implantable
microchip.
The implantation of our implantable microchip may be found, or
be perceived, to cause risks to a persons health.
Potential or perceived risks include adverse tissue reactions,
migration of the microchip and infection from implantation.
There have been articles published asserting, despite numerous
studies to the contrary, that the implanted microchip causes
malignant tumor formation in laboratory animals. As more people
are implanted with our implantable microchip, it is possible
that these and other risks to health will manifest themselves.
Actual or perceived risks to a persons health associated
with the microchip implantation process could constrain our
sales of the VeriMed Health Link system or result in costly and
expensive litigation. Further, the potential resultant negative
publicity could damage our business reputation, leading to loss
in sales of our other systems targeted at the healthcare market
which would harm our business and negatively affect our
prospects.
If we
are required to effect a recall of our implantable microchip,
our reputation could be materially and adversely affected and
the cost of any such recall could be substantial, which could
adversely affect our results of operations and financial
condition.
From time to time, implanted devices have become subject to
recall due to safety, efficacy, product failures or other
concerns. To date, we have not had to recall any of our
implantable microchips. However, if, in the future, we are
required to effect such a recall, the cost of the recall, and
the likely related loss of system sales, could be substantial
and could materially and adversely affect our results of
operations and financial condition. In addition, any such recall
could materially adversely affect our reputation and our ability
to sell our systems that make use of the implantable microchip
which would harm our business and negatively affect our
prospects.
Interruptions
in access to, or the hacking into, our VeriMed Health Link
patient information database may have a negative impact on our
revenue, damage our reputation and expose us to
litigation.
Reliable access to the VeriMed Health Link patient information
database is a key component of the functionality of our VeriMed
Health Link system. Our ability to provide uninterrupted access
to the database, whether operated by us or one or more third
parties with whom we contract, will depend on the efficient and
uninterrupted operation of the computer and communications
systems involved. Although certain elements of technological,
power, communications, personnel and site redundancy are
maintained, the database may not be fully redundant. Further,
the database may not function properly if certain necessary
third-party systems fail, or if some other unforeseen act or
natural disaster should occur. In the past, we have experienced
short periods during which the database was inaccessible as a
result of development work, system maintenance and power
outages. Any disruption of the database services, computer
systems or communications networks, or those of third parties
that we rely on, could result in the inability of users to
access the database for an indeterminate period of time. This,
in turn, could cause us to lose the confidence of the healthcare
community and persons who have undergone the microchip implant
procedure, resulting in a loss of revenue and possible
litigation.
In addition, if the firewall software protecting the information
contained in our database fails or someone is successful in
hacking into the database, we could face damage to our business
reputation and litigation.
Regulation
of products and services that collect personally-identifiable
information or otherwise monitor an individuals activities
may make the provision of our services more difficult or
expensive and could jeopardize our growth
prospects.
Certain technologies that we currently, or may in the future,
support are capable of collecting personally-identifiable
information. A growing body of laws designed to protect the
privacy of personally-identifiable information, as well as to
protect against its misuse, and the judicial interpretations of
such laws, may adversely affect the growth of our business. In
the U.S., these laws include the Health Insurance Portability
and Accountability Act, or HIPAA, the Federal Trade Commission
Act, the Electronic Communications Privacy Act, the Fair Credit
Reporting Act, and the Gramm-Leach-Bliley Act, as well as
various state laws
22
and related regulations. Although we are not a covered entity
under HIPAA, we have entered into agreements with certain
covered entities in which we are considered to be a
business associate under HIPAA. As a business
associate, we are required to implement policies, procedures and
reasonable and appropriate security measures to protect
individually identifiable health information we receive from
covered entities. Our failure to protect health information
received from customers could subject us to liability and
adverse publicity, and could harm our business and impair our
ability to attract new customers.
In addition, certain governmental agencies, like the
U.S. Department of Health and Human Services and the
Federal Trade Commission, have the authority to protect against
the misuse of consumer information by targeting companies that
collect, disseminate or maintain personal information in an
unfair or deceptive manner. We are also subject to the laws of
those foreign jurisdictions in which we operate, some of which
currently have more protective privacy laws. If we fail to
comply with applicable regulations in this area, our business
and prospects could be harmed.
Certain regulatory approvals generally must be obtained from the
governments of the countries in which our foreign distributors
sell our systems. However, any such approval may be subject to
significant delays or may not be obtained. Any actions by
regulatory agencies could materially and adversely affect our
growth plans and the success of our business.
If we
fail to comply with anti-kickback and false claims laws, we
could be subject to costly and time-consuming litigation and
possible fines or other penalties.
We are, or may become subject to, various federal and state laws
designed to address healthcare fraud and abuse, including
anti-kickback laws and false claims laws. The federal
anti-kickback statute prohibits the offer, payment, solicitation
or receipt of any form of remuneration in return for referring
items or services payable by Medicare, Medicaid or any other
federally-funded healthcare program. This statute also prohibits
remuneration in return for purchasing, leasing or ordering or
arranging, or recommending the purchasing, leasing or ordering,
of items or services payable by Medicare, Medicaid or any other
federally-funded healthcare program. The anti-kickback laws of
various states apply more broadly to prohibit remuneration in
return for referrals of business payable by payers other than
federal healthcare programs.
False claims laws prohibit anyone from knowingly presenting, or
causing to be presented, for payment to third-party payers,
including Medicare and Medicaid, which currently do not provide
reimbursement for our microchip implant procedure, claims for
reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims
for medically unnecessary items or services. Our activities
relating to the reporting of wholesale or estimated retail
prices of our VeriMed Health Link system, the reporting of
Medicaid rebate information, and other information affecting
federal, state and third-party payment for the VeriMed Health
Link system, will be subject to scrutiny under these laws.
The anti-kickback statute and other fraud and abuse laws are
very broad in scope, and many of their provisions have not been
uniformly or definitively interpreted by existing case law or
regulations. Violations of the anti-kickback statute and other
fraud and abuse laws may be punishable by criminal
and/or
civil
sanctions, including fines and civil monetary penalties, as well
as the possibility of exclusion from federal healthcare
programs, including Medicare and Medicaid, which currently do
not provide reimbursement for our microchip implant procedure.
We have not been challenged by a governmental authority under
any of these laws and believe that our operations are in
compliance with such laws. However, because of the far-reaching
nature of these laws, we may be required to alter one or more of
our practices to be in compliance with these laws. Healthcare
fraud and abuse regulations are complex and even minor,
inadvertent irregularities in submissions can potentially give
rise to claims that the statute has been violated. If we are
found to have violated these laws, or are charged with violating
them, our business, financial condition and results of
operations could suffer, and our management team could be
required to dedicate significant time addressing the actual or
alleged violations.
23
PROPOSAL NO. 1
- THE XMARK TRANSACTION
Background
and Material Terms of the Proposed Xmark Transaction
Background
of the Proposed Xmark Transaction
We develop, market and sell radio frequency identification,
frequently referred to as RFID, systems used for the
identification, location and protection of people and assets in
the healthcare market.
Utilizing RFID technology, our healthcare security business
currently engages in marketing, selling and developing the
following products:
|
|
|
|
|
infant protection systems used in hospital maternity wards and
birthing centers to prevent infant abduction and mother-baby
mismatching;
|
|
|
|
wander prevention systems used by long-term care facilities to
locate and protect their residents; and
|
|
|
|
an asset/personnel location and identification system used by
hospitals and other healthcare facilities to identify, locate
and protect medical staff, patients, visitors and medical
equipment.
|
Our industrial business currently engages in marketing, selling
and developing the following product:
|
|
|
|
|
vibration monitoring instruments used by engineering,
construction and mining professionals to monitor the effects of
human-induced vibrations, such as blasting activity.
|
The businesses described above constitute our Xmark business.
Our VeriMed Health Link system, formerly known as the VeriMed
patient identification system, uses an implantable passive RFID
microchip that is used in patient identification applications.
Each implantable microchip contains a unique verification number
that is read when it is scanned by VeriChips scanner. In
October 2004, the FDA cleared our VeriMed Health Link system for
use in medical applications in the U.S.
As of December 31, 2007, we had an accumulated deficit of
$29.0 million and had incurred net losses of
$11.9 million, $6.7 million and $5.3 million for
the years ended December 31, 2007, December 31, 2006,
and December 31, 2005, respectively. As of March 31,
2008, we had an accumulated deficit of $31.8 million.
Scott R. Silverman, our chairman of the board and chief
executive officer, was first contacted by Stanley in late 2005,
at which time Stanley expressed an interest in the businesses
that later became Xmark. The parties did not pursue a
transaction at that time primarily due to the price being
offered by Stanley.
Between 2006 and 2007, the parties had periodic discussions,
initiated by Stanley, regarding the possibility of a
transaction, but no definitive agreement was ever reached.
In November 2007, Stanley again contacted Mr. Silverman,
advising him that it remained very interested in purchasing the
Xmark business but at a more reasonable price (based, in part,
on VeriChips current market capitalization) than
previously discussed. Mr. Silverman suggested that Stanley
consider buying the entire company.
An in-person meeting occurred on November 13, 2007 in New
York City between certain Stanley executives and
representatives, Mr. Silverman and our senior vice
president of operations to discuss the possible purchase by
Stanley of the Xmark business.
Thereafter, Stanley conducted due diligence on VeriChip and
subsequently advised us that it was not interested in purchasing
our VeriMed Health Link business. From that point in time
through January 2008, Stanley continued to express its interest
in purchasing the Xmark business from us.
On January 16, 2008, Stanley sent us and Digital Angel a
non-binding expression of interest, subject to satisfactory
completion of a full financial, operational and legal due
diligence, receipt of all internal approvals within Stanley, and
the execution of a definitive purchase agreement and all
necessary ancillary documents, including a voting agreement and
guarantee. In that expression of interest, Stanley indicated
that it expected to be in a position to offer a purchase price
for the assets specific to the Xmark business in the range of
24
$45 million cash, plus the assumption of liabilities
specific to the Xmark business (excluding all debt and debt-like
items). Stanley clarified that its interest was strictly limited
to the purchase of the Xmark business on a debt-free basis,
without any interim, implied, direct or indirect ownership or
assumption by Stanley of assets or liabilities other than those
of the Xmark business. The expression of interest was
accompanied by a letter agreement stipulating a
45-day
exclusivity period, to be executed by us and Digital Angel in
the event that such companies desired to continue discussing a
potential transaction with Stanley.
Between January 16, 2008 and January 23, 2008,
management determined that an asset sale was not advisable, due
to the significant tax liabilities associated with such
structure.
During a meeting on January 23, 2008, our board of
directors engaged in an extensive discussion regarding the
structural issues and value issues associated with the
contemplated sale of the Xmark business, as well as the
significant tax implications of an asset sale. Our board of
directors also discussed the fact that Digital Angel had agreed
to our exclusive negotiations with Stanley. Our board of
directors considered and reviewed, among other things:
(1) our market capitalization; (2) the amount of money
that was paid for the Xmark business at the time it was
acquired; (3) how the contemplated transaction would
facilitate our debt repayment to Digital Angel; (4) the
interest previously expressed by other companies in buying the
Xmark business; (5) the estimated amounts of
change-of-control payments due to management; (6) general
current economic, capital market and other conditions; and
(7) alternatives relating to our remaining business. Our
board of directors also considered issues that would arise in
connection with the contemplated sale, such as the need for a
fairness opinion, Stanleys desire that certain Xmark
employees remain with Xmark, and the need to negotiate stay
payments with certain Xmark employees.
After thorough discussions and extensive debate, our board of
directors determined that it was in our best interests and our
stockholders best interests that we enter into the
exclusivity letter with Stanley and accordingly authorized
William J. Caragol, our president, chief financial officer,
treasurer and secretary, to execute the exclusivity letter with
Stanley.
On January 24, 2008, Mr. Silverman sent a letter to
Stanley, along with a copy of the exclusivity letter signed by
both VeriChip and Digital Angel, clarifying that the sale to
Stanley would have to be a stock sale rather than an asset sale
due to the substantial tax liability to VeriChip if the sale
were structured as an asset sale.
Representatives of ours, Xmark and Stanley met in Ottawa, Canada
from February 13, 2008 through February 15, 2008 to
perform due diligence and discuss integration issues relating to
the businesses.
On February 21, 2008, our board of directors discussed the
fact that our management had previously met with a few other
potential suitors, all of which operated in the healthcare
industry, who had expressed an interest in a potential
acquisition of Xmark. Management advised the board that it had
provided each of the companies with certain requested financial
data but none of them was willing to pay as much as Stanley. The
board of directors also discussed its fiduciary duties in
connection with the contemplated sale. Our board of directors
resolved that it was in our best interest to proceed with the
contemplated sale, including, but not limited to, due diligence,
our participation in strategic and tactical discussions, and the
execution of a definitive purchase agreement.
In order to have sufficient working capital to operate through
2008, on February 29, 2008, we and Xmark closed an
$8.0 million debt financing with Valens Offshore SPV II,
Corp., or Valens Offshore, pursuant to the terms of a Securities
Purchase Agreement, dated February 29, 2008, among
VeriChip, Xmark, Valens Offshore and LV Administrative Services,
Inc., as administrative and collateral agent, or the Financing
Arrangement. Under the terms of the Financing Arrangement,
Valens Offshore extended financing to us and Xmark in the form
of an $8.0 million secured term note. The note bears
interest at a rate of 12% per annum, and has a maturity date of
March 31, 2009. We used part of the proceeds of the
financing with Valens Offshore to pre-pay $5.3 million of
debt owed to Digital Angel.
Also on February 29, 2008, we, Stanley, and Digital Angel
amended the letter agreement dated January 16, 2008, to
extend the
45-day
exclusivity period through March 31, 2008.
25
On March 14, 2008, Stanley provided us with a proposed form
of Stock Purchase Agreement, voting agreement and guarantee. We
and Stanley negotiated the terms of the proposed Stock Purchase
Agreement, and Digital Angel and Stanley negotiated the terms of
the voting agreement and guarantee, over the following couple
months and exchanged numerous drafts of such agreements. Stanley
requested that Digital Angel and Mr. Silverman enter into a
voting agreement committing those stockholders to vote in favor
of the Xmark Transaction and against any competing transaction
for a period that would last until approval of the Stock
Purchase Agreement or eighteen months following termination of
the Stock Purchase Agreement. We refer to this period as the
tail period.
Representatives of ours, Xmark and Stanley met in Lincoln,
Nebraska on March 25, 2008 and March 26, 2008 to
discuss the integration of the businesses, and the
representatives continued to discuss the terms of the Stock
Purchase Agreement and the voting agreements on subsequent
conference calls.
On March 17, 2008, the board of directors engaged Merriman
to act as a financial advisor to us with respect to rendering a
fairness opinion in connection with the contemplated sale.
On April 4, 2008, the board of directors reviewed open
business points in connection with the contemplated sale, as
well as post-transaction alternatives. Specifically, after
completing the sale of the Xmark business, paying off
VeriChips principal creditors (i.e., Digital Angel and
Valens Offshore) and distributing an initial, special cash
dividend to VeriChips stockholders pro rata, it considered
other possible strategic alternatives.
On April 17, 2008, the board of directors engaged Kaufman
Bros., L.P. as its exclusive financial advisor and exclusive
agent in connection with identifying, contacting and introducing
a party who would be interested in entering into a business
transaction with VeriChip, through which our VeriMed Health Link
business
and/or
the
remaining assets of VeriChip would be acquired by, or combined
with, a third party.
On the same day, Merriman met telephonically with our board of
directors to give an update, based on Merrimans analysis,
regarding its ongoing analysis of the fairness of the Xmark
Transaction to us from a financial point of view.
During a number of meetings in April 2008, the compensation
committee considered certain payments due to Mr. Silverman,
in connection with the Xmark Transaction, under his employment
agreement. On April 29, 2008, the compensation committee
determined that it was in the best interests of VeriChip and the
VeriChip stockholders to enter into a separation agreement with
Mr. Silverman, which would clarify that
Mr. Silvermans employment will eventually be
terminated without cause upon the closing of the Xmark
Transaction, as well as the amounts due to Mr. Silverman
upon the closing of the Xmark Transaction. The compensation
committee accordingly authorized Mr. Caragol to execute
such agreement.
On May 14, 2008, Merriman met telephonically with our board
of directors to render its oral opinion, which confirmed its
written opinion dated May 13, 2008, attached to this proxy
statement as
Appendix G
, that, as of the date of the
written opinion, based upon and subject to certain assumptions,
qualifications, limitations and factors described in
Merrimans opinion, the purchase price to be received by us
in connection with the Xmark Transaction was fair, from a
financial point of view.
During various meetings throughout March, April and May 2008,
our board of directors discussed progress made with respect to,
and open items in connection with, the Stock Purchase Agreement
with Stanley. In addition, during various meetings throughout
March, April and May 2008, we participated in meetings with
Stanley and Digital Angel, in order to finalize the terms of the
voting agreements that Digital Angel and Mr. Silverman
entered into in connection with the Xmark Transaction, as well
as the guarantee that Digital Angel entered into in connection
with the Xmark Transaction. On or about May 1, 2008,
outside legal counsel for VeriChip, Digital Angel and Stanley
continued negotiations of the voting agreements and guarantee.
The parties agreed to reduce the length of the tail
period in applicable circumstances to
seven-and-a-half
months from Stanleys original proposal of eighteen months
and to allow Digital Angel and Mr. Silverman to vote
against the Xmark Transaction if our board of directors changes
its Board Recommendation.
26
From May 6, 2008 to May 13, 2008, we and Stanley had
several discussions to reach an agreement on the remaining open
issues and finalize the Stock Purchase Agreement and related
documents. On May 14, 2008, our board of directors approved
the Stock Purchase Agreement and the transactions contemplated
by the Stock Purchase Agreement.
In connection with the signing the Stock Purchase Agreement, we
and Digital Angel reached an agreement relating to, among other
things, Digital Angels ability to designate after the
closing of the Xmark Transaction three members to our board of
directors, the payment of $250,000 to Digital Angel as
consideration for the execution of the guarantee plus the
reimbursement of up to $250,000 for Digital Angels
expenses incurred in connection with the Xmark Transaction, and
Digital Angels right to access certain of our financial
information.
On May 15, 2008, the Stock Purchase Agreement was entered
into by the parties, and, later that day, we issued a press
release announcing the Xmark Transaction.
Our Plans
Following the Closing of the Proposed Xmark
Transaction
Assuming the special meeting is held as scheduled on
July , 2008, and in the event we consummate the Xmark
Transaction, and subject to compliance with Delaware law, we
intend to use a portion of the proceeds to fund an initial,
special cash dividend to our stockholders, the amount of which
is currently estimated to be in the range of $1.25 to $1.35 per
share of VeriChip common stock.
However, the actual amount may be lower than this range due to
uncertainties regarding the ultimate amount of our liabilities
following the Xmark Transaction. In addition, although we
anticipate paying out the initial, special cash dividend
sometime in the third quarter of 2008, payment could be delayed
depending on certain factors, including delays relating to the
release of the escrow required under Canadian law. Prior to
making the initial, special cash dividend, we will announce, at
least ten days in advance, the record date for such
distribution. Only holders of our common stock on the record
date for the initial, special cash dividend will be entitled to
receive the initial, special cash dividend. Please note that the
record date for the initial, special cash dividend will be after
the closing date of the Xmark Transaction and is different from
the record date for determining which holders of our common
stock are entitled to vote on the matters described in this
proxy statement.
After the closing of the Xmark Transaction, we will be
substantially smaller and have limited assets and revenue.
Accordingly, our focus will be on the sale of our remaining
business, the VeriMed Health Link business, which, as of
December 31, 2007, has generated only nominal revenues. For
the year ended December 31, 2007, our VeriMed Health Link
business accounted for less than 1% of our total revenues and
approximately 19% of our total operating expenses. Our net sales
for the foreseeable future will be substantially lower than they
are currently. We do not expect to generate more than nominal
revenue from our VeriMed Health Link business over the next 12
to 18 months, and we cannot assure you that our VeriMed
Health Link business will achieve profitability in the near
term. Our VeriMed Health Link business generated gross sales of
$76,000 in 2007 and $3,000 in the first quarter of 2008. In
addition, historically, we have relied on the earnings, cash
flow and assets of the Xmark business for liquidity and capital
requirements.
We have retained the investment banking firm of Kaufman Bros.,
L.P. to assist in the sale of our VeriMed Health Link business
and/or
another transaction through which the remaining assets of
VeriChip would be acquired by, or combined with, a third party.
In the event that we are not able to sell the VeriMed Health
Link business, our board of directors will continue to evaluate
strategic alternatives available to us. Such alternatives may
include, among other things, the sale of the entire company,
restructuring, the distribution of assets to our stockholders,
or the possible dissolution of us and liquidation of our assets,
the discharge of any remaining liabilities, and the eventual
distribution of the remaining assets to our stockholders in the
event we are liquidated.
We currently intend to fund a second, special cash dividend to
our stockholders consisting of all of the remaining
distributable cash that we hold following any sale of our
VeriMed Health Link business or VeriChip in its entirety, as
well as the release of the funds escrowed in connection with the
Stock Purchase Agreement.
27
The amount and timing of the second, special cash dividend will
depend on a number of factors, several of which cannot be
determined at this time, including:
|
|
|
|
|
the lapse of 12 months before $4.5 million of the
purchase price, which funds will be placed in escrow to secure
our indemnity obligations under the Stock Purchase Agreement,
are released;
|
|
|
|
the total proceeds of any sale of our VeriMed Health Link
business or VeriChip in its entirety;
|
|
|
|
the ultimate amount of the known, unknown and contingent debts
and liabilities for which we will remain responsible after such
sale;
|
|
|
|
the operating costs to support ongoing operations incurred
during the interim periods prior to closing, which are dependent
on the timing of such sale;
|
|
|
|
the costs to complete such sale, which are dependent on the
corresponding amount of total proceeds and time for
completion; and
|
|
|
|
if applicable, whether the purchaser of our VeriMed Health Link
business meets its obligations to perform and discharge those
obligations and liabilities of ours that it assumes in
connection with such sale.
|
Our
Reasons for the Proposed Xmark Transaction
Our board of directors determined that the proposed Xmark
Transaction is in the best interests of VeriChip and our
stockholders after considering a number of positive and negative
factors. The positive factors that our board of directors
considered included the following:
|
|
|
|
|
the proposed Xmark Transaction will enable our stockholders to
realize immediately a portion of the value of Xmark in cash.
Subject to compliance with Delaware law, we intend to use a
portion of the proceeds to fund an initial, special cash
dividend to our stockholders, the amount of which is currently
estimated to be in the range of $1.25 to $1.35 per share of
VeriChip common stock (subject to reduction due to uncertainties
regarding the ultimate amount of our liabilities following the
Xmark Transaction), to be made sometime in the third quarter of
2008;
|
|
|
|
we met with a few potential suitors regarding the potential sale
of Xmark. During this process, even though interest was
expressed in purchasing Xmark, none of the suitors was willing
to pay as much as Stanley, and none of the discussions with
these parties advanced beyond the preliminary stage;
|
|
|
|
our board of directors familiarity with and review of our
business, results of operations, financial condition, liquidity
and prospects, including, without limitation, our revenue and
earnings;
|
|
|
|
the consummation of the Xmark Transaction would facilitate our
debt repayment to Valens Offshore;
|
|
|
|
the consummation of the Xmark Transaction would give us the
financial means to pre-pay our loan obligations to Digital Angel
at a discount of approximately $2.5 million;
|
|
|
|
the likelihood that Stanley will be able to complete the
transactions contemplated by the Xmark Transaction;
|
|
|
|
the opinion of Merriman delivered orally on May 14, 2008,
which confirmed its written opinion dated May 13, 2008,
that, based upon and subject to certain assumptions,
qualifications, limitations and factors described in
Merrimans opinion, that the purchase price was fair, from
a financial point of view, to VeriChip;
|
|
|
|
the fact that we do not expect that the Xmark Transaction to
result in Canadian federal income tax consequences to our
stockholders;
|
|
|
|
the prices and premiums paid in comparable acquisition
transactions involving other similarly-situated companies;
|
|
|
|
a review of the Stock Purchase Agreement;
|
28
|
|
|
|
|
the general current economic, capital market and other
conditions;
|
|
|
|
our intent to fund a second, special cash dividend to our
stockholders consisting of all of the remaining distributable
cash then held by VeriChip following any sale of the VeriMed
Health Link business or VeriChip and the release of the escrowed
funds resulting from the sale of Xmark to Stanley; and
|
|
|
|
although the proposed Xmark Transaction will be a taxable
transaction to us for U.S. federal income tax purposes, as
a result of net operating loss carryforwards, the corresponding
taxes are expected to be immaterial.
|
Our board of directors also considered a number of potentially
negative factors in its deliberations concerning the proposed
Xmark Transaction, including the following:
|
|
|
|
|
if we complete the proposed Xmark Transaction, our VeriMed
Health Link business, which, as of December 31, 2007, has
generated only nominal revenues, will represent substantially
all of our business. For the year ended December 31, 2007,
our VeriMed Health Link business accounted for less than 1% of
our total revenues and approximately 19% of our total operating
expenses. As a result, our net sales for the foreseeable future
will be substantially lower than they are currently. In
addition, historically, we have relied on the earnings, cash
flow and assets of the Xmark business for liquidity and capital
requirements;
|
|
|
|
if we are unable to sell the VeriMed Health Link business, our
board will have to evaluate other possible alternatives for
VeriChip, which may include, among other things, the sale of the
entire company, restructuring, the distribution of assets to our
stockholders, or the possible dissolution of us and liquidation
of our assets, the discharge of any remaining liabilities, and
the eventual distribution of the remaining assets to our
stockholders in the event we are liquidated;
|
|
|
|
the cost of maintaining a business which has not yet achieved
market acceptance in a public company structure;
|
|
|
|
we will be responsible for certain pre-closing liabilities of
Xmark, such as pre-closing taxes and other excluded liabilities.
While we do not believe that these liabilities will be
significant, we may retain some portion of the proceeds of the
Xmark Transaction to pay for any of these liabilities that may
arise in the future;
|
|
|
|
we have agreed to indemnify Stanley against certain losses that
it may suffer arising out of Xmark. We do not anticipate that we
will be required to indemnify Stanley for any matters, but, if
we are forced to do so, it could have a material adverse impact
on our business by draining our available cash reserves;
|
|
|
|
the proposed Xmark Transaction is conditioned upon a number of
factors, including stockholder approval of the Stock Purchase
Agreement and the transactions contemplated by the Stock
Purchase Agreement. If we are unable to satisfy these conditions
and fail to complete the proposed Xmark Transaction as a result,
our business and results of operations may suffer because our
customers, as well as our employees and the employees of Xmark,
may question our commitment to Xmark;
|
|
|
|
under the terms of the Stock Purchase Agreement, we are not
permitted to solicit other offers to acquire Xmark. In addition,
if we receive an offer that is superior to the proposed Xmark
Transaction, we may not enter into a definitive written
acquisition agreement with respect to such superior proposal
unless (1) our board of directors determines, after
receiving the advice of its outside counsel and in good faith,
that it is reasonably necessary to do so to comply with the
boards fiduciary duties to our stockholders and
(2) we pay Stanley a termination fee of either $450,000 or
$1,500,000 (depending on the circumstances surrounding such
termination) concurrently with such termination;
|
|
|
|
our stockholders that have executed voting agreements, who
collectively represent a majority of the outstanding stock of
VeriChip, would be precluded from voting to approve (1) a
Superior Proposal, unless our board of directors changes its
Board Recommendation and (2) any other competing
|
29
|
|
|
|
|
proposal for a tail period of
seven-and-a-half
months, and the possibility that these facts might discourage
other parties that may otherwise have an interest in an
acquisition of Xmark from making a competing proposal; and
|
|
|
|
|
|
our stockholders will lose the opportunity to capitalize on any
potential future success of Xmark.
|
Our board of directors believed that certain of these negative
factors were unlikely to occur or unlikely to have a material
impact on us, while others could be avoided or mitigated by us,
and that, overall, the risks associated with the proposed Xmark
Transaction were outweighed by the potential benefits of the
Xmark Transaction.
The foregoing discussion of information and factors considered
by our board of directors is not intended to be all-inclusive.
In view of the wide variety of factors considered, our board of
directors did not find it practicable to quantify or otherwise
assign relative weight to the specific factors considered.
However, after taking into account all of the factors set forth
above, our board of directors unanimously determined that the
proposed Xmark Transaction is in the best interests of VeriChip
and VeriChip stockholders and that we should proceed with the
proposed Xmark Transaction.
Recommendation
of Our Board of Directors regarding the Proposed Xmark
Transaction
For the reasons described above, our board of directors
unanimously recommends the approval of the Stock Purchase
Agreement and the transactions contemplated by the Stock
Purchase Agreement and believes the sale of Xmark is advisable,
fair to, and in the best interests of VeriChips
stockholders.
Accordingly, our board of directors recommends that you vote
FOR the approval of the Stock Purchase Agreement and
the transactions contemplated by the Stock Purchase Agreement by
(1) using the toll-free number shown on your proxy card;
(2) visiting the website shown on your proxy card to vote
via the internet; (3) completing, signing, dating and
returning the enclosed proxy card in the enclosed postage-paid
envelope; (4) attending the special meeting and voting in
person; or (5) if your shares are held in street
name by your brokerage firm, bank, trust or other nominee,
instructing your brokerage firm, bank, trust or other nominee in
accordance with their procedures.
Information
about the Parties
VeriChip
We were formed as a Delaware corporation by Digital Angel in
November 2001. In January 2002, we began our efforts to create a
market for RFID systems that utilize our human implantable
microchip. Digital Angel owned over 90% of our stock as of
December 31, 2006. On February 14, 2007, we completed
our initial public offering in which we sold
3,100,000 shares of our common stock at $6.50 per share. As
of June 3, 2008, Digital Angel owned approximately 48.6% of
our common stock.
In March 2005, we acquired EXI Wireless Inc., a Canadian
corporation engaged through its subsidiaries in the business of
developing and marketing RFID systems for infant protection,
wander prevention and asset/personnel location and
identification for use within the healthcare industry, and asset
management systems used by industrial companies to manage and
track their mobile equipment and tools. Subsequent to the
acquisition, EXI Wireless was renamed VeriChip Holdings Inc., or
VHI. In June 2005, we acquired Instantel Inc., a Canadian
corporation engaged in the business of developing and marketing
RFID systems for infant protection, wander prevention, emergency
response and asset tracking within the healthcare industry, as
well as vibration monitoring instruments for the construction,
mining and commercial blasting industries. In January 2006, we
effected an amalgamation of Instantel and the former EXI
Wireless subsidiaries under Canadian law. The combined entities
operated as a wholly-owned subsidiary of VHI under the name
VeriChip Corporation, which in April 2007 was changed to Xmark.
On January 1, 2008, VHI and Xmark were amalgamated with
Xmark surviving.
We are primarily engaged in the development, marketing and sale
of RFID systems used to identify, locate and protect people and
assets. The healthcare industry represents the principal market
for our RFID
30
systems. In early 2007, we realigned our business into three
business segments: healthcare security, implantable, and
industrial.
Our healthcare security segment encompasses the development,
marketing and sale of our healthcare security and location
systems, specifically: (i) infant protection systems used
in hospital maternity wards and birthing centers to prevent
infant abduction and mother-baby mismatching; (ii) wander
prevention systems used by long-term care facilities to locate
and protect their residents; and (iii) an asset/personnel
location and identification system used by hospitals and other
healthcare facilities to identify, locate and protect medical
staff, patients, visitors and medical equipment. The principal
offering of our implantable segment is our VeriMed Health Link
system using the implantable microchip, a human-implantable RFID
microchip that can be used in a variety of patient
identification applications. Each implantable microchip contains
a unique verification number that is read when it is scanned by
our scanner. In October 2004, the FDA cleared our VeriMed Health
Link system for use in medical applications in the U.S. Our
industrial segment encompasses the sale of vibration monitoring
instruments used by engineering, construction and mining
professionals to monitor the effects of human-induced
vibrations, such as blasting activity.
Our principal executive offices are located at VeriChip
Corporation, 1690 South Congress Avenue, Suite 200, Delray
Beach, Florida 33445, and our telephone number is
(561) 805-8008.
Stanley
Stanley is a diversified worldwide supplier of tools and
engineered solutions for professional, industrial, construction,
and do-it-yourself, or DIY, use, as well as engineered solutions
and security solutions for industrial and commercial
applications. Its operations are classified into three business
segments: Construction & DIY, or CDIY, Industrial and
Security. The CDIY segment manufactures and markets hand tools,
storage systems, fasteners, and electronic leveling and
measuring tools, as these products are principally utilized in
construction and do-it-yourself projects. These products are
sold primarily to professional end users and distributed through
retailers (including home centers, mass merchants, hardware
stores, and retail lumber yards). The Industrial segment
manufactures and markets: professional mechanics and storage
systems, plumbing, heating, air conditioning and roofing tools,
assembly tools and systems, hydraulic tools and specialty tools
(Stanley supply and services). These products are sold to
industrial customers and distributed primarily through
third-party distributors, as well as direct sales forces. The
Security segment is a provider of access and security solutions
primarily for retailers, educational, financial and healthcare
institutions, as well as commercial, governmental and industrial
customers. Stanley provides an extensive suite of mechanical and
electronic security integration systems, software, related
installation, maintenance, and a variety of security services,
including security monitoring services, electronic integration
systems, software, related installation and maintenance
services, automatic doors, door closers, exit devices, hardware
and locking mechanisms.
For several years, Stanley has pursued a diversification
strategy to enable profitable growth. The strategy involves
industry, geographic and customer diversification, as
exemplified by the expansion of security solution product
offerings, the growing proportion of sales outside the U.S., and
the deliberate reduction of Stanleys dependence on sales
to U.S. home centers and mass merchants. Execution of this
strategy has entailed approximately $2.2 billion of
acquisitions since the beginning of 2002, several divestitures,
and increased brand investments. Additionally, the strategy
reflects managements vision to build a growth platform in
security while expanding the valuable branded tools platform.
Over the past several years, Stanley has generated strong free
cash flow and received substantial proceeds from divestitures
that enabled a transformation of the business portfolio. Stanley
is a Connecticut corporation, and its principal executive
offices are located at The Stanley Works, 1000 Stanley Drive,
New Britain, Connecticut 06053.
The Stock
Purchase Agreement
On May 15, 2008, we entered into the Stock Purchase
Agreement with Stanley, pursuant to which we will, subject to
certain terms and conditions, including approval by our
stockholders at the special meeting, sell all of our shares of
Xmark. As consideration for the Xmark Transaction, Stanley will
assume only certain of Xmarks liabilities and will pay us
approximately $45 million in cash at the closing of the
Xmark
31
Transaction. In addition, within sixty calendar days following
the closing of the Xmark Transaction, and depending whether the
calculation yields a positive or a negative number, Stanley or
we will pay an additional amount to the other party, which we
refer to as the aggregate adjustment, equal to the
sum (i.e., an amount which may be a positive or a negative
number) of: (i) an amount, which may be a positive or a
negative number, obtained by subtracting $4.7 million from
the net tangible asset value, as more fully described on
Exhibit C to the Stock Purchase Agreement, as of the date
of closing of the Xmark Transaction, plus (ii) the net
indebtedness as of the closing date of the Xmark Transaction,
which may be a positive or a negative number. We do not believe
there will be a downward adjustment to the purchase price.
The following is a summary of the material provisions of the
Stock Purchase Agreement and is qualified in its entirety by
reference to the complete text of the Stock Purchase Agreement,
a copy of which is attached to this proxy statement as
Appendix A
.
Representations
and Warranties
The Stock Purchase Agreement contains certain representations
and warranties by VeriChip relating to:
|
|
|
|
|
the organization of VeriChip and of Xmark;
|
|
|
|
the authority of VeriChip to execute and enter into the Stock
Purchase Agreement;
|
|
|
|
VeriChips valid and binding obligation in connection with
the Stock Purchase Agreement;
|
|
|
|
the lack of conflict with any of VeriChips or Xmarks
organizational documents;
|
|
|
|
agreements or rules and obtaining the requisite consents and
approvals;
|
|
|
|
our title and ownership of the Xmark shares to be sold;
|
|
|
|
Xmarks capitalization;
|
|
|
|
Xmarks lack of ownership interest in another business
entity;
|
|
|
|
financial statement information;
|
|
|
|
the absence of certain changes that may result in a material
adverse effect on Xmark or Xmarks business or would
require Stanleys consent;
|
|
|
|
the absence of undisclosed liabilities;
|
|
|
|
Xmarks valid title, lease and license to use the assets,
properties and rights required for its business;
|
|
|
|
certain material contracts to which Xmark is a party or
otherwise bound;
|
|
|
|
Xmarks largest customers and suppliers and whether Xmark
has been notified of any (1) issue that may have a material
adverse effect on Xmark or (2) suppliers or
customers intent or threat to terminate or adversely alter
the terms of its business with us or Xmark;
|
|
|
|
the absence of any contract between Xmark and a governmental
agency or department;
|
|
|
|
Xmarks ethical practices in its relationship with
governmental entities;
|
|
|
|
Xmarks compliance with express and implied manufacturer
warranties made in connection with the products it provides, and
Xmarks actions in support of any express and implied
manufacturer warranties of products sold to it;
|
|
|
|
insurance coverage of Xmark and Xmarks business;
|
|
|
|
the absence of litigation and other proceedings by, against or
relating to Xmark or Xmarks business;
|
|
|
|
Xmarks compliance with laws, including environmental laws;
|
|
|
|
employee benefit plans sponsored, maintained or contributed to
by Xmark or Xmarks affiliates, or to which either Xmark or
one of Xmarks affiliates has a liability;
|
32
|
|
|
|
|
Xmarks and Xmarks predecessors taxes,
including the accuracy and timely filing of returns and timely
payment;
|
|
|
|
Xmarks intellectual property, including ownership
interests, rights, and lack of unauthorized uses;
|
|
|
|
Xmarks information technology;
|
|
|
|
Xmarks employees, consultants and related labor matters;
|
|
|
|
other than Merriman, the absence of any party entitled to
brokers or finders fees or other commissions in
connection with the Xmark Transaction (other than parties
engaged by Stanley);
|
|
|
|
affiliate transactions and payment obligations involving
VeriChip, Digital Angel, any affiliate of Xmark, or any director
or officer of Xmark, VeriChip or Digital Angel, or any affiliate
of Xmark, VeriChip or Digital Angel;
|
|
|
|
the accuracy of this proxy statement, and the inclusion of all
material facts necessary to make this proxy statement not
misleading;
|
|
|
|
Xmarks historical separation from other businesses
conducted by VeriChip;
|
|
|
|
VeriChips actions in transferring liabilities and
obtaining releases, if necessary, with respect to any and all
liabilities (including any and all liabilities relating to the
VeriMed Health Link business or Xmarks former Toolhound
business) other than liabilities incurred solely due to the
operation of Xmarks business;
|
|
|
|
the solvency of Xmark;
|
|
|
|
VeriChips receipt of a fairness opinion from Merriman;
|
|
|
|
Xmarks status as a private issuer under
certain Canadian laws;
|
|
|
|
the nature of Xmarks business activities;
|
|
|
|
the aggregate value of Xmarks Canadian assets and gross
revenues from Xmarks Canadian sales; and
|
|
|
|
Xmarks compliance with privacy laws.
|
The Stock Purchase Agreement contains certain representations
and warranties by Stanley relating to:
|
|
|
|
|
Stanleys organization;
|
|
|
|
the authority of Stanley to execute and enter into the Stock
Purchase Agreement;
|
|
|
|
the lack of conflict with any of Stanleys organizational
documents;
|
|
|
|
agreements or rules and obtaining the requisite consents and
approvals;
|
|
|
|
the absence of litigation and other proceedings pending or
threatened against Stanley, or any of Stanleys affiliates,
relating to VeriChip, Xmark, the Stock Purchase Agreement or any
related document or transactions;
|
|
|
|
the absence of any party entitled to brokers or
finders fees or other commissions in connection with the
Xmark Transaction;
|
|
|
|
Stanleys possession of sufficient funds to consummate the
transactions contemplated by the Stock Purchase Agreement;
|
|
|
|
Stanleys status as an accredited investor
under certain Canadian laws; and
|
|
|
|
Stanleys acknowledgement that VeriChip makes only the
representations and warranties set forth in the Stock Purchase
Agreement and certain ancillary agreements and certificates to
the Stock Purchase Agreement.
|
33
Covenants
The Stock Purchase Agreement contains customary covenants from
each of the parties, including agreements by us (1) to
cause Xmark to conduct its operations according to its ordinary
course of business consistent with past practice, (2) to
cause Xmark to refrain from certain actions between the time of
signing the Stock Purchase Agreement and the closing of the
Xmark Transaction, and (3) to obtain the requisite approval
of our stockholders.
The covenants also include agreements by us, among other things:
|
|
|
|
|
from May 15, 2008 until the closing of the Xmark
Transaction, to conduct our operations in the ordinary course of
business consistent with past practice and refrain from certain
actions specified in the Stock Purchase Agreement;
|
|
|
|
as soon as practicable after May 15, 2008, to prepare and
file this proxy statement with the SEC and establish a record
date, duly call, give notice of, convene and hold a meeting of
our stockholders for the purpose of obtaining stockholder
approval of this proposal;
|
|
|
|
to cease discussions or negotiations with any person or entity
with respect to any proposal or offer relating to the
acquisition of our assets or shares of the assets or shares of
Xmark, a tender offer or exchange offer, or a merger,
consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution, or similar
transaction involving us or Xmark;
|
|
|
|
to use commercially reasonable efforts to take, or cause to be
taken, all actions and things proper or advisable to consummate
the closing of the Xmark Transaction as promptly as possible;
|
|
|
|
to treat and hold as confidential all information relating to
trade secrets and all other proprietary information of Xmark and
the business;
|
|
|
|
to pay all excise, sales, transfer, documentary, filing,
recordation and other similar taxes, levies, fees and charges
that may be payable in connection with the Stock Purchase
Agreement; and
|
|
|
|
prior to the closing of the Xmark Transaction, to allow Stanley
reasonable access during regular business hours to all books,
records, personnel, officers and other facilities and properties
of the business.
|
Non-Competition
Provisions
For four years from the closing date of the Xmark Transaction,
the Stock Purchase Agreement provides that we shall not:
|
|
|
|
|
directly or indirectly participate with, control or own an
interest in any entity that is engaged in the business of
manufacturing, selling, financing, supplying, marketing or
distributing infant security systems, wander prevention systems,
asset/personnel location and identification systems, and
vibration monitoring instruments; or
|
|
|
|
encourage or attempt to persuade any Xmark employee to terminate
his employment relationship with Xmark, or offer to hire any
Xmark employee.
|
Our remaining business, the VeriMed Health Link business, is not
deemed to compete with Xmarks business. However, the
non-compete provisions will restrict our ability to engage in
any business that competes with Xmarks business for four
years from the date of closing.
Superior
Proposals
The Stock Purchase Agreement provides that our board of
directors may, under certain circumstances, negotiate with third
parties regarding superior proposals.
Prior to obtaining the approval of our stockholders, if our
board of directors determines, after consultation with outside
counsel and in good faith, that an unsolicited written takeover
proposal, which was not received
34
due to any breach of the Stock Purchase Agreement, is reasonably
likely to lead to a superior proposal and that it is reasonably
necessary to take such action to comply with the boards
fiduciary duties to our stockholders, then we, after giving
Stanley prompt written notice of such determination, may furnish
information about us and Xmark under a confidentiality agreement
and participate in negotiations regarding a takeover proposal.
Our board of directors may withdraw or modify the Board
Recommendation if our board of directors determines, after
receiving the advice of its outside counsel and in good faith,
that it is reasonably necessary to do so to comply with the
boards fiduciary duties to our stockholders. If our board
of directors receives a takeover proposal that it determines, in
good faith, constitutes a superior proposal, we or Xmark may
enter into a definitive written acquisition agreement with
respect to such superior proposal if our board of directors
determines, after receiving the advice of its outside counsel
and in good faith, and after five days pass following the date
on which VeriChip provides written notice to Stanley of
VeriChips desire to terminate the Stock Purchase
Agreement, that it is reasonably necessary to do so to comply
with the boards fiduciary duties to our stockholders and,
concurrently with entering into such agreement, terminates the
Stock Purchase Agreement, in which case we would be required to
pay either $450,000 or $1,500,000 (depending on the
circumstances surrounding such termination) to Stanley
concurrently with such termination. If we enter into an
acquisition agreement or make an Adverse Recommendation Change,
we are required to give Stanley written notice of such takeover
proposal or Adverse Recommendation Change.
The $1,500,000 termination fee would only become due in certain
circumstances under a pledge-default scenario involving
(i) a creditor of Digital Angel exercising such
creditors rights to foreclose on the shares of VeriChip
owned by Digital Angel (which shares are subject to the voting
agreement entered into between Stanley and Digital Angel) and
(ii) after such foreclosure, the creditor party not
ensuring that the shares remained subject to the voting
agreement between Stanley and Digital Angel, which we refer to
as the Pledge Default.
Otherwise, our board of directors may not enter into, approve or
authorize us or Xmark to enter into any agreement for a takeover
proposal or make an Adverse Recommendation Change.
If we do make an Adverse Recommendation Change, we or Stanley
may terminate the Stock Purchase Agreement (see
Proposal No. 1 The Xmark
Transaction The Stock Purchase Agreement
Termination) and our stockholders who entered into voting
agreements may choose not to vote for the Xmark Transaction (see
Proposal No. 1 The Xmark
Transaction Ancillary Agreements to the Stock
Purchase Agreement Voting Agreements).
Indemnification
Subject to specified dollar and time limitations, we have agreed
to indemnify Stanley, Xmark and their respective affiliates, as
well as the officers, directors, employees and agents of each of
these companies, from and against any and all damages, losses,
actions, proceedings, causes of action, obligations,
liabilities, claims, encumbrances, penalties, demands,
assessments, settlements, judgments, costs and expenses,
including court costs and reasonable attorneys fees and
disbursements and costs of litigation, but not including
punitive, special, consequential, treble or exemplary damages or
damages for business interruption or lost profits (except to the
extent such damages are awarded in connection with a third-party
claim for which indemnification is available under the Stock
Purchase Agreement), arising out of or relating to:
|
|
|
|
|
any breach or inaccuracy of any of our representations and
warranties contained in the Stock Purchase Agreement;
|
|
|
|
any breach by us of our covenants or obligations contained in
the Stock Purchase Agreement;
|
|
|
|
any and all liabilities (including any and all liabilities
relating to the VeriMed Health Link business or Xmarks
former Toolhound business) other than liabilities incurred
solely due to the operation of Xmarks business;
|
35
|
|
|
|
|
any claims (real or threatened) by security holders (actual or
purported) of ours, Digital Angels or any of our or their
respective affiliates in connection with the transactions
contemplated by the Stock Purchase Agreement and certain
ancillary agreements;
|
|
|
|
any representation or warranty by us or any of our affiliates in
any agreement, program or other form of communication to
employees relating to retention,
change-in-control
or similar payments;
|
|
|
|
certain litigation and warranty matters; and
|
|
|
|
pre-closing taxes.
|
Subject to specified dollar and time limitations, Stanley has
agreed to indemnify us, Xmark and our respective affiliates, as
well as the officers, directors, employees and agents of each of
these companies, from and against any and all damages, losses,
actions, proceedings, causes of action, obligations,
liabilities, claims, encumbrances, penalties, demands,
assessments, settlements, judgments, costs and expenses,
including court costs and reasonable attorneys fees and
disbursements and costs of litigation, but not including
punitive, special, consequential, treble or exemplary damages or
damages for business interruption or lost profits (except to the
extent such damages are awarded in connection with a third-party
claim for which indemnification is available under the Stock
Purchase Agreement), arising out of or relating to:
|
|
|
|
|
any breach or inaccuracy of any of Stanleys
representations and warranties contained in the Stock Purchase
Agreement;
|
|
|
|
any breach by Stanley of its covenants or obligations contained
in the Stock Purchase Agreement; or
|
|
|
|
the ownership, lease, use or operation of Xmark or Xmarks
business from and after the closing of the Xmark Transaction.
|
Conditions
to Closing
The obligations of the parties to consummate the Xmark
Transaction are subject to certain customary closing conditions,
including, among other things, that the Xmark Transaction has
been approved by our stockholders. In addition, Stanleys
obligation to consummate the Xmark Transaction is subject to,
among other things:
|
|
|
|
|
one of our senior officers signing and delivering a certificate
to the effect that (i) our representations and warranties,
as of the applicable date, are true and correct and (ii) we
have performed and complied with, in all material respects, all
covenants and obligations required by the Stock Purchase
Agreement to be performed or complied with prior to or at the
closing of the Xmark Transaction; and
|
|
|
|
our delivering to Stanley certain items, as set forth in the
Stock Purchase Agreement, such as the shares of Xmark,
resignation letters and pay-off letters from our lenders.
|
Our obligation to consummate the Xmark Transaction is subject
to, among other things:
|
|
|
|
|
one of Stanleys officers signing and delivering a
certificate to the effect that (i) Stanleys
representations and warranties, as of the applicable date, are
true and correct and (ii) Stanley has performed and
complied with, in all material respects, all covenants and
obligations required by the Stock Purchase Agreement to be
performed or complied with prior to or at the closing of the
Xmark Transaction; and
|
|
|
|
Stanley delivering certain items to us, as set forth in the
Stock Purchase Agreement, such as the funds due upon closing of
the Xmark Transaction.
|
36
Termination
The Stock Purchase Agreement can be terminated at any time prior
to closing of the Xmark Transaction, whether before or after
receipt of stockholder approval:
|
|
|
|
|
by the mutual written consent of the parties;
|
|
|
|
by either party, upon prior written notice to the other party,
if the closing of the Xmark Transaction has not occurred on or
before January 14, 2009, so long as the failure to close
does not primarily result from the terminating partys
failure to perform any of its obligations under the Stock
Purchase Agreement (and so long as we do not terminate on this
basis if a vote on the approval of the Stock Purchase Agreement
and the transactions contemplated by the Stock Purchase
Agreement has not yet occurred);
|
|
|
|
by either party, upon prior written notice to the other party,
if any law or order that prohibits the closing of the Xmark
Transaction is in effect and has become final and
non-appealable; or
|
|
|
|
by either party, upon prior written notice to the other party,
if our stockholders do not approve the Stock Purchase Agreement.
|
The Stock Purchase Agreement can be terminated by Stanley at any
time prior to closing of the Xmark Transaction, whether before
or after receipt of stockholder approval, upon prior written
notice to us, if:
|
|
|
|
|
we breach or fail to perform certain of our representations,
warranties, covenants or agreements under the Stock Purchase
Agreement, and we cannot cure our breach or failure to perform
by January 14, 2009, or, if curable, we do not cure it
within 45 days after Stanley notifies us of the breach or
failure to perform, so long as Stanley is not in material breach
of any of its covenants or agreements under the Stock Purchase
Agreement;
|
|
|
|
(1) we provided written notice to Stanley of our desire to
enter into an acquisition agreement with respect to a takeover
proposal, and Stanley terminates the Stock Purchase Agreement on
or before five business days after receiving such notice or
(2) we provided written notice to Stanley of an Adverse
Recommendation Change;
|
|
|
|
certain conditions contained in the Stock Purchase Agreement,
which must be satisfied or waived before Stanley becomes
obligated to consummate the closing of the Xmark Transaction,
become incapable of satisfaction before January 14, 2009,
unless this situation results from Stanleys breach of its
obligations under the Stock Purchase Agreement; or
|
|
|
|
we have, or Xmark has, breached, in any material respect, any of
our or its obligations in connection with preparing the proxy
statement, convening the stockholder meeting and not soliciting
takeover proposals.
|
The Stock Purchase Agreement can be terminated by us at any time
prior to closing of the Xmark Transaction, whether before or
after receipt of stockholder approval, upon prior written notice
to Stanley, if:
|
|
|
|
|
Stanley breaches or fails to perform any of its representations,
warranties, covenants or agreements under the Stock Purchase
Agreement, and Stanley cannot cure its breach or failure to
perform by January 14, 2009, or, if curable, Stanley does
not cure it within 45 days after we notify Stanley of the
breach or failure to perform, so long as we are not in material
breach of any of our covenants or agreements under the Stock
Purchase Agreement;
|
|
|
|
prior to stockholder approval and after providing Stanley with
five business days written notice of our desire to make an
Adverse Recommendation Change, we (1) have complied with
our obligations in connection with preparing the proxy
statement, convening the stockholder meeting and not soliciting
takeover proposals, (2) pay the applicable termination fee
(as discussed below) and (3) concurrently enter into a
definitive written acquisition agreement for a superior
proposal; or
|
|
|
|
certain conditions contained in the Stock Purchase Agreement,
which must be satisfied or waived before we become obligated to
consummate the closing of the Xmark Transaction, become
incapable
|
37
|
|
|
|
|
of satisfaction before January 14, 2009, unless this
situation results from our breach of our obligations under the
Stock Purchase Agreement.
|
Termination
Fee and Expenses
We and Stanley have agreed that each party will pay their own
costs and expenses incurred in connection with the Stock
Purchase Agreement, except where, under the Stock Purchase
Agreement, we and Stanley have agreed otherwise.
We have agreed to pay Stanley a termination fee of either
$450,000 (if termination occurs before a Pledge Default, as
defined above) or $1,500,000 (if termination occurs after a
Pledge Default) under the following circumstances:
|
|
|
|
|
if we terminate the Stock Purchase Agreement, prior to
stockholder approval and after providing Stanley with five
business days written notice of our desire to make an
Adverse Recommendation Change, and after (1) complying with
our obligations in connection with preparing the proxy
statement, convening the stockholder meeting and not soliciting
takeover proposals, and (2) concurrently entering into a
definitive written acquisition agreement for a superior proposal;
|
|
|
|
if Stanley terminates the Stock Purchase Agreement, because
(1) we provided written notice to Stanley of our desire to
enter into an acquisition agreement with respect to a takeover
proposal, and Stanley terminates the Stock Purchase Agreement on
or before five business days after receiving such notice or
(2) we provided written notice to Stanley of an Adverse
Recommendation Change;
|
|
|
|
if Stanley terminates the Stock Purchase Agreement, because we
have, or Xmark has, breached, in any material respect, any of
our or its obligations in connection with preparing the proxy
statement, convening the stockholder meeting and not soliciting
takeover proposals;
|
|
|
|
if (1) either we or Stanley terminate the Stock Purchase
Agreement, because the closing of the Xmark Transaction has not
occurred on or before January 14, 2009, so long as the
failure to close does not primarily result from the terminating
partys failure to perform any of its obligations under the
Stock Purchase Agreement and (2) (a) after May 15,
2008 and before the date of the termination, a party
communicates interest in making a takeover proposal and
(b) we enter into a corresponding acquisition agreement, or
consummate the corresponding transactions, within twelve months
of the termination;
|
|
|
|
if (1) Stanley terminates the Stock Purchase Agreement,
because (a) we breach or fail to perform certain of our
representations, warranties, covenants or agreements under the
Stock Purchase Agreement, and (b) we cannot cure our breach
or failure to perform by January 14, 2009, or, if curable,
we do not cure it within 45 days after Stanley notifies us
of the breach or failure to perform and (2) (a) after
May 15, 2008 and before the date of the termination, a
party communicates interest in making a takeover proposal and
(b) we enter into a corresponding acquisition agreement, or
consummate the corresponding transactions, within twelve months
of the termination.
|
In addition, we have agreed to pay Stanley a termination fee of:
|
|
|
|
|
$450,000 if either we or Stanley terminate the Stock Purchase
Agreement, because our stockholders do not approve the Stock
Purchase Agreement, regardless of whether such termination
occurs after a Pledge Default; or
|
|
|
|
$1,500,000 if (1) either we or Stanley terminate the Stock
Purchase Agreement after a Pledge Default, because our
stockholders do not approve the Stock Purchase Agreement and (2)
(a) after May 15, 2008 and before the date of the
termination, a party communicates its interest in making a
takeover proposal and (ii) we enter into a corresponding
acquisition agreement, or consummate the corresponding
transactions, within twelve months of the termination.
|
38
Ancillary
Agreements to the Stock Purchase Agreement
Voting
Agreements
Digital Angel and Mr. Silverman, which hold approximately
48.6% and 5.0%, respectively, of the outstanding shares of our
common stock, each entered into a voting agreement with Stanley
in the forms attached to this proxy statement as
Appendices B
and C.
In the voting agreements, Digital Angel and
Mr. Silverman agreed to vote their shares of VeriChip in
favor of the approval of the Stock Purchase Agreement and the
transactions contemplated by the Stock Purchase Agreement,
unless (i) our board of directors has received a takeover
proposal that it determines, in good faith, constitutes a
superior proposal and (ii) our board of directors
determines, after receiving the advice of outside counsel and in
good faith, that it is reasonably necessary to withdraw or
modify the Board Recommendation to comply with the boards
fiduciary duties to our stockholders. Thus, because Digital
Angel and Mr. Silverman own more than 50% of our
outstanding common stock, unless our board of directors changes
its Board Recommendation, stockholder approval of the Xmark
Transaction is assured.
In the voting agreements, each of Digital Angel and
Mr. Silverman agreed:
|
|
|
|
|
not to transfer (or agree to transfer) their respective shares
of VeriChip stock, and not to grant (or agree to grant) any
proxy or power-of-attorney regarding such shares, other than
stock pledges already granted by Digital Angel to its
lenders; and
|
|
|
not to directly or indirectly (including through any advisors
and representatives) initiate or encourage any inquiries or
proposals from, or discuss or provide any non-public information
to, any parties regarding a takeover proposal, unless such
discussions are permitted under the Stock Purchase Agreement.
|
The voting agreements terminate upon the earliest to occur of:
|
|
|
|
|
the closing of the Xmark Transaction;
|
|
|
the date that is seven months and fifteen days after
termination, in the event that the Stock Purchase Agreement is
validly terminated:
|
|
|
|
|
○
|
by either VeriChip or Stanley, because our stockholders do not
approve the Stock Purchase Agreement;
|
|
○
|
by Stanley, because we provide written notice to Stanley of our
desire to (1) enter into an acquisition agreement with
respect to a takeover proposal, and Stanley terminates within
five business days after receiving such notice or (2) our
board of directors makes an Adverse Recommendation Change;
|
|
○
|
by Stanley, because we have, or Xmark has, breached, in any
material respect, ours or its obligations in connection with
preparing the proxy statement, convening the stockholder meeting
and not soliciting takeover proposals;
|
|
○
|
by us, prior to stockholder approval and after providing Stanley
with five business days written notice of our desire to
make an Adverse Recommendation Change, and after
(1) complying with our obligations in connection with
preparing the proxy statement, convening the stockholder meeting
and not soliciting takeover proposals, (2) paying the
applicable termination fee, and (3) concurrently entering
into a definitive written acquisition agreement for a superior
proposal; or
|
|
○
|
after May 15, 2008 but prior to the date of termination of
the Stock Purchase Agreement, a takeover proposal (or a
communication relating to a potential takeover proposal) is made
known to us or is made directly to our stockholders, or any
person publicly announces an interest in making (or an intention
to make) a takeover proposal, and the Stock Purchase Agreement
is terminated:
|
|
|
|
|
§
|
by either Stanley or us, because the closing of the Xmark
Transaction has not occurred on or before January 14, 2009,
so long as the failure to close does not primarily result from
the terminating partys failure to perform any of its
obligations under the Stock Purchase Agreement (and so long as
we do not terminate on this basis if a vote on the approval of
the Stock Purchase Agreement and the transactions contemplated
by the Stock Purchase Agreement has not yet occurred); or
|
39
|
|
|
|
§
|
by Stanley, because (a) we breach or fail to perform
certain of our representations, warranties, covenants or
agreements under the Stock Purchase Agreement, and (b) we
cannot cure our breach or failure to perform by January 14,
2009, or, if curable, we do not cure it within 45 days
after Stanley notifies us of the breach or failure to perform,
so long as Stanley is not in material breach of any of its
covenants or agreements under the Stock Purchase Agreement;
|
|
|
|
|
|
the termination of the Stock Purchase Agreement, if such
termination occurs on any basis other than the situations
outlined immediately above (except for the closing of the Xmark
Transaction); and
|
|
|
the date the Stock Purchase Agreement is amended, unless such
amendment is agreed to in writing by Digital Angel or Scott
Silverman, as applicable.
|
Guarantee
Digital Angel has also executed a guarantee in favor of Stanley,
pursuant to which Digital Angel, among other things, agreed to
be directly liable from and after the closing of the Xmark
Transaction for the amount of any indemnification obligations,
due to a third party, with respect to either (i) any
excluded liabilities (as defined in the Stock Purchase
Agreement) or (ii) any claims by holders (actual or
claimed) of any securities or rights to acquire our securities,
Digital Angels securities or securities of any of their
respective affiliates in connection with the transactions
contemplated by the Stock Purchase Agreement and by the
ancillary agreements thereto, which obligations are not
completely paid by us when due. Under the guarantee, Digital
Angel may interpose any counterclaim or set-off that we are, or
would have been, entitled to interpose, except for so long as,
and to the extent, such counterclaim or set-off had already
reduced the amount of such obligations. In addition, Digital
Angel may interpose any defense that we are, or would have been,
entitled to interpose, other than any defense arising by reason
of our disability, incapacity, bankruptcy or insolvency.
Escrow
Agreement
On the closing date of the Xmark Transaction, VeriChip, Stanley
and Citibank, N.A., as escrow agent, will enter into the escrow
agreement in the form of
Appendix E
. Under the
escrow agreement, Stanley will deposit $4.5 million into an
escrow account to cover claims made by Stanley under the
indemnification provisions of the Stock Purchase Agreement.
Section 116
Escrow Agreement
On the closing date of the Xmark Transaction, VeriChip, Stanley
and Citibank, N.A., as Section 116 escrow agent, will enter
into the Section 116 escrow agreement in the form of
Appendix F
. Canadian income tax legislation requires
the withholding and remittance to the CRA of 25% of the purchase
price payable in connection with the Xmark Transaction, which we
refer to as the withheld amount. We are required to obtain a
clearance certificate from the Minister of National Revenue
(Canada). We have applied for such clearance certificate and
believe that the sale of Xmark is exempt from Canadian income
tax by virtue of the income tax treaty between the U.S. and
Canada. However, it is uncertain whether we will obtain a
clearance certificate prior to closing. If we are unable to
obtain the clearance certificate prior to closing, the withheld
amount will be held in escrow and provided that, before the
29th day following the end of the month in which the
closing of the Xmark Transaction occurs, we either
(1) obtain the clearance certificate or (2) a letter
from the CRA authorizing the escrow agent to continue to hold
the funds in the trust account, the withheld amount will be
released to us after the escrow agent receives the clearance
certificate. If the escrow agent does not receive either items
(1) or (2) above within this timeframe, the escrow
agent will remit the withheld amount to the Receiver General of
Canada.
Non-Competition
Agreement between Digital Angel and Stanley
In connection with the Xmark Transaction, Digital Angel entered
into a non-competition agreement with Stanley, and accordingly
agreed that, for a period of three years following the closing
of the Xmark Transaction, it will not compete in certain of the
businesses in which Xmark is currently operating.
40
Regulatory
Approvals
We do not require any regulatory approvals to complete the Xmark
Transaction.
Appraisal
Rights
Under Delaware law, our stockholders are not entitled to
appraisal rights for their shares in connection with the Xmark
Transaction.
Closing
of the Xmark Transaction Not Conditioned on Stanley Obtaining
Financing
Stanley has indicated that it has ready access to the cash
consideration required to close this Xmark Transaction and does
not require a financing condition.
Accounting
Treatment
As a result of the proposed Xmark Transaction, we will remove
the Xmark assets and liabilities from our consolidated balance
sheet and record a gain on the sale of Xmark equal to the
difference between the book value of our ownership interest in
Xmark and the purchase price received. For a twelve-month period
following the closing, $4.5 million of the purchase price
will be held in escrow to fund indemnification obligations under
the Stock Purchase Agreement, if any. The gain related to the
$4.5 million will be deferred until the escrow is settled.
See Unaudited Pro Forma Condensed Consolidated Financial
Statements for an estimated calculation and description of
the accounting gain.
Certain
Federal Tax Consequences
The following is a general discussion of the anticipated
material federal income tax consequences of the Xmark
Transaction and the intended initial, special cash dividend to
holders of VeriChip common stock. This discussion is a summary
for general information only and applies solely to holders of
VeriChip common stock and to us.
This discussion is based on the U.S. Internal Revenue Code
of 1986, as amended, or the Code, administrative pronouncements,
judicial decisions and final, temporary and proposed Treasury
regulations, all as in effect on the date hereof, all of which
may be changed, perhaps retroactively, so as to result in
U.S. federal income tax consequences different from those
described below. This summary does not address all aspects of
U.S. federal income and estate taxes and does not deal with
foreign, state, local or other tax considerations that may be
relevant to holders of VeriChip common stock in light of their
particular circumstances. In addition, it does not address
U.S. federal income tax consequences applicable to entities
that are subject to special treatment under the
U.S. federal income tax laws (including
U.S. expatriates, controlled foreign
corporations, passive foreign investment
companies, corporations that accumulate earnings to avoid
U.S. federal income tax or investors in pass-through
entities). Furthermore, this summary deals only with holders of
shares of VeriChip common stock that hold such shares as capital
assets.
For purposes of this discussion, a U.S. Holder
is a beneficial owner of VeriChip common stock that is, for
U.S. federal income tax purposes, an individual citizen or
resident of the U.S., a U.S. corporation, a trust if the
trust (i) is subject to the primary supervision of a
U.S. court and one or more U.S. persons are able to
control all substantial decisions of the trust or (ii) has
elected to be treated as a U.S. person, or an estate the
income of which is subject to U.S. federal income tax
regardless of its source. A
non-U.S. Holder
is any holder of VeriChip common stock other than a
U.S. Holder.
Certain
Federal Tax Consequences to VeriChip of the Xmark
Transaction
The Xmark Transaction will be a taxable transaction for us in
the U.S. We will realize gain with respect to our Xmark
stock equal to the difference between the proceeds received by
us on such sale and our tax basis in the stock sold. For
purposes of calculating the amount of our tax gain, the proceeds
received by us will include the cash received and any other
consideration we receive for our Xmark stock. It is anticipated
that we will have sufficient losses (including net operating
loss carryforwards) to offset the gain expected to be
41
realized from the Xmark Transaction for federal income tax
purposes. It is anticipated that the Xmark Transaction will not
generate a significant federal alternative minimum tax
liability. However, there can be no assurance that the Internal
Revenue Service or relevant state tax authorities will
ultimately assent to our tax treatment of the Xmark Transaction
or the net operating losses. If the Internal Revenue Service or
any relevant state tax authorities re-characterize the tax
treatment of the Xmark Transaction or the net operating losses,
there may be adverse tax consequences to us and our stockholders.
We may be subject to state income taxes to the extent that gains
exceed losses for state tax law purposes; however, we do not
estimate that such taxes will be significant. We do not expect
that the Xmark Transaction will result in any federal income tax
consequences to our stockholders.
Certain
U.S. Federal Income Tax Consequences to VeriChip and to
Holders of VeriChip Common Stock of a Cash Dividend
The following is a discussion of certain U.S. federal
income tax consequences to us and to holders of VeriChip common
stock in connection with the intended initial, special cash
dividend to our stockholders of the available proceeds from the
Xmark Transaction.
U.S. federal income tax treatment of the initial,
special cash dividend.
The initial, special cash
dividend will not be a taxable event to us. The initial, special
cash dividend will be treated as a taxable dividend to the
extent of our current or accumulated earnings and profits
(computed using U.S. federal income tax principles), with
any amount in excess of such current or accumulated earnings and
profits treated as a non-taxable return of capital to the extent
of the holders adjusted tax basis in their VeriChip common
stock and, thereafter, as capital gain. Because our current
earnings and profits must take into account the results of
operations for the entire year in which the initial, special
cash dividend is made, we will not be able to determine the
portion of the initial, special cash dividend that will be
treated as a dividend until after the close of the taxable year
in which the initial, special cash dividend is made. If the
portion of a U.S. Holders initial, special cash
dividend that is treated as a dividend equals or exceeds 10% of
the U.S. Holders tax basis in the
U.S. Holders shares of VeriChip common stock, the
dividend may be treated as an extraordinary
dividend. See below for a description of the
U.S. federal income tax consequences of receiving an
extraordinary dividend.
U.S. federal income tax consequences to
U.S. Holders.
Current U.S. federal income tax
law applies long-term capital gains tax rates (currently a
maximum 15% rate) to the dividend income of an individual
U.S. Holder with respect to dividends paid by a domestic
corporation if certain minimum holding period requirements are
met. Dividends paid to a U.S. Holder that is a corporation
will generally be eligible for the dividends received deduction.
As noted above, the portion of the initial, special cash
dividend received by a U.S. Holder that exceeds the
holders share of our earnings and profits and also exceeds
the holders tax basis in the holders shares of
VeriChip common stock will be treated as received pursuant to a
taxable sale or exchange of the holders shares of VeriChip
common stock and the holder will recognize gain in an amount
equal to such excess. Any gain will be capital gain and will be
long-term capital gain if the U.S. Holder held its shares
of VeriChip common stock for more than one year.
Tax treatment of extraordinary dividends.
As noted
above, the portion of the initial, special cash dividend that is
a dividend for U.S. federal income tax purposes may be
treated as an extraordinary dividend. If a dividend received by
an individual U.S. Holder is subject to U.S. federal
income tax at the capital gains rates noted above, and the
dividend is an extraordinary dividend with respect to that
holder, the holder will be required to treat any loss on a sale
of its shares of VeriChip common stock as long-term capital loss
to the extent of the extraordinary dividend. With regard to
corporate holders claiming a dividends-received deduction, the
dividend may be an extraordinary dividend if the corporate
holder has not held its shares of our common stock for more than
2 years prior to the dividend announcement date
as determined by the tax law. For this purpose, the
dividend announcement date is the date on which we
declare, announce, or agree to the amount or payment of such
dividend, whichever is the earliest. If the dividend is treated
as an extraordinary dividend for a U.S. Holder that is a
corporation, the corporate holder will be required to reduce its
tax basis, and may be required to recognize current gain in
respect of the shares of VeriChip common stock that entitled the
42
holder to the dividend. U.S. Holders should consult their
own tax advisors regarding the application of the extraordinary
dividend rules.
U.S. federal income tax consequences to
non-U.S. Holders.
Dividends
paid to a
non-U.S. Holder
of VeriChip common stock generally will be subject to
withholding of U.S. federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax
treaty. However, dividends that are effectively connected with
the conduct of a trade or business by the
non-U.S. Holder
within the U.S. are not subject to the withholding tax,
provided certain certification and disclosure requirements are
satisfied. Instead, such dividends are subject to
U.S. federal income tax on a net income basis in the same
manner as if the
non-U.S. Holder
were a U.S. person as defined under the Code, unless an
applicable income tax treaty provides otherwise. Any such
effectively connected dividends received by a foreign
corporation may be subject to an additional branch profits
tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty.
A
non-U.S. Holder
of VeriChip common stock who wishes to claim the benefit of an
applicable treaty rate for dividends will be required to
(a) complete Internal Revenue Service
Form W-8BEN
(or other applicable form) and certify under penalty of perjury
that such holder is not a U.S. person as defined under the
Code and is eligible for treaty benefits or (b) if the
holders shares of VeriChip common stock are held through
certain foreign intermediaries, satisfy the relevant
certification requirements of applicable U.S. Treasury
regulations. Special certification and other requirements apply
to certain
non-U.S. Holders
that are pass-through entities rather than corporations or
individuals.
As noted above, for
non-U.S. Holders,
the portion of the initial, special cash dividend received by a
non-U.S. Holder
that exceeds the holders share of our earnings and profits
and also exceeds the holders tax basis in their shares of
VeriChip common stock will be treated as received pursuant to a
taxable sale or exchange of their shares of VeriChip common
stock, and the holder will recognize gain in an amount equal to
such excess. Any gain realized on such a disposition of VeriChip
common stock generally will not be subject to U.S. federal
income tax unless:
|
|
|
|
|
the gain is effectively connected with a trade or business of
the
non-U.S. Holder
in the U.S. (and, if required by an applicable income tax
treaty, is attributable to a U.S. permanent establishment
of the
non-U.S. Holder);
|
|
|
the
non-U.S. Holder
is an individual who is present in the U.S. for
183 days or more in the taxable year of that disposition,
and certain other conditions are met; or
|
|
|
we are or have been a U.S. real property holding
corporation for U.S. federal income tax purposes and
the
non-U.S. Holder
owns (or has owned) more than 5% of the outstanding shares of
our stock.
|
An individual
non-U.S. Holder
described in the first bullet point immediately above will be
subject to tax on the net gain derived from the sale under
regular graduated U.S. federal income tax rates in the same
manner as if the
non-U.S. Holder
were a U.S. person as defined under the Code. If a
non-U.S. Holder
that is a foreign corporation falls under the first bullet point
immediately above, it will be subject to tax on its net gain in
the same manner as if it were a U.S. person as defined
under the Code and, in addition, may be subject to the branch
profits tax equal to 30% of its effectively connected earnings
and profits or at such lower rate as may be specified by an
applicable income tax treaty. An individual
non-U.S. Holder
described in the second bullet point immediately above will be
subject to a flat 30% tax on the gain derived from the sale,
which may be offset by U.S. source capital losses, even
though the individual is not considered a resident of the U.S.
Information reporting and backup
withholding.
Information reporting to the
U.S. Internal Revenue Service generally will be required
with respect to a payment of cash to U.S. Holders, other
than corporations and other exempt recipients. A 28%
backup withholding tax may apply to those payments
if such a holder fails to provide a taxpayer identification
number to the paying agent and to certify that no loss of
exemption from backup withholding has occurred.
Non-U.S.
Holders may be required to comply with applicable certification
procedures to establish that they are not U.S. Holders in
order to avoid the application of such information reporting
requirements and backup withholding. The amounts withheld under
the backup withholding rules are not an additional tax and may
be refunded, or credited against the holders
U.S. federal
43
income tax liability, if any, provided the required information
is furnished to the U.S. Internal Revenue Service.
Opinion
of Merriman to the Board of Directors
On May 13, 2008, Merriman rendered its opinion to our board
of directors that, based upon and subject to the factors and
assumptions set forth therein and such other matters as Merriman
considered relevant, as of such date, the purchase price to be
paid by Stanley to VeriChip for the sale of Xmark was fair, from
a financial point of view, to VeriChip.
The full text of the written opinion of Merriman, dated
May 13, 2008, which sets forth the assumptions made,
procedures followed, matters considered and limitations on the
review undertaken in connection with the opinion, is attached as
Appendix G
to this proxy statement. Merriman
provided its opinion for the information and assistance of our
board of directors in connection with its consideration of the
Xmark Transaction.
In arriving at the opinion described above, Merriman had, among
other things:
|
|
|
|
(i)
|
reviewed a draft of the Stock Purchase Agreement, dated
May 11, 2008, and the financial terms and conditions set
forth therein;
|
|
|
(ii)
|
reviewed drafts of the voting agreements to be executed by each
of Digital Angel and Mr. Silverman, as well as the
guarantee to be executed by Digital Angel;
|
|
|
(iii)
|
reviewed certain financial information, including information
with respect to Xmarks historical and projected financial
performance for the fiscal years ending December 31, 2003
through December 31, 2012, prepared and furnished to
Merriman by VeriChips management;
|
|
|
|
|
(iv)
|
reviewed certain publicly available information concerning
Xmark, including information set forth in VeriChips Annual
Report on
Form 10-K
for the year ended December 31, 2007;
|
|
|
|
|
(v)
|
interviewed VeriChips chief executive officer and chief
financial officer and discussed with them the business and
prospects of Xmark;
|
|
|
(vi)
|
reviewed certain publicly available information with respect to
Xmark and certain other companies deemed to be comparable to
Xmark and trading markets for certain of such other
companies securities;
|
|
|
(vii)
|
compared the proposed financial terms of the Xmark Transaction
with certain publicly available information concerning the
nature and terms of certain other transactions that Merriman
considered to be relevant; and
|
|
|
(viii)
|
reviewed other financial studies, analyses and investigations,
and considered such other information Merriman deemed necessary
or appropriate, including Merrimans assessment of general
financial, economic, market and other conditions.
|
In its review and analysis and in arriving at its opinion,
Merriman relied upon, without any independent verification or
liability therefor, the accuracy and completeness of all of the
financial and other information that was publicly available or
supplied or otherwise made available to Merriman by or on behalf
of VeriChip or Xmark, and upon the assurances of the management
of VeriChip that no relevant information had been omitted or
remained undisclosed to Merriman. Merriman also relied upon the
management of VeriChip and Xmark as to the reasonableness of the
assumptions, and bases therefor, of the financial and operating
projections provided to Merriman. Merriman also held discussions
with members of the management of VeriChip regarding their views
with respect to a number of risks and uncertainties associated
with projections provided to Merriman. Merriman was not engaged
to assess the reasonableness of such projections, of the
timeframe for achieving them or of the assumptions on which they
were based. Merriman expressed no view as to such projections or
assumptions, but Merriman took into account, for purposes of its
analysis, the risks and uncertainties described above.
44
In addition, Merriman did not evaluate or appraise any of the
assets, properties or facilities of Xmark nor was Merriman
furnished with any such evaluation or appraisal. Merriman also
was not requested to assume, and did not assume, any obligation
to conduct any inspection of the properties or facilities of
Xmark or to evaluate any assets or liabilities, including any
litigation, nor was Merriman furnished with any such evaluation.
Merriman did not evaluate the solvency of VeriChip or Xmark or
the fair value of Xmark under any state or federal laws relating
to bankruptcy, insolvency or similar matters.
At the direction of our board of directors, Merriman did not
offer any opinion as to the material terms of the Stock Purchase
Agreement or the form of the Xmark Transaction. Merriman
assumed, with the consent of our board of directors, however,
for purposes of its opinion, that the aggregate adjustment would
not be a negative number, that there would be no post-closing
adjustment to the purchase price pursuant to Section 2.2 of
the Stock Purchase Agreement, that any Canadian taxes withheld
from the purchase price at closing would be promptly refunded to
VeriChip pursuant to the
Canada and United States Income Tax
Convention
, and that the intangible assets, including
goodwill, currently on the books of VeriChip would be
transferred to Stanley as part of the Xmark Transaction.
Merriman also assumed, with the consent of our board of
directors, that the Xmark Transaction would be consummated as
promptly as practicable, with no unanticipated delays in the
consummation of the Xmark Transaction. Merriman also assumed,
with the consent of our board of directors: that the final
executed form of the Stock Purchase Agreement would not differ
in any material respect from the form of the draft Stock
Purchase Agreement furnished to and reviewed by Merriman; that
the final forms of all agreements, instruments and certificates
relating to the Xmark Transaction would not differ in any
material respect from the forms thereof furnished to and
reviewed by Merriman; that the conditions to the Xmark
Transaction, as set forth in the Stock Purchase Agreement, would
be satisfied; and that the Xmark Transaction would be
consummated on a timely basis in the manner contemplated by the
Stock Purchase Agreement.
Without limiting the generality of the foregoing, for purposes
of rendering its opinion, Merriman assumed, in all respects
material to its analysis, with the consent of our board of
directors, (a) that the proposed Xmark Transaction would be
consummated as described in the Stock Purchase Agreement and in
compliance with all applicable laws, (b) that all of the
representations and warranties of each party contained in the
Stock Purchase Agreement were true, correct and complete and did
not omit to state any material fact required to be stated or
incorporated by reference therein or necessary in order to make
the statements therein, in light of the circumstances under
which they are made, not misleading, (c) that each party to
the Stock Purchase Agreement would perform all of the covenants
and agreements required to be performed by it thereunder without
any consents or waivers of the other parties thereto, and
(d) that all conditions to the consummation of the proposed
Xmark Transaction would be satisfied without waiver thereof.
Merriman noted that it is not a legal, tax, accounting or
regulatory expert, and had made no independent investigation of
any legal matters involving VeriChip, Xmark or the Xmark
Transaction, and that Merriman had assumed the correctness of
all statements with respect to legal matters made or otherwise
provided to our board of directors and Merriman by
VeriChips counsel. Merriman did not express any opinion as
to any legal, tax, accounting or regulatory matters involving
VeriChip, Xmark or the Xmark Transaction, as to which Merriman
understood that VeriChip had conducted such investigations, and
had obtained such advice from qualified professionals, as it had
deemed necessary. Merriman assumed, with the consent of our
board of directors, that all governmental, regulatory or other
consents and approvals (contractual or otherwise) necessary for,
or in connection with, the consummation of the proposed Xmark
Transaction would be obtained without any adverse effect on
VeriChip on the contemplated benefits of the proposed
Transaction to VeriChip, in any respect material to
Merrimans analysis.
The following is a summary of the material financial analyses
undertaken by Merriman in connection with rendering the opinion
described above. The following summary, however, does not
purport to be a complete description of the financial analyses
performed by Merriman, nor does the order of analyses described
represent relative importance or weight given to those analyses
by Merriman. Some of the summaries of the financial analyses
include information presented in tabular format. The tables must
be read together with the full text of each summary and are
alone not a complete description of Merrimans financial
analyses. Except as otherwise noted, the following quantitative
information, to the extent that it is based on
45
market data, is based on market data as it existed on or before
May 9, 2008 and is not necessarily indicative of current
market conditions.
Comparable Public Companies Analysis.
Merriman
reviewed certain financial information, multiples and ratios for
Xmark and compared such information and data to corresponding
financial information, multiples and ratios for the following
publicly traded corporations in the asset tracking industry:
|
|
|
|
|
Checkpoint Systems Inc.
|
|
|
|
Ituran Location & Control Ltd.
|
|
|
|
LoJack Corp.
|
|
|
|
Cogent, Inc.
|
|
|
|
ScanSource, Inc.
|
|
|
|
EMS Technologies, Inc.
|
|
|
|
ORBCOMM, Inc.
|
|
|
|
Numerex Corp.
|
|
|
|
ID Systems Inc.
|
|
|
|
WJ Communications Inc.
|
|
|
|
Telular Corp.
|
|
|
|
Alanco Technologies Inc.
|
|
|
|
Advanced ID Corp.
|
Although none of the selected companies is directly comparable
to Xmark, the companies included were chosen because they are
publicly traded companies with operations that, for purposes of
Merrimans analysis, Merriman considered similar to certain
operations of Xmark.
Merriman calculated and compared the various multiples and
ratios based on financial data as of May 9, 2008,
information it obtained from SEC filings and estimates provided
by Capital IQ (a financial data service owned by
Standard & Poors). The multiples and ratios of
each of the selected companies were calculated using the closing
price of each such selected companys common stock on
May 9, 2008, as well as the most recent publicly available
information and CapitalIQ estimates. The multiples and ratios of
Xmark were based on estimates provided by VeriChips
management. With respect to each of the selected companies,
Merriman calculated:
|
|
|
|
|
enterprise value, which is the market value of common equity
plus the book value of debt, less cash, as a multiple of the
latest twelve months (LTM) revenue, estimated 2008
revenue and estimated 2009 revenue;
|
|
|
|
enterprise value as a multiple of the LTM earnings before
interest, taxes, depreciation and amortization
(EBITDA), estimated 2008 EBITDA and estimated 2009
EBITDA; and
|
|
|
|
the closing price per share on May 9, 2008 as a multiple of
the LTM earnings per share, estimated 2008 earnings per share
and estimated 2009 earnings per share.
|
The results of these analyses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Value/Revenue Multiple
|
|
Enterprise Value/EBITDA Multiple
|
|
Price/Earnings Multiple
|
|
|
|
|
Estimated
|
|
Estimated
|
|
|
|
Estimated
|
|
Estimated
|
|
|
|
Estimated
|
|
Estimated
|
|
|
LTM
|
|
2008
|
|
2009
|
|
LTM
|
|
2008
|
|
2009
|
|
LTM
|
|
2008
|
|
2009
|
|
Mean
|
|
|
2.7
|
x
|
|
|
1.6
|
x
|
|
|
1.8
|
x
|
|
|
8.6
|
x
|
|
|
8.0
|
x
|
|
|
6.7
|
x
|
|
|
15.0
|
x
|
|
|
14.6
|
x
|
|
|
14.1
|
x
|
Median
|
|
|
1.5
|
x
|
|
|
1.1
|
x
|
|
|
1.6
|
x
|
|
|
8.3
|
x
|
|
|
8.4
|
x
|
|
|
7.4
|
x
|
|
|
12.9
|
x
|
|
|
15.4
|
x
|
|
|
15.3
|
x
|
46
Merriman then calculated an implied equity value of Xmark of
approximately $47.5 million, which was based on the median
multiple of enterprise value to LTM revenue of 1.5x and
Xmarks LTM revenue, representing the midpoint of a range
of approximately $44.5 million to approximately
$50.5 million based on the foregoing analysis. This implied
equity value was compared to the purchase price, excluding the
possible effect of the aggregate adjustment.
Discounted Cash Flow Analysis.
Merriman performed an
illustrative discounted cash flow analysis on Xmark using the
projections provided to Merriman by management of VeriChip.
Merriman calculated indications of net present value of free
cash flows for Xmark for the years 2008 through 2011 (with each
fiscal year ending December 31) using discount rates
ranging from 9.0% to 29.0% per annum, with a midpoint discount
rate of 19.0% per annum. Merriman calculated implied equity
values for Xmark using illustrative terminal values in the year
2011 based on implied EBITDA multiples in the year 2011 ranging
from 5.0x to 7.0x. These illustrative terminal values were then
discounted to calculate implied indications of present values
using discount rates ranging from 9.0% to 29.0% per annum, with
a midpoint discount rate of 19.0% per annum. These calculations
resulted in an implied equity value of Xmark of approximately
$44.9 million, representing the midpoint of a range of
approximately $41.9 million to approximately
$47.9 million based on the foregoing analysis. This implied
equity value was compared to the purchase price, excluding the
possible effect of the aggregate adjustment.
Precedent Transactions Analysis.
Merriman analyzed
certain information relating to 15 selected transactions in the
asset tracking industry. The transactions considered and the
month and year each transaction was announced were as follows:
|
|
|
|
|
Acquirer
|
|
Target
|
|
Month and Year
Announced
|
|
TriQuint Semiconductor Inc.
|
|
WJ Communications Inc.
|
|
March 2008
|
BT Singapore Pte. Ltd.
|
|
Frontline Technologies Corp.
|
|
December 2007
|
BOS Better Online Solutions
|
|
Dimex Systems Ltd.
|
|
December 2007
|
ST Electronics Pte. Ltd.
|
|
Telematics Wireless Ltd.
|
|
November 2007
|
Applied Digital Solutions Inc.
|
|
Digital Angel Corp.
|
|
August 2007
|
Avery Dennison Corp.
|
|
Paxar Corp.
|
|
March 2007
|
Zebra Technologies
|
|
WhereNet
|
|
January 2007
|
Motorola
|
|
Symbol Technologies
|
|
September 2006
|
Lockheed Martin
|
|
Savi Technology
|
|
May 2006
|
SIRIT, Inc.
|
|
Samsys
|
|
February 2006
|
Applied Digital Solutions Inc.
|
|
Instantel Inc.
|
|
June 2005
|
Applied Digital Solutions Inc.
|
|
eXI Wireless Inc.
|
|
November 2004
|
Digital Angel Corp.
|
|
DSD Holdings
|
|
March 2005
|
Roper Industries
|
|
TransCore Holdings
|
|
October 2004
|
Pain & Partners, LLC
|
|
WJ Communications Inc.
|
|
October 1999
|
Although none of the selected transactions is directly
comparable to the Xmark Transaction and none of the companies is
directly comparable to Xmark, the transactions identified above
were chosen because they involve transactions that, for purposes
of Merrimans analysis, Merriman considered similar to the
Xmark Transaction or involved publicly traded companies with
operations that, for purposes of Merrimans analysis,
Merriman considered similar to certain operations of Xmark.
47
For each of the selected transactions, Merriman calculated the
aggregate transaction value, which is the equity consideration
plus debt minus cash and cash equivalents, as a multiple of LTM
revenues and of LTM EBITDA. Merriman then compared these
multiples to the corresponding multiples for Xmark and the Xmark
Transaction. The following table presents the results of this
analysis:
Selected
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Value
|
|
|
|
|
|
|
|
Proposed
|
as a Multiple of:
|
|
Range
|
|
Mean
|
|
Median
|
|
Transaction
|
|
LTM Revenue
|
|
|
0.7x 3.5x
|
|
|
|
1.6x
|
|
|
|
1.4x
|
|
|
|
1.4x
|
|
LTM EBITDA
|
|
|
5.6x 26.4x
|
|
|
|
12.9x
|
|
|
|
10.3x
|
|
|
|
9.2x
|
|
These calculations resulted in an implied equity value of Xmark
of approximately $44.6 million, representing the midpoint
of a range of approximately $41.6 million to approximately
$47.6 million based on the foregoing analysis. This implied
equity value was compared to the purchase price, excluding the
possible effect of the aggregate adjustment.
The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analyses or of the
summary set forth above, without considering the analyses as a
whole, could create an incomplete view of the processes
underlying Merrimans opinion. In arriving at its fairness
determination, Merriman considered the results of all of its
analyses and did not attribute any particular weight to any
factor or analysis considered by it. Rather, Merriman made its
determination as to fairness on the basis of its experience and
professional judgment after considering the results of all of
its analyses. No company or transaction used in the above
analyses as a comparison is directly comparable to Xmark,
VeriChip, Stanley or the contemplated Xmark Transaction.
Merrimans opinion was necessarily based on the economic,
monetary, market and other conditions as in effect on, and the
information made available to it, as of May 13, 2008 and
did not address any matters subsequent to such date. Although
subsequent developments may affect Merrimans opinion,
Merriman does not have any obligation to update, revise or
reaffirm the opinion. Merriman disclaimed any undertaking or
obligation to advise any person of any change in any fact or
matter affecting the opinion which may come or be brought to its
attention after such date. Without limiting the foregoing, the
opinion provided that, in the event that in Merrimans
judgment there is any material change in any fact, assumption
upon which its opinion was based or matter affecting the opinion
after such date, Merriman reserves the right to withdraw, revise
or modify its opinion.
Merrimans opinion was limited to the fairness of the
purchase price, from a financial point of view, to VeriChip. The
opinion did not address the underlying or relative merits of the
Xmark Transaction or any related transaction and any other
transactions or business strategies discussed by our board of
directors or that might have been available as alternatives to
the Xmark Transaction, or the decision of VeriChip to proceed
with the Xmark Transaction or any related transaction.
Merrimans opinion was not, and should not be construed as,
a valuation of Xmark or its assets or any class or series of
securities of Xmark.
Merrimans opinion was prepared solely for the information
of our board of directors for its confidential use in connection
with its consideration of the Xmark Transaction and provided
that it may not, in whole or in part, be reproduced,
disseminated, quoted, summarized, described or referred to at
any time, communicated or provided to any person or otherwise
made public or used for any other purpose without
Merrimans prior written consent. Our board of directors
did not ask Merriman to address, and Merrimans opinion did
not address, the fairness of the Xmark Transaction to the
holders of any class of securities, creditors or other
constituencies of VeriChip, and Merrimans opinion did not
address the fairness of any specific portion of the Xmark
Transaction. In rendering its opinion, Merriman expressed no
view or opinion with respect to the fairness (financial or
otherwise) of the amount or nature or any other aspect of any
compensation payable to or to be received by any officers,
directors, or employees of Xmark or any parties to the Xmark
Transaction, or any class of such persons, relative to the
purchase price or otherwise. Merrimans opinion was
authorized for issuance by a fairness committee of Merriman.
Merriman did not express any opinion as to the prices at
48
which any securities of VeriChip would trade following the
announcement or consummation of the Xmark Transaction.
As described above, Merrimans opinion to our board of
directors was one of many factors taken into consideration by
our board of directors in making its determination to approve
the Stock Purchase Agreement and the Xmark Transaction. The
foregoing summary does not purport to be a complete description
of the analyses performed by Merriman in connection with the
fairness opinion and is qualified in its entirety by reference
to the written opinion of Merriman attached as
Appendix G
.
Our board of directors selected Merriman as its financial
advisor because it is a recognized investment banking firm that
has substantial experience in transactions similar to the Xmark
Transaction. Pursuant to a letter agreement dated March 17,
2008, VeriChip engaged Merriman to render a fairness opinion in
conjunction with the proposed Xmark Transaction. Merriman
received a fee in the amount of $225,000 for its services in
rendering its opinion, $100,000 of which was payable upon the
execution of the letter agreement and $125,000 of which was
payable upon delivery of the opinion. VeriChip also agreed to
reimburse Merriman for reasonable out-of-pocket expenses. None
of the fee was contingent on the consummation of the Xmark
Transaction. In addition, VeriChip has agreed to indemnify
Merriman for, and exculpate Merriman from, certain liabilities
arising out of Merrimans engagement. Merriman and its
affiliates have in the past provided investment banking services
to VeriChip, for which Merriman and its affiliates received
compensation, including acting as lead managing underwriter in
VeriChips initial public offering. Merriman and its
affiliates currently, and in the past, have made a market in
VeriChips common stock, and Merriman and its affiliates
provide research on VeriChip. Merriman is a full service
securities firm engaged in securities trading and brokerage
activities, as well as providing investment banking and other
financial services. In the ordinary course of business, Merriman
and its affiliates may acquire, hold or sell securities of
VeriChip or Stanley.
Interests
of Certain Persons in the Xmark Transaction
When considering the recommendation of our board of directors,
you should be aware that our executive officers, the members of
our board of directors and our controlling stockholder, Digital
Angel, have interests in the Xmark Transaction other than their
interests as our stockholders generally. These interests arise
under certain of our existing agreements. These interests may be
different from, or in conflict with, your interests as our
stockholder. The members of our board of directors were aware of
these additional interests, and considered them, when they
approved the Xmark Transaction and the Stock Purchase Agreement.
Separation
Agreement with Our Chief Executive Officer
In connection with the Xmark Transaction, on May 15, 2008,
we entered into a separation agreement, or the Silverman
Separation Agreement, with Scott R. Silverman, our chairman and
chief executive officer, which provides that upon the closing of
the Xmark Transaction, Mr. Silvermans employment will
be terminated, as will the employment and non-compete agreement,
dated December 5, 2006, between us and Mr. Silverman,
or the Silverman Employment Agreement.
The Silverman Separation Agreement provides that, if the closing
of the Xmark Transaction occurs on or prior to July 8,
2008, Mr. Silverman will receive a payment in the amount of
up to $4,282,611, less all deductions and withholdings, or the
Termination Amount, from us in full and final satisfaction of
the amounts due to Mr. Silverman under the terms of the
Silverman Employment Agreement. If the closing of the Xmark
Transaction occurs after July 8, 2008 but on or prior to
December 31, 2008, the Termination Amount will be adjusted
downward to reflect the lower amount of salary actually paid and
benefits due to Mr. Silverman under the terms of the
Silverman Employment Agreement. Mr. Silverman will also
receive a bonus payment for the completion of the Xmark
Transaction in the amount of $1.2 million, which is payable
in two installments. The first installment of $1,080,000 will be
paid upon the closing of the Xmark Transaction. The second
installment of $120,000 will be paid twelve months after the
closing of the Xmark Transaction, upon release of the funds
escrowed to cover our indemnification obligations under the
Stock Purchase Agreement.
In the event that our VeriMed Health Link business is sold, all
of our stock is sold, or the public company is used for a
strategic transaction, or the VeriChip Transaction, on or before
July 15, 2008, or if a binding
49
letter of intent, indication of interest or purchase agreement
for the VeriChip Transaction is entered into on or before
July 15, 2008, Mr. Silverman will receive a success
fee equal to twenty-five percent (25%) of the value of the
VeriChip Transaction (including all cash, securities, promissory
notes or other evidences of indebtedness, and other property or
other assets paid, payable or received, including debt,
liabilities, and obligations which are assumed, in connection
with the VeriChip Transaction) exclusive of amounts paid to
other financial advisors or finders, unless Mr. Silverman,
directly or indirectly, purchases or acquires, or has the option
to purchase or acquire, through merger or otherwise, the VeriMed
Health Link business, our stock, or enters into a strategic
transaction using the public company. Additionally, if the
purchaser of the VeriMed Health Link business assumes all of the
liabilities of the VeriMed Health Link business,
Mr. Silverman will receive a one-time assumption of
liabilities bonus in the amount of $500,000. Any success fee or
the assumption of liabilities bonus will be paid on the date of
the closing of such VeriChip transaction.
The Silverman Separation Agreement also contains a
confidentiality provision and a non-competition provision, which
provide that Mr. Silverman, during his employment and for a
two (2) year period after the closing of the Xmark
Transaction, will not compete with us and our affiliates by
directly or indirectly engaging in our business within the RFID
market space or by engaging in any business comparable to that
of us and our affiliates. If the VeriMed Health Link business is
not sold or transferred to a third party, or if the VeriMed
Health Link business is sold or transferred to
Mr. Silverman or an affiliate of Mr. Silverman, the
competition restriction (only as it applies to the VeriMed
Health Link business) will become null and void.
From the closing of the Xmark Transaction until the earlier of
(i) July 15, 2008 or (ii) the closing of a
VeriChip Transaction, Mr. Silverman will remain active as a
consultant in the sale of the VeriMed Health Link business, even
though he will no longer be an officer or director of VeriChip.
Change-of-Control
Payment due to Our Chief Financial Officer
As contemplated under the VeriChip Corporation Executive
Management Change in Control Plan, dated as of March 2,
2007, Mr. Caragol will receive a payment of $1,131,400 upon
the closing of the Xmark Transaction.
Letter
Agreement with Our Chief Financial Officer
In connection with the Xmark Transaction, on May 15, 2008,
we entered into a letter agreement with William J. Caragol, our
president and chief financial officer, or the Caragol Letter
Agreement, which affirms that we desire to retain him as our
president and chief financial officer following the closing of
the Xmark Transaction, confirms that Mr. Caragols
base salary will remain at $203,500 per year, and provides for
incentive compensation. Specifically, the Caragol Letter
Agreement provides that Mr. Caragol will receive a bonus of
$50,000 if the total distributed cash or equity value to our
stockholders is at least $21.5 million. For all amounts
over $21.5 million, Mr. Caragol will receive a cash
bonus equal to 4% of the amount that exceeds $21.5 million.
The incentive compensation provided to Mr. Caragol under
the Caragol Letter Agreement will not exceed $200,000 in the
aggregate, such compensation being contingent on the total
distributed cash or equity value to VeriChip stockholders
equaling or exceeding $21.5 million.
Agreements
with the Chief Executive Officer and President of
Xmark
The VeriChip Corporation Executive Management Change in Control
Plan, dated as of March 2, 2007, provides that any
change-in-control
compensation due to Daniel A. Gunther, Xmarks chief
executive officer and president, in connection with a
change-in-control
transaction (e.g., the Xmark Transaction) would be decreased by
the amount of any compensation that is contractually guaranteed
by the acquiror (e.g., Stanley), so long as the guaranteed
compensation relates to an executive position that is of the
same or increased level of responsibility and authority and at
the same or higher salary and bonus levels as Mr. Gunther
held as of March 2, 2007. If Mr. Gunther were not
guaranteed compensation on these terms, the maximum amount to
which he would be entitled under the change in control plan, in
connection with the Xmark Transaction, would be $1,062,368.
However, to address the fact that Mr. Gunthers
change-in-control
compensation would equal $0 if Stanley guaranteed his
compensation on these terms, we entered into a transaction bonus
agreement with
50
Mr. Gunther, dated February 11, 2008, to guarantee him
a payment of $600,000 upon the closing of the Xmark Transaction.
Stanley has agreed to assume the terms of the letter agreement
between Mr. Gunther and us, dated August 11, 2005, as
amended by the letter agreement between Mr. Gunther and us,
dated March 2, 2007. Therefore, we believe that
Mr. Gunther is only entitled to a payment of $600,000 from
VeriChip under the transaction bonus agreement. Mr. Gunther
has recently notified us, however, that he disputes the amount
of this payment.
Transaction
Bonuses for Certain Employees of Xmark
Upon the closing of the Xmark Transaction, five members of
Xmarks senior management team, other than
Mr. Gunther, will receive transaction bonuses totaling
$1,175,400 in the aggregate.
Change-of-Control
Payment and Stay Bonuses for Certain Employees of
VeriChip
As contemplated under the VeriChip Corporation Executive
Management Change in Control Plan, dated as of March 2,
2007, our senior vice president of operations will receive a
payment of $535,500 upon the closing of the Xmark Transaction.
In addition, on May 12, 2008, our compensation committee
approved stay bonuses for certain of our employees, in order to
incentivize such employees to remain employed by VeriChip after
the closing of the Xmark Transaction until the earlier to occur
of either (1) the closing of the sale of our VeriMed Health
Link business or (2) the termination of such employee by us
without cause.
Director
Fees
On May 14, 2008, the compensation committee authorized, in
addition to the payment of quarterly board fees, a payment of
$25,000 to each member of our board of directors (other than
Mr. Silverman) to compensate them for their extraordinary
efforts in connection with the Xmark Transaction.
Letter
Agreement with Digital Angel
In connection with the signing of the Stock Purchase Agreement,
on May 15, 2008, we and Digital Angel entered in a letter
agreement, or the Digital Angel Agreement. The Digital Angel
Agreement provides that the Stock Purchase Agreement and the
transactions contemplated by the Stock Purchase Agreement do not
constitute an event of default under the commercial loan
agreement, dated December 27, 2005, as amended, between us
and Digital Angel, (ii) the security agreement, dated
December 27, 2005, as amended, between us and Digital
Angel, and (iii) the third amended and restated revolving
line of credit note, dated as of February 8, 2007, as
amended, from us in favor of Digital Angel.
The Digital Angel Agreement allows Digital Angel to designate,
from and after the date of the closing of the Xmark Transaction
or upon a breach of the Digital Angel Agreement, up to three
(3) members of our board of directors, all of which must be
independent with the exception of Joseph J. Grillo, Digital
Angels president and chief executive officer. Upon the
closing of the Xmark Transaction, Mr. Grillo is expected to
join our board of directors as the chairman, and
Mr. Silverman will resign. We must pay to Digital Angel,
upon the closing of the Xmark Transaction, (i) $250,000 as
consideration for the execution of the guarantee signed in
connection with the Stock Purchase Agreement and (ii) up to
$250,000 for Digital Angels actual expenses, incurred or
reasonably expected to be incurred by Digital Angel in
connection with the Xmark Transaction.
The Digital Angel Agreement also provides, among other things,
that (i) we will limit all bonus and other special payments
to those currently scheduled, with any changes or new payments
to be pre-approved by Digital Angel,
(ii) Mr. Silverman will enter into a separation
agreement with us, (iii) Digital Angel will have access to
certain payroll and cash flow information, as reasonably
requested by Digital Angel, and (iv) we will obtain
pre-paid tail policies on our existing
directors and officers liability insurance policy
and our existing general and products liability insurance
policy, both of which tail policies will name Digital Angel as
an additional insured.
51
Vesting
of Equity Awards
Upon the closing of the Xmark Transaction, the vesting schedule
of certain equity awards that we have granted, including certain
VeriChip equity awards held by current or former directors of
VeriChip, will be accelerated. The following table summarizes
the aggregate estimated payments that may be made by us to the
current or former non-employee members of our board of directors
upon the closing of, or in connection with, the Xmark
Transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Dividend
|
|
|
|
|
|
|
|
|
|
Payment in Respect
|
|
|
|
|
|
|
|
Name of Director
|
|
of Common Stock(1)
|
|
|
All Other Payments
|
|
|
Total Payments
|
|
|
Jeffrey S. Cobb
|
|
$
|
135,000
|
(2)
|
|
$
|
25,000
|
(8)
|
|
$
|
160,000
|
|
Barry M. Edelstein
|
|
$
|
135,000
|
(3)
|
|
$
|
25,000
|
(8)
|
|
$
|
160,000
|
|
Steven R. Foland
|
|
$
|
75,060
|
(4)
|
|
$
|
25,000
|
(8)
|
|
$
|
100,060
|
|
Paul C. Green
|
|
$
|
135,000
|
(5)
|
|
$
|
25,000
|
(8)
|
|
$
|
160,000
|
|
Daniel E. Penni
|
|
$
|
90,000
|
(6)
|
|
$
|
|
|
|
$
|
90,000
|
|
Constance K. Weaver
|
|
$
|
45,000
|
(7)
|
|
$
|
|
|
|
$
|
45,000
|
|
|
|
|
(1)
|
|
Assumes a total estimated initial, special cash dividend with
respect to common stock equal to $1.35 per common share.
|
|
(2)
|
|
Consists of an anticipated dividend payment of $135,000 with
respect to 100,000 shares of restricted common stock, of
which zero are vested and held by Mr. Cobb as of
June 3, 2008. In addition, Mr. Cobb holds options to
purchase 25,000 shares of common stock at an exercise price
of $5.28, of which 8,334 are vested. All unvested securities
will accelerate upon the closing of the Xmark Transaction.
|
|
(3)
|
|
Consists of an anticipated dividend payment of $135,000 with
respect to 100,000 shares of restricted common stock, of
which zero are vested and held by Mr. Edelstein as of
June 3, 2008. In addition, Mr. Edelstein holds options
to purchase 25,000 shares of common stock at an exercise
price of $2.01, none of which are vested. All unvested
securities will accelerate upon the closing of the Xmark
Transaction.
|
|
(4)
|
|
Consists of (i) an anticipated dividend payment of $7,560
with respect to 5,600 shares of common stock purchased by
Mr. Foland and owned as of June 3, 2008 and
(ii) an anticipated dividend payment of $67,500 with
respect to 50,000 shares of restricted common stock, of
which zero are vested and held by Mr. Foland as of
June 3, 2008. All unvested securities will accelerate upon
the closing of the Xmark Transaction.
|
|
(5)
|
|
Consists of an anticipated dividend payment of $135,000 with
respect to 100,000 shares of restricted common stock, of
which zero are vested and held by Mr. Green as of
June 3, 2008. In addition, Mr. Green holds options to
purchase 69,444 shares of common stock at an exercise price
of $5.75, of which 23,149 are vested. All unvested securities
will accelerate upon the closing of the Xmark Transaction.
|
|
(6)
|
|
Mr. Penni holds options to purchase 91,666 shares of
common stock at exercise prices between $0.23 and $5.75, of
which 75,000 are vested. All unvested securities will accelerate
upon the closing of the Xmark Transaction. Mr. Penni
resigned from our board of directors on January 11, 2008.
If Mr. Penni were to exercise all of his in-the-money
options, he would receive an anticipated dividend payment of
approximately $90,000.
|
|
(7)
|
|
Ms. Weaver holds options to purchase 102,777 shares of
common stock at exercise prices between $0.23 and $6.93, of
which 86,111 are vested. All unvested securities will accelerate
upon the closing of the Xmark Transaction. Ms. Weaver
resigned from our board of directors on January 11, 2008.
If Ms. Weaver were to exercise all of her in-the-money
options, she would receive an anticipated dividend payment of
approximately $45,000.
|
|
(8)
|
|
Consists of estimated board of directors fees payable to
non-employee directors for their services and meeting
attendance, in connection with the Xmark Transaction, as members
of the board of directors.
|
52
Upon the closing of the Xmark Transaction, the vesting schedule
of certain equity awards that we have granted, including certain
VeriChip equity awards held by current or former executive
officers of VeriChip, will be accelerated. The following table
summarizes the aggregate estimated payments that may be made by
us to our executive officers upon the closing of, or in
connection with, the Xmark Transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Dividend
|
|
|
|
|
|
|
|
|
|
Payment in Respect
|
|
|
|
|
|
|
|
Name of Executive
Officer
|
|
of Common Stock(1)
|
|
|
All Other Payments
|
|
|
Total Payments
|
|
|
Scott R. Silverman
|
|
$
|
1,169,250
|
(2)
|
|
$
|
5,482,611
|
(5)
|
|
$
|
6,651,861
|
|
William J. Caragol
|
|
$
|
139,050
|
(3)
|
|
$
|
1,131,400
|
(6)
|
|
$
|
1,270,450
|
|
Daniel A. Gunther
|
|
$
|
|
(4)
|
|
$
|
600,000
|
(7)
|
|
$
|
600,000
|
|
|
|
|
(1)
|
|
Assumes a total estimated initial, special cash dividend with
respect to common stock equal to $1.35 per common share.
|
|
(2)
|
|
Consists of (i) an anticipated dividend payment of $6,750
with respect to 5,000 shares of common stock purchased by
Mr. Silverman and owned as of June 3, 2008,
(ii) an anticipated dividend payment of $742,500 with
respect to 550,000 shares of restricted common stock, of
which zero are vested and held by Mr. Silverman as of
June 3, 2008, and (iii) an anticipated dividend
payment of $420,000 if Mr. Silverman were to exercise all
of his in-the-money options. Mr. Silverman holds options to
purchase 311,111 shares of common stock at exercise prices
between $0.23 and $1.13, all of which are vested.
|
|
(3)
|
|
Consists of (i) an anticipated dividend payment of $4,050
with respect to 3,000 shares to common stock purchased by
Mr. Caragol and owned as of June 3, 2008 and
(ii) an anticipated dividend payment of $135,000 with
respect to 100,000 shares of restricted common stock, of
which zero are vested and held by Mr. Caragol as of
June 3, 2008. In addition, Mr. Caragol holds options
to purchase 50,000 shares of common stock at an exercise
price of $10.00, of which 16,667 are vested. All unvested
securities will accelerate upon the closing of the Xmark
Transaction.
|
|
(4)
|
|
Mr. Gunther holds options to purchase 55,556 shares of
common stock at an exercise price of $7.43, all of which are
vested.
|
|
(5)
|
|
Mr. Silverman serves as our chairman of the board and chief
executive officer. On December 5, 2006, we entered into an
employment agreement with Mr. Silverman. The initial term
of Mr. Silvermans agreement terminates on
December 31, 2011. The agreement provides for a base salary
of $420,000 for fiscal year 2007, with the base salary being
subject to an annual increase of no less than 10% in each of
fiscal year 2008 and fiscal year 2009. Thereafter, any increases
are to be at our reasonable discretion. In the event the
agreement is terminated without cause during fiscal year 2008,
Mr. Silverman is entitled to, in addition to our
maintaining his fringe benefits through December 31, 2011:
any and all earned but unpaid base salary and any and all earned
but unpaid incentive compensation as of the date of termination;
his then-base salary from the date of termination through
December 31, 2011; and 75% of the bonus paid by us to
Mr. Silverman in 2007, which amount shall be interpolated
from the date of termination through December 31, 2011. On
May 15, 2008, we and Mr. Silverman entered into a
separation agreement, under which he will receive a payment in
the amount of up to $4,282,611 from VeriChip in full and final
satisfaction of the obligations imposed under his employment
agreement, provided the closing of the Xmark Transaction occurs
on or prior to July 8, 2008. If the closing of the Xmark
Transaction occurs after July 8, 2008 but on or prior to
December 31, 2008, this amount will be adjusted downward to
reflect the lower amount of salary actually paid and benefits
due to Mr. Silverman under the terms of his employment
agreement. In addition, the separation agreement provides for a
$1.2 million bonus payment to Mr. Silverman for the
completion of the Xmark Transaction, which is payable in two
installments. The first installment of $1,080,000 will be paid
upon the closing of the Xmark Transaction. The second
installment of $120,000 will be paid twelve months after the
closing of the Xmark Transaction, upon release of the funds
escrowed to cover our indemnification obligations under the
Stock Purchase Agreement.
|
|
(6)
|
|
Mr. Caragol serves as our president and chief financial
officer. On August 2, 2006, we entered into an offer letter
with Mr. Caragol. The agreement provides for an initial
annual base salary of $150,000. On March 2, 2007,
Mr. Caragols base salary was increased to $165,000.
Then, on May 4, 2007, in connection with the appointment of
Mr. Caragol to also serve as our president, his base salary
was increased to
|
53
|
|
|
|
|
$185,000. In 2008, Mr. Caragols base salary was
further increased to $203,500. In addition, on March 2,
2007, Mr. Caragol entered into the VeriChip Corporation
Executive Management Change in Control Plan, under which, upon
the occurrence of a change in control, he is entitled to the sum
of (a) any and all earned but unpaid base salary and earned
but unpaid bonus compensation as of the date of the change in
control; (B) the multiplier (as defined below)
times his base salary; and (C) with respect to a change in
control occurring during 2008, the multiplier times
his average bonus for 2006 and 2007. For purposes of a change in
control during 2008, the multiplier is 2.0.
|
|
(7)
|
|
Mr. Gunther serves as Xmarks chief executive officer
and president. On August 11, 2005, we entered into an
employment agreement with Mr. Gunther, which provided for
an initial base salary of CDN$210,000. On March 2, 2007, we
amended Mr. Gunthers employment agreement to, among
other things, increase his base salary to CDN$250,000. In
addition, on March 2, 2007, Mr. Gunther entered into
the VeriChip Corporation Executive Management Change in Control
Plan, under which, upon the occurrence of a change in control
(e.g., the Xmark Transaction), he is entitled to the sum of
(a) any and all earned but unpaid base salary and earned
but unpaid bonus compensation as of the date of the change in
control; (B) the multiplier (as defined below)
times his base salary; and (C) with respect to a change in
control occurring during 2008, the multiplier times
his average bonus for 2006 and 2007. For purposes of a change in
control during 2008, the multiplier is 2.0. However,
such
change-in-control
compensation will be decreased by the amount of any compensation
that is contractually guaranteed by the acquiror (e.g.,
Stanley), so long as the guaranteed compensation relates to an
executive position that is of the same or increased level of
responsibility and authority and at the same or higher salary
and bonus levels as Mr. Gunther held as of March 2,
2007. If Mr. Gunther were not guaranteed compensation on
these terms, the maximum amount to which he would be entitled
under the change in control plan, in connection with the Xmark
Transaction, would be $1,062,368. However, to address the fact
that Mr. Gunthers
change-in-control
compensation would equal $0 if Stanley guaranteed his
compensation on these terms, we entered into a transaction bonus
agreement with Mr. Gunther, dated February 11, 2008,
to guarantee him a payment of $600,000 upon the closing of the
Xmark Transaction. Stanley has agreed to assume the terms of the
letter agreement between Mr. Gunther and us, dated
August 11, 2005, as amended by the letter agreement between
Mr. Gunther and us, dated March 2, 2007. Therefore, we
believe that Mr. Gunther is only entitled to a payment of
$600,000 from VeriChip under the transaction bonus agreement.
Mr. Gunther has recently notified us, however, that he
disputes the amount of this payment.
|
Required
Vote and Board Recommendation
All holders of our common stock as of the record date are
entitled to vote on Proposal No. 1. Approval of the
Stock Purchase Agreement and the transactions contemplated by
the Stock Purchase Agreement requires the affirmative vote of
the holders of a majority of the outstanding shares of our
common stock entitled to vote at the special meeting.
Abstentions and broker non-votes will have the same
effect as votes against Proposal No. 1.
The board of directors has concluded that the Stock Purchase
Agreement and transactions contemplated by the Stock Purchase
Agreement, including the Xmark Transaction, are in the best
interests of our stockholders.
THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL TO APPROVE THE STOCK PURCHASE AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY THE STOCK PURCHASE
AGREEMENT
54
SELECTED
FINANCIAL DATA
The following table summarizes certain of our selected financial
data for the five years ended December 31, 2007 and the
three months ended March 31, 2008 and 2007.
The summary historical financial data is only a summary, and
should be read in conjunction with
Managements
Discussion and Analysis of Financial Condition and Results of
Operations,
the consolidated financial statements and
the related notes contained in our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007 filed with
the SEC on March 28, 2008, which is incorporated by
reference into this proxy statement.
We acquired two businesses during the first half of 2005 and,
accordingly, our historical results only include their results
of operations since their respective dates of acquisition. The
pro forma results reflected below give effect to the
acquisitions of these two businesses as if they had occurred on
January 1, 2005.
Consolidated
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2005 Pro
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
forma
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Historical
|
|
|
Historical
|
|
|
(unaudited)
|
|
|
Historical
|
|
|
Historical
|
|
|
Historical
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
32,106
|
|
|
$
|
27,304
|
|
|
$
|
24,554
|
|
|
$
|
15,869
|
|
|
$
|
247
|
|
|
$
|
545
|
|
Total cost of products and services
|
|
|
14,960
|
|
|
|
11,779
|
|
|
|
10,332
|
|
|
|
6,395
|
|
|
|
199
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
17,146
|
|
|
|
15,525
|
|
|
|
14,222
|
|
|
|
9,474
|
|
|
|
48
|
|
|
|
345
|
|
Selling, general and administrative
|
|
|
23,514
|
|
|
|
17,620
|
|
|
|
16,990
|
|
|
|
12,442
|
|
|
|
1,930
|
|
|
|
1,977
|
|
Research and development
|
|
|
4,678
|
|
|
|
3,786
|
|
|
|
3,260
|
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
(222
|
)
|
|
|
(57
|
)
|
|
|
(83
|
)
|
|
|
(63
|
)
|
|
|
(15
|
)
|
|
|
|
|
Interest expense
|
|
|
1,698
|
|
|
|
868
|
|
|
|
343
|
|
|
|
343
|
|
|
|
144
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit for income taxes
|
|
|
(12,966
|
)
|
|
|
(6,692
|
)
|
|
|
(6,288
|
)
|
|
|
(5,206
|
)
|
|
|
(2,011
|
)
|
|
|
(1,710
|
)
|
(Benefit from) provision for income taxes
|
|
|
(1,056
|
)
|
|
|
33
|
|
|
|
(761
|
)
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(11,910
|
)
|
|
|
(6,725
|
)
|
|
|
(5,527
|
)
|
|
|
(5,262
|
)
|
|
|
(2,011
|
)
|
|
|
(1,710
|
)
|
Deemed dividends
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholder
|
|
$
|
(11,910
|
)
|
|
$
|
(6,725
|
)
|
|
$
|
(5,528
|
)
|
|
$
|
(5,263
|
)
|
|
$
|
(2,011
|
)
|
|
$
|
(1,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholder per common share-
basic and diluted
|
|
$
|
(1.36
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: Basic and
diluted
|
|
|
8,756
|
|
|
|
5,556
|
|
|
|
5,556
|
|
|
|
5,279
|
|
|
|
4,444
|
|
|
|
4,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Historical (in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
7,250
|
|
|
$
|
996
|
|
|
$
|
1,440
|
|
|
$
|
23
|
|
|
$
|
269
|
|
Equipment, net of accumulated depreciation and amortization
|
|
|
952
|
|
|
|
950
|
|
|
|
890
|
|
|
|
131
|
|
|
|
147
|
|
Goodwill
|
|
|
15,776
|
|
|
|
16,025
|
|
|
|
16,982
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
49,998
|
|
|
|
50,888
|
|
|
|
48,438
|
|
|
|
283
|
|
|
|
782
|
|
Long-term debt
|
|
|
10,753
|
|
|
|
13,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
14,435
|
|
|
|
14,488
|
|
|
|
6,975
|
|
|
|
4,221
|
|
|
|
2,864
|
|
Stockholders equity (deficit)
|
|
|
25,591
|
|
|
|
22,345
|
|
|
|
28,527
|
|
|
|
(4,012
|
)
|
|
|
(2,258
|
)
|
EXI
Wireless Inc.
We have presented the following selected consolidated financial
data for EXI Wireless Inc. because EXI Wireless is considered to
be a predecessor of ours. The information presented is for
periods prior to our acquisition of EXI Wireless. We acquired
EXI Wireless effective March 31, 2005.
You should read the following selected consolidated financial
data in conjunction with the EXI Wireless consolidated financial
statements and related notes and Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations appearing in our Annual Report
on
Form 10-K,
as amended, for the year ended December 31, 2007 filed with
the SEC on March 28, 2008, which is incorporated by
reference into this proxy statement. The consolidated statements
of operations and balance sheet data at and for the years ended
December 31, 2004 and 2003, and at and for the three months
ended March 31, 2005, are derived from the EXI Wireless
audited consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,986
|
|
|
$
|
6,004
|
|
|
$
|
6,118
|
|
Cost of sales
|
|
|
575
|
|
|
|
1,763
|
|
|
|
1,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,411
|
|
|
|
4,241
|
|
|
|
4,383
|
|
Selling, general and administrative expense and depreciation and
amortization
|
|
|
1,355
|
|
|
|
3,524
|
|
|
|
3,222
|
|
Research and development
|
|
|
262
|
|
|
|
918
|
|
|
|
741
|
|
Interest and other income
|
|
|
(2
|
)
|
|
|
(17
|
)
|
|
|
(4
|
)
|
Foreign exchange loss (gain)
|
|
|
(18
|
)
|
|
|
169
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
(186
|
)
|
|
|
(353
|
)
|
|
|
90
|
|
Benefit from income taxes
|
|
|
|
|
|
|
(24
|
)
|
|
|
(55
|
)
|
Loss from discontinued operations net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(186
|
)
|
|
|
(329
|
)
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
554
|
|
|
|
1,127
|
|
|
|
1,025
|
|
Property, plant and equipment
|
|
|
191
|
|
|
|
189
|
|
|
|
294
|
|
Goodwill
|
|
|
1,441
|
|
|
|
1,450
|
|
|
|
1,348
|
|
Total assets
|
|
|
4,975
|
|
|
|
5,338
|
|
|
|
5,203
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
ended
|
|
|
|
|
March 31,
|
|
Year Ended December 31,
|
|
|
2005
|
|
2004
|
|
2003
|
|
Total debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
3,971
|
|
|
|
4,025
|
|
|
|
4,070
|
|
Instantel
Inc.
We have presented the following selected consolidated financial
data for Instantel Inc. because Instantel is considered to be a
predecessor of ours. The information presented is for periods
prior to our acquisition of Instantel. We acquired Instantel
effective June 10, 2005.
You should read the following selected consolidated financial
data in conjunction with Instantels consolidated financial
statements and related notes and Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations appearing in our Annual Report
on
Form 10-K,
as amended, for the year ended December 31, 2007 filed with
the SEC on March 28, 2008, which is incorporated by
reference into this proxy statement. The consolidated statements
of operations and balance sheet data at and for the years ended
December 31, 2004 and 2003, and at and for the period ended
June 9, 2005, are derived from Instantels audited
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
June 9,
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(in thousands)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,759
|
|
|
$
|
13,595
|
|
|
$
|
11,382
|
|
Cost of goods sold
|
|
|
3,226
|
|
|
|
5,450
|
|
|
|
4,645
|
|
Gross profit
|
|
|
3,533
|
|
|
|
8,145
|
|
|
|
6,737
|
|
Selling, general and administrative expense
|
|
|
4,205
|
|
|
|
6,928
|
|
|
|
6,281
|
|
Research and development
|
|
|
1,040
|
|
|
|
1,688
|
|
|
|
1,397
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
367
|
|
|
|
943
|
|
|
|
1,055
|
|
Loss before income taxes
|
|
|
(2,079
|
)
|
|
|
(1,414
|
)
|
|
|
(1,996
|
)
|
Benefit from income taxes
|
|
|
(1,221
|
)
|
|
|
(660
|
)
|
|
|
(795
|
)
|
Net loss
|
|
|
(858
|
)
|
|
|
(754
|
)
|
|
|
(1,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 9,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4
|
|
|
$
|
46
|
|
|
$
|
167
|
|
Property and Equipment
|
|
|
493
|
|
|
|
474
|
|
|
|
278
|
|
Goodwill
|
|
|
593
|
|
|
|
593
|
|
|
|
593
|
|
Total Assets
|
|
|
10,280
|
|
|
|
11,593
|
|
|
|
14,418
|
|
Long-term debt
|
|
|
|
|
|
|
5,500
|
|
|
|
5,500
|
|
Total debt
|
|
|
6,214
|
|
|
|
6,087
|
|
|
|
8,133
|
|
Stockholders (deficit) equity
|
|
|
(222
|
)
|
|
|
634
|
|
|
|
1,382
|
|
57
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated
financial statements give effect to our sale of Xmark and our
proposed initial, special cash dividend. The statements are
derived from, and should be read in conjunction with, our
historical financial statements and notes thereto, as presented
in our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007 filed with
the SEC on March 28, 2008 and our Quarterly Report on
Form 10-Q
for the three months ended March 31, 2008 filed with the
SEC on May 15, 2008, both of which are incorporated by
reference into this proxy statement.
The unaudited pro forma condensed consolidated balance sheet as
of March 31, 2008 assumes the Xmark Transaction occurred on
March 31, 2008. The unaudited pro forma condensed
consolidated statements of operations for the year ended
December 31, 2007 and the three months ended March 31,
2008 give effect to the Xmark Transaction as if it had occurred
as of the beginning of those periods.
The unaudited pro forma financial information is presented for
illustrative purposes and is not designed to represent, and does
not represent, what the financial position or operating results
would have been had the Xmark Transaction been completed as of
the dates assumed, nor is it intended to project our future
financial position or results of operations.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
At March 31, 2008
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Xmark
|
|
|
|
|
|
Without
|
|
|
Pro Forma
|
|
|
|
|
|
|
Historical
|
|
|
(a)
|
|
|
Other
|
|
|
Xmark
|
|
|
Adjustment
|
|
|
As Adjusted
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,935
|
|
|
$
|
40,674
|
|
|
$
|
(21,517
|
)(b)(c)
|
|
$
|
24,092
|
|
|
$
|
(15,000
|
)(f)
|
|
$
|
9,092
|
|
Restricted cash
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
4,500
|
|
Accounts receivable, net
|
|
|
5,395
|
|
|
|
(5,381
|
)
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
Inventories
|
|
|
2,604
|
|
|
|
(2,498
|
)
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
106
|
|
Pre-paid expenses and other
|
|
|
2,149
|
|
|
|
(507
|
)
|
|
|
(500
|
)(b)
|
|
|
1,142
|
|
|
|
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,083
|
|
|
|
36,788
|
|
|
|
(22,017
|
)
|
|
|
29,854
|
|
|
|
(15,000
|
)
|
|
|
14,854
|
|
Property and equipment, net
|
|
|
875
|
|
|
|
(770
|
)
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
105
|
|
Goodwill and other intangible assets, net
|
|
|
32,080
|
|
|
|
(32,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
48,038
|
|
|
$
|
3,938
|
|
|
|
(22,017
|
)
|
|
$
|
29,959
|
|
|
$
|
(15,000
|
)
|
|
$
|
14,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
$
|
8,000
|
|
|
$
|
|
|
|
$
|
(8,000
|
)(b)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accounts payable
|
|
|
1,086
|
|
|
|
(858
|
)
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
228
|
|
Deferred gain on sale
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
4,500
|
|
Accrued expenses and other liabilities
|
|
|
3,704
|
|
|
|
(2,812
|
)
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,790
|
|
|
|
830
|
|
|
|
(8,000
|
)
|
|
|
5,620
|
|
|
|
|
|
|
|
5,620
|
|
Deferred taxes
|
|
|
3,693
|
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable, stockholder
|
|
|
7,595
|
|
|
|
|
|
|
|
(7,595
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
24,078
|
|
|
|
(2,863
|
)
|
|
|
(15,595
|
)
|
|
|
5,620
|
|
|
|
|
|
|
|
5,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
23,960
|
|
|
|
6,801
|
|
|
|
(6,422
|
)(b)(c)
|
|
|
24,339
|
|
|
|
(15,000
|
)(f)
|
|
|
9,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
48,038
|
|
|
$
|
3,938
|
|
|
$
|
(22,017
|
)
|
|
$
|
29,959
|
|
|
$
|
(15,000
|
)
|
|
$
|
14,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
58
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2007
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
of Xmark
|
|
|
|
|
|
Without
|
|
|
Pro Forma
|
|
|
|
|
|
|
Historical
|
|
|
(e)
|
|
|
Other
|
|
|
Xmark
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
Revenue
|
|
$
|
30,780
|
|
|
$
|
(30,704
|
)
|
|
$
|
|
|
|
$
|
76
|
|
|
|
|
|
|
$
|
76
|
|
Cost of revenue
|
|
|
14,309
|
|
|
|
(13,948
|
)
|
|
|
|
|
|
|
361
|
|
|
|
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,471
|
|
|
|
(16,756
|
)
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
(285
|
)
|
Operating expenses
|
|
|
27,518
|
|
|
|
(15,428
|
)
|
|
|
|
|
|
|
12,090
|
|
|
|
8,805
|
(c)
|
|
|
20,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11,047
|
)
|
|
|
(1,328
|
)
|
|
|
|
|
|
|
(12,375
|
)
|
|
|
(8,805
|
)
|
|
|
(21,180
|
)
|
Interest (income) and other expense
|
|
|
222
|
|
|
|
(502
|
)
|
|
|
|
|
|
|
(280
|
)
|
|
|
(6,801
|
)(a)
|
|
|
(7,081
|
)
|
Interest expense
|
|
|
1,698
|
|
|
|
(25
|
)
|
|
|
(1,673
|
)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
1,920
|
|
|
|
(527
|
)
|
|
|
(1,673
|
)
|
|
|
(280
|
)
|
|
|
(6,801
|
)
|
|
|
(7,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(12,967
|
)
|
|
|
(801
|
)
|
|
|
1,673
|
|
|
|
(12,095
|
)
|
|
|
(2,004
|
)
|
|
|
(14,099
|
)
|
Income tax benefit
|
|
|
(1,056
|
)
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(11,911
|
)
|
|
$
|
(1,857
|
)
|
|
$
|
(1,673
|
)
|
|
$
|
(12,095
|
)
|
|
$
|
(2,004
|
)
|
|
$
|
(14,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from continuing operations
basic and diluted
|
|
$
|
(1.36
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(1.38
|
)
|
|
|
|
|
|
$
|
(1.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
and diluted
|
|
|
8,756
|
|
|
|
|
|
|
|
|
|
|
|
8,756
|
|
|
|
|
|
|
|
8,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
59
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2008
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
of Xmark
|
|
|
|
|
|
Without
|
|
|
Pro Forma
|
|
|
|
|
|
|
Historical
|
|
|
(e)
|
|
|
Other
|
|
|
Xmark
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
8,598
|
|
|
$
|
(8,595
|
)
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
3
|
|
Gross profit
|
|
|
3,558
|
|
|
|
(3,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
5,040
|
|
|
|
(5,037
|
)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Loss from operations
|
|
|
7,211
|
|
|
|
(4,130
|
)
|
|
|
|
|
|
|
3,081
|
|
|
|
8,805
|
(c)
|
|
|
11,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) and other expense
|
|
|
(2,171
|
)
|
|
|
(907
|
)
|
|
|
|
|
|
|
(3,078
|
)
|
|
|
(8,805
|
)
|
|
|
(11,883
|
)
|
Interest expense
|
|
|
52
|
|
|
|
93
|
|
|
|
|
|
|
|
145
|
|
|
|
(6,801
|
)(a)
|
|
|
(6,656
|
)
|
Other expenses
|
|
|
361
|
|
|
|
|
|
|
|
(361
|
)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
413
|
|
|
|
93
|
|
|
|
(361
|
)
|
|
|
145
|
|
|
|
(6,801
|
)
|
|
|
(6,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,584
|
)
|
|
|
(1,000
|
)
|
|
|
361
|
|
|
|
(3,223
|
)
|
|
|
(2,004
|
)
|
|
|
(5,227
|
)
|
Income tax provision
|
|
|
283
|
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(2,867
|
)
|
|
$
|
(717
|
)
|
|
$
|
361
|
|
|
$
|
(3,223
|
)
|
|
$
|
(2,004
|
)
|
|
$
|
(5,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from continuing operations
basic and diluted
|
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
and diluted
|
|
|
9,604
|
|
|
|
|
|
|
|
|
|
|
|
9,604
|
|
|
|
|
|
|
|
9,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
60
Notes to
Unaudited Pro Forma Condensed
Consolidated Financial Statements
|
|
Note 1
|
Basis of
Presentation
|
The unaudited pro forma condensed consolidated statements of
operations for the twelve months ended December 31, 2007
and the three months ended March 31, 2008 presented herein
have been prepared based on historical reported amounts,
adjusted to reflect: (1) the deconsolidation of Xmark and
the assumed reduction of interest expense from the retirement of
all debt after the sale of Xmark, and (2) the costs
incurred and the initial gain from the sale of Xmark. In
conjunction with the terms of the Stock Purchase Agreement,
$4.5 million will be placed in a twelve-month escrow to
fund indemnification obligations, if any, that may arise during
that time. We will defer any gain on the escrowed proceeds until
the escrow is settled.
The unaudited pro forma balance sheet as of March 31, 2008
presented herein has been prepared based on historical reported
amounts, adjusted to reflect: (1) the sale of Xmark,
including estimated proceeds received; assets and liabilities
sold and transferred; debt retired and contractual obligations
settled; and (2) our proposed $15 million initial,
special cash dividend, which amount is subject to reduction due
to uncertainties regarding the ultimate amount of our
liabilities following the Xmark Transaction.
The estimated net sales price and gain on the sale of Xmark is
as follows (in thousands):
|
|
|
|
|
Base sales price
|
|
$
|
45,000
|
|
Less estimated transaction costs(3)
|
|
|
(1,100
|
)
|
Plus estimated Aggregate Adjustment pursuant to Stock Purchase
Agreement(1)
|
|
|
2,734
|
|
|
|
|
|
|
Net sales price to VeriChip, after transaction costs
|
|
$
|
46,634
|
|
|
|
|
|
|
Consisting of:
|
|
|
|
|
Cash
|
|
$
|
42,134
|
|
Restricted cash(2)
|
|
|
4,500
|
|
|
|
|
|
|
Net sales price to VeriChip, after transaction costs
|
|
|
46,634
|
|
Book value of VeriChips ownership interest in Xmark
|
|
|
35,333
|
|
|
|
|
|
|
Gain on sale of Xmark(2)
|
|
$
|
11,301
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on the Xmark balance sheet at March 31, 2008 and
calculated pursuant to the Stock Purchase Agreement.
|
|
(2)
|
|
To be held in escrow after closing for twelve months to fund
indemnification obligations, if any.
|
|
|
|
The gain related the $4.5 million will be deferred until
the escrow is settled.
|
|
(3)
|
|
Estimate of transaction costs, including legal, banking and
accounting fees.
|
|
|
Note 3
|
Pro Forma
Adjustments
|
The following are descriptions of the pro forma adjustments
related to the sale of Xmark, identified as (a) through
(f) in the accompanying Unaudited Pro Forma Condensed
Consolidated Balance Sheet and Unaudited Pro Forma Condensed
Consolidated Statements of Operations (in thousands):
|
|
|
|
(a)
|
Proceeds to be received from the sale of Xmark and the sale of
assets and liabilities pursuant to the Stock Purchase Agreement.
The gain of $4.5 million related to the escrow agreement
will be deferred until the escrow is settled. See Note 2
for a more complete description of the proceeds and resulting
gain on the sale of Xmark.
|
|
|
|
|
(b)
|
Retirement of our notes payable to Valens Offshore and Digital
Angel, including a gain on retirement of the Digital Angel debt
of $2.5 million and a pre-payment fee of $120 thousand on
the Valens Offshore debt. The net gain of $2.4 million has
been included as a pro forma adjustment in
|
61
|
|
|
|
|
the Unaudited Pro Forma Condensed Consolidated Balance Sheet,
but has not been included in the Unaudited Pro Forma Statements
of Operations.
|
The table below details the payments related to the retirement
of debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valens
|
|
|
|
|
|
|
Digital Angel
|
|
|
Offshore
|
|
|
Total
|
|
|
Debt outstanding at March 31, 2008
|
|
$
|
7,595
|
|
|
$
|
8,000
|
|
|
$
|
15,595
|
|
Amount pre-paid in December 2007
|
|
|
(500
|
)
|
|
|
|
|
|
|
(500
|
)
|
Gain on early extinguishment
|
|
|
(2,503
|
)
|
|
|
|
|
|
|
(2,503
|
)
|
Pre-payment fee
|
|
|
|
|
|
|
120
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment required to retire all outstanding debt
|
|
$
|
4,592
|
|
|
$
|
8,120
|
|
|
$
|
12,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Includes payments to officers and employees of $8.8 million
related to contractual commitments for the settlement of
employment contract obligations, change of control payments, and
transaction bonus agreements.
|
|
|
|
|
(d)
|
Reduction of interest expense from the assumed retirement of
debt.
|
|
|
|
|
(e)
|
Elimination of the operating results of Xmark.
|
|
|
|
|
(f)
|
We plan to pay an initial, special cash dividend of
$15 million upon completion of the Xmark Transaction.
However, the actual amount may be lower due to uncertainties
regarding the ultimate amount of our liabilities following the
Xmark Transaction. We also plan to distribute any proceeds from
the sale of our VeriMed business and the release of the escrow
from the sale of Xmark at the completion of the escrow period in
the form of an additional dividend. The table below presents the
estimated use of initial proceeds:
|
|
|
|
|
|
Estimated net sales price (see Note 2)
|
|
$
|
46,634
|
|
Less twelve month escrow
|
|
|
(4,500
|
)
|
|
|
|
|
|
Sub-Total
|
|
|
42,134
|
|
Estimated use of initial proceeds:
|
|
|
|
|
Retirement of debt
|
|
|
(12,712
|
)
|
Contractual commitments
|
|
|
(8,805
|
)
|
Allocation to working capital
|
|
|
(5,617
|
)
|
|
|
|
|
|
Net sales price available for initial, special cash dividend
|
|
$
|
15,000
|
|
|
|
|
|
|
62
UNAUDITED
FINANCIAL STATEMENTS OF XMARK CORPORATION
XMARK
CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,460
|
|
|
$
|
5,155
|
|
|
$
|
988
|
|
Accounts receivable, net of allowance for doubtful accounts of
$144 (2007 - $144; 2006 - $146)
|
|
|
5,381
|
|
|
|
5,196
|
|
|
|
4,411
|
|
Inventories, net of allowance
|
|
|
2,498
|
|
|
|
2,211
|
|
|
|
3,149
|
|
Prepaid expenses and other current assets
|
|
|
488
|
|
|
|
347
|
|
|
|
449
|
|
Discontinued operations
|
|
|
19
|
|
|
|
202
|
|
|
|
108
|
|
Deferred tax asset
|
|
|
185
|
|
|
|
216
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
10,031
|
|
|
|
13,327
|
|
|
|
9,625
|
|
Due from parent
|
|
|
6,917
|
|
|
|
5,329
|
|
|
|
6,500
|
|
Equipment, net of accumulated amortization
|
|
|
770
|
|
|
|
840
|
|
|
|
823
|
|
Intangible assets, net of accumulated amortization
|
|
|
16,304
|
|
|
|
16,752
|
|
|
|
18,567
|
|
Goodwill
|
|
|
15,776
|
|
|
|
15,776
|
|
|
|
16,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,798
|
|
|
$
|
52,024
|
|
|
$
|
51,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness
|
|
$
|
|
|
|
$
|
1,515
|
|
|
$
|
853
|
|
Accounts payable
|
|
|
858
|
|
|
|
1,517
|
|
|
|
2,129
|
|
Accrued expenses and other current liabilities
|
|
|
2,812
|
|
|
|
3,675
|
|
|
|
3,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,670
|
|
|
|
6,707
|
|
|
|
6,474
|
|
Deferred tax liability
|
|
|
3,878
|
|
|
|
3,808
|
|
|
|
5,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
7,548
|
|
|
|
10,515
|
|
|
|
11,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
42,250
|
|
|
|
41,509
|
|
|
|
39,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,798
|
|
|
$
|
52,024
|
|
|
$
|
51,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
63
XMARK
CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month
|
|
|
|
|
|
|
period ended March 31,
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Product revenue
|
|
$
|
8,049
|
|
|
$
|
6,678
|
|
|
$
|
29,002
|
|
|
$
|
25,095
|
|
|
$
|
15,524
|
|
Service revenue
|
|
|
546
|
|
|
|
431
|
|
|
|
1,701
|
|
|
|
1,340
|
|
|
|
1,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
8,595
|
|
|
|
7,109
|
|
|
|
30,703
|
|
|
|
26,435
|
|
|
|
16,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
3,121
|
|
|
|
3,065
|
|
|
|
12,729
|
|
|
|
10,129
|
|
|
|
5,735
|
|
Cost of services
|
|
|
437
|
|
|
|
262
|
|
|
|
1,219
|
|
|
|
861
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products and services
|
|
|
3,558
|
|
|
|
3,327
|
|
|
|
13,948
|
|
|
|
10,990
|
|
|
|
6,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,037
|
|
|
|
3,782
|
|
|
|
16,755
|
|
|
|
15,445
|
|
|
|
10,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,863
|
|
|
|
2,482
|
|
|
|
9,872
|
|
|
|
10,217
|
|
|
|
7,008
|
|
Research and development
|
|
|
939
|
|
|
|
1,372
|
|
|
|
4,355
|
|
|
|
3,626
|
|
|
|
2,090
|
|
Management fees to parent
|
|
|
330
|
|
|
|
750
|
|
|
|
1,200
|
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,132
|
|
|
|
4,604
|
|
|
|
15,427
|
|
|
|
14,803
|
|
|
|
9,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
905
|
|
|
|
(822
|
)
|
|
|
1,328
|
|
|
|
642
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized foreign exchange and other expense
|
|
|
(93
|
)
|
|
|
1
|
|
|
|
502
|
|
|
|
(57
|
)
|
|
|
(84
|
)
|
Interest expense
|
|
|
|
|
|
|
9
|
|
|
|
25
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(93
|
)
|
|
|
10
|
|
|
|
527
|
|
|
|
20
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
998
|
|
|
|
(832
|
)
|
|
|
801
|
|
|
|
622
|
|
|
|
1,184
|
|
Provision (benefit) for income taxes
|
|
|
281
|
|
|
|
45
|
|
|
|
(1,056
|
)
|
|
|
33
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
717
|
|
|
|
(877
|
)
|
|
|
1,857
|
|
|
|
589
|
|
|
|
1,128
|
|
Net income (loss) from discontinued operations
|
|
|
24
|
|
|
|
(62
|
)
|
|
|
1
|
|
|
|
(280
|
)
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
741
|
|
|
|
(939
|
)
|
|
|
1,858
|
|
|
|
309
|
|
|
|
1,173
|
|
Opening retained earnings
|
|
|
3,340
|
|
|
|
1,482
|
|
|
|
1,482
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing retained earnings
|
|
|
4,081
|
|
|
|
543
|
|
|
|
3,340
|
|
|
|
1,482
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
64
XMARK
CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three-month
period ended March 31,
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
741
|
|
|
$
|
(939
|
)
|
|
$
|
1,858
|
|
|
$
|
309
|
|
|
$
|
1,173
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
579
|
|
|
|
601
|
|
|
|
2,383
|
|
|
|
2,343
|
|
|
|
1,327
|
|
Deferred income taxes
|
|
|
101
|
|
|
|
|
|
|
|
(1,304
|
)
|
|
|
(160
|
)
|
|
|
391
|
|
Management fees to parent
|
|
|
330
|
|
|
|
750
|
|
|
|
1,200
|
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(185
|
)
|
|
|
(180
|
)
|
|
|
(785
|
)
|
|
|
684
|
|
|
|
(1,178
|
)
|
Inventories
|
|
|
(287
|
)
|
|
|
335
|
|
|
|
938
|
|
|
|
(1,311
|
)
|
|
|
427
|
|
Prepaid expenses and other current assets
|
|
|
(141
|
)
|
|
|
(155
|
)
|
|
|
102
|
|
|
|
44
|
|
|
|
(147
|
)
|
Accounts payable and accrued expenses
|
|
|
(1,522
|
)
|
|
|
(574
|
)
|
|
|
(180
|
)
|
|
|
2,228
|
|
|
|
440
|
|
Discontinued operations
|
|
|
62
|
|
|
|
(115
|
)
|
|
|
(94
|
)
|
|
|
60
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(322
|
)
|
|
|
(277
|
)
|
|
|
4,118
|
|
|
|
5,157
|
|
|
|
2,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for equipment
|
|
|
(61
|
)
|
|
|
(112
|
)
|
|
|
(584
|
)
|
|
|
(580
|
)
|
|
|
(342
|
)
|
Discontinued operations
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
60
|
|
|
|
(112
|
)
|
|
|
(584
|
)
|
|
|
(580
|
)
|
|
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term borrowings, net
|
|
|
(1,515
|
)
|
|
|
350
|
|
|
|
662
|
|
|
|
759
|
|
|
|
94
|
|
Advances to parent company
|
|
|
(1,918
|
)
|
|
|
(53
|
)
|
|
|
71
|
|
|
|
(3,781
|
)
|
|
|
20,218
|
|
Purchase of Instantel Inc.
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
(2,029
|
)
|
|
|
(22,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(3,433
|
)
|
|
|
297
|
|
|
|
633
|
|
|
|
(5,051
|
)
|
|
|
(1,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(3,695
|
)
|
|
|
(92
|
)
|
|
|
4,167
|
|
|
|
(474
|
)
|
|
|
335
|
|
Cash, beginning of year
|
|
|
5,155
|
|
|
|
988
|
|
|
|
988
|
|
|
|
1,462
|
|
|
|
1,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
1,460
|
|
|
$
|
896
|
|
|
$
|
5,155
|
|
|
$
|
988
|
|
|
$
|
1,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
65
XMARK
CORPORATION
Notes to Unaudited Condensed Consolidated Financial
Statements
(tabulated amounts in thousands of dollars)
|
|
Note 1
|
Basis of
Presentation
|
EXI Wireless Inc. (EXI) was incorporated under the
Alberta Business Corporation Act in 1996 and was continued under
the Canada Business Corporation Act on June 2, 1999.
Effective March 31, 2005, Applied Digital Solutions, Inc.,
doing business as Digital Angel (Digital Angel)
acquired EXI and its wholly-owned subsidiaries.
VeriChip Corporation (VeriChip) is a Delaware
corporation formed by Digital Angel in November 2001. VeriChip
commenced operations in January 2002. On February 14, 2007,
VeriChip completed an initial public offering of its common
stock.
On March 31, 2005, Digital Angel contributed EXI to
VeriChip under the terms of an exchange agreement.
On June 10, 2005, Instantel Inc. became a wholly-owned
subsidiary of EXI under the terms of a share purchase agreement
(see Note 4).
In 2006, EXIs wholly-owned subsidiaries, including
Instantel, were amalgamated and subsequently, in 2007, re-named
Xmark Corporation. Effective January 1, 2008, EXI and Xmark
Corporation were amalgamated and continued under the name Xmark
Corporation (Xmark).
Xmark develops, markets and sells RFID systems used for the
identification, location and protection of people and assets in
the healthcare market. Xmarks healthcare security systems
utilize external, active RFID tags to locate and protect people
and assets.
Significant
Accounting Policies
Principles
of Consolidation
The financial statements include the accounts of the EXI and its
wholly-owned subsidiaries for all periods presented and
Instantel Inc. from the date of acquisition.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. requires management to make certain estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are
based on the knowledge of current events and actions Xmark may
undertake in the future, they may ultimately differ from actual
results. Included in these estimates are assumptions about
allowances for inventory obsolescence, bad debt reserves, lives
of long-lived assets, lives of intangible assets, estimates of
the fair value of acquired assets and assumed liabilities, the
determination of whether any impairment is to be recognized on
goodwill or intangibles, among others.
Foreign
Currency
Effective March 31, 2005, Digital Angel contributed EXI to
VeriChip. From April 1, 2005 until June 30, 2005, the
subsidiary used its local currency, the Canadian dollar, as its
functional currency. Results of operations and cash flow were
translated to U.S. dollars at average exchange rates during
the period, and assets and liabilities were translated at
end-of-period exchange rates. Translation adjustments resulting
from this process are included in accumulated other
comprehensive loss in the statement of stockholders equity.
On July 1, 2005, the functional currency changed from the
local currency to the reporting currency. This was done as a
result of a functional currency determination test that showed
that the majority of EXIs business operations were
transacted in the reporting currency. Translation adjustments
for the period April 1,
66
2005 to June 30, 2005 were not removed from equity, and
will remain in equity until a sale or substantially complete
liquidation of the investment in EXI. The translated amounts for
non-monetary assets at the end of the period became the
accounting basis for those assets in the period of the change
and subsequent periods.
Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of
operations as incurred. Foreign currency gains and losses on
debt borrowings and repayments are included as a component of
interest income and other expenses. A realized gain/(loss) of
$77,000, ($1,000), $(502,000), $40,000 and $60,000 was recorded
for the three months ended March 31, 2008 and
March 31, 2007, and the years ended December 31, 2007,
2006, and 2005, respectively.
Inventories
Inventories consist of raw materials, work in process, and
finished goods. Inventory is valued at the lower of cost,
determined by the
first-in,
first-out method, or market. Xmark monitors and analyzes
inventory for potential obsolescence and slow-moving items based
upon the aging of the inventory and the inventory turns by
product. Inventory items designated as slow moving are reduced
to net realizable value. Inventory items designated as obsolete
are written off. The allowance for inventory excess and
obsolescence was approximately $0.5 million as of
March 31, 2008, and $0.5 million and $0.2 million
as of December 31, 2007 and 2006, respectively.
Equipment
Equipment is carried at cost less accumulated depreciation
computed using the straight-line method over the estimated
useful lives. Leasehold improvements are depreciated over the
life of the lease, software is depreciated over one year, and
equipment is depreciated over three years. Repairs and
maintenance, which do not extend the useful life of the asset,
are charged to expense as incurred. Gains and losses on sales
and retirements are reflected in the consolidated statements of
operations.
Advertising
Costs
Xmark expenses production costs of print advertisements on the
first date the advertisements take place. Advertising expense
included in selling, general and administrative expense was
approximately $42,000, $47,000, $180,000, $190,000 and $182,000
for the three months ended March 31, 2008 and
March 31, 2007, and the years ended December 31, 2007,
2006 and 2005, respectively.
Goodwill
and Other Intangible Assets
Xmark follows Statement of Financial Accounting Standards, or
SFAS, No. 142,
Goodwill and Intangible Assets
, or
FAS 142. Goodwill represents the excess of purchase price
over the fair values assigned to the net assets acquired in
business combinations. Goodwill is allocated to reporting units
as of the acquisition date for the purpose of goodwill
impairment testing. Xmarks reporting units are those
businesses for which discrete financial information is available
and upon which segment management makes operating decisions.
Goodwill of a reporting unit is tested for impairment at least
once a year, or between testing dates if an impairment condition
or event is determined to have occurred.
Xmarks trademarks are indefinite lived-assets, and
accordingly are not amortized. Xmark tests its trademarks for
impairment at least once a year, or between testing dates if an
impairment condition or event is determined to have occurred.
Future events, such as market conditions or operational
performance of acquired businesses, could cause Xmark to
conclude that additional impairment conditions exist. Any
resulting impairment loss could also have a material adverse
impact on the financial condition and results of operations.
Xmark has other intangible assets consisting of patented and
non-patented technologies, customer relationships and
distribution networks. These intangible assets are amortized
over their expected economic lives ranging from 4 to
12.3 years. The lives were determined based upon the
expected use of the asset, the
67
estimated average life of the replacement parts of the reporting
units products, the stability of the industry, expected changes
in and replacement value of distribution networks and other
factors deemed appropriate.
In accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets,
Xmark
continually evaluates whether events or circumstances have
occurred that indicate the remaining estimated useful lives of
its definite-lives intangible assets may warrant revision or
that the remaining balance of such assets may not be
recoverable. Xmark uses an estimate of the related undiscounted
cash flows over the remaining life of the asset in measuring
whether the asset is recoverable. There was no impairment of
definite-lived intangible or other long-lived assets during
2008, 2007, 2006 or 2005.
Revenue
Recognition
Xmark follows the revenue recognition guidance in Staff
Accounting Bulletin, or SAB, 101, and SAB 104.
Hardware and software revenue is recognized when persuasive
evidence of an arrangement exists, the goods are shipped and
title has transferred, the price is fixed or determinable and
collection of the sales proceeds is reasonably assured. Revenue
from the sale of software implementation services and consulting
services is recognized as the services are performed. Revenue
from post-contract support services is recognized over the term
of the agreement. When software arrangements include multiple
elements to which contract accounting does not apply, the
individual elements are accounted for separately if vendor
specific objective evidence, or VSOE, of fair value exists for
the undelivered elements. Generally, the residual method is
applied in allocating revenue between delivered and undelivered
elements. If VSOE does not exist, the revenue on the completed
arrangement is deferred until the earlier of VSOE being
established or all of the undelivered elements are delivered or
performed with the following exceptions: if the only undelivered
element is post contract support, the deferred amount is
recognized ratably over the post contract support period, and if
the only undelivered element is services that do not require
significant production, modification or customization of the
software, the deferred amount is recognized as the services are
performed. Maintenance revenue is deferred and recognized
ratably over the terms of the maintenance agreements.
Warranties
Xmark provides certain warranties on all of its products.
Provisions for future warranty costs are based on
managements best estimates and are recorded when revenue
on product sales is recognized. The warranty period for products
range from one to three years. Management determines the
warranty provision based on known product failures, historical
experience, and other currently available evidence.
Warranty expense was approximately nil, $0.4 million,
$0.6 million, $0.6 million and $0.2 million for
the periods ended March 31, 2008 and March 31, 2007,
and the years ended December 31, 2007, 2006 and 2005,
respectively.
Income
Taxes
Xmark accounts for income taxes under the asset and liability
approach for the financial accounting and reporting for income
taxes. Deferred taxes are recorded based upon the tax impact of
items affecting financial reporting and tax filings in different
periods. A valuation allowance is provided against net deferred
tax assets when Xmark determines realization is not currently
judged to be more likely than not.
Effective January 1, 2007, Xmark adopted the provisions of
the Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109. FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS No. 109, Accounting for Income
Taxes. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the
tax benefit as the largest amount which is more than 50% likely
of being realized upon ultimate settlement. Xmark considers many
factors when evaluating and
68
estimating its tax positions and tax benefits, which may require
periodic adjustments and which may not accurately anticipate
actual outcomes. The impact of FIN 48 on Xmarks
financial position is discussed in Note 9
Income Taxes. Accordingly, Xmark reports a liability for
unrecognized tax benefits resulting from the uncertain tax
positions taken or expected to be taken in a tax return and
recognizes interest and penalties, if any, related to uncertain
tax positions in income tax expense. In connection with the
adoption of FIN 48, Xmark has elected an accounting policy
to classify interest and penalties related to unrecognized tax
benefits as interest expense.
Research
and Development
Research and development costs are expensed as incurred and
consist of development work associated with Xmarks
existing and potential products. Xmarks research and
development expenses relate primarily to payroll costs for
engineering personnel, costs associated with various projects,
including testing, developing prototypes and related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Raw materials
|
|
|
$1,368
|
|
|
|
$1,411
|
|
|
|
$1,448
|
|
Work in process
|
|
|
857
|
|
|
|
512
|
|
|
|
1,255
|
|
Finished goods
|
|
|
818
|
|
|
|
810
|
|
|
|
611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,043
|
|
|
|
2,733
|
|
|
|
3,314
|
|
Allowance for excess and obsolescence
|
|
|
(545
|
)
|
|
|
(522
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2,498
|
|
|
|
$ 2,211
|
|
|
|
$ 3,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Leasehold improvements
|
|
|
$132
|
|
|
|
$130
|
|
|
|
$128
|
|
Equipment
|
|
|
2,079
|
|
|
|
2,019
|
|
|
|
1,306
|
|
Software
|
|
|
156
|
|
|
|
156
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,367
|
|
|
|
2,305
|
|
|
|
1,606
|
|
Less accumulated depreciation
|
|
|
(1,597
|
)
|
|
|
(1,465
|
)
|
|
|
(783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$770
|
|
|
|
$840
|
|
|
|
$823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense charged against income
amounted to approximately $0.1 million, $0.6 million
and $0.5 million for the periods ended March 31, 2008,
December 31, 2007 and December 31, 2006 respectively.
Instantel
Inc.
On June 10, 2005, EXI entered into a share purchase
agreement by and among Instantel, Instantel Holding Company
s.ar.l., Perceptis, L.P., VeriChip, Xmark and Digital Angel to
acquire 100% of the common stock of Instantel. VeriChip funded
the acquisition, with such funding being recorded as a loan to
Xmark. Under the terms of the agreement, Instantel became a
wholly-owned subsidiary of EXI.
The purchase price for Instantel was $24.5 million. The
first payment of $22.0 million was paid in cash at the
closing of the transaction. The second payment was required to
be made on the earlier of (i) the closing of
VeriChips initial public offering or
(ii) September 30, 2006. Prior to September 30,
2006, in accordance with the share purchase agreement, VeriChip
was notified by Perceptis that it would exercise its right to
69
receive the second payment of the purchase price in the form of
a cash payment of $2.5 million. In 2006, VeriChip paid
Perceptis $2.1 million, which amount reflected a holdback
of the amount due to Perceptis resulting from a pending
$0.4 million indemnification claim resulting from certain
tax obligations. The final payment of $0.2 million was made
in 2007, and $0.2 million was waived as settlement of the
indemnification claim. In addition, Xmark incurred approximately
$0.3 million in acquisition costs consisting primarily of
legal and accounting related services that are direct costs of
the acquisition. The initial payments to finance the acquisition
were funded by Digital Angel through VeriChip. For presentation
under U.S. generally accepted accounting principles, we have
treated that financing as capital contributions.
Instantel, which was based in Ottawa, Canada, manufactures and
sells healthcare security systems for the hospital and long-term
care markets and vibration monitoring for the commercial
construction market.
The Instantel acquisition was accounted for under the purchase
method of accounting. The excess of purchase price over the
estimated fair value of the assets acquired and liabilities
assumed of Instantel was recorded as goodwill of
$11.0 million. In addition, Xmark has recorded intangible
assets of $14.9 million comprised of patents, trademarks,
customer relationships and distribution networks. These
intangible assets are being amortized over periods ranging from
8.4 to 11.8 years. The trademarks have indefinite lives.
Xmark recorded amortization expense of approximately
$0.4 million, $0.4 million, $1.8 million,
$1.8 million and $0.6 million for the periods ended
March 31, 2008 and March 31, 2007, and the years ended
December 31, 2007, 2006 and 2005, respectively, associated
with these intangibles.
In considering the benefits of the Instantel acquisition,
management recognized the strategic complement of these
businesses technologies and customer bases with
Xmarks existing business. The estimated fair value of the
acquired intangible assets of Instantel were determined on the
basis of customer relationships, patents and other proprietary
rights for technologies, contract lives and revenue, distributor
relationships and other factors related to distribution
networks, and using discounted cash flow methodology. Under this
method, Xmark estimated the cash flows that each of these
intangible assets are expected to generate over the course of
their expected economic lives. Actual cash flows may differ
significantly from these estimates. The expected economic lives
of these intangible assets were determined based upon the
expected use of the asset, the ability to extend or renew
patents and other contractual provisions associated with the
asset, the estimated average life of the associated products,
the stability of the industry, expected changes in and
replacement value of distribution networks, and other factors
deemed appropriate.
In performing the expected life analysis, Xmark determined that
the acquired trademarks had indefinite lives. In making this
assessment, Xmark evaluated whether there were any legal,
regulatory, or contractual factors limiting the useful lives of
the acquired trademarks, and Xmark concluded that these factors
did not limit the useful lives of the acquired trademarks as of
the dates of their acquisition. In addition, Xmark evaluated and
determined that there were no competitive or economic factors,
including technological advances or obsolescence of the related
products, that limited the useful lives of the acquired
trademarks. Given Xmarks market share, the proprietary
nature of Xmarks RFID products, and the current
competitive environment, Xmark is not aware of any significant
risk that Xmarks technology will be rendered obsolete in
the foreseeable future. Therefore, Xmark concluded that based on
(i) the current market positions for the acquired products;
(ii) the overall expected growth of the RFID technology in
Xmarks market; (iii) the market presence provided by
the established distribution networks; (iv) the lack of
legal, contractual or competitive factors limiting the useful
lives of the acquired trademarks; and (v) the conclusion
that the trademarks will have value for the foreseeable future,
Xmark had reasonable support to conclude that the acquired
trademarks had indefinite lives.
70
The total purchase prices of Instantel was allocated as follows:
|
|
|
|
|
Current assets
|
|
$
|
5,678
|
|
Equipment
|
|
|
493
|
|
Intangibles:
|
|
|
|
|
Patented and non-patented proprietary technology
|
|
|
1,720
|
|
Trademarks
|
|
|
3,790
|
|
Customer relationships
|
|
|
3,390
|
|
Distribution network
|
|
|
6,000
|
|
Goodwill
|
|
|
10,787
|
|
Current liabilities
|
|
|
(2,748
|
)
|
Deferred tax liability
|
|
|
(4,622
|
)
|
|
|
|
|
|
|
|
$
|
24,488
|
|
|
|
|
|
|
In determining the purchase price for Instantel, Xmark
considered various factors including: (i) historical and
projected revenue streams and operating cash flows of each
company; (ii) their management teams; (iii) the
potential to expand the market for Xmarks existing
business through their existing distribution channels;
(iv) the complementary nature of each of Xmarks
product offerings as an extension of the offerings of the other
company and of Xmarks existing business;
(v) similarities in corporate culture; and (vi) the
opportunity for expanded research and development of the
combined product offerings and the potential for new product
offerings. Based on Xmarks assessments, it determined that
it was appropriate to offer a purchase price for Instantel that
resulted in the recognition of goodwill. Specifically,
Xmarks management believed that the business would grow,
in large part because of its industry standing and because its
asset/staff location and identification business, infant
protection business, and wander prevention business are, in
Xmarks view, poised for growth. Xmarks management
believed that the growth would ultimately result in a favorable
return on its investment notwithstanding the amount of the
purchase price that included amounts for goodwill. Based on such
assessments, Xmark determined that the purchase price offered
was appropriate for the businesses acquired.
The information below about Xmarks acquired intangible
assets is based upon purchase price allocations. The estimated
fair values of the acquired intangible assets were determined on
the basis of customer relationships, patents and other
proprietary rights for technologies, contract lives and revenue,
distributor relationships and other factors associated with
distribution networks, and using cash flow methodology. Under
this method, Xmark estimated the cash flows that each of the
intangible assets are expected to generate over the course of
their expected economic lives. Actual cash flows may differ
significantly from these estimates.
The expected economic lives of these intangible assets were
determined based upon an analysis of the expected use of the
asset, Xmarks ability to extend or renew patents and other
contractual provisions associated with the asset, the estimated
average life of the associated products, the stability of the
industry, expected changes in or the costs Xmark is likely to
incur in finding alternative distribution networks or channels,
and other factors deemed appropriate. In performing the expected
life analysis, Xmark determined that its trademarks had
indefinite lives. In making this assessment, Xmark evaluated
whether there were any legal, regulatory, or contractual factors
limiting the useful lives of the acquired trademarks, and it
concluded that these factors did not limit the useful lives of
the acquired trademarks as of the dates of their acquisition.
71
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
average
|
|
|
March 31,
|
|
December 31,
|
|
December 31,
|
|
lives
|
|
|
2008
|
|
2007
|
|
2006
|
|
(in years)
|
|
Trademarks
|
|
|
$4,921
|
|
|
$4,921
|
|
|
$4,921
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented and non-patented proprietary technology
|
|
|
$5,430
|
|
|
$5,430
|
|
|
$5,430
|
|
|
12.11
|
Customer relationships
|
|
|
4,288
|
|
|
4,288
|
|
|
4,288
|
|
|
8.75
|
Distribution networks
|
|
|
6,816
|
|
|
6,816
|
|
|
6,816
|
|
|
8.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$16,534
|
|
|
$16,534
|
|
|
$16,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented and non-patented proprietary technology
|
|
|
$1,231
|
|
|
$1,119
|
|
|
$671
|
|
|
|
Customer relationships
|
|
|
1,649
|
|
|
1,522
|
|
|
980
|
|
|
|
Distribution networks
|
|
|
2,271
|
|
|
2,062
|
|
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5,151
|
|
|
$4,703
|
|
|
$2,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
|
$ 16,304
|
|
|
$ 16,752
|
|
|
$ 18,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization expense for definite lived assets for the
years ending December 31, is as follows:
|
|
|
|
|
2008
|
|
$
|
1,790
|
|
2009
|
|
|
1,656
|
|
2010
|
|
|
1,614
|
|
2011
|
|
|
1,614
|
|
2012
|
|
|
1,584
|
|
Thereafter
|
|
|
3,573
|
|
|
|
|
|
|
|
|
$
|
11,831
|
|
|
|
|
|
|
Goodwill consists of the excess of cost over fair value of net
tangible and identifiable intangible assets of companies
purchased. Xmark applies the principles of
SFAS No. 141,
Business Combinations
or
FAS 141, and uses the purchase method of accounting for
acquisitions of subsidiaries.
The carrying amount of Xmarks goodwill by reporting unit
(reporting units are those businesses for which discrete
financial information is available and upon which segment
management makes operating decisions) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
|
|
|
|
|
|
|
Security
|
|
|
Industrial
|
|
|
Consolidated
|
|
|
Balance, December 31, 2005
|
|
$
|
13,131
|
|
|
$
|
3,851
|
|
|
$
|
16,982
|
|
Adjustment to purchase price allocation
|
|
|
(789
|
)
|
|
|
(168
|
)
|
|
|
(957
|
)
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
12,342
|
|
|
|
3,683
|
|
|
|
16,025
|
|
Adjustment to purchase price allocation
|
|
|
(180
|
)
|
|
|
(69
|
)
|
|
|
(249
|
)
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
12,162
|
|
|
$
|
3,614
|
|
|
$
|
15,776
|
|
|
|
|
|
|
|
72
In the fourth quarter of 2007, Xmark tested its goodwill and
other intangible assets at each reporting unit level in
accordance with FAS 142. Based on these assessments, there
was no impairment of goodwill and other intangible assets at
December 31, 2007.
|
|
Note 7
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Accrued wages, severance and payroll expenses
|
|
$
|
1,034
|
|
$
|
1,825
|
|
$
|
1,248
|
Accrued purchases
|
|
|
257
|
|
|
201
|
|
|
353
|
Accrued professional fees
|
|
|
20
|
|
|
20
|
|
|
99
|
Warranty liability
|
|
|
500
|
|
|
580
|
|
|
487
|
Income taxes payable
|
|
|
488
|
|
|
300
|
|
|
220
|
Deferred revenue
|
|
|
201
|
|
|
256
|
|
|
383
|
Deferred purchase price obligation
|
|
|
|
|
|
|
|
|
442
|
Other accrued expenses
|
|
|
312
|
|
|
493
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,812
|
|
$
|
3,675
|
|
$
|
3,492
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8
|
Financing
Agreements and Liquidity
|
Xmark was party to a credit agreement with the Royal Bank of
Canada, which was terminated on February 28, 2008. The
credit facility provided for borrowings up to
CDN$1.5 million, or approximately US$1.5 million at
December 31, 2007. Approximately $1.5 million was
outstanding under the credit facility as of December 31,
2007. The annual interest rate on the facility was the Royal
Bank of Canada prime rate of interest plus 1% (6% as of
December 31,2007). The borrowing limit was up to 85% of
eligible accounts receivable and up to 25% of eligible
inventory. Under the terms of the agreement, Xmark had to comply
with certain reporting covenants and requirements. The loan was
collateralized by all of the assets of Xmark.
On February 29, 2008, VeriChip entered into a new debt
financing. This financing eliminated the credit agreement with
the Royal Bank of Canada, except for a remaining
$0.4 million security interest.
Xmark accounts for income taxes under the asset and liability
approach. Deferred taxes are recorded based upon the tax impact
of items affecting financial reporting and tax filings in
different periods. A valuation allowance is provided against net
deferred tax assets where Xmark determines realization is not
currently judged to be more likely than not.
73
The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and reserves
|
|
|
$270
|
|
|
|
$337
|
|
|
|
$531
|
|
Property and equipment
|
|
|
141
|
|
|
|
133
|
|
|
|
85
|
|
Research and development tax credit
|
|
|
980
|
|
|
|
1,114
|
|
|
|
397
|
|
Net operation loss carry forwards
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
1,391
|
|
|
|
1,584
|
|
|
|
1,241
|
|
Valuation allowance
|
|
|
(387
|
)
|
|
|
(350
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
|
|
1,234
|
|
|
|
1,149
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
4,697
|
|
|
|
4,826
|
|
|
|
6,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
|
$ 3,693
|
|
|
|
$ 3,592
|
|
|
|
$ 4,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The deferred tax assets and liabilities are included in the
following balance sheet captions:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Current deferred tax asset
|
|
|
$185
|
|
|
$216
|
|
|
$520
|
Long-term deferred tax liability
|
|
|
3,878
|
|
|
3,808
|
|
|
5,415
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
|
$3,693
|
|
|
$3,592
|
|
|
4,895
|
|
|
|
|
|
|
|
|
|
|
The deferred tax liability relates primarily to taxable
temporary differences resulting from allocation of the purchase
price of acquired companies.
FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, or FIN 48, was issued to clarify the
requirements of SFAS No. 109, Accounting for Income
Taxes, relating to the recognition of income tax benefits.
FIN 48 provides a two-step approach to recognizing and
measuring tax benefits when the benefits realization is
uncertain. The first step is to determine whether the benefit is
to be recognized, and the second step is to determine the amount
to be recognized:
|
|
|
|
|
income tax benefits should be recognized when, based on the
technical merits of a tax position, the company believes that if
a dispute arose with the taxing authority and were taken to a
court of last resort, it is more likely than not (i.e., a
probability of greater than 50 percent) that the tax
position would be sustained as filed; and
|
|
|
|
if a position is determined to be more likely than not of being
sustained, the company should recognize the largest amount of
tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with the taxing authority.
|
Xmark adopted FIN 48 on January 1, 2007 and there was
no impact upon adoption or during December 31, 2007.
|
|
Note 10
|
Segmented
Information
|
Xmark operates in two business segments: Healthcare Security and
Industrial.
74
Healthcare
Security
Utilizing RFID technology, Xmarks Healthcare Security
segment currently engages in marketing, selling and developing
the following products:
|
|
|
|
|
infant protection systems used in hospital maternity wards and
birthing centers to prevent infant abduction and mother-baby
mismatching;
|
|
|
|
wander prevention systems used by long-term care facilities to
locate and protect their residents; and
|
|
|
|
an asset/personnel location and identification system used by
hospitals and other healthcare facilities to identify, locate
and protect medical staff, patients, visitors and medical
equipment.
|
Industrial
Xmarks Industrial segment engages in marketing, selling
and developing the following products:
|
|
|
|
|
vibration monitoring instruments used by engineering,
construction and mining professionals to monitor the effects of
human-induced vibrations, such as blasting activity.
|
The following is the selected segment data:
Three
Month Period Ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
|
|
|
|
Security
|
|
Industrial
|
|
Total
|
|
Product revenue
|
|
|
$6,474
|
|
|
$ 1,575
|
|
|
$8,049
|
Services revenue
|
|
|
150
|
|
|
396
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$6,624
|
|
|
$1,971
|
|
|
$8,595
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$1,015
|
|
|
$220
|
|
|
$1,235
|
Depreciation and amortization
|
|
|
463
|
|
|
116
|
|
|
579
|
Goodwill
|
|
|
12,162
|
|
|
3,614
|
|
|
15,776
|
Segmented assets
|
|
|
41,573
|
|
|
8,225
|
|
|
49,798
|
Three
Month Period Ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
|
|
|
|
|
|
Security
|
|
|
Industrial
|
|
Total
|
|
|
Product revenue
|
|
|
$5,199
|
|
|
|
$1,479
|
|
|
$6,678
|
|
Services revenue
|
|
|
110
|
|
|
|
321
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5,309
|
|
|
|
$1,800
|
|
|
$7,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$(279
|
)
|
|
|
$207
|
|
|
$(72
|
)
|
Depreciation and amortization
|
|
|
430
|
|
|
|
153
|
|
|
583
|
|
Goodwill
|
|
|
12,342
|
|
|
|
3,683
|
|
|
16,025
|
|
Segmented assets
|
|
|
39,807
|
|
|
|
10,051
|
|
|
49,858
|
|
75
Year
Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
|
|
|
|
Security
|
|
Industrial
|
|
Total
|
|
Product revenue
|
|
|
$ 22,644
|
|
|
$ 6,358
|
|
|
$ 29,002
|
Services revenue
|
|
|
549
|
|
|
1,152
|
|
|
1,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$23,193
|
|
|
$7,510
|
|
|
$30,703
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$1,651
|
|
|
$877
|
|
|
$2,528
|
Depreciation and amortization
|
|
|
1,864
|
|
|
478
|
|
|
2,342
|
Goodwill
|
|
|
12,162
|
|
|
3,614
|
|
|
15,776
|
Segmented assets
|
|
|
43,069
|
|
|
8,955
|
|
|
52,024
|
Year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
|
|
|
|
Security
|
|
Industrial
|
|
Total
|
|
Product revenue
|
|
|
$ 20,035
|
|
|
$5,060
|
|
|
$ 25,095
|
Services revenue
|
|
|
380
|
|
|
960
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$20,415
|
|
|
$6,020
|
|
|
$26,435
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$639
|
|
|
$963
|
|
|
$1,602
|
Depreciation and amortization
|
|
|
1,705
|
|
|
569
|
|
|
2,274
|
Goodwill
|
|
|
12,342
|
|
|
3,683
|
|
|
16,025
|
Segmented assets
|
|
|
41,016
|
|
|
10,524
|
|
|
51,540
|
|
|
Note 11
|
Commitments
and Contingencies
|
Operating
Lease Commitments
Xmark has entered into an operating lease with a remaining term
through 2009 in Ottawa, Ontario. Minimum lease payments due
under the operating lease are presented in the table below:
Legal
proceedings
Xmark is engaged in certain legal actions in the ordinary course
of business, and Xmark believes that the ultimate outcome of
these actions will not have a material adverse effect on
Xmarks operating results, liquidity or financial position.
Xmark has accrued an estimate of the probable costs for the
resolution of these claims, and, as of December 31, 2007,
Xmark has recorded a nominal reserve with respect to such
claims. This estimate has been developed in consultation with
outside counsel handling Xmarks defense in these matters
and is based upon an analysis of potential results, assuming a
combination of litigation and settlement strategies.
Xmark is a party to various legal actions, as either plaintiff
or defendant, arising in the ordinary course of business, none
of which is expected to have a material adverse effect on
Xmarks business, financial condition or results of
operations. However, litigation is inherently unpredictable, and
the costs and other effects of pending or future litigation,
governmental investigations, legal and administrative cases and
proceedings, whether civil or criminal, settlements, judgments
and investigations, claims or charges in any such matters, and
developments or assertions by or against Xmark relating to Xmark
or to Xmarks intellectual property rights and intellectual
property licenses could have a material adverse effect on
Xmarks business, financial condition and operating results.
76
|
|
Note 12
|
Related-Party
Transactions
|
VeriChip charges Xmark for certain general and administrative
services that are provided to Xmark, including accounting,
finance, payroll and legal services under a management services
agreement. The costs of these services was determined based on
Xmarks use of such services. In determining the estimated
use by Xmark, VeriChip determined the actual cost incurred for
each of the services provided and determined the allocation of
each of such costs that were attributable to Xmarks
operations.
|
|
Note 13
|
Supplementary
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
March 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
2007
|
|
2006
|
|
2005
|
|
Income taxes paid
|
|
|
$ -
|
|
|
$ -
|
|
|
$280
|
|
|
$437
|
|
|
$143
|
Interest paid
|
|
|
-
|
|
|
9
|
|
|
25
|
|
|
46
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ -
|
|
|
$9
|
|
|
$305
|
|
|
$483
|
|
|
$145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14
|
Exit and
Disposal Activity
|
In November 2006, Xmark made the decision to consolidate its
healthcare security operations into an existing facility located
in Ottawa, Ontario to eliminate duplicative functions and to
improve operating efficiencies. The consolidation entailed the
closing of operations in Vancouver, British Columbia. Xmark
substantially completed the consolidation by March 31,
2007. As a result of the consolidation, Xmark has recorded
charges of $0.3 and $0.9 million, in 2007 and 2006,
respectively, primarily resulting from payroll-related charges.
Such charges are reflected in the consolidated statement of
operations in selling, general and administrative expense and in
research and development expenses.
|
|
Note 15
|
Subsequent
Events
|
In May 2008, VeriChip subscribed for one additional common share
at a price of CDN$19.7 million. VeriChip paid for the share
by reducing the total balance owing from Xmark.
On May 15, 2008 VeriChip entered into a Stock Purchase
Agreement with Stanley to sell all of the outstanding capital
stock of Xmark for $45 million cash. This transaction is
not subject to any financing conditions, but is subject to
approval by VeriChips stockholders. Two of VeriChips
largest stockholders, representing over 50% of VeriChips
common stock, have formally agreed to vote in favor of the
transaction.
77
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us
regarding beneficial ownership of shares of our common stock as
of June 3, 2008 by:
|
|
|
|
|
each of our directors;
|
|
|
|
each of our named executive officers;
|
|
|
|
all of our executive officers and directors as a group; and
|
|
|
|
each person, or group of affiliated persons, known to us to be
the beneficial owner of more than 5% of our outstanding shares
of common stock.
|
Beneficial ownership is determined in accordance with the rules
and regulations of the SEC and includes voting and investment
power with respect to the securities. In computing the number of
shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently
exercisable or exercisable within 60 days of June 3,
2008 are deemed outstanding. Such shares, however, are not
deemed outstanding for purposes of computing the percentage
ownership of any other person. To our knowledge, except as
indicated in the footnotes to this table and subject to
community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to
all shares of our common stock shown opposite such persons
name. The percentage of beneficial ownership is based on
11,019,377 shares of our common stock outstanding as of
June 3, 2008. Unless otherwise noted below, the address of
the persons and entities listed in the table is
c/o VeriChip
Corporation, 1690 South Congress Avenue, Suite 200, Delray
Beach, Florida 33445.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Shares
|
|
Percent of
|
|
|
Beneficially
|
|
Outstanding
|
Name and Address of Beneficial
Owner
|
|
Owned(#)
|
|
Shares(%)
|
|
Five percent stockholders:
|
|
|
|
|
|
|
|
|
Applied Digital Solutions, Inc. (1)
|
|
|
5,355,556
|
|
|
|
48.6
|
%
|
1690 South Congress Avenue, Suite 201
Delray Beach, Florida 33445
|
|
|
|
|
|
|
|
|
Austin W. Marxe (2)
|
|
|
986,099
|
|
|
|
8.9
|
%
|
527 Madison Avenue, Suite 2600
New York, New York 10022
|
|
|
|
|
|
|
|
|
David M. Greenhouse (2)
|
|
|
986,099
|
|
|
|
8.9
|
%
|
527 Madison Avenue, Suite 2600
New York, New York 10022
|
|
|
|
|
|
|
|
|
Named Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
Scott R. Silverman (3)
|
|
|
866,111
|
|
|
|
7.6
|
%
|
William J. Caragol (4)
|
|
|
119,667
|
|
|
|
1.1
|
%
|
Daniel A. Gunther (5)
|
|
|
55,556
|
|
|
|
*
|
|
Jeffrey S. Cobb (6)
|
|
|
108,334
|
|
|
|
1.0
|
%
|
Barry M. Edelstein (7)
|
|
|
100,000
|
|
|
|
*
|
|
Steven R. Foland (8)
|
|
|
55,600
|
|
|
|
*
|
|
Paul C. Green (9)
|
|
|
123,149
|
|
|
|
1.1
|
%
|
Executive Officers and Directors as a Group (7 persons) (10)
|
|
|
1,428,417
|
|
|
|
12.5
|
%
|
|
|
|
*
|
|
Less than 1%
|
|
(1)
|
|
Digital Angel has pledged 3,611,111 shares and
4,284,445 shares to Laurus Master Fund, Ltd. and Kallina
Corporation, respectively, to secure, in part, loans from each
of the lenders to Digital Angel. The 3,611,111 shares that
were pledged to Laurus Master Fund, Ltd. were also pledged to
Kallina Corporation.
|
78
|
|
|
(2)
|
|
Austin W. Marxe and David M. Greenhouse share voting and
investment control over all securities owned by Special
Situations Fund III QP (QP), Special Situations
Technology Fund, L.P. (Tech) and Special Situations
Technology Fund II, L.P. (Tech II).
544,522 shares of our common stock are owned by QP,
62,179 shares of our common stock are owned by Tech and
379,398 shares of our common stock are owned by Tech II.
The interest of Messrs. Marxe and Greenhouse in the shares
of our common stock owned by QP, Tech and Tech II is
limited to the extent of their pecuniary interest. The
information included in the table is based solely on the
Form 4 filed jointly with the SEC on February 1, 2008
by Mr. Marxe and Mr. Greenhouse.
|
|
(3)
|
|
Includes 550,000 restricted shares of our common stock,
311,111 shares of our common stock issuable upon the
exercise of stock options that are currently exercisable or
exercisable within 60 days of June 3, 2008, and
5,000 shares of our common stock. Mr. Silvermans
securities are held pursuant to the voting agreement more fully
described under Proposal No. 1The Xmark
TransactionAncillary Agreements to the Stock Purchase
Agreement on page 39.
|
|
(4)
|
|
Includes 100,000 restricted shares of our common stock,
16,667 shares of our common stock issuable upon the
exercise of stock options that are currently exercisable or
exercisable within 60 days of June 3, 2008, and
3,000 shares of our common stock.
|
|
(5)
|
|
Includes 55,556 shares of our common stock issuable upon
the exercise of stock options that are currently exercisable or
exercisable within 60 days of June 3, 2008.
|
|
(6)
|
|
Includes 100,000 restricted shares of our common stock and
8,334 shares of our common stock issuable upon the exercise
of stock options that are currently exercisable or exercisable
within 60 days of June 3, 2008.
|
|
(7)
|
|
Includes 100,000 restricted shares of our common stock.
|
|
(8)
|
|
Includes 50,000 restricted shares of our common stock and
5,600 shares of our common stock.
|
|
(9)
|
|
Includes 100,000 restricted shares of our common stock and
23,149 shares of our common stock issuable upon the
exercise of stock options that are currently exercisable or
exercisable within 60 days of June 3, 2008.
|
|
(10)
|
|
Includes shares of our common stock beneficially owned by
current executive officers and directors and shares issuable
upon the exercise of stock options that are currently
exercisable or exercisable within 60 days of June 3,
2008, in each case as set forth in the footnotes to this table.
|
79
PROPOSAL NO. 2
TRANSACTION OF OTHER PROPER BUSINESS
We are asking our stockholders to vote on a proposal to transact
such other business as may properly come before the special
meeting of stockholders or any adjournment or postponement
thereof.
Although it is not currently expected (and assuming the
establishment of a quorum), the special meeting may be adjourned
or postponed for the purpose of soliciting additional proxies if
there are insufficient votes at the time of the special meeting
to approve the Stock Purchase Agreement and the transactions
contemplated by the Stock Purchase Agreement. Once a quorum is
present, the affirmative vote of a majority of the holders of
shares of our common stock representing such quorum shall be
required to approve this proposal to transact such other
business as may properly come before the special meeting of
stockholders or any adjournment or postponement thereof.
Concurrently with the execution of the Stock Purchase Agreement,
Digital Angel and Mr. Silverman, which hold approximately
48.6% and 5.0%, respectively, of the outstanding shares of our
common stock, each entered into a voting agreement with Stanley
in the forms attached to this proxy statement as
Appendices B
and C.
In the voting agreements, Digital Angel and
Mr. Silverman agreed to vote their shares of VeriChip in
favor of the approval of the Stock Purchase Agreement and the
transactions contemplated by the Stock Purchase Agreement,
unless (i) our board of directors has received a takeover
proposal that it determines, in good faith, constitutes a
superior proposal and (ii) our board of directors
determines, after receiving the advice of outside counsel and in
good faith, that it is reasonably necessary to withdraw or
modify the Board Recommendation to comply with the boards
fiduciary duties to our stockholders. The voting agreements
limit the ability of each of Digital Angel and
Mr. Silverman to transfer shares of stock held in VeriChip
or vote for any alternative transaction during the period prior
to the consummation of the Xmark Transaction and, in some cases,
for a period of seven months and fifteen days afterward. Thus,
because Digital Angel and Mr. Silverman own more than 50%
of our outstanding common stock, unless our board of directors
changes its Board Recommendation, stockholder approval of the
Xmark Transaction is assured.
Before any adjournment or postponement of the special meeting,
our stockholders may revoke their previously-sent proxies.
Required
Vote and Board Recommendation
All holders of our common stock as of the record date are
entitled to vote on Proposal No. 2. Approval of the
transaction of such other business as may properly come before
the special meeting of stockholders or any adjournment or
postponement thereof requires the affirmative vote of the
holders of a majority of the outstanding shares of our common
stock entitled to vote at the special meeting. Abstentions and
broker non-votes will have the same effect as votes
against Proposal No. 2.
Our board of directors unanimously recommends that you vote
FOR the proposal to transact such other business as
may properly come before the special meeting of stockholders or
any adjournment or postponement thereof.
THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE
PROPOSAL
TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE
SPECIAL MEETING OF STOCKHOLDERS OR ANY ADJOURNMENT OR
POSTPONEMENT THEREOF
80
STOCKHOLDER
PROPOSALS FOR OUR ANNUAL MEETING IN 2008
We will continue to be a publicly-held company, and there will
continue to be future meetings of our stockholders. As a result,
our stockholders will continue to be entitled to attend and
participate in our stockholder meetings.
We will inform our stockholders, by press release or other means
determined reasonable, of the date by which stockholder
proposals must be received by us for inclusion in the proxy
materials relating to our 2008 annual meeting, which proposals
must comply with the rules and regulations of the SEC then in
effect. In addition, our amended and restated by-laws provide
that stockholders seeking to bring business before an annual
meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a
stockholders notice of proposed business must be received
at our principal executive offices not later than the close of
business on the 90th day nor earlier than the opening of
business on the 120th day before the anniversary date of
the immediately preceding annual meeting of stockholders;
however, in the event that the annual meeting is called for a
date that is not within 45 days before or after such
anniversary date, notice by the stockholder to be timely must be
so received not earlier than the opening of business on the
120th day before the meeting and not later than the later
of (x) the close of business on the 90th day before
the meeting or (y) the close of business on the
10th day following the day on which public announcement of
the date of the annual meeting is made. As a result of the Xmark
Transaction and the possible sale of our VeriMed Health Link
business, we plan to delay our annual meeting this year.
HOUSEHOLDING
Regulations regarding the delivery of copies of proxy materials
and annual reports to stockholders permit us, banks, brokerage
firms and other nominees to send one proxy statement and annual
report to multiple stockholders who share the same address under
certain circumstances, unless contrary instructions are received
from stockholders. This practice is known as
householding. Stockholders who hold their shares
through a bank, broker or other nominee may have consented to
reducing the number of copies of materials delivered to their
address. In the event that a stockholder wishes to request
delivery of a single copy of proxy statements or annual reports,
or to revoke a householding consent previously
provided to a bank, broker or other nominee, the stockholder
must contact the bank, broker or other nominee, as applicable,
to revoke such consent. In any event, if a stockholder wishes to
receive a separate proxy statement for the special meeting or a
2007 annual report, the stockholder may contact VeriChip
Corporation, 1690 South Congress Avenue, Suite 200, Delray
Beach, Florida 33445, Attention: Jay McKeage by mail or by
calling Jay McKeage at
(561) 805-8008.
Any stockholders of record sharing an address who now receive
multiple copies of our proxy statements and annual reports, and
who wish to receive only one copy of these materials per
household in the future, should also contact us by mail or
telephone as instructed above. Any stockholders sharing an
address whose shares of common stock are held by a bank, broker
or other nominee who now receive multiple copies of our proxy
statements and annual reports, and who wish to receive only one
copy of these materials per household, should contact the bank,
broker or other nominee to request that only one set of our
proxy statements and annual reports be delivered in the future.
OTHER
MATTERS
Our consolidated financial statements for the year ended
December 31, 2007 are included in our 2007 annual report to
stockholders. Copies of the annual report are being sent to our
stockholders concurrently with the mailing of this proxy
statement.
As of the date of this proxy statement, the board of directors
knows of no other business to be presented at the special
meeting. Under our by-laws, business transacted at the special
meeting is limited to matters relating to the purposes stated in
the notice of special meeting, which is provided at the
beginning of this proxy statement. If other matters do properly
come before the special meeting, or any adjournment or
postponement thereof, that we do not know, a reasonable time
before the mailing of this proxy statement, will be presented at
the special meeting, it is the intention of the persons named in
the proxy to vote on such matters in their sole discretion. If
we become aware, a reasonable time before the mailing of this
proxy
81
statement, of any other business to be presented at the special
meeting, the persons named in the proxy will not exercise their
discretionary authority to vote on such matters.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any
reports, proxy statements or other information that we file with
the SEC at the following location of the SEC, Public Reference
Room, 100 F Street, N.E., Washington, D.C. 20549.
You may read and copy any materials that we file with the SEC at
the SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. For more information on the
operation of the SECs Public Reference Room, you may call
the SEC at
1-800-SEC-0330.
Our public filings are also available to the public from
commercial document retrieval services and at the website
maintained by the SEC located at
http://www.sec.gov.
The reports and other information that we file with the SEC are
also available at our website
http://www.verichipcorp.com
(click on Investors and Financial
Reports).
For printed copies of any of our reports, please contact
VeriChip Corporation, 1690 South Congress Avenue,
Suite 200, Delray Beach, Florida 33445, Attention: Jay
McKeage by mail or by calling Jay McKeage at
(561) 805-8008.
These reports are also available free of charge from our website
at
http://www.verichipcorp.com
as soon as reasonably practicable after we electronically file
or furnish such material with or to the SEC. The information on
our website is not incorporated by reference into this proxy
statement.
You should rely only on the information contained in this
proxy statement. We have not authorized anyone to provide you
with information that is different from what is contained in
this proxy statement. This proxy statement is dated
June , 2008. You should not assume that the
information contained in this proxy statement is accurate as of
any date other than such date, and the mailing of this proxy
statement to stockholders shall not create an implication to the
contrary.
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference
business and financial information that is not included in, or
delivered with, this proxy statement, which means that we can
disclose important information to you by referring to another
document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this proxy
statement, except for any information superseded by information
in this proxy statement. We incorporate by reference the
documents listed below.
The following documents previously filed with the SEC are hereby
incorporated by reference in this proxy statement (other than
filings, or portions of filings, that are furnished under
applicable SEC rules rather than filed):
Our
Filings
|
|
|
|
|
Our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007 filed with the
SEC on March 28, 2008, as amended on April 29, 2008;
|
|
|
|
Our Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2008 filed with the SEC on
May 15, 2008; and
|
|
|
|
Our Current Report on
Form 8-K
filed with the SEC on May 16, 2008.
|
All documents and reports that we file pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
(other than filings, or portions of filings, that are furnished
under applicable SEC rules rather than filed) after the date of
this proxy statement and up to the date of the special meeting
shall be deemed to be incorporated by reference into this proxy
statement and to be a part of it from the date of filing of
those documents. Any statement contained in a document
incorporated into this proxy statement by reference shall be
deemed to be modified or superseded for purposes of this proxy
statement, to the extent that a statement contained in this
proxy statement or in any other subsequently-filed document
which also is, or is deemed to be, incorporated by reference in
this proxy statement modifies or supersedes such earlier
statement. Any statement modified or superseded shall not be
deemed, except as modified or superseded, to constitute a part
of this proxy statement.
82
You can obtain any of the documents listed above, or any related
documents that are filed after the date hereof and incorporated
by reference in this proxy statement, from us or the SEC. You
may obtain such documents from us by requesting them, upon
written or oral request, at the address or through the telephone
number listed under the section Where You Can Find
Additional Information. We will provide such documents
without charge, by first-class mail or other equally-prompt
means without one business day of receipt of such request, but
excluding all exhibits (unless the exhibits have specifically
been incorporated by reference in this proxy statement).
The following accountants reports are required to be filed
with this proxy statement.
83
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
VeriChip Corporation
We have audited the accompanying consolidated balance sheets of
VeriChip Corporation and subsidiaries (the Company)
as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders equity
and cash flows for each of the years in the three-year period
ended December 31, 2007. Our audits also included the
financial statement schedule Valuation and
Qualifying Accounts. These consolidated financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
schedule are free of material misstatement. We were not engaged
to perform an audit of the Companys internal control over
financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion .
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements enumerated above
present fairly, in all material respects, the consolidated
financial position of VeriChip Corporation and subsidiaries as
of December 31, 2007 and 2006, and the consolidated results
of their operations and their consolidated cash flows for each
of the years in the three-year period ended December 31,
2007, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the
financial statement schedule referred to above, when considered
in relation to the financial statements taken as a whole,
presents fairly, in all material respects, the information
stated therein.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Financial Accounting Standards
Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes- an interpretation
of FASB No. 109
, effective January 1, 2007,
and Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment
, applying the
modified prospective method, effective
January 1, 2006.
As more fully described in Note 14, the Company sells,
markets and distributes human-implantable passive radio
frequency identification microchips which it obtains from an
affiliate. These microchips depend on a key technology for which
the Company may have insufficient rights to support its use of
or to protect such intellectual property.
New York, New York
March 28, 2008
84
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
EXI Wireless Inc.
We have audited the accompanying consolidated balance sheet of
EXI Wireless Inc. and subsidiaries as of March 31, 2005,
and the related consolidated statements of operations,
stockholders equity, and cash flows for the three month
period then ended. These consolidated financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of EXI Wireless Inc. and subsidiaries as of
March 31, 2005, and the results of their operations and
their cash flows for the three month period then ended in
conformity with U.S. generally accepted accounting
principles.
The comparative figures for the three month period ended
March 31, 2004 are unaudited.
KPMG LLP (signed)
Chartered Accountants
Vancouver, Canada
November 9, 2005
85
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholder of Instantel Inc.
We have audited the accompanying balance sheet of Instantel Inc.
(The Company) as of June 9, 2005 and the
statements of operations, shareholders equity and cash
flows for the period January 1 to June 9, 2005. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. The
balance sheet of the Company as at December 31, 2004 was
audited by other auditors whose report dated January 21,
2005, except for notes 13 and 14 which were as of
December 15, 2005, expressed an unqualified opinion on
those statements. The comparative figures for the period of
January 1, 2004 to June 9, 2004 are unaudited.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of June 9, 2005 and the results of its
operations and its cash flows for the period then ended in
accordance with accounting principles generally accepted in the
United States of America.
MEYERS NORRIS PENNY LLP
Chartered Accountants
Calgary, Alberta
November 17, 2005
86
Appendix A
EXECUTION
VERSION
STOCK
PURCHASE AGREEMENT
by
and between
THE STANLEY WORKS
and
VERICHIP CORPORATION
dated as of
May 15, 2008
A-i
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
ARTICLE I PURCHASE AND SALE OF SHARES
|
|
|
A-1
|
|
Section 1.1
|
|
Sale and Transfer of Shares
|
|
|
A-1
|
|
Section 1.2
|
|
Consideration; Purchase Price
|
|
|
A-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE II THE CLOSING
|
|
|
A-2
|
|
Section 2.1
|
|
The Closing
|
|
|
A-2
|
|
Section 2.2
|
|
Post-Closing Adjustment
|
|
|
A-3
|
|
Section 2.3
|
|
Canadian Withholding Tax
|
|
|
A-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER
|
|
|
A-5
|
|
Section 3.1
|
|
Organization
|
|
|
A-6
|
|
Section 3.2
|
|
Authorization
|
|
|
A-6
|
|
Section 3.3
|
|
Execution; Validity of Agreement
|
|
|
A-6
|
|
Section 3.4
|
|
Consents and Approvals; No Violations
|
|
|
A-6
|
|
Section 3.5
|
|
Ownership of Shares
|
|
|
A-7
|
|
Section 3.6
|
|
Capitalization
|
|
|
A-7
|
|
Section 3.7
|
|
Subsidiaries
|
|
|
A-7
|
|
Section 3.8
|
|
Financial Statements
|
|
|
A-7
|
|
Section 3.9
|
|
Absence of Certain Changes
|
|
|
A-8
|
|
Section 3.10
|
|
Property and Assets
|
|
|
A-8
|
|
Section 3.11
|
|
Leases, Contracts and Commitments
|
|
|
A-8
|
|
Section 3.12
|
|
Suppliers and Customers
|
|
|
A-9
|
|
Section 3.13
|
|
Commercial Relationships with Governmental Entities
|
|
|
A-9
|
|
Section 3.14
|
|
Ethical Practices
|
|
|
A-9
|
|
Section 3.15
|
|
Product and Service Warranties
|
|
|
A-9
|
|
Section 3.16
|
|
Insurance
|
|
|
A-9
|
|
Section 3.17
|
|
Litigation; Other Proceedings
|
|
|
A-10
|
|
Section 3.18
|
|
Environmental Matters
|
|
|
A-10
|
|
Section 3.19
|
|
Compliance with Laws
|
|
|
A-11
|
|
Section 3.20
|
|
Employee Benefit Plans
|
|
|
A-11
|
|
Section 3.21
|
|
Tax Matters
|
|
|
A-12
|
|
Section 3.22
|
|
Intellectual Property
|
|
|
A-14
|
|
Section 3.23
|
|
Information Technology
|
|
|
A-16
|
|
Section 3.24
|
|
Labor Matters
|
|
|
A-16
|
|
Section 3.25
|
|
Brokers or Finders
|
|
|
A-17
|
|
Section 3.26
|
|
Affiliate Transactions
|
|
|
A-17
|
|
Section 3.27
|
|
Information Supplied
|
|
|
A-18
|
|
Section 3.28
|
|
Separation; Excluded Liabilities
|
|
|
A-18
|
|
Section 3.29
|
|
Solvency
|
|
|
A-18
|
|
Section 3.30
|
|
Opinion of Financial Advisor
|
|
|
A-18
|
|
Section 3.31
|
|
Private Issuer
|
|
|
A-18
|
|
Section 3.32
|
|
Investment Canada Act
|
|
|
A-19
|
|
Section 3.33
|
|
Competition Act
|
|
|
A-19
|
|
Section 3.34
|
|
Privacy Laws
|
|
|
A-19
|
|
|
|
|
|
|
|
|
A-ii
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER
|
|
|
A-19
|
|
Section 4.1
|
|
Organization
|
|
|
A-19
|
|
Section 4.2
|
|
Authorization; Validity of Agreement
|
|
|
A-19
|
|
Section 4.3
|
|
Consents and Approvals; No Violations
|
|
|
A-20
|
|
Section 4.4
|
|
Litigation
|
|
|
A-20
|
|
Section 4.5
|
|
Brokers or Finders
|
|
|
A-20
|
|
Section 4.6
|
|
Financing
|
|
|
A-20
|
|
Section 4.7
|
|
Accredited Investor
|
|
|
A-20
|
|
Section 4.8
|
|
No Other Representations and Warranties
|
|
|
A-20
|
|
|
|
|
|
|
ARTICLE V COVENANTS OF SELLER AND PURCHASER
|
|
|
A-20
|
|
Section 5.1
|
|
Interim Operations of the Company
|
|
|
A-20
|
|
Section 5.2
|
|
Access
|
|
|
A-22
|
|
Section 5.3
|
|
Preparation of the Proxy Statement; Stockholders Meeting
|
|
|
A-23
|
|
Section 5.4
|
|
No Solicitation
|
|
|
A-23
|
|
Section 5.5
|
|
Certain Pre-Closing Actions
|
|
|
A-26
|
|
Section 5.6
|
|
Indebtedness
|
|
|
A-26
|
|
Section 5.7
|
|
Efforts and Actions to Cause Closing to Occur
|
|
|
A-26
|
|
Section 5.8
|
|
Tax Matters
|
|
|
A-28
|
|
Section 5.9
|
|
Publicity
|
|
|
A-31
|
|
Section 5.10
|
|
Transition Services
|
|
|
A-31
|
|
Section 5.11
|
|
Intercompany Arrangements
|
|
|
A-31
|
|
Section 5.12
|
|
Maintenance of Books and Records
|
|
|
A-31
|
|
Section 5.13
|
|
Insurance Policies
|
|
|
A-31
|
|
Section 5.14
|
|
Bank Accounts
|
|
|
A-32
|
|
Section 5.15
|
|
Notices of Certain Events
|
|
|
A-32
|
|
Section 5.16
|
|
Further Assurances
|
|
|
A-32
|
|
Section 5.17
|
|
Change in Control Payments
|
|
|
A-32
|
|
Section 5.18
|
|
Confidentiality
|
|
|
A-33
|
|
Section 5.19
|
|
Non-competition and Non-solicitation
|
|
|
A-33
|
|
Section 5.20
|
|
Antitakeover Statutes
|
|
|
A-34
|
|
|
|
|
|
|
ARTICLE VI CONDITIONS
|
|
|
A-34
|
|
Section 6.1
|
|
Conditions to Each Partys Obligation to Effect the Closing
|
|
|
A-34
|
|
Section 6.2
|
|
Conditions to Obligations of Purchaser to Effect the Closing
|
|
|
A-34
|
|
Section 6.3
|
|
Conditions to Obligations of Seller to Effect the Closing
|
|
|
A-35
|
|
|
|
|
|
|
ARTICLE VII TERMINATION
|
|
|
A-35
|
|
Section 7.1
|
|
Termination
|
|
|
A-35
|
|
Section 7.2
|
|
Effect of Termination
|
|
|
A-36
|
|
Section 7.3
|
|
Termination Fee
|
|
|
A-36
|
|
|
|
|
|
|
ARTICLE VIII INDEMNIFICATION
|
|
|
A-37
|
|
Section 8.1
|
|
Indemnification; Remedies
|
|
|
A-37
|
|
Section 8.2
|
|
Notice of Claim; Defense
|
|
|
A-39
|
|
Section 8.3
|
|
Reductions for Insurance Proceeds and Other Recoveries
|
|
|
A-40
|
|
A-iii
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
Section 8.4
|
|
No Duplication
|
|
|
A-41
|
|
Section 8.5
|
|
Rights Under Escrow Agreement
|
|
|
A-41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE IX DEFINITIONS AND INTERPRETATION
|
|
|
A-41
|
|
Section 9.1
|
|
Definitions
|
|
|
A-41
|
|
Section 9.2
|
|
Interpretation
|
|
|
A-50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARTICLE X MISCELLANEOUS
|
|
|
A-50
|
|
Section 10.1
|
|
Representations and Warranties
|
|
|
A-50
|
|
Section 10.2
|
|
Fees and Expenses
|
|
|
A-50
|
|
Section 10.3
|
|
Amendment and Modification
|
|
|
A-50
|
|
Section 10.4
|
|
Notices
|
|
|
A-50
|
|
Section 10.5
|
|
Counterparts; Facsimile
|
|
|
A-51
|
|
Section 10.6
|
|
Entire Agreement; No Third Party Beneficiaries
|
|
|
A-51
|
|
Section 10.7
|
|
Severability
|
|
|
A-51
|
|
Section 10.8
|
|
Governing Law
|
|
|
A-52
|
|
Section 10.9
|
|
Jurisdiction
|
|
|
A-52
|
|
Section 10.10
|
|
Time of Essence
|
|
|
A-52
|
|
Section 10.11
|
|
Extension; Waiver
|
|
|
A-52
|
|
Section 10.12
|
|
Assignment
|
|
|
A-52
|
|
Section 10.13
|
|
Preservation of Obligations
|
|
|
A-52
|
|
Section 10.14
|
|
Specific Performance
|
|
|
A-52
|
|
Exhibits
|
|
|
|
|
Exhibit A Form of Escrow Agreement
|
|
|
|
|
Exhibit B Form of Director Resignation and Release
|
|
|
|
|
Exhibit C Net Tangible Asset Value
|
|
|
|
|
Exhibit D Guarantee by Parent, executed and dated as of the
date of this Agreement
|
|
|
|
|
Exhibit E Voting Agreement by Parent for the benefit of
Purchaser, executed and dated as of the date of this Agreement
|
|
|
|
|
Exhibit F Voting Agreement by Scott R. Silverman for the
benefit of Purchaser, executed and dated as of the date of this
Agreement
|
|
|
|
|
Exhibit G Noncompete Agreement
|
|
|
|
|
Exhibit H Form of Section 116 Escrow Agreement
|
|
|
|
|
A-iv
STOCK
PURCHASE AGREEMENT
Stock Purchase Agreement, dated as of May 15, 2008, by and
between The Stanley Works, a Connecticut corporation
(
Purchaser
) and VeriChip Corporation, a
Delaware corporation (
Seller
). Certain
capitalized terms used in this Agreement have the meanings
assigned to them in Article IX.
WHEREAS, Seller is the holder of all the capital stock of Xmark
Corporation, a corporation governed under the laws of Canada
(the
Company
);
WHEREAS, the Company is engaged in the Business;
WHEREAS, Seller wishes to sell, and Purchaser wishes to acquire,
all of the outstanding capital stock of the Company, which
consists exclusively of the Shares, upon the terms and subject
to the conditions set forth herein;
WHEREAS, Seller does not intend to transfer, directly or
indirectly, to Purchaser, and Purchaser does not intend to be
the transferee of or otherwise assume, any liabilities of any
kind, whether known or unknown, accrued or contingent, relating
to any operations of Seller, any of its Subsidiaries or the
Company (including without limitation any liabilities relating
to any operations of the Implantable Chip Business or the
Toolhound Business) other than the Business;
WHEREAS, the Board of Directors of Seller has unanimously
approved and adopted, and recommends that the stockholders of
Seller approve and adopt, this Agreement and transactions
contemplated hereby, upon the terms and subject to the
conditions set forth herein;
WHEREAS, concurrently with the execution of this Agreement, and
as a condition and inducement to Purchasers willingness to
enter into this Agreement, Applied Digital Solutions, Inc.,
doing business as Digital Angel (
Parent
),
which holds 48.6% of Seller Shares, has executed and delivered
to Purchaser (a) a guarantee (the
Guarantee
) in favor of Purchaser, in the form
of
Exhibit D
, with respect to Sellers
obligations under Article VIII of this Agreement and
(b) a voting agreement (the
Parent Voting
Agreement
), attached hereto as
Exhibit E
,
obligating Parent to, among other things, vote in favor of the
approval of this Agreement and the transactions contemplated
hereby, upon the terms and subject to the conditions set forth
therein;
WHEREAS, concurrently with the execution of this Agreement, and
as a condition and inducement to Purchasers willingness to
enter into this Agreement, Scott R. Silverman (the
Voting Stockholder
), who owns 5.0% of Seller
Shares, has executed and delivered to Purchaser a voting
agreement attached hereto as Exhibit F (the
Stockholder Voting Agreement
and, together
with the Parent Voting Agreement, the
Voting
Agreements
), obligating such Person to, among other
things, vote in favor of the approval of this Agreement and the
transactions contemplated hereby, upon the terms and subject to
the conditions set forth therein.
WHEREAS, concurrently with the execution of this Agreement, and
as a condition and inducement to Purchasers willingness to
enter into this Agreement, Parent and Purchaser are entering
into the Noncompete Agreement attached hereto as Exhibit G;
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth
herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound hereby, the parties hereto agree
as follows:
ARTICLE I
PURCHASE
AND SALE OF SHARES
Section 1.1
Sale and Transfer of Shares
.
Subject to the terms and conditions of this
Agreement, at the Closing, Seller shall sell, convey, assign,
transfer and deliver to Purchaser all of the issued and
outstanding Shares, free and clear of all Encumbrances, and
Purchaser shall, or shall cause its designated Subsidiary to,
purchase, acquire and accept the Shares from Seller.
A-1
Section 1.2
Consideration; Purchase
Price
. (a) As consideration for the Shares
and the covenants and undertakings contained herein, Purchaser
shall pay to Seller, in the manner described herein, an amount
in cash (the
Purchase Price
) equal to
(i) at the Closing, $45,000,000 (the
Transaction Value
),
plus
(ii) the Aggregate Adjustment as finally determined
pursuant to and at the time provided under Section 2.2. For
purposes of this Agreement,
Aggregate
Adjustment
means the amount (which may be a positive
or a negative number) equal to the sum of: (x) an amount
(the
Net Tangible Asset Value Adjustment
)
(which may be a positive or negative number) obtained by
subtracting $4,700,000 from the Net Tangible Asset Value as of
the Closing Date (the
Closing Net Tangible Asset
Value
) as finally determined pursuant to
Section 2.2
plus
(y) the Net Indebtedness as of
the Closing Date (the
Closing Date Net
Indebtedness
) (which may be a positive or negative
number) as finally determined pursuant to Section 2.2.
Notwithstanding anything herein to the contrary, any amounts
included in the Net Tangible Asset Value cannot be included in
the Closing Date Net Indebtedness and vice versa.
(b) At least four Business Days prior to the anticipated
Closing Date, Seller shall deliver to Purchaser Sellers
good faith estimate, together with reasonable supporting detail,
of (i) the Net Tangible Asset Value Adjustment (the
Estimated Net Tangible Asset Value
Adjustment
), (ii) the Closing Date Net
Indebtedness (the
Estimated Closing Date Net
Indebtedness
) and (iii) the Aggregate Adjustment
(the
Estimated Aggregate Adjustment
). The
Base Purchase Price
is equal to (i) the
Transaction Value,
plus
(ii) the Estimated Aggregate
Adjustment.
ARTICLE II
THE
CLOSING
Section 2.1
The
Closing
. (a) The closing of the sale and
transfer of the Shares by Seller to Purchaser (the
Closing) shall take place at the offices of Seller
at 10:00 am (New York City time), not later than four Business
Days following the satisfaction or waiver of all conditions set
forth in Article VI (other than those conditions that are
to be satisfied at Closing, but subject to the waiver or
fulfillment of those conditions), unless another date or place
is agreed in writing by each of the parties hereto.
(b) At the Closing, Purchaser shall:
(i) deliver an amount equal to the Base Purchase Price
minus
the Escrow Amount by wire transfer of immediately
available U.S. funds to a an account(s) specified in
writing by Seller at least four Business Days prior to the
Closing Date;
(ii) deposit a cash amount equal to 10% of the Transaction
Value (the
Escrow Amount
) in an escrow
account (the
Escrow Account
), to be retained
and distributed by Citibank, N.A. (or such other Person as is
mutually agreed by Seller and Purchaser), as escrow agent (the
Escrow Agent
), pursuant to the terms of this
Agreement and an escrow agreement substantially in the form
attached hereto as
Exhibit A
(the
Escrow
Agreement
);
(iii) deliver to Seller the certificate specified in
Section 6.3(c); and
(iv) deliver to Seller a copy of each of the Escrow
Agreement and the Section 116 Escrow Agreement duly
executed by Purchaser.
(c) At the Closing, Seller shall:
(i) deliver to Purchaser, or its Subsidiary designated in
writing by Purchaser, one or more certificates representing all
the Shares, each such certificate to be duly and validly
endorsed in favor of Purchaser or accompanied by a separate
stock power duly and validly executed by Seller and otherwise
sufficient to vest in Purchaser legal and beneficial ownership
of such Shares, free and clear of all Encumbrances;
(ii) deliver to Purchaser duly executed resignations and
releases from the directors of the Company, effective as of the
Closing, in the form attached hereto as
Exhibit B
;
(iii) deliver to Purchaser the certificate specified in
Section 6.2(c);
A-2
(iv) deliver to Purchaser a copy of each of the Escrow
Agreement and the Section 116 Escrow Agreement duly
executed by Seller; and
(v) deliver to Purchaser the executed payoff letters, UCC-3
termination statements, and other documents referred to in
Section 5.6(a).
Section 2.2
Post-Closing Adjustment
.
(a) Within 60 calendar days following Closing, Seller will
deliver to Purchaser a consolidated balance sheet of the Company
as of the Closing Date (the
Closing Date Balance
Sheet
), and a certificate (the
Closing
Certificate
), together with reasonable supporting
detail, setting forth Sellers calculation of
(i) Closing Date Net Indebtedness, (ii) the Net
Tangible Asset Value Adjustment and (iii) the Aggregate
Adjustment derived from the Closing Date Balance Sheet and
including appropriate adjustments to assure that the Closing
Date Net Indebtedness and the Net Tangible Asset Value
Adjustment are determined consistent with the definitions of
such terms in this Agreement. Subject to
Exhibit C
and the defined terms in this Agreement, the Closing Date
Balance Sheet and the Closing Certificate shall be prepared in
accordance with U.S. GAAP. Purchaser will provide Seller
and its accountants reasonable access to the books and records
and personnel of the Company during the period of the
preparation of the Closing Date Balance Sheet and Closing
Certificate and the resolution of any disputes that may arise
under this Section 2.2.
(b) Purchaser shall have 120 calendar days following
receipt of the Closing Certificate to deliver to Seller a
written notice (a
Notice of Dispute
) that
Purchaser disputes Sellers calculation of any of the
amounts or any portion of the amounts set forth therein, which
Notice of Dispute shall set forth in reasonable detail the basis
for each element of such dispute. If Purchaser does not deliver
a Notice of Dispute on or before the expiration of such
120-day
period (or if Purchaser notifies Seller in writing that there is
no such dispute), the calculations of the Closing Date Net
Indebtedness, the Net Tangible Asset Value Adjustment, and the
Aggregate Adjustment set forth in the Closing Certificate shall
be deemed to be final, binding and conclusive as to the parties.
In the event that Purchaser delivers a Notice of Dispute with
respect to only certain of the amounts or certain portions of
the amounts set forth in the Closing Certificate but not others,
then any undisputed amount or portion thereof shall be deemed to
be final, binding and conclusive as to the parties. In the event
Purchaser delivers a Notice of Dispute to Seller, Purchaser and
Seller shall cooperate in good faith to resolve any such dispute
as promptly as possible.
(c) In the event that Purchaser and Seller are unable to
resolve all such disputes on or before the 30th calendar
day following the delivery of the Notice of Dispute, then
Purchaser and Seller shall retain a partner at
Deloitte & Touche LLP to resolve such dispute, or if
no partner at Deloitte & Touche LLP is willing and
able to take on such assignment, a mutually acceptable third
party firm, the retention of which will not give rise to present
or potential future auditor independence problems for any party
or any of their respective Affiliates as determined in each
partys reasonable discretion (Deloitte & Touche
LLP or such firm being referred to as the
Accounting
Arbitrator
). The Accounting Arbitrator may only
resolve disagreements as to matters covered by the Notice of
Dispute. All matters not covered by the Notice of Dispute shall
be deemed to be final, binding and conclusive. The determination
by the Accounting Arbitrator shall be final, binding and
conclusive on Seller and Purchaser. Purchaser and Seller each
shall promptly provide their assertions regarding the Aggregate
Adjustment in writing to the Accounting Arbitrator and to each
other. The Accounting Arbitrator shall consider only those items
and amounts which are identified in the Notice of Dispute as
being items which Seller and Purchaser are unable to resolve.
The Accounting Arbitrators determination will be based
solely on the definitions of Closing Date Net Indebtedness,
Closing Net Tangible Asset Value and Aggregate Adjustment
contained in this Agreement and
Exhibit C
. Further,
the Accounting Arbitrators determination shall be based
solely on the presentations by Purchaser and Seller which are in
accordance with the terms and procedures set forth in this
Agreement (i.e., not on the basis of an independent review). The
fees, costs and expenses of the Accounting Arbitrator shall be
borne one half by Purchaser and one half by Seller; provided
that if the Accounting Arbitrator determines that one
partys position is completely correct, then such party
shall pay none of the fees, costs and expenses of the Accounting
Arbitrator and the other party shall pay all such fees, costs
and expenses. The Accounting Arbitrator shall be instructed to
render its determination as soon as reasonably possible (which
the parties agree should not be later than 60 calendar
A-3
days following the day on which the disagreement is referred to
the Accounting Arbitrator). The Accounting Arbitrator shall
conduct its determination activities in a manner wherein all
materials submitted to it are held in confidence and shall not
be disclosed to third parties. The parties agree that judgment
may be entered upon the determination of the Accounting
Arbitrator in any court having jurisdiction over the party
against which such determination is to be enforced.
(d) Within five (5) Business Days after the Aggregate
Adjustment shall have become final, binding and conclusive in
all respects, in accordance with this Section 2.2,
(i) if the Purchase Price exceeds the Base Purchase Price,
Purchaser shall deliver to Seller such excess, or (ii) if
the Base Purchase Price exceeds the Purchase Price, Seller shall
deliver to Purchaser such excess.
(e) All payments under Section 2.2(e) shall be made by
wire transfer of immediately available funds to an account
specified in writing by the receiving party, and such wire
transfer shall include, in addition to the amount specified in
Section 2.2(e), an amount equal to interest accrued on such
amount at the annual Prime Rate as announced by JPMorgan Chase
on the Closing Date (compounded quarterly) for the period from
the Closing Date through the date of payment.
Section 2.3
Canadian Withholding
Tax
. Notwithstanding any other provisions hereof,
the following provisions shall apply with respect to the
Purchase Price:
(a) Seller shall make commercially reasonable efforts to
obtain and deliver to Purchaser at or before the Closing a
certificate issued by the Minister of National Revenue under
subsection 116(2) of the ITA.
(b) If a certificate is so delivered to Purchaser,
Purchaser shall be entitled to withhold from the Purchase Price
payable at the Closing twenty-five percent (25%) of the amount,
if any, by which the Purchase Price exceeds the certificate
limit as defined in subsection 116(2) of the ITA and
specified by the Minister of National Revenue in such
certificate, and Purchaser will pay any such withheld amount to
the Escrow Agent on the Closing Date and the amount so paid will
be credited to Purchaser as payment on account of a portion of
the Purchase Price.
(c) If a certificate is not so delivered, Purchaser shall
be entitled to withhold from the Purchase Price payable at the
Closing an amount equal to twenty-five percent (25%) of the
Purchase Price, and Purchaser will pay any such withheld amount
to the Escrow Agent on the Closing Date and the amount so paid
will be credited to Purchaser as payment on account of a portion
of the Purchase Price.
(d) The Escrow Agent will invest, on behalf of Seller, the
withheld amount in one or more investments, the interest on
which is not subject to Canadian withholding Tax under
Part XIII of the Tax Act, from the Closing Date until the
earlier of the date on which such withheld amount (or relevant
portion thereof) is delivered to the Seller or remitted to the
Canada Revenue Agency (CRA) in accordance with this
Section. Where Purchaser has withheld any amount under
Section 2.3(b) or (c) and Seller delivers to
Purchaser, after Closing and not later than twenty-seven
(27) days after the end of the month in which Purchaser (or
an Affiliate of Purchaser, as the case may be) acquired the
Shares (the
Remittance Deadline
), a
certificate issued by the Minister of National Revenue under
either subsection 116(2) or 116(4) of the ITA, the Escrow
Agent:
(i) shall, in the case of a certificate issued by the
Minister of National Revenue under subsection 116(2) of the
ITA, remit forthwith to the Receiver General for Canada
twenty-five percent (25%) of the amount, if any, by which the
Purchase Price exceeds the certificate limit fixed in such
certificate; and
(ii) shall pay forthwith to Seller any amount that
Purchaser has withheld and is not required to pay to the
Receiver General for Canada in accordance with
subparagraph (i) above
and/or
Section 2.3(i) below and any interest earned on such amount
to the date of such payment.
(e) Where Purchaser has withheld any amount under
Section 2.3(b) or (c) and no certificate has been
delivered to Purchaser by Seller on or before the Remittance
Deadline in accordance with Section 2.3(d), subject to
Section 2.3(g), such amount shall be remitted by the Escrow
Agent to the Receiver General for Canada in accordance with
section 116 of the ITA.
A-4
(f) The Escrow Agent shall not remit the amounts referred
to in Section 2.3(e) before the day after the Remittance
Deadline.
(g) Where Purchaser has withheld any amount under
Section 2.3(c) and no certificate has been delivered to
Purchaser by Seller on or before the Remittance Deadline in
accordance with Section 2.3(d), no amount shall be remitted
by the Escrow Agent to the Receiver General for Canada if Seller
delivers to Purchaser, on or before the Remittance Deadline, a
comfort letter issued by the CRA in form and substance
reasonably satisfactory to Purchaser extending the time period
under which Purchaser is required to remit an amount in respect
of the Purchase Price on behalf of Seller without being subject
to interest and penalties, provided that in any such case,
Seller shall indemnify Purchaser for any tax, interest, penalty
or other amount payable by Purchaser as a result of
Purchasers reliance on such comfort letter.
(h) Where Purchaser has withheld any amount under this
Section 2.3 (the
Withheld Amount
)
and Seller has delivered to Purchaser a comfort letter as
described in Section 2.3(g), the Escrow Agent shall
continue to withhold such amount until, either (i) the
Escrow Agent pays such amount to Seller, which shall occur upon
delivery to Purchaser of a certificate issued by the Minister of
National Revenue under either (A) subsection 116(2) of
the ITA, except that the Escrow Agent shall withhold and remit
to the Receiver General for Canada the amount, if any, by which
the Withheld Amount exceeds twenty-five percent (25%) of the
certificate limit, or (B) subsection 116(4) of the
ITA; or (ii) the Escrow Agent remits such amount to the
Receiver General for Canada for the account of Seller if
notified to do so by the CRA.
(i) Any amount paid by Purchaser or the Escrow Agent to the
Receiver General for Canada under Section 2.3(d), (e), or
(h) on account of tax (not including amounts in relation to
penalties or interest) shall be treated for purposes of this
Agreement as a payment to Seller on account of the Purchase
Price upon delivery to Seller of confirmation from the CRA that
such remittance was made on Sellers behalf.
(j) For purposes of this Section 2.3, any certificate
delivered to Purchaser shall be deemed not to have been
delivered unless such certificate is reasonably satisfactory to
Purchaser.
(k) Any amounts withheld under this Section 2.3 shall
be converted into Canadian dollars on the date of withholding
and, for the avoidance of doubt, any amount released to Seller
under the terms hereof including any payment of interest
pursuant to Section 2.3(d) or remitted to the Receiver
General for Canada shall also be denominated in Canadian dollars.
(l) The provisions of this Section 2.3 shall apply,
mutatis mutandis
to any portion of the Purchase Price
paid or payable at any time after the Closing.
(m) Where Purchaser assigns the right to purchase the
Shares to an Affiliate of Purchaser, Purchaser shall so notify
Seller, and Seller shall notify the CRA that such Affiliate of
Purchaser, and not Purchaser, is the purchaser of the Shares. In
the event Purchaser assigns the right to purchase the Shares to
an Affiliate of Purchaser, the provisions of this
Section 2.3 shall apply as if the references to Purchaser
were references to such Affiliate of Purchaser.
(n) Purchaser and Seller agree to enter into an escrow
agreement in the form attached hereto as Exhibit H (the
Section 116 Escrow Agreement
) with the
Escrow Agent to provide for the remittance to, holding and
release by the Escrow Agent of the amounts referred to in this
section.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF SELLER
Subject to Section 10.1(a) and except as set forth in the
corresponding numbered section of the Disclosure Schedule
(provided, however, that a matter disclosed with respect to one
representation or warranty shall also be deemed to be disclosed
with respect to each other representation or warranty to which
the matter disclosed
A-5
reasonably relates, to the extent such relationship is readily
apparent on the face of the disclosure contained in the
Disclosure Schedule), Seller represents and warrants to
Purchaser as follows:
Section 3.1
Organization
. Each
of Seller and the Company (a) is a corporation or other
legal entity duly organized, validly existing and, if
applicable, in good standing under the laws of its jurisdiction
of organization; (b) has all requisite corporate or other
legal entity power and authority to carry on its business and
the Business as they are now being conducted and to own the
properties and assets that such Person now owns or that are used
in the Business; and (c) is duly qualified or licensed to
do business in every jurisdiction in which such qualification is
required. Seller has heretofore delivered to Purchaser complete
and correct copies of the articles of amalgamation and by-laws
of the Company as presently in effect.
Section 3.2
Authorization
.
(a) Seller has the requisite corporate power and authority
to execute, deliver and perform this Agreement and, subject to
receipt of Stockholder Approval, to consummate the Closing. The
execution, delivery and performance by Seller of this Agreement
and the consummation by Seller of the Closing have been duly
authorized by the Board of Directors of Seller, and no other
corporate action on the part of Seller is necessary to authorize
the execution, delivery and performance by Seller of this
Agreement or the consummation by Seller of the Closing, subject
in the case of the consummation by Seller of the Closing to
obtaining the Stockholder Approval.
(b) Sellers Board of Directors, at a meeting duly
called and held, has unanimously (i) approved and adopted
this Agreement and approved the transactions contemplated
hereby, (ii) determined that the transactions contemplated
hereby are advisable, fair to, and in the best interests of
Seller and its stockholders, and (iii) resolved to submit
this Agreement to the stockholders of Seller for approval, file
the Proxy Statement with the SEC and, subject to
Section 5.4 hereof, recommend that the stockholders of
Seller approve and adopt this Agreement.
(c) Sellers Board of Directors has approved the
Voting Agreements and taken all necessary action so that neither
Section 203 of the Delaware General Corporation Law nor any
fair price, moratorium, control
share acquisition or other anti-takeover Law shall be
applicable to this Agreement, the Voting Agreements or the
transactions contemplated hereby or thereby and so that
Purchaser will not be an interested stockholder (as
such term is used in Section 203 of the Delaware General
Corporation Law) with respect to Seller.
(d) The affirmative vote (in person or by proxy) of the
holders of at least a majority of the outstanding shares of
common stock of Seller at the Stockholders Meeting, or any
adjournment or postponement thereof, in favor of the approval of
this Agreement and the transactions contemplated hereby (the
Stockholder Approval
) is the only vote
or approval of the holders of any class or series of capital
stock of Seller or any of its Subsidiaries that is necessary to
approve this Agreement, approve the transactions contemplated
hereby, and perform and consummate the transactions contemplated
by this Agreement.
Section 3.3
Execution; Validity of
Agreement
. This Agreement has been duly executed
and delivered by Seller, and, assuming due and valid
authorization, execution and delivery hereof by Purchaser, is a
valid and binding obligation of Seller, enforceable against
Seller in accordance with its terms, except that (i) such
enforcement may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar
Law, now or hereafter in effect, relating to or limiting
creditors rights generally and (ii) equitable
remedies of specific performance and injunctive and other forms
of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor
may be brought.
Section 3.4
Consents and Approvals; No
Violations
. Except for the filing and mailing by
Seller with the SEC of a proxy statement relating to the
Stockholders Meeting (as amended or supplemented from time to
time, the
Proxy Statement
), and the
receipt of Stockholder Approval, and other filings required
under, and other applicable requirements of, the Exchange Act
and the rules and regulations promulgated thereunder, and the
NASDAQ rules, and except for filings, permits, authorizations,
consents and approvals as may be required under, and other
applicable requirements of, state securities or blue sky laws,
the HSR Act and the Investment Canada Act, none of the
execution, delivery or performance of this Agreement by Seller
or the consummation
A-6
by Seller of the Closing or the execution, delivery or
performance by Parent or the Voting Stockholder of the Voting
Agreements or by Parent of the Guarantee will (a) conflict
with or result in any breach of any provision of the amended and
restated certificate of incorporation or amended and restated
by-laws of Seller or any organizational document of the Company,
(b) require any filing with or notice by Seller or the
Company to, or the issuance or provision to Seller or the
Company of, any permit, authorization, consent or approval of,
any Governmental Entity, (c) result in a violation or
breach of, or constitute (with or without notice or lapse of
time or both) a default (or give rise to any right of
termination, cancellation or acceleration) or adverse
modification of any terms or rights under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or
obligation (
Contract
) to which Seller, the
Business, or the Company is a party or by which any of them or
any of their respective properties, assets or rights may be
bound, except for the consents obtained, to be obtained, or
waived by Purchaser, in respect of Contracts set forth in
Section 3.4 of the Disclosure Schedule
, or
(d) violate any statute, law, constitutional provision,
code, regulation, ordinance, rule, ruling, judgment, decision,
order, writ, injunction, decree, issued guidance or other
requirement of any Government Entity (
Law
)
applicable to Seller, the Company or any of their respective
properties or assets.
Section 3.5
Ownership of
Shares
.
Except as set forth in
Section 3.5 of the Disclosure Schedule
, Seller is the
record, legal and beneficial owner of all the issued and
outstanding Shares, free and clear of all Encumbrances, except
for any Encumbrances created by this Agreement.
Section 3.6
Capitalization
.
(a) The issued and outstanding capital stock of the Company
consists exclusively of the Shares. All the Shares are duly
authorized, validly issued, fully paid and non-assessable. There
are no options, rights or agreements to which any of Seller or
the Company is a party or by which any of them may be bound
obligating any of them (a) to issue, deliver or sell, or
refrain from issuing, delivering or selling, any shares of
capital stock of the Company, or to grant, extend or enter into
any such option, right or agreement, (b) to repurchase,
redeem or otherwise acquire, or to refrain from repurchasing,
redeeming or otherwise acquiring, any shares of capital stock of
the Company, or to grant, extend or enter into any such option,
right or agreement or (c) to vote, or to refrain from
voting, any shares of capital stock of the Company.
(b) As of the date hereof, the issued and outstanding
capital stock of Seller consists exclusively of
11,016,877 shares of common stock, par value $0.01 (the
Seller Shares
). The aggregate voting power
conveyed by the Voting Agreements to Purchaser shall be
sufficient, by itself, to cause the Stockholder Approval at any
stockholders meeting even if all other shares of capital stock
of seller were voted against the Stockholder Approval.
Section 3.7
Subsidiaries
. The
Company does not have any Subsidiaries, and the Company does not
own, directly or indirectly, any capital stock or other
ownership interests, or have any obligations to acquire any
capital stock or other ownership interests or make any
investment, in any corporation, partnership, joint venture or
other Person.
Section 3.8
Financial
Statements
. (a) True and complete copies of
the Financial Statements are included in
Section 3.8 of
the Disclosure Schedule
. The Financial Statements have been
prepared in accordance with U.S. GAAP applied on a
consistent basis and fairly present the financial position and
the results of operations and cash flows of the Business as of
the dates and for the periods referred to therein.
(b) The Company does not have any liabilities or
obligations of any nature, whether accrued, absolute, fixed,
known or unknown, contingent, or otherwise, whether due or to
become due and whether or not required to be recorded or
reflected on a balance sheet under U.S. GAAP, other than
(a) liabilities that are set forth in the Financial
Statements, (b) liabilities (including Taxes) incurred in
the ordinary course of business consistent with past practice
since the Balance Sheet Date, (c) liabilities under
contractual obligations to be performed after the date hereof
under Contracts set forth in
Section 3.11 of the
Disclosure Schedule
or other Contracts to the extent not
required to be listed therein (but excluding any obligations or
liabilities that arise in connection with any such Contracts as
a result of any breach, default or tort on or prior to the
Closing Date in connection with such Contracts), and
(d) liabilities set forth in
Section 3.8(b) of the
Disclosure Schedule
.
A-7
(c) Following the Closing, all amounts deposited with the
Royal Bank of Canada pursuant to the Blocked
Accounts Agreement, dated February 29, 2008, among the
Company, LV Administrative Services, Inc. and Royal Bank of
Canada and the Cash Collateral Agreement, dated
February 28, 2008, between the Company and Royal Bank of
Canada will be, assuming termination of such agreements,
available for distribution to Purchaser, but only to the extent
that such amounts exceed the credit card charges secured by such
deposited amounts.
Section 3.9
Absence of Certain
Changes
. Except as set forth in
Section 3.9 of the Disclosure Schedule
,
(a) since the Balance Sheet Date, there has not been any
change, effect, event or circumstance that has had or would
reasonably be expected to have a Material Adverse Effect, and
(b) since March 31, 2008, the Company has not taken
action that, if taken after the date hereof, would require
Purchasers consent under Section 5.1.
Section 3.10
Property and Assets
.
(a) Seller and its Subsidiaries have not engaged in the
Business other than through the Company. The Company has, or on
the Closing Date will have, good title to, or a valid lease,
license or right to use, all assets, properties and rights used
in the conduct of the Business as it is currently conducted and
as is necessary to permit it to be conducted consistent with
past practice, free of any Encumbrances other than Permitted
Encumbrances.
(b) Except as set forth in
Section 3.10(b) of the
Disclosure Schedule
, those real and other tangible
properties purported to be owned by the Company are held free
and clear of all Encumbrances other than (i) Encumbrances
for Taxes not yet due and payable, (ii) mechanics,
materialmens, carriers, warehousemen, workers,
repairers, landlords and similar Encumbrances
arising or incurred in the ordinary course of business
consistent with past practice, (iii) zoning, entitlement,
building and other land use regulations that are not violated by
current occupancy or use, (iv) customary covenants,
conditions, restrictions, easements and similar restrictions of
record affecting title that do not impair current occupancy or
use, (v) Encumbrances for Taxes that the Company is
contesting in good faith, which are set forth in
Section 3.10(b) of the Disclosure Schedule
, and
(vi) purchase money liens and liens securing rental
payments under capital lease arrangements, provided that the
underlying obligation is paid in the ordinary course of business
consistent with past practice when due (clauses (i) through
(vi) being
Permitted Encumbrances
). As
of the date hereof, all tangible assets owned or leased by the
Company are in satisfactory operating condition for the uses to
which they are being put.
(c)
Section 3.10(c) of the Disclosure Schedule
sets forth a complete list of all Real Property and specifies
which Real Property is owned and which is leased.
Section 3.11
Leases, Contracts and
Commitments
. (a)
Section 3.11(a) of
the Disclosure Schedule
sets forth a complete list as of the
date hereof of Contracts to which the Company is a party (or by
which the Business or any of the assets, properties or rights of
the Company, or the Business is bound) and that
(i) provides for or is reasonably likely to result in
future payments by the Company or the Business, or to the
Company or the Business, of more than $50,000 per annum
(excluding purchase orders entered into or incurred in the
ordinary course of business consistent with past practice);
(ii) was entered into by the Company or the Business with
Seller, any Affiliate of Seller (other than the Company) or with
any officer or director of Seller or any Affiliate of Seller
(including the Company) (other than such Contracts that were
entered into before January 1, 2006 and are no longer in
effect); (iii) is a partnership, limited liability company,
joint venture or similar agreement, or pursuant to which the
Company or the Business has an obligation to make an investment
in or loan to any Person; (iv) under which the Company or
the Business has created incurred, assumed, guaranteed or
secured Indebtedness; (v) pursuant to which
(A) payments were made by or to the Company or the Business
during the twelve month period ended on the Balance Sheet Date
in excess of $50,000, or (B) payments are reasonably
anticipated by the Company or the Business, to be made by or to
the Company or the Business during the twelve month period
ending on the first anniversary of the Balance Sheet date in
excess of $50,000; (vi) contains outstanding obligations
relating to the settlement of any Proceeding; (vii) is a
collective bargaining agreement, License, IT Contract, or
similar agreement; (viii) relates to the acquisition or
disposition of any business, operations or division (whether by
merger, sale of stock, sale of
A-8
assets or otherwise) to the extent any unresolved claims or
actual or contingent obligations of any party thereunder remain;
(ix) restricts the Company or the Business (including any
Contract that would restrict Purchaser or any of its
Subsidiaries at any time from and after the Closing) from
engaging in any business activity anywhere in the world or
(x) relates to cash management (any such Contract, whether
or not listed in
Section 3.11(a) of the Disclosure
Schedule
, a
Material Contract
).
(b) There is not and, to the Knowledge of Seller, there has
not been claimed or alleged by any Person, with respect to any
Material Contract, any existing default or event that, with
notice or lapse of time or both, would constitute a default or
event of default on the part of the Company or the Business or,
to the Knowledge of Seller, on the part of any other party
thereto. Each of the Material Contracts is in full force and
effect and is valid and binding on the Company, and, to the
Knowledge of Seller, each other party thereto.
Section 3.12
Suppliers and Customers
.
(a)
Section 3.12(a) of the Disclosure Schedule
sets forth the names of the 10 largest customers of the Company
as of the date hereof (as measured by revenue for the
twelve-month period ended on the Balance Sheet Date) (with each
governmental agency counted as a separate and distinct customer)
and the 10 largest suppliers of the Company as of the date
hereof (as measured by aggregate cost of items or services
purchased for the twelve-month period ended on the Balance Sheet
Date) and specifies the percentage of the Companys
revenues or purchased goods and services, accounted for by each
such customer or supplier during such period.
(b) Except as set forth in
Section 3.12(b) of the
Disclosure Schedule
, none of the Company or Seller
(a) has been notified (x) of any dispute with any
customer or supplier listed in
Section 3.12(a) of the
Disclosure Schedule
or (y) by 10 or more customers or
suppliers concerning any single issue or series of related
issues that could reasonably be expected to have an adverse
impact on the Company or (b) has been notified by any such
customer or supplier that it intends or is threatening to
terminate or otherwise adversely alter the terms of its business
with Seller, any of its Subsidiaries or the Company, either as a
result of the consummation of the transactions contemplated by
this Agreement or otherwise.
Section 3.13
Commercial Relationships with
Governmental Entities
. As of the date hereof,
other than standard form non-exclusive licenses, the Company is
not a party to a contract with any agency or department of any
government (including any government-run or sponsored hospital).
Section 3.14
Ethical
Practices
. Except as permitted under applicable
Law, the Company has not offered or given anything of value to
any official of a Governmental Entity, any political party or
official thereof, or any candidate for political office
(i) with the intent of inducing such Person to use such
Persons influence with any Governmental Entity to affect
or influence any act or decision of such Governmental Entity to
assist the Company in obtaining or retaining business for, or
with, or directing business to, any Person in contravention of
any Law applicable to the Company, or (ii) constituting a
bribe, kickback or illegal or improper payment to assist the
Company in obtaining or retaining business for or with any
Governmental Entity.
Section 3.15
Product and Service
Warranties
. The Company (a) has not taken
any action that has had or is reasonably likely to have, or
failed to take any action the failure of which to take has had
or would reasonably be expected to have, individually or in the
aggregate, an adverse effect on (i) any express or implied
manufacturer warranties of any products sold to it or
(ii) any express or implied service warranties for any
services provided by it and (b) does not provide a
guaranty, warranty or other indemnity beyond the standard terms
and conditions of sale set forth in
Section 3.15 of the
Disclosure Schedule
, except (in the case of clause (b))
to the extent any warranties may be implied under applicable Law
absent any express action by the Company.
Section 3.16
Insurance
.
Section 3.16 of the Disclosure Schedule
lists all
insurance policies in effect as of the date hereof that provide
coverage with respect to the business, or assets of the Company
or the Business. No written notice of default, cancellation or
termination has been received with respect to any such insurance
policy, and to the Knowledge of Seller, no event has occurred
that, with the lapse of time or the giving of notice or both,
would constitute a default under any such insurance policy.
There are no historical
A-9
gaps in coverage with respect to any such policy, and no such
limited of liability have been exhausted under any such policy.
Section 3.17
Litigation; Other
Proceedings
. Except as set forth in
Section 3.17 of the Disclosure Schedule
, there is no
Proceeding pending (or, to the Knowledge of Seller, threatened)
(a) by, against or relating to the Company, the Business or
any property or rights of the Company or the Business or
(b) as of the date hereof, relating to this Agreement or
any Related Document or any of the transactions contemplated
hereby or thereby.
Section 3.17 of the Disclosure
Schedule
sets forth a true, correct and complete list of all
Proceedings resolved or settled from January 1, 2006 to the
date hereof requiring payments by the Company in excess of
$20,000. The Company is not subject to any outstanding order,
writ, injunction or decree of any Governmental Entity (an
Order
). Each of the third, fourth and fifth
items set forth in
Section 3.17 of the Disclosure
Schedule
is currently covered by one or more of the
insurance policies set forth in
Section 3.16 of the
Disclosure Schedule
.
Section 3.18
Environmental and Health and
Safety Matters
.
(a) During the three years preceding the Closing Date, the
Company has been and is in compliance with all applicable
Environmental Laws.
(b) During the three years preceding the Closing Date, the
Company has maintained and has been and is in compliance with
all approvals, authorizations, consents, licenses, waivers,
variances, certificates or permits required for the Business
pursuant to Environmental Laws and has timely filed all
applications for their renewal.
(c) There is no Proceeding pending (or, to the Knowledge of
Seller, threatened) by, against or relating to the Company
either (i) pursuant to Environmental Laws or
(ii) arising from the Release or presence of or exposure to
Hazardous Substances, whether on or off the property owned or
operated by the Company.
(d) There are no conditions or circumstances, including
without limitation the Release or presence of or exposure to any
Hazardous Substances, reasonably anticipated to result in
liabilities or obligations to, or requirements for notification,
investigation or remediation by, the Company pursuant to
Environmental Laws.
(e) To the Knowledge of Seller, no asbestos-containing
materials, polychlorinated biphenyls, underground storage tank,
or landfill, impoundment or other disposal area containing
Hazardous Materials, is present at the property owned or
operated by the Company.
(f) All waste materials generated by the Company have been
properly stored, transported, treated and disposed of in
accordance with all applicable Environmental Laws.
(g) Seller has provided to Purchaser all written
environmental, health or safety assessments, audits,
investigations, and sampling or similar reports directed to or
obtained by the Company since January 1, 2005, including
any documents relating to the Release or presence of or exposure
to Hazardous Substances.
(h) No Encumbrances pursuant to Environmental Laws have
been or are imposed on the property owned or operated by the
Company, and to the Knowledge of Seller, no such liens have been
threatened.
(i) For purposes of this Agreement:
(i)
Environmental Laws
means all
Laws relating to: (i) protection, preservation or cleanup
of the environment or natural resources; (ii) any Release
or threatened Release, including, without limitation, control,
investigation, study, assessment, testing, monitoring,
containment, removal, remediation, cleanup or abatement of such
Release or threatened Release; (iii) the management,
manufacture, generation, formulation, processing, labeling,
distribution, introduction into commerce, registration, use,
treatment, handling, storage, disposal, transportation, re-use,
recycling or reclamation of any Hazardous Substance, or
(iv) health and safety.
(ii)
Hazardous Substances
means
any substances, materials, wastes or agents that are designated
as hazardous or toxic or subject to regulation or liability
under Environmental Laws, including without limitation petroleum
or any fraction thereof, asbestos, polychlorinated biphenyls,
and mold.
A-10
(iii)
Release
means any spilling,
leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping, disposing, of any
Hazardous Substances at, in, on, into or onto the environment,
including, without limitation, the migration of any Hazardous
Substances through or in the environment.
Section 3.19
Compliance with Laws
.
(a) Each of the Business and the Company is in possession
of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates,
approvals and orders (
Permits
) of any
Governmental Entity that is necessary for it to carry on its
business as it is now being conducted and is in compliance with
the terms and requirements of all such Permits and no suspension
or cancellation of any of the foregoing is pending or to the
Knowledge of Seller, threatened. Since January 1, 2006,
none of the Company or the Business (i) has been in
violation of any applicable Law or (ii) has received
written notice of any violation or alleged violation of any Law,
except violations or alleged violations that have been resolved
prior to the date hereof without any continuing obligation or
liability of the Company.
(b) Without limiting the generality of the foregoing, the
manufacture, sale, marketing, and distribution of the Business
Products are and have been in compliance, with all applicable
Laws, including those related to use of radio frequency
spectrums, customary manufacturing practices, labeling,
advertising, record keeping, reporting of adverse events and
filing of reports with applicable Governmental Entities. None of
the Business Products have been recalled, withdrawn, suspended
or discontinued (whether voluntarily or otherwise) since
January 1, 2005. No Proceedings (whether completed or
pending) seeking the recall, withdrawal, suspension or seizure
of the Business Products or pre-market approvals or marketing
authorizations relating to the Business Products are pending or,
to the Knowledge of Seller, are threatened, against Seller or
the Company, at any time since January 1, 2005.
No representation or warranty is made under this
Section 3.19
with respect to compliance with
Environmental Laws, which is covered by
Section 3.18
.
Section 3.20
Employee Benefit
Plans
. (a)
Section 3.20(a) of the
Disclosure Schedule
contains a true and complete list of all
Plans as of the date hereof. The Company has made available to
Purchaser a true and complete copy of (i) each written Plan
and all amendments thereto and each agreement creating or
modifying any related trust or other funding vehicle,
(ii) a written description of the material terms of each
unwritten Plan; (iii) the most recent annual report with
respect to each Plan (if any such report was required by
applicable Law); (iv) the most recent summary plan
description (or similar document) for each Plan; (v) the
most recent determination letter received from the IRS with
respect to each Plan, if applicable; (vi) the most recent
available financial or actuarial report for each Plan, if
applicable; and (vii) all material correspondence with any
Governmental Entity regarding any Plan.
(b) No Plan is a multi-employer pension plan,
as defined in Section 3(37) of ERISA or under the
provisions of any other applicable Law nor is any Plan subject
to Section 302 or Title IV of ERISA or
Section 412 of the Code. No liability under Title I
or IV or Section 302 of ERISA, the penalty, excise tax
or joint and several liability provisions of the Code or under
any Law or regulation relating to the plans has been incurred by
the Company or any ERISA Affiliate. The PBGC has not instituted
proceedings to terminate any Title IV Plan and no condition
exists that presents a risk that such proceedings will be
instituted.
(c) No Plan is a registered pension plan as
that term is defined in subsection 248(1) of the ITA.
(d) None of the Plans provide, and the Company has no
liability with respect to, any post-employment life or health
insurance or other welfare benefits except as may be required by
Section 4980B of the Code or other applicable Law.
(e) Each Plan has been, to the extent applicable,
established, registered, qualified, funded, invested, operated
and administered in accordance with, and is in good standing
under, its terms and applicable Law, including ERISA, the Code,
the applicable Canada Pension Standards legislation and the ITA.
To the Knowledge of Seller, there are no investigations by any
Governmental Entity, termination proceedings or other claims
(except routine claims for benefits payable under the Plans)
against or involving any Plan or asserting
A-11
any rights to or claims for benefits under any Plan. All
contributions or premiums required by Law or by the terms of the
Plan have been timely made. There are no taxes, penalties or
fees owing or eligible under any of the Plans. All liabilities
of the Company (whether accrued, absolute, contingent or
otherwise) related to all Plans have been fully and accurately
disclosed in accordance with U.S. GAAP in the Financial
Statements and will be fully and accurately disclosed in the
Closing Date Balance Sheet and no changes have occurred to any
Plan or are reasonably expected to occur which could adversely
affect the actuarial report related to such Plan, if any, or the
Financial Statements.
(f) No Plan is intended to be qualified within
the meaning of Section 401(a) of the Code.
(g) Except as listed on
Section 3.20(g) if the
Disclosure Schedule
, neither the execution or delivery of
this Agreement nor the consummation of the transactions
contemplated by this Agreement will, either alone or in
conjunction with any other event (whether contingent or
otherwise) (i) result in any payment or benefit becoming
due or payable or required to be provided, to any director,
employee or independent contractor of the Company,
(ii) increase the amount or value of any benefit or
compensation otherwise payable or required to be provided to any
such director, employee or independent contractor,
(iii) result in the acceleration of the time of payment,
vesting or funding of any such benefit or compensation or
(iv) result in any amount failing to be deductible by
reason of Section 280G of the Code.
(h) All data reasonably necessary to administer each Plan
has been provided to Purchaser and is true and correct, to the
Knowledge of Seller. The Company may unilaterally amend, vary,
revise, revoke, or terminate, in whole or in part, each Plan and
take contribution holidays under or withdraw surplus from each
Plan, subject only to approvals required by applicable Law and
the terms of the Plans. Subject to obtaining any approvals under
applicable Law, the Company may merge any Plan with any other
arrangement, plan or fund and may transfer without restriction,
the assets from any Plan to any other arrangement, plan or fund.
There have been no withdrawals, applications or transfers of
assets from any Plan or the trusts or other funding medical
relating thereto except in accordance with the terms of each
Plan, applicable Law and all applicable agreements. None of the
Company or, to the Knowledge of Seller, any of its agents or
fiduciaries, has been in breach of any contractual or fiduciary
obligation with respect to the administration of any Plan or the
trusts or other funding media related thereto. No insurance
policy or other contract or agreement affecting any Plan
requires or permits a retroactive increase in premiums or
payments due thereunder.
(i) There exists no liability in connection with any former
benefit plan relating to any employee or former employee of the
Company or its beneficiaries that has terminated, and all
procedures for termination of each such former benefit plan have
been properly followed in accordance with the terms of such
former benefit plans and applicable Law.
Section 3.21
Tax Matters
.
(a) Each of the Company and each Company Predecessor has
timely filed (or there have been filed on its behalf) with
appropriate Governmental Entities all Tax Returns required to be
filed by it on or prior to the date hereof, and such Tax Returns
are correct in all material respects and all Taxes shown as due
on such Tax Returns have been timely paid. No extension of time
in which to file any such Tax Returns is currently in effect.
(b) All Taxes of the Company and each Company Predecessor
to the extent due and payable as of the date hereof have been
timely paid except to the extent of amounts that are being
contested in good faith appropriate proceedings or that are
reserved for Tax liabilities in the Financial Statements.
(c) There are no Encumbrances for Taxes upon any property
or assets of the Company, except for Encumbrances for Taxes not
yet due.
(d) Except as set forth in
Section 3.21(d) of the
Disclosure Schedule
, no federal, state, provincial, local or
foreign audits, examinations, investigations, reassessments, or
other administrative proceedings (such audits, examinations,
investigations and other administrative proceedings referred to
collectively as
Audits
) or court proceedings
are presently pending or, to the Knowledge of Seller, being
initiated or considered with regard to any Taxes or Tax Returns
filed by or on behalf of the Company or a Company Predecessor,
and there are no outstanding issues which have been raised and
communicated to Seller or the Company by any Governmental Entity
for any fiscal period in respect of which a Tax Return of the
Company has been audited. Since April 1,
A-12
2005, no Governmental Entity has challenged or disputed a filing
position taken by the Company or a Company Predecessor in any
Tax Return. Neither Seller nor the Company is aware of any
contingent liabilities for Taxes or any grounds for an
assessment or reassessment of the Company, including unreported
benefits conferred on any stockholder of the Company. Neither
Seller nor the Company has received any indication from any
Governmental Entity that an assessment or reassessment of the
Company is proposed in respect of any Taxes, regardless of its
merits.
(e) There are no outstanding requests, agreements, consents
or waivers to extend the statutory period of limitations
applicable to the assessment of any Taxes or deficiencies
against the Company.
(f) There is no obligation of the Company to contribute to
the payment of any Tax or any portion of a Tax (or any amount
calculated with reference to any portion of a Tax) of any Person
other than the Company, including as transferee or successor, by
Contract or otherwise.
(g) No claim has been made in writing by any authority in a
jurisdiction where the Company does not file Tax Returns that
the Company or a Company Predecessor is or may be subject to
taxation by that jurisdiction.
(h) The Company has not constituted either a
distributing corporation or a controlled
corporation within the meaning of
Section 355(a)(1)(A) of the Code since January 1, 2006.
(i) Prior to the date hereof, the Company has made
available to Purchaser complete and accurate copies of all Tax
Returns filed by the Company on or prior to the date hereof for
all tax periods beginning on or after January 1, 2005.
(j) Prior to the date hereof, the Company has made
available to Purchaser complete and accurate copies of all audit
reports, letter rulings, technical advice memoranda and similar
documents received from any Governmental Entity since
December 31, 2004 relating to the U.S. and Canadian
federal, state, provincial, or local Taxes due from or with
respect to the Company or a Company Predecessor.
(k) Neither the Company nor any Company Predecessor has
participated in a listed transaction,
nor to the Knowledge of Seller, in reportable
transactions (as those terms are defined in Treasury
Regulation Section 1.6011-4(b)).
(l) The Company has maintained and continues to maintain at
its place of business in Canada all books and records required
to be maintained under the ITA and any other applicable Law and
any comparable Law of any province or territory in Canada,
including Laws relating to sales and use taxes.
(m) The Shares are not taxable Québec
property for purposes of the
Taxation Act
(Québec).
(n) Neither the Company nor any Company Predecessor has
participated, directly or through a partnership, in a
transaction or series of transactions contemplated in
subsection 247(2) of the ITA or any comparable Law of any
province or territory in Canada.
(o) None of the Company, any Company Predecessor or the
Business is party to or bound by any tax sharing agreement, tax
indemnity obligation in favor of any Person or similar agreement
in favor of any Person with respect to Taxes (including any
advance pricing agreement or other similar agreement relating to
Taxes with any Governmental Entity). Without limiting the
generality of the foregoing, the Company has not entered into an
agreement contemplated in section 80.04, section 191.3
or subsection 18(2.3), 127(13), 127(20) or 125(3) of the
ITA or any comparable Law of any province or territory of Canada.
(p) The Company has not claimed any reserves for purposes
of the ITA (or for purposes of any analogous or comparable
provincial, territorial or similar statute) for the most recent
Tax year ending prior to the date hereof.
(q) No circumstances exist which could result in the
application to the Company of sections 78, 80 to 80.04 or
160 of the ITA or any analogous provision of any comparable Law
of any province or territory of Canada.
A-13
(r) All Canadian federal and provincial research and
development investment tax credits claimed (and refunds
received) by the Company or a Company Predecessor were claimed
(and refunds received) by virtue of the Company or a Company
Predecessor operating its business and all such tax credits were
claimed (and refunds received) in accordance with the relevant
rules and conditions under the ITA and applicable Canadian
provincial or territorial legislation.
Section 3.22
Intellectual Property
.
(a)
Section 3.22(a) of the Disclosure Schedule
contains an accurate and complete list of the following Owned
Intellectual Property as of the date hereof: (i) Patents;
(ii) applications and registrations for Trademarks and all
material unregistered Trademarks; (iii) Internet domain
names; and (iv) applications and registrations for
Copyrights and all material unregistered Copyrights, in each
case listing, as applicable, (A) the title of the
application or registration, (B) the name of the current
owner, (C) the jurisdiction where the
application/registration is located, (D) the application or
registration number, and (E) the status of the application
or registration, including deadlines for any renewals or other
required filings required to be made in the next six-months
after the date of this Agreement.
(b) Except as set forth in
Section 3.22(b) of the
Disclosure Schedule
, the Intellectual Property held under
Licenses, together with the Owned Intellectual Property
(collectively, the
Company Intellectual
Property
), constitutes all of the Intellectual
Property used or held for use in the conduct and operation of
the Business of the Company as currently conducted and
contemplated by Seller to be conducted, or necessary for the
conduct and operation of the Business of the Company as
currently conducted. Immediately following the Closing Date, no
Intellectual Property relating to the Business will be owned by
Seller.
(c) The Company is the sole and exclusive owner of all
right, title and interest in or has the valid right to use, the
Company Intellectual Property, free and clear of all
Encumbrances (other than Permitted Encumbrances) and the Company
shall have such rights immediately after the Closing Date. The
Company has not granted to any third party, by License or
otherwise, any material right or interest in such Intellectual
Property, other than non-exclusive licenses to customers of the
Business Products that are software related, in the ordinary
course of business consistent with past practice.
(d) The conduct and operation of the Business as currently
conducted and contemplated by Seller to be conducted, including
the use of the Company Intellectual Property therein, does not,
to the Knowledge of Seller, infringe upon, misappropriate,
violate or conflict in any way with any rights (including rights
in Intellectual Property) held by any Person. The Companys
past or present devices and the Companys past and current
methods do not infringe any valid claim of U.S. Patent Nos.
7,274,294 and 7,365,645. The past and current configurations of
the RoamAlert tags do not transmit a VLF signal (3 to 30 kHz).
The battery status of a tag that is displayed by the past and
current RoamAlert Pocket Tag Readers is not related to a time of
installation or manufacture of the battery. The power level of
the signal output of past and current RoamAlert Pocket Tag
Readers is not adjustable. RoamAlert tags, according to the
current configuration, that transmit a battery level (or status)
either continuously or when the battery level is low (or
becoming low) to a RoamAlert Pocket Tag Reader were on sale in
the U.S. before January 25, 2004. RoamAlert Pocket Tag
Readers that receive a battery level (or status) from a tag and
display an indication of the battery status, according to the
current configuration, were on sale in the U.S. before
January 25, 2004. RoamAlert tags that store and transmit
warranty dates, but do not determine tag battery status based on
the warranty dates (i.e., tag battery status is based on battery
voltage), were on sale in the U.S. before January 25,
2004. RoamAlert Pocket Tag Readers that display warranty dates,
but do not determine tag battery status based on the warranty
dates (i.e., tag battery status is based on battery voltage),
were on sale in the U.S. before January 25, 2004. Past
and current configurations of the RoamAlert Pocket Tag Readers
are not essential to the operation of the past and current
configurations of the RoamAlert system. The Company has not
received any written demand, written claim or written notice
with respect to the Company Intellectual Property which alleges
that the Company infringes upon, misappropriates, violates or
conflicts with the Intellectual Property rights of any Person or
which challenges the ownership, validity or enforceability of
any Company Intellectual Property. There is no pending or, to
the Knowledge of Seller, threatened written assertion or written
claim that the use or exploitation of any Company Intellectual
Property by the Company or the conduct of the business of the
Company or of the
A-14
Business infringes upon, misappropriates, violates or conflicts
with the rights of any Person. None of the Company Intellectual
Property is subject to any outstanding order, judgment, decree
or agreement adversely affecting the Companys use thereof
or rights thereto. The Company is not party to any Proceeding
which involves a claim of infringement or misappropriation of
any Intellectual Property of any third party or of any Company
Intellectual Property.
(e) Except as set forth in
Section 3.22(e) of the
Disclosure Schedule
, to the Knowledge of Seller,
(i) there are no unauthorized uses, disclosures,
infringements or misappropriations of any Company Intellectual
Property by any third party and (ii) there is not any fact
or matter which would or may create any such unauthorized use,
disclosure, infringement or misappropriation.
(f) The Company has taken all commercially reasonable and
appropriate steps to protect and preserve the rights in, and
have complied with and are in compliance with all Laws
(including marking requirements and payment of all applicable
fees) with respect to, any Owned Intellectual Property that is
issued, granted or registered by or with a Governmental Entity
or for which an application therefor has been filed with any
Governmental Entity, and all registrations for Owned
Intellectual Property are valid, subsisting and enforceable and
currently in good standing.
(g) The Company has taken commercially reasonable steps to
protect and preserve the rights in all unregistered Intellectual
Property. All current and former employees, consultants and
contractors of the Company who contribute or have contributed to
the creation or development of any of the Company Intellectual
Property have executed written instruments with the Company that
assign all rights, title and interest in and to any such
contributions that the Company does not already own by operation
of law. Except as set forth in
Section 3.22(g) of the
Disclosure Schedule
, no current employee, officer, director,
stockholder, consultant or independent contractor, or to the
Knowledge of Seller, no former employee, officer, director,
stockholder, consultant or independent contractor, has any
right, claim or interest in or with respect to any Owned
Intellectual Property.
(h) The Company is the licensee under the license
agreements set forth in
Section 3.22(h) of the
Disclosure Schedule
, which are all of the Licenses, except
for (i) any IT Contracts (which are addressed in
Section 3.23) and (ii) any license implied by the sale
of a product, and there are no outstanding or, to the Knowledge
of Seller, threatened disputes with respect to the Licenses. The
Company has not granted a license to any Person to use any
Intellectual Property other than non-exclusive licenses of
Intellectual Property granted by the Company to customers in the
ordinary course of business consistent with past practice.
(i) No License or any grant of exclusivity contained
therein may be unilaterally terminated or materially altered by
any third party which is a party to such License as a result of
the consummation of the transactions provided for herein. The
Company is in compliance and is not in default under any License
and, to the Knowledge of Seller, third parties to any such
License are in compliance and not in default under any License.
(j) Neither this Agreement nor the transaction contemplated
hereunder will result in: (i) the Company or Purchaser
granting to any third party any right to or with respect to any
Intellectual Property owned by, or licensed to, the Company or
Purchaser, or (ii) the Company or Purchaser being bound by,
or subject to, any non-compete or other material restriction on
the operation or scope of their respective businesses or of the
Business.
(k) The Companys collection, storage, use and
dissemination of information and data, whether proprietary or
not, relating to customers, clients and patients of customers or
end-users (
Customer Information
) and any
personally identifiable information are and have been in
compliance with all applicable Laws relating to privacy, data
security and data protection, and all applicable privacy
policies and terms of use or other contractual obligations. All
use, exploitation and disclosure in connection with the Business
of Customer Information or Trade Secrets owned by a third party
has been pursuant to the terms of a license agreement or another
written agreement with such third party, or is otherwise lawful.
The Company has reasonable security and data protections in
place, consistent with general industry practices, with respect
to third-party Trade Secrets or Customer Information, and any
personally identifiable information, and there has been no
material breach thereof or loss of data.
A-15
Section 3.23
Information
Technology
. (a)
Section 3.23(a) of
the Disclosure Schedule
contains an accurate and complete
list, as of the date of this Agreement, of all IT Systems and
each Contract to which the Company is a party relating to any
such IT Systems pursuant to which the aggregate payments paid or
payable by the Company with respect to such Contract exceeds
$100,000 (each such Contract, an
IT
Contract
). For purposes of this Agreement,
IT
Systems
means electronic data processing, information,
recordkeeping, communications, telecommunications, networking,
account management, inventory management and other such
applications, Computer Software, hardware, equipment and
services (including all applications and software installed on
all hardware and equipment), and all documentation related to
the foregoing.
(b) No Computer Software owned by the Company and, to the
Knowledge of Seller, no other Computer Software included in
Company Intellectual Property, incorporates, is comprised of or
distributed with Computer Software subject to the provisions of
any open source or third party license agreement
that (i) requires the distribution of source code in
connection with the distribution of such software in object code
form; (ii) materially limits the Companys freedom to
seek full compensation in connection with marketing, licensing
and distributing such software; or (iii) allows a customer
or requires that a customer have the right to decompile,
disassemble or otherwise reverse engineer the software by its
terms and not by operation of law.
(c) Each of the IT Systems: (i) is supported by a
written Contract providing for appropriate maintenance and
support and (ii) is subject to full and unrestricted access
and use by the Company (and no third party agreement or consent
is required to enable such access and use by the Company to
continue after the Closing), (iii) is adequate in all
material respects for their intended use and for the operation
of the Business as currently conducted and contemplated to be
conducted, and are in good working condition (normal wear and
tear excepted), (iv) has not been subject to any material
malfunction with respect to any such IT Systems that has not
been remedied or replaced, (v) has not, to the Knowledge of
Seller, been infected with any computer code or any other
mechanisms which may: (A) disrupt, disable, erase or harm
in any way such IT Systems operation, or cause such IT
System to damage or corrupt any data, hardware, storage media,
programs, equipment or communications, or (B) permit any
third party to access such IT System without authorization, and
(vi) has disaster recovery plans in place that are
appropriate, in accordance with good industry practice, to
minimize the disruption of business in the event of failure of
the IT Systems, however arising.
Section 3.24
Labor Matters
.
(a)
Section 3.24(a) of the Disclosure Schedule
lists as of the date hereof (i) all the employees and
(ii) the Persons who are receiving remuneration for work or
services provided to the Company who are not employees as of the
date of this Agreement, and for each, the position, status,
length of service, location of employment, and compensation of
each employee and the terms on which each other Person who is
providing work or services to the Company is engaged. As of the
date of this Agreement, no employee of the Company is on
long-term disability leave, extended absence or receiving
benefits pursuant to the Workplace Safety and Insurance Act,
1999 (Ontario). The employment of all of the employees is
terminable on such notice as is required by Law, including
common law notice, or pursuant to the terms of a written
agreement of employment.
(b) There is no labor strike, dispute, slowdown, stoppage
or lockout actually pending, or to the Knowledge of Seller,
threatened against the Company.
(c) No employee of the Company is represented by a labor
union or labor organization. None of the Company or the Business
is a party to or bound by any collective bargaining agreement,
labor contract, letter of understanding, letter of intent,
voluntary recognition agreement or legally binding commitment or
written communication with any labor organization, labor union,
trade union or employee organization and there are no pending,
or to the Knowledge of Seller, threatened representation
campaigns, elections or proceedings concerning union
representation involving any employee of the Company.
(d) No labor union has been certified by the National Labor
Relations Board as bargaining agent for any of the employees of
the Company.
(e) There is no unfair labor practice charge or complaint
against the Company pending or to the Knowledge of Seller
threatened before the National Labor Relations Board. The
Company is in compliance
A-16
with all applicable local, state, federal and foreign Laws
relating to labor and employment, including but not limited to
Laws relating to discrimination, disability, labor relations,
hours of work, payment of wages and overtime wages, pay equity,
immigration, workers compensation, working conditions, employee
scheduling, family and medical leave, and employee terminations.
Except as set forth in
Section 3.24(e) of the Disclosure
Schedule
, there are no complaints, lawsuits, arbitrations,
administrative proceedings, or other proceedings pending or, to
the Knowledge of Seller, threatened against the Company brought
by or on behalf of any applicant for employment, any current or
former employee, any person alleging to be a current or former
employee, any class of the foregoing, or any Governmental
Entity, relating to any such Law or regulation, or alleging
breach of any express or implied contract of employment,
wrongful termination of employment, or alleging any other
discriminatory, wrongful or tortious conduct in connection with
the employment relationship. The Company is in compliance with
the Workplace Safety and Insurance Act, 1997 (Ontario) and is
not subject to any penalty assessments thereunder based upon a
determination by the Workplace Safety and Insurance Board.
(f) There are no outstanding orders made under the
Occupational Health and Safety Act (Ontario) relating to the
Company or the Business. The Company is operating in compliance
with all occupational health and safety laws, including the
Workplace Hazardous Materials Information System (WHMIS), in
connection with the Business. There are no pending, or to the
Knowledge of Seller, threatened charges against the Company
under occupational health and safety laws relating to the
Business. There have been no fatal or critical accidents which
have occurred in the course of the operation of the Business
which have resulted in or that are reasonably likely to result
in charges under the Occupational Health and Safety Act
(Ontario). The Company has complied in all respects with any
orders issued under occupational health and safety laws.
(g) Since the enactment of the WARN Act, the Company has
not effectuated a
plant closing
(as
defined in the WARN Act) affecting any site of employment or one
or more facilities or operating units within any site of
employment or facility of the Company, and there has not
occurred a
mass layoff
(as defined in the
WARN Act) affecting any site of employment or facility of the
Company. Within the last six months, the Company has not
incurred any liability or obligation which remains unsatisfied
under the WARN Act or any other applicable Laws regarding the
termination or layoff of employees.
(h) Except as set forth on
Section 3.24(h) of the
Disclosure Schedule
, none of the employees or independent
contractors engaged by the Company in the year immediately prior
to the date hereof has indicated to the Company that he, she or
it intends to resign, retire or terminate his, her or its
engagement with the Company as a result of the transactions
contemplated by this Agreement or otherwise. To the Knowledge of
Seller, none of the employees of the Company is in violation of
any non-competition, non-solicitation, non-disclosure or any
similar agreement with any third party.
Section 3.25
Brokers or
Finders
. Other than Merriman Curhan
Ford & Co., whose fees and expenses will be paid by
Seller, no agent, broker, investment banker, financial advisor
or other firm is or will be entitled to any brokers or
finders fee or other commission or similar fee in
connection with the transactions contemplated by this Agreement
except for any agent, broker, investment banker, financial
advisor or other firm or Person engaged by Purchaser.
Section 3.26
Affiliate Transactions
.
(a) None of (i) Seller or Parent, (ii) any
Affiliate of the Company, Seller or Parent (other than the
Company) or (iii) any director or officer of (x) the
Company, Seller or Parent or (y) any Affiliate of the
Company, Seller or Parent (each of the foregoing, a
Related Party
) has any interest in any
Contract with, or relating to, the Business, the Company or any
of the properties, assets or rights of the Company or the
Business, except for those listed in
Section 3.26(a) of
the Disclosure Schedule
and for normal compensation for
services as an officer, director or employee of the Company.
(b)
Section 3.26(b) of the Disclosure Schedule
lists all current and non-current payment obligations to the
Company as to which the obligor is a Related Party (other than
de minimis advances in the ordinary course of business
consistent with past practice to employees who are neither
officers nor directors of the Company, Parent or Seller or any
of their respective Affiliates). Without limiting the generality
of the
A-17
foregoing, no Related Party has any obligation under any
outstanding guarantee, letter of comfort, letter of assurance,
keepwell, letter of credit, performance bond, assurance bond,
surety agreement, indemnity agreement or any other form of
assurance or guaranty (a
Credit Support
Obligation
) in connection with the Business or the
Company.
(c)
Section 3.26(c) of the Disclosure Schedule
lists all current and non-current payment obligations of the
Company to any Related Party (other than (x) amounts owing
to employees that arise under the terms of their employment and
related ordinary course benefit plans of the Company that are
listed in the Disclosure Schedule and (y) ordinary course
expense reimbursements to employees and directors of the Company
relating to the performance of their duties for the Company).
Without limiting the generality of the foregoing, the Company
has no Credit Support Obligation in connection with any Related
Parties or any of their respective businesses (other than the
Business).
Section 3.27
Information
Supplied
. The Proxy Statement will not, on the
date it is first mailed to stockholders of Seller and at the
time of the Stockholders Meeting, contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they are made, not misleading. The Proxy Statement will comply
as to form with the applicable requirements of the Exchange Act.
The representations and warranties contained in this
Section 3.27 will not apply to statements or omissions
included in the Proxy Statement based upon information furnished
in writing to Seller by Purchaser specifically for use therein.
Section 3.28
Separation; Excluded
Liabilities
.
(a) The Business and the Company have at all times been
operated separately from other businesses conducted by Seller.
The Company and its predecessors have not, at any time, engaged
in, managed, supervised, represented, held itself out to third
parties or the public as conducting, or operated in any way the
Implantable Chip Business.
(b)
Section 3.28(b) of the Disclosure Schedule
sets forth a list and detailed description of each Excluded
Liability for which the Company, as of the date hereof, has any
liability of any kind or nature, whether primary, successor or
secondary, and whether or not accrued, contingent or required to
be recorded under U.S. GAAP. By the Closing Date, Seller
shall have taken all necessary actions, including by
transferring liabilities and obtaining releases, to cause all
Excluded Liabilities to have ceased to be liabilities (of any
kind or nature, whether primary, successor or secondary, and
whether or not accrued, contingent or required to be recorded
under U.S. GAAP) of the Company.
Section 3.29
Solvency
. Seller
is (and, as of the Closing Date, immediately after giving effect
to all of the transactions contemplated by this Agreement,
including, without limitation, the payment of all related fees
and expenses, will be) Solvent. For purposes of this Agreement,
the term
Solvent
means that, as of any
date of determination, (a) the amount of the fair saleable
value of the assets of Seller and its Subsidiaries, taken as a
whole, exceeds, as of such date, the sum of (i) the value
of all liabilities of Seller and its Subsidiaries, taken as a
whole, including contingent and other liabilities, as of such
date, as such terms are generally determined in accordance with
the applicable federal Laws governing determinations of the
solvency of debtors, and (ii) the amount that will be
required to pay the probable liabilities of Seller and its
Subsidiaries, taken as a whole, on its existing debts and
obligations (including contingent liabilities) as such debts and
obligations mature; (b) Seller will not have, as of such
date, an unreasonably small amount of capital for the operation
of the business in which it is engaged or proposed to be engaged
by Seller following such date; and (c) Seller will be able
to pay its liabilities, including contingent and other
liabilities, as they mature.
Section 3.30
Opinion of Financial
Advisor.
The financial advisor of Seller,
Merriman Curhan Ford & Co., has delivered to Seller an
opinion dated the date of this Agreement to the effect that, as
of such date, the Purchase Price is fair to Seller from a
financial point of view.
Section 3.31
Private Issuer
.
The Company is a private issuer within the meaning
of National Instrument
45-106
Prospectus and Registration Exemptions adopted by the Canadian
Securities Administrators.
A-18
Section 3.32
Investment Canada
Act
. The Company (a) is not engaged in the
production of uranium and does not own an interest in a
producing uranium property in Canada, (b) does not provide
any financial service, as defined under Part IV
of the Investment Canada Act (Canada), (c) does not provide
any transportation service, as defined in the
Investment Canada Regulations (SOR/85-611), and (d) is not
a cultural business, as defined under Part IV
of the Investment Canada Act (Canada).
Section 3.33
Competition Act
.
For the purposes of Section 110 of the Competition Act, the
aggregate value of the assets in Canada and the gross revenues
generated from sales in/or from Canada, of the Company and its
Subsidiaries (within the meaning of the Competition Act) is not
greater than Cdn$50 million and Cdn$50 million per
annum, respectively, in accordance with the Notifiable
Transactions Regulations (SOR/87-348).
Section 3.34
Privacy Laws
.
(a) The Company has complied at all times in all material
respects with all Privacy Laws in connection with the
collection, use and disclosure of Personal Information by the
Company; and all Personal Information has been collected, used
and disclosed with the consent of each individual to whom such
Personal Information relates and has been used only for the
purposes for which it was initially collected.
(b) The Company has had in place since March 31, 2005
a privacy policy governing the collection, use and disclosure of
Personal Information by the Company and has collected, used and
disclosed Personal Information in accordance with such policy.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF PURCHASER
Subject to Section 10.1(b), Purchaser represents and
warrants to Seller that:
Section 4.1
Organization
.
Purchaser is a corporation duly organized, validly existing and
in good standing under the laws of Connecticut, (b) has all
requisite corporate or other legal entity power and authority to
carry on its business as it is now being conducted and to own
the properties and assets it now owns and (c) is duly
qualified or licensed to do business in every jurisdiction in
which such qualification is required.
Section 4.2
Authorization; Validity of
Agreement
. Purchaser has the requisite corporate
power and authority to execute, deliver and perform this
Agreement and to consummate the Closing. The execution, delivery
and performance by Purchaser of this Agreement and the
consummation by Purchaser of the Closing have been duly
authorized by the Board of Directors of Purchaser, and no other
corporate action on the part of Purchaser is necessary to
authorize the execution, delivery and performance by Purchaser
of this Agreement or the consummation by Purchaser of the
Closing. This Agreement has been duly executed and delivered by
Purchaser, and, assuming due and valid authorization, execution
and delivery hereof by Seller, is a valid and binding obligation
of Purchaser, enforceable against Purchaser in accordance with
its terms, except that (i) such enforcement may be subject
to applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other similar Law, now or
hereafter in effect, relating to or limiting creditors
rights generally and (ii) equitable remedies of specific
performance and injunctive and other forms of equitable relief
may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought.
Section 4.3
Consents and Approvals; No
Violations
. Except for filings required under,
and other applicable requirements of, the Exchange Act and the
rules and regulations promulgated thereunder, and the NASDAQ
rules, and except for filings, permits, authorizations, consents
and approvals as may be required under, and other applicable
requirements of, state securities or blue sky laws, the HSR Act
and the Investment Canada Act, none of the execution, delivery
or performance of this Agreement by Purchaser or the
consummation by Purchaser of the Closing will (a) conflict
with or result in any breach of any provision of the certificate
of incorporation or by-laws or similar organizational document
of Purchaser, (b) require any filing with or notice to, or
permit, authorization, consent or approval of, any Governmental
Entity, (c) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a
default (or give rise
A-19
to any right of termination, cancellation or acceleration) or
any adverse modification of any terms or rights under, any of
the terms, conditions or provisions of any Contract to which
Purchaser or any of its Subsidiaries is a party or by which any
of them or any of their respective properties, assets or rights
may be bound or (d) violate any Law applicable to
Purchaser, any of its Subsidiaries or any of their respective
properties or assets.
Section 4.4
Litigation
. As of
the date hereof, there is no Proceeding pending or, to the
Knowledge of Purchaser, threatened against Purchaser or any of
its Affiliates relating to Seller, the Company, this Agreement
or any Related Document or any of the transactions contemplated
hereby or thereby.
Section 4.5
Brokers or
Finders
. Neither Purchaser nor any of its
Subsidiaries or its Affiliates has entered into any agreement or
arrangement entitling any agent, broker, investment banker,
financial advisor or other firm or Person to any brokers
or finders fee or any other commission or similar fee in
connection with any of the transactions contemplated by this
Agreement.
Section 4.6
Financing
.
Purchaser has sufficient funds to enable it to consummate the
transactions contemplated by this Agreement.
Section 4.7
Accredited
Investor
. Purchaser is an accredited
investor within the meaning of the National Investment
45-106
Prospectus and Registration Exemptions adopted by the Canadian
Securities Administrators.
Section 4.8
No Other Representations and
Warranties
. Purchaser acknowledges and agrees
that Seller makes no representations or warranties other than as
set forth in this Agreement, the Related Documents to which it
is or will be a party, and any certificates or documents
delivered pursuant to a requirement of hereto or thereto;
provided that nothing herein or therein shall limit or prejudice
any claim or action by Purchaser for fraud.
ARTICLE V
COVENANTS OF
SELLER AND PURCHASER
Section 5.1
Interim Operations of the
Company
. Except as expressly contemplated by this
Agreement, during the period from the date of this Agreement to
the Closing, Seller will cause the Company to conduct its
operations according to its ordinary course of business
consistent with past practice, and Seller will use and will
cause the Company to use its commercially reasonable efforts to
preserve intact its business organization, to keep available the
services of its current officers and employees and to preserve
the goodwill of and maintain satisfactory relationships with
those Persons having business relationships with the Company or
the Business. Without limiting the generality of the foregoing
and except as otherwise expressly provided in this Agreement,
Section 5.1 of the Disclosure Schedule
or (after
prior notice to Purchaser) required by Law, during the period
from the date of this Agreement to the Closing, Seller will
cause the Company not to and, solely to the extent relating to
the Business, the Company, this Agreement, any Related Document
or the transactions contemplated hereby or thereby, Seller shall
not:
(a) (i) amend its articles of amalgamation or by-laws
or similar organizational documents or (ii) (A) issue,
sell, transfer, pledge, dispose of or encumber any shares of any
class or series of its capital stock, or securities convertible
into or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of any
class or series of its capital stock, (B) declare, set
aside or pay any non-cash dividend or any other distribution
payable in stock or property (other than cash and cash
equivalents) with respect to any shares of any class or series
of its capital stock, (C) split, combine or reclassify any
shares of any class or series of its stock or (D) redeem,
purchase or otherwise acquire directly or indirectly any shares
of any class or series of its capital stock, or any instrument
or security which consists of or includes a right to acquire
such shares;
(b) [Intentionally omitted];
A-20
(c) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring,
recapitalization or other corporate reorganization of the
Company;
(d) change in any material respect any of the accounting
methods used by it unless required by a change in applicable
U.S. GAAP or Canadian reporting requirements;
(e) (i) adopt or change any accounting method relating
to Taxes, (ii) make, change or revoke any material election
relating to Taxes, or (iii) enter into any closing
agreement relating to Taxes, settle any material claim or
assessment relating to Taxes or consent to any material claim or
assessment relating to Taxes or any waiver of the statute of
limitations for any such claim or assessment;
(f) make or become legally committed to any new capital
lease or any other new capital expenditure in excess of $25,000
individually or $50,000 in the aggregate, except for
expenditures included in the consolidated capital expenditure
budget of the Company set forth in
Section 5.1(f) of the
Disclosure Schedule
, or fail to make any capital expenditure
contemplated by
Section 5.1(f) of the Disclosure
Schedule
;
(g) sell, lease, license, subject to any Encumbrance (other
than Permitted Encumbrances) or otherwise dispose of any assets
(including Company Intellectual Property) other than
(i) the sale of assets having a market value not in excess
of $25,000 individually or $50,000 in the aggregate and not
otherwise material to the business of the Company or the
Business, and (ii) the sale of inventory or excess or
obsolete equipment, or settlement of accounts receivable, in
each case in the ordinary course of business consistent with
past practice;
(h) acquire or offer to acquire any corporation,
partnership, limited liability company, other business
organization or division thereof or any assets, in each case
involving payments or receipt of consideration in excess of
$25,000 individually or $50,000 in the aggregate (other than
acquisitions from suppliers in the ordinary course of business
consistent with past practice);
(i) make any loans or advances to any Person other than
loans to employees (who are not officers or directors) in the
ordinary course of business consistent with past practice;
(j) settle or compromise any Proceeding if such settlement
or compromise (i) involves aggregate payments by (or
forgiveness of amounts payable to) the Company after the Closing
in excess of $100,000 in respect of any such Proceedings or in
excess of $250,000 in respect of all such Proceedings,
(ii) involves any relief other than money damages or
(iii) relates to this Agreement, any Related Document, or
any of the transactions contemplated hereby or thereby;
(k) cancel, compromise, fail to exercise, waive or release
any right or claim, or series of related rights or claims, that
have a value that would reasonably be expected to exceed
$250,000 in the aggregate;
(l) create, incur, assume, guarantee or amend the terms of
any Indebtedness, except for Indebtedness incurred pursuant to
existing credit facilities in the ordinary course of business
consistent with past practice;
(m) to the extent that such transaction would be required
to be disclosed under Section 3.26 (Affiliate Transactions)
if such transaction were entered into immediately prior to the
date hereof, enter into any transaction with or for the benefit
of any Related Party other than the transactions contemplated by
this Agreement;
(n) except in the ordinary course of business consistent
with past practice, enter into, assume or amend in any material
respect, terminate, or waive or assign any material rights
under, any Material Contract or other Contract or commitment
that would be a Material Contract if entered into prior to the
date hereof;
(o) fail to maintain insurance upon all its material assets
and properties in such amounts and of such kinds comparable to
that in effect since January 1, 2007;
A-21
(p) fail to continue its advertising and promotional
activities, and pricing and purchasing policies in the aggregate
in accordance with the ordinary course of business consistent
with past practice;
(q) change in any material respect its policies or
practices regarding its accounts receivable or accounts payable
or fail to manage its working capital in accordance with past
practice;
(r) fail to make any applications for renewal as and when
required for any Permits necessary for the conduct of its
business or the operation of its facilities or the Business;
(s) (i) make or commit to make any change in the
compensation (including bonuses) payable or to become payable to
any director, manager, officer or other employee of the Company
(other than normal recurring salary and wage increases in the
ordinary course of business consistent with past practice or
pursuant to plans, programs or agreements existing on the date
hereof and disclosed in the Disclosure Schedule) or
(ii) enter into, or adopt or amend, any bonus, incentive,
deferred compensation, insurance, medical, hospital, disability
or severance plan, agreement or arrangement or enter into, adopt
or materially amend any employee benefit plan or employment,
consulting or management agreement, other than any such
amendment to an employee benefit plan that is made to maintain
the qualified status of such plan or its continued compliance
with applicable Law;
(t) (i) adopt, amend or terminate any Plan or adopt or
enter into any plan or arrangement that would be considered a
Plan if it were in existence on the date hereof or increase the
benefits provided under any Plan, or promise or commit to
undertake any of the foregoing in the future or (ii) enter
into, amend or extend any collective bargaining or other labor
agreement;
(u) (i) hire any individual as a director, manager,
officer or other employee of the Company without
Purchasers prior written consent (not to be unreasonably
withheld or delayed) except in the ordinary course of business
consistent with past practice or (ii) terminate any
employee without Purchasers prior written consent (not to
be unreasonably withheld or delayed), unless such
employees employment is terminated prior to the Closing
Date for cause (as determined by Seller in its reasonable
discretion) or due to such employees death, disability or
voluntary resignation, or, except as otherwise provide by
applicable Law;
(v) take, or agree to or commit to take, any action that
would cause, or fail to take any action that would prevent, the
failure of (i) any of the representations and warranties in
Article III to be true and correct as if made and restated
during the period after the date hereof through and including
the Closing Date or (ii) any of the conditions to the
Closing set forth in Article VI to be satisfied; or
(w) enter into any agreement, contract, commitment or
arrangement to do any of the foregoing.
Seller shall not take any action that would cause, or fail to
take any action that would prevent, during the period from the
date hereof to the Closing (a) an adverse effect on
(i) the ability of Seller to perform its obligations
hereunder or to consummate the transactions contemplated hereby
without delay or (ii) the ability of Parent or the Voting
Stockholder to perform their respective obligations under the
Guarantee or the Voting Agreements, (b) the result that the
Voting Agreements would be applicable to less than a majority of
the Seller Shares, or that except as set forth in the Voting
Agreements, Purchaser would be unable unilaterally to cause the
Stockholder Approval to occur by exercising the proxies set
forth in the Voting Agreements and without any other Seller
Shares having been voted or (c) the failure of (i) any
of the representations and warranties in Article III to be
true and correct as though made on and as of the Closing Date
(or representations and warranties that by their terms speak
specifically as of the date of this Agreement or another date to
be true and correct as of such date), or (ii) any of the
conditions to the Closing set forth in Article VI to be
satisfied.
Section 5.2
Access
. (a) Seller
shall cause the Company prior to the Closing to (a) give
Purchaser and its authorized representatives, upon reasonable
advance notice and during regular business hours, reasonable
access to all books, records, personnel, officers and other
facilities and properties of the Business and the Company,
(b) permit Purchaser to make such copies and inspections
thereof, upon reasonable advance notice and during regular
business hours, as Purchaser may reasonably request and
(c) cause the officers of the
A-22
Business and the Company to furnish Purchaser with such
unaudited financial and operating data and other information
with respect to the Business and the business and properties of
the Company as is regularly prepared in the ordinary course that
Purchaser may from time to time reasonably request and provide
to Purchaser, whether or not requested, copies of all monthly
and quarterly financial reports about the Business that are
distributed to officers or directors of the Company or Seller;
provided
,
however
, that any such access shall be
conducted at a reasonable time and not interfere with the normal
operations of the business of Seller or the Company. No access
or other provision of information shall limit any rights or
remedies of Purchaser. Any information obtained by Purchaser
pursuant to this Section 5.2 shall be subject to the terms
and conditions of the Confidentiality Agreement.
Section 5.3
Preparation of the Proxy
Statement; Stockholders Meeting
.
(a) As soon as practicable following the date of this
Agreement, Seller shall prepare the Proxy Statement, and within
no more than 21 days after the date hereof and after
consulting with Purchaser and giving Purchaser at least three
Business Days to review and comment, Seller shall file the
preliminary Proxy Statement with the SEC. Seller shall
thereafter use its reasonable best efforts to respond as
promptly as practicable to any comments of the SEC with respect
to the Proxy Statement and to cause the Proxy Statement to be
mailed to the stockholders of Seller as promptly as practicable
after the date of this Agreement. Seller shall promptly notify
Purchaser upon the receipt of any comments from the SEC or its
staff or any request from the SEC or its staff for amendments or
supplements to the Proxy Statement, shall consult with Purchaser
prior to responding to any such comments or request or filing
any amendment or supplement to the Proxy Statement, and shall
provide Purchaser with copies of all correspondence between
Seller and its representatives, on the one hand, and the SEC and
its staff, on the other hand relating to the Proxy Statement. If
at any time prior to the Closing any information in the Proxy
Statement should be discovered by Seller which should be set
forth in an amendment or supplement to the Proxy Statement so
that any of such documents would not include any misstatement of
a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under
which they were made, not misleading, Seller shall promptly
notify Purchaser and, to the extent required by Law, file with
the SEC and mail to its stockholders an appropriate amendment or
supplement describing such information.
(b) Seller shall, as soon as practicable following the date
of this Agreement, establish a record date for, duly call, give
notice of, convene and hold a meeting of its stockholders (the
Stockholders Meeting
) for the purpose of
obtaining Stockholder Approval. Subject to Section 5.4(c),
Seller shall, through its Board of Directors, recommend to its
stockholders approval of this Agreement and include such
recommendation in the Proxy Statement. Without limiting the
generality of the foregoing, Sellers obligations pursuant
to the first sentence of this Section 5.3(b) shall not be
affected by (i) the commencement, public proposal, public
disclosure or communication to Seller of any Takeover Proposal
or (ii) any Adverse Recommendation Change. Notwithstanding
anything to the contrary contained in this Agreement, Seller
shall not be required to hold the Stockholders Meeting only if
this Agreement is terminated in accordance with Section 7.1.
Section 5.4
No Solicitation
.
(a) Seller shall, and shall cause its Subsidiaries and its
and its Subsidiaries respective directors, officers and
employees and each investment banker, financial advisor,
attorney, accountant and each other advisor, agent or
representative retained by or acting at the direction of Seller
or any of its Subsidiaries in connection with the transactions
contemplated by this Agreement (collectively,
Representatives
) to, (i) cease any
discussions or negotiations with any Person with respect to a
Takeover Proposal or that would reasonably be expected to lead
to a Takeover Proposal, (ii) request the prompt return or
destruction of any confidential information or evaluation
material relating to the Company or the Business previously
provided or furnished to any such Person and (iii) not
terminate, waive, amend, modify or fail to enforce any provision
of any standstill undertaking relating to Seller or any of its
Subsidiaries (including any standstill undertaking contained in
any confidentiality agreement) or confidentiality agreement
relating to the Company to which it or any of its Subsidiaries
is a party. Seller shall not, and shall cause the Company and
its and the Companys Representatives not to, directly or
indirectly (i) solicit, initiate, facilitate or knowingly
encourage any Takeover Proposal or any inquiry that constitutes
or would reasonably be likely to lead to a Takeover Proposal or
(ii) other than
A-23
to inform such third party of the provisions of this
Section 5.4, participate in any discussions or negotiations
regarding any Takeover Proposal or any inquiry that constitutes
or would reasonably be likely to lead to a Takeover Proposal,
furnish to any Person any information or data with respect to,
or otherwise cooperate with or take any action to knowingly
facilitate any proposal that constitutes or would reasonably be
expected to lead to any Takeover Proposal, or requires Seller to
abandon, terminate or fail to consummate the transactions
contemplated by this Agreement or (iii) enter into any
letter of intent, memorandum of understanding, merger agreement
or other agreement or understanding (whether oral or written,
binding or nonbinding) relating to, or that would reasonably be
expected to lead to, any Takeover Proposal. Notwithstanding the
foregoing, prior to Stockholder Approval, if the Board of
Directors of Seller determines, after consultation with outside
counsel, in good faith by resolution duly adopted that an
unsolicited written Takeover Proposal received after the date
hereof other than in breach of this Section 5.4 constitutes
or is reasonably likely to lead to a Superior Proposal and that
it is reasonably necessary to take such action to comply with
its fiduciary duties to the stockholders of Seller under
applicable Law, then Seller, after giving Purchaser prompt
written notice of such determination (and in any event no later
than 48 hours after such determination), may
(A) furnish any information with respect to Seller and the
Company to the Person (and its Representatives) making such
Takeover Proposal pursuant to a confidentiality agreement not
less restrictive of such Person than the Confidentiality
Agreement, provided, that all such information provided or
furnished to such Person has been provided or furnished
previously to Purchaser or is provided or furnished to Purchaser
concurrently with it being provided or furnished to such Person
and (B) participate in discussions and negotiations with
such Person (and its Representatives) regarding a Takeover
Proposal. Seller agrees that any violation of this
Section 5.4(a) by any Representative of Seller or any of
its Subsidiaries shall be deemed a breach of this
Section 5.4(a) by Seller.
(b) In the event Seller receives a Takeover Proposal or
request for information or inquiry that relates to or would be
reasonably likely to lead to a Takeover Proposal, Seller shall
promptly (within 48 hours) provide Purchaser with a copy
(if in writing) and summary of the material terms and conditions
of such Takeover Proposal, request or inquiry and the identity
of the Person (and its equity investors, if known by Seller)
making such Takeover Proposal, request or inquiry, and shall
keep Purchaser reasonably informed of the status of any
financial or other material modifications to such Takeover
Proposal, request or inquiry, including by conveying a copy of
all such modifications that are in writing, promptly (within
48 hours) of any of Sellers officers,
directors or financial advisors receipt thereof.
(c) Except as expressly permitted by this
Section 5.4(c), the Board of Directors of Seller or any
committee thereof shall not and shall not publicly propose to
(i)(A) withdraw or modify, in a manner adverse to Purchaser, the
approval of this Agreement or the recommendation by such Board
of Directors or committee that stockholders of Seller approve
this Agreement (the
Board Recommendation
),
(B) recommend to the stockholders of Seller, or approve or
adopt, a Takeover Proposal or (C) in the event that any
Takeover Proposal is publicly announced or any Person commences
a tender offer or exchange offer for any outstanding shares of
common stock of Seller, fail to issue a press release that
reaffirms the Board Recommendation and, in the case of a tender
offer or exchange offer, recommend against acceptance of such
tender offer or exchange offer by Seller stockholders, in each
case within 10 Business Days of such announcement or
commencement (for the avoidance of doubt, the taking of no
position by the Board of Directors of Seller in respect of the
acceptance of any tender offer or exchange offer by its
stockholders shall constitute a failure to recommend against any
such offer) (any action, publicly proposed action or inaction
described in this clause (i) being referred to as an
Adverse Recommendation Change
) or
(ii) enter into, approve or authorize Seller or the Company
to enter into any letter of intent, memorandum of understanding,
or any merger, acquisition, option, joint venture, partnership
or similar agreement (whether oral or written, binding or
nonbinding) with respect to any Takeover Proposal (other than a
confidentiality agreement, subject to the requirements set forth
in Section 5.4(a)) (each, an
Acquisition
Agreement
). Notwithstanding the foregoing,
(x) the Board of Directors of Seller may, subject to
compliance with this Section 5.4, withdraw or modify the
Board Recommendation if such Board determines (after receiving
the advice of its outside counsel) in good faith by resolution
duly adopted that it is reasonably necessary to do so to comply
with its fiduciary duties to the stockholders of Seller under
applicable Law or (y) if the Board of Directors of Seller
receives a Takeover Proposal that such Board determines, in good
faith by resolution duly adopted, constitutes a Superior
Proposal, Seller or the Company may, subject to compliance with
this Section 5.4, enter into a definitive written
Acquisition Agreement with respect to such Superior
A-24
Proposal if such Board determines (after receiving the advice of
its outside counsel) in good faith by resolution duly adopted
that it is reasonably necessary to do so to comply with its
fiduciary duties to the stockholders of Seller under applicable
Law and concurrently with entering into such Acquisition
Agreement terminates this Agreement pursuant to
Section 7.1(d)(ii) and concurrently therewith pays the
Initial Termination Fee pursuant to Section 7.3(a) or
Termination Fee pursuant to Section 7.3(b), as applicable.
If Seller desires to enter into such a Acquisition Agreement
with respect to a Takeover Proposal or to make a Adverse
Recommendation Change, it shall give Purchaser written notice
(an
Adverse Recommendation Notice
) containing
a description of the material terms of such Takeover Proposal or
any other basis for an Adverse Recommendation Change, the most
current version of any Acquisition Agreement relating to the
Superior Proposal, if any, any other information required by
Section 5.4(b) and, if applicable, advising Purchaser that
the Board of Directors of Seller has determined that such
Takeover Proposal is a Superior Proposal, that such Board has
determined (after receiving the advice of its outside counsel)
in good faith by resolution duly adopted that it is reasonably
necessary to do so to comply with its fiduciary duties to the
stockholders of Seller under applicable Law and that the Board
intends to enter into a definitive written Acquisition Agreement
with respect to such Superior Proposal. Seller may make an
Adverse Recommendation Change or terminate this Agreement
pursuant to Section 7.1(d)(ii) only (i) if at least
five Business Days have passed since the date of the Adverse
Recommendation Notice and (ii) if after taking into account
any revised proposal that may be made by Purchaser since receipt
of the Adverse Recommendation Notice, the Board of Directors of
Seller shall have not changed its determination under
clause (x) above or its determination that such Takeover
Proposal is a Superior Proposal (it being understood that any
amendment to the financial terms or other terms of such Superior
Proposal shall require a new Adverse Recommendation Notice and a
new five Business Day period).
(d) For purposes of this Agreement:
(i)
Takeover Proposal
means, other than
a transaction between Seller and Purchaser, any proposal or
offer, whether or not conditional, whether or not binding, and
whether or not written, from any Person (other than Purchaser
and its Subsidiaries) relating to any direct or indirect
(A) acquisition of assets of Seller and the Company
(including securities of the Company, but excluding sales of
assets in the ordinary course of business consistent with past
practice in compliance with this Agreement) equal to 20% or more
of Sellers consolidated assets or to which 20% or more of
Sellers revenues or earnings on a consolidated basis are
attributable, (B) acquisition of 20% or more of the
outstanding shares of common stock of Seller or of the Shares,
voting power of Seller or the Company or any class of equity
securities of Seller or the Company, (C) tender offer or
exchange offer that if consummated would result in any Person
beneficially owning 20% or more of the outstanding shares of
common stock of Seller or of the Shares or (D) merger,
consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution or similar
transaction involving Seller or the Company.
(ii)
Superior Proposal
means a bona fide
written proposal or offer to acquire, directly or indirectly,
more than 50% of the equity securities of Seller or all or
substantially all of the assets of Seller and the Company on a
consolidated basis (including an acquisition of all of the
Shares), made by a third party, and which is otherwise on terms
and conditions which the Board of Directors of Seller determines
in its good faith judgment and by resolution duly adopted (after
consultation with outside counsel and its financial advisors and
in light of all relevant circumstances that the Board of
Directors deems relevant, including all the terms and conditions
of such proposal and this Agreement and the timing and certainty
of consummation) to be more favorable to Sellers
stockholders from a financial point of view than the terms set
forth in this Agreement or the terms of any other proposal made
by Purchaser after Purchasers receipt of an Adverse
Recommendation Notice, and which the Board of Directors of
Seller determines in good faith is reasonably capable of being
consummated on the terms so proposed, taking into account any
financing and approval requirements, timing of such consummation
and all financial, regulatory, legal and other aspects of such
proposal that the Board of Directors deems relevant.
(e) Nothing in this Section 5.4 shall prohibit the
Board of Directors of Seller from taking and disclosing to
Sellers stockholders a position contemplated by
Rule 14e-2(a),
Rule 14d-9
or Item 1012(a) of
Regulation M-A
promulgated under the Exchange Act, or other applicable Law, if
such Board determines, after consultation with outside counsel,
that there is a reasonable likelihood that failure to so
disclose such position
A-25
would constitute a violation of applicable Law and it understood
and agreed that, for purposes of this Agreement, any stop,
look and listen communication by the Board of Directors to
the stockholders of Seller pursuant to
Rule 14d-9(f)
of the Exchange Act or any similar communication to the
stockholders shall not constitute an Adverse Recommendation
Change; provided that, in no event will Seller, the Board of
Directors of Seller or any committee thereof (A) recommend
that the stockholders of Seller tender their shares in
connection with any tender or exchange offer (or otherwise
approve or recommend any Takeover Proposal) or (B) engage
in an Adverse Recommendation Change, in each case other than in
accordance with Section 5.4(c).
Section 5.5
Certain Pre-Closing Actions
.
(a) [Intentionally Omitted].
(b) On or prior to the Closing:
(i) Seller shall cause all assets, properties and rights,
which are listed (if any) in
Section 3.10(a) of the
Disclosure Schedule
, to have been transferred to the
Company, free and clear of Encumbrances, upon terms and
conditions satisfactory to Purchaser.
(ii) Seller shall cause the Company to transfer all
Excluded Liabilities of the Company, including liabilities of
any kind relating to the Toolhound Business, to a Person that is
not the Company, without any liability or obligation (including,
without limitation, any indemnification obligations) of the
Company at or after the Closing in respect of such transfer or
Excluded Liabilities.
Section 5.6
Indebtedness
. (a) With
respect to each item under Clause (ii) of the definition of
Net Indebtedness that would exist with respect to
the Company as of the Closing or immediately thereafter (other
than (x) Deferred Purchase Price obligations not yet due on
or immediately after the Closing Date, (y) obligations
described in Clause (F) or (G) of the definition of
Net Indebtedness that would not otherwise be covered
by clause (ii) of the definition of Net
Indebtedness and are not yet due on or immediately after
the Closing Date and (z) capital leases, Seller shall
deliver, at least four Business Days prior to the Closing Date,
executed payoff letters or final invoices, as applicable, from
each lender, creditor, noteholder or other counterparty to whom
such obligation is owing (whether or not then due and payable),
including, without limitation, in respect of the Indebtedness
owed pursuant to that certain secured term note in the principal
amount of $8.0 million in favor of Valens Offshore SPV II,
Corp., in each case (A) that sets forth the amount to be
paid on the Closing Date, together with wire transfer
instructions, (B) evidencing that the payment of such
amount would result in the full repayment, satisfaction,
release, and discharge of all current and future obligations of
the Company (and, in the case of hedging, swap or similar
agreements, the complete unwind and settlement of such
arrangements) in respect of such item (except obligations for
indemnification and reimbursement that expressly survive
repayment in full) and of all current and future Encumbrances
relating to such item and (C) contemplating the delivery of
UCC-3 termination statements and mortgage releases that when
filed or recorded, as the case may be, will be sufficient to
release any and all Encumbrances relating to such item. Seller
shall arrange for delivery of all such UCC-3 termination
statements and mortgage releases, if any, at the Closing.
(b) All actions taken by Seller and the Company in
connection with Section 5.6(a) shall be in accordance with
applicable Law and on terms and conditions reasonably acceptable
to Purchaser.
Section 5.7
Efforts and Actions to Cause
Closing to Occur
. (a) Prior to the Closing,
upon the terms and subject to the conditions of this Agreement,
Purchaser and Seller shall use their respective commercially
reasonable efforts to take, or cause to be taken, all actions,
and to do, or cause to be done and cooperate with each other in
order to do, all things necessary, proper or advisable to
consummate the Closing as promptly as practicable, including
(i) the preparation and filing of all forms, registrations
and notices required to be filed to consummate the Closing and
the taking of such actions as are necessary to obtain any
requisite approvals, authorizations, consents, orders, licenses,
permits, qualifications, exemptions or waivers by any third
party or Governmental Entity, (ii) defending all lawsuits
and other proceedings by or before any Governmental Entity
challenging this Agreement or the consummation of the Closing,
and (iii) causing to be lifted or rescinded any ruling,
Order or other action of any Governmental Entity adversely
affecting the ability of the parties to consummate the Closing,
provided that
, without Purchasers consent, Seller
shall not enter into any settlement
A-26
with holders or purported holders of any securities or rights to
acquire securities of Seller or any of its Affiliates in
connection with the transactions contemplated by this Agreement
unless such settlement does not have any adverse effect on the
Business, Purchaser or on Sellers ability to satisfy its
Closing obligations under this Agreement. In addition, no party
hereto shall take any action after the date hereof that could
reasonably be expected to materially delay the obtaining of, or
result in not obtaining, any permission, approval or consent
from any Governmental Entity or other Person required to be
obtained prior to Closing.
(b) If any party hereto or Affiliate thereof receives a
request for information or documentary material from any
Governmental Entity with respect to this Agreement or any of the
transactions contemplated hereby, then such party shall endeavor
in good faith to make, or cause to be made, as soon as
reasonably practicable and after consultation with the other
party, an appropriate response in compliance with such request.
(c) The parties shall keep each other apprised of the
status of matters relating to the completion of the transactions
contemplated hereby and work cooperatively in connection with
obtaining the requisite approvals, consents or Orders of each
applicable Governmental Entity, including, without limitation:
(i) cooperating with each other in connection with filings
under the Exchange Act and the rules and regulations promulgated
thereunder and the NASDAQ rules;
(ii) cooperating with each other in connection with any
filings required under the HSR Act and any foreign investments
Laws or any other antitrust Laws;
(iii) furnishing to the other party all information within
its possession that is required for any application or other
filing to be made by the other party pursuant to the HSR Act,
any foreign investment Laws or any other antitrust Laws,
including without limitation the Investment Canada Act, in
connection with the transactions contemplated by this Agreement;
(iv) promptly notifying each other of any communications
from or with any Governmental Entity with respect to the
transactions contemplated by this Agreement;
(v) not agreeing to participate in any meeting or
discussion with any Governmental Entity in connection with
proceedings under or relating to the HSR Act, any foreign
investment Laws or any other antitrust Laws, unless it consults
with the other party in advance, and, to the extent permitted by
such Governmental Entity, gives the other party the opportunity
to attend and participate thereat; and
(vi) consulting and cooperating with one another in
connection with all analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of any party hereto in connection with
proceedings under or relating to the HSR Act, any foreign
investment Laws or any other antitrust Laws.
(d) Prior to Closing, each party shall, and Seller shall
cause the Company to, use commercially reasonable efforts to
obtain from any third party that is not a Governmental Entity
any consents, licenses, waivers, approvals or authorizations and
send any notices, in each case, which are required to be
obtained, made or sent in connection with the execution,
delivery and performance of this Agreement or the consummation
of the transactions contemplated by this Agreement (the
Third-Party Consents
);
provided
that
no material modification of any Contracts or entrance into new
Contracts other than in the ordinary course of business
consistent with past practice shall be made pursuant to this
Section 5.7(d) without the prior written consent of
Purchaser.
(e) Notwithstanding the foregoing, this Section 5.7
shall not require Purchaser to, or to cause any of its
Subsidiaries to, (i) provide any non-public information
concerning its or its Subsidiaries operations to any other
party hereto, (ii) make or agree to make any out-of-pocket
payment other than application fees and other nominal payments
or (iii) propose, negotiate, commit to and effect, by
consent decree, hold separate order, or otherwise, the sale,
divestiture or disposition of any assets or businesses of
Purchaser or any of its Subsidiaries or to otherwise take or
commit to take actions that limit Purchasers or its
Subsidiaries freedom of action with respect to, or its
ability to retain, one or more of its or its Subsidiaries
businesses, product lines or assets or otherwise make
concessions to any Governmental Entity relating to the conduct
of the Business or any
A-27
business of any of Purchaser or its Subsidiaries. Seller shall
cause the Company and the Company Subsidiaries to not take any
action described in clause (iii) without the consent of
Purchaser.
(f) Seller shall provide Purchaser with all data,
certifications and information (including good faith
projections) that Purchaser deems reasonably necessary for the
firm referenced in Section 6.2(e) to be able to provide the
opinion referenced therein (and Purchaser may, without liability
hereunder or under the Confidentiality Agreement, provide such
information to such firm). Purchaser shall use commercially
reasonable efforts to obtain such opinion.
Section 5.8
Tax Matters
.
(a)
Apportionment of Taxes
.
(i) In order appropriately to apportion any Taxes relating
to a period that includes the Closing Date, the parties hereto
will to the extent permitted by applicable Law, treat and, if
required, elect with the relevant taxing authority to treat, for
all purposes the Closing Date as the last day of a taxable
period of the Company (a
Short Period
), and
such period shall be treated as a Short Period and a period
ending on the Closing Date for purposes of this Agreement.
(ii) For purposes of this Agreement,
Pre-Closing
Period Taxes
means:
(A) with respect to Taxes imposed upon the Company with
respect to taxable periods ending prior to or on the Closing
Date, all Taxes due for such taxable period other than Taxes
attributable to the portion of the Closing Date after the
Closing (regardless of whether such Taxes are due and payable at
Closing); and
(B) with respect to Taxes imposed upon the Company with
respect to taxable periods beginning before and ending after the
Closing Date (each, a
Straddle Period
), the
portion of any such Taxes that is allocable to the portion of
the Straddle Period ending on the Closing Date (such Taxes, the
Pre-Closing Straddle Taxes
), determined in
accordance with the following:
1) In the case of Taxes that are either (x) based upon
or related to income, receipts or stockholders equity or
(y) imposed in connection with any sale, transfer or
assignment or any deemed sale, transfer or assignment of
property (real or personal, tangible or intangible), including
in transactions contemplated by this Agreement (regardless of
whether such transaction occur before or after the Closing Date)
or undertaken to implement this Agreement, Pre-Closing Period
Straddle Taxes shall be deemed equal to the amount that would be
payable if the Tax year ended on the Closing Date. For purposes
of this clause (1), any exemption, deduction, credit or other
item that is calculated on an annual basis shall be allocated to
the portion of the Straddle Period ending on the Closing Date on
a
pro rata
basis determined by multiplying the entire
amount of such item allocated to the Straddle Period by a
fraction, the numerator of which is the number of calendar days
in the portion of the Straddle Period ending on the Closing Date
and the denominator of which is the number of calendar days in
the entire Straddle Period.
2) In the case of Taxes (other than those described in
clause (1) above, and Taxes addressed in
Section 5.8(b) (Transfer Taxes)) imposed on a periodic
basis with respect to the Company or otherwise measured by the
level of any item, Pre-Closing Straddle Taxes shall be deemed to
equal (x) the aggregate amount of such Taxes for the entire
Straddle Period (or, in the case of Taxes determined on an
arrears basis, the amount of such Taxes for the immediately
preceding Tax period)
multiplied by
(y) a fraction,
the numerator of which is the number of calendar days in the
portion of the Straddle Period ending on the Closing Date and
the denominator of which is the number of calendar days in the
entire Straddle Period.
(b)
Transfer Taxes and Other Closing
Expenses
. Seller shall pay directly, or reimburse
Purchaser promptly upon demand and delivery of proof of payment,
all excise, sales, transfer, documentary, filing, recordation
and other similar taxes, levies, fees and charges, if any
(including all real estate transfer taxes and conveyance and
recording fees, if any), that may be imposed upon, or payable or
collectible or incurred in connection with, this Agreement and
the transactions contemplated hereby (such Taxes,
Transfer Taxes
).
A-28
Seller shall be responsible for preparing and timely filing any
Tax Returns required with respect to any such Transfer Taxes.
Purchaser and Seller shall cooperate with each other in order to
minimize applicable Transfer Taxes in a manner that is mutually
agreeable and in compliance with applicable Law, and shall to
that extent execute such documents, agreements, applications,
instruments or other forms as reasonably required, and as shall
permit any such Transfer Taxes to be assessed and paid in
accordance with applicable Law.
(c)
Tax Returns
.
(i) (A) Seller shall be responsible for the timely
filing (taking into account any extensions received from the
relevant Tax authorities) of all Tax Returns required by Law to
be filed by (or to include) the Company, on or prior to the
Closing Date and (B) all Taxes indicated as due and payable
on such Tax Returns shall be paid or will be paid by Seller as
and when required by Law to the extent such Taxes are not
reflected on the Financial Statements
and/or
are
not taken into account in calculating the Aggregate Adjustment.
Unless a different treatment of any item is required by an
intervening change in applicable Law, such Tax Returns shall be
prepared on a basis consistent with those prepared for prior
taxable periods. Seller shall not amend, without
Purchasers prior written consent, which consent shall not
be unreasonably withheld or delayed, a Tax Return of the Company.
(ii) The Company shall be responsible for the timely filing
(taking into account any extensions received from the relevant
tax authorities) of all Tax Returns required by Law to be filed
by the Company after the Closing Date, it being understood that
all Taxes indicated as due and payable on such returns shall be
the responsibility of the Company, except for Pre-Closing Period
Taxes and such Taxes which are the responsibility of Seller
pursuant to this Agreement (including pursuant to this
Section 5.8(c)) which Seller shall pay (as and when
required by Law) to the extent such Taxes are not reflected on
the Financial Statements
and/or
are
not taken into account in calculating the Aggregate Adjustment.
In the case of any Tax Return that contains any Taxes that
Seller is required to pay, (A) the Company shall prepare
such Tax Return on a basis consistent with the Tax Returns
prepared for prior taxable periods (unless a different treatment
of any item is required by an intervening change in applicable
Law) and (B) the Company shall provide such Tax Return to
Seller for Sellers review prior to filing and make any
changes requested by Seller that (1) are reasonable and
(2) do not increase the Tax liability of Purchaser or the
Company (in excess of Taxes that are reflected on the Financial
Statements
and/or
taken
into account in calculating the Aggregate Adjustment) for any
Taxable period or otherwise materially adversely affect
Purchaser or the Company. Neither Purchaser nor the Company
shall amend, without Sellers prior written consent, which
consent shall not be unreasonably withheld or delayed, a Tax
Return relating to a period that includes or ends on the Closing
Date.
(d)
Contest
.
(i) For purposes of this Agreement, a
Contest
is any audit, court proceeding or
other dispute with respect to any Tax matter that affects the
Company. Unless Purchaser has previously received written notice
from Seller of the existence of such Contest, Purchaser shall
promptly give written notice to Seller of the existence of any
Contest relating to a Tax matter that is or may be Sellers
full or shared responsibility under this Agreement, but no
failure to give such notice shall relieve Seller of any
liability hereunder except to the extent, if any, that the
rights of Seller with respect to such claim are actually
prejudiced. Unless Seller has previously received written notice
from Purchaser of the existence of such Contest, Seller shall
promptly give written notice to Purchaser of the existence of
any Contest.
(ii) Purchaser, on the one hand, and Seller on the other,
agrees, in each case at no cost to the other party, to cooperate
with the other and the others representatives in a prompt
and timely manner in connection with any Contest. Such
cooperation shall include, but not be limited to, making
available to the other party, during normal business hours, all
books, records, returns, documents, files, other information
(including, without limitation working papers and schedules),
officers or employees (without substantial interruption of
employment) or other relevant information necessary or useful in
connection with any Contest requiring any such books, records
and files.
(iii) In the case of any Contest relating to a Tax matter
arising in a period ending on or before the Closing Date or any
other Contest for which Seller would be required to indemnify
Purchaser in full pursuant
A-29
to this Agreement, Seller shall have the right to represent the
Companys interests, to employ counsel of its choice at its
expense and to control the conduct of such Contest. Seller shall
have the right to settle or dispose of any Contest relating to
such Tax matter;
provided
,
however
, that Seller
shall consult with Purchaser regarding any such Contest and
shall allow Purchaser to participate in any such proceeding and
provided
,
further
, that no settlement or other
disposition of any claim for Tax which would adversely affect
Purchaser or the Company in any taxable period ending after the
Closing Date to any material extent (including, but not limited
to, the imposition of income tax deficiencies, the reduction of
asset basis or cost adjustments and the reduction of loss or
credit carryovers) shall be agreed to without Purchasers
prior written consent, which consent shall not be unreasonably
withheld.
(iv) In the case of any Contest relating to a Tax Return
for a Straddle Period (other than a Contest covered by
Section 5.8(e)(iii), but only to the extent such Tax matter
relates to Taxes for which Seller may be required to indemnify
Purchaser pursuant to this Agreement, Purchaser and Seller shall
jointly represent their interests in any Contest, shall employ
counsel of their mutual choice and shall cooperate with the
other and the others representatives in a prompt and
timely manner in connection with any Contest. The parties shall
mutually agree on any settlement or other disposition of the
Contest. In the event Purchaser and Seller are unable to agree
regarding any aspect of the conduct of any such Contest, the
decision shall be made by the counsel employed to pursue such
Contest on the basis of counsels good faith judgment
regarding the course of action that would produce the overall
lowest present value of Tax and litigation cost to the parties.
Any such Contest expenses shall be shared by the parties to the
extent they relate to a Tax matter, shall be borne by Purchaser
and Seller in the same proportion as such related Taxes are
borne economically by Purchaser and Seller.
(v) Purchaser shall have the right to control the conduct
of any Contest in its sole discretion with respect to any other
Tax matter.
(e)
Cooperation on Tax Matters
. After the
Closing, Seller, Purchaser, and the Company, will make available
to the other, as reasonably requested, and to any taxing
authority, all information, records or documents relating to the
liability for Taxes or potential liability of the Company or a
Company Predecessor for Taxes (or imposed with respect to the
income or activities of Company) for all periods prior to or
including the Closing Date and will preserve such information,
records or documents until the expiration of any applicable
statute of limitations or extensions thereof, including all
information that either party may be required to report pursuant
to Section 6043A of the Code and all Treasury Regulations
promulgated thereunder
and/or
Section 231.2 of the ITA and any other applicable Canadian
Law. Seller, Purchaser, and the Company agree to cooperate, and
to cause their Affiliates to cooperate, with regard to any
qualification or filing requirements or similar requirements
relating to Taxes for the purpose of minimizing such Taxes.
Purchaser and the Company will, upon reasonable request of
Seller, use all reasonable commercial efforts to take reasonable
steps, including obtaining any certificate or other document
from, or effect any filing with, any taxing authority as may be
considered desirable to mitigate, reduce or eliminate any Taxes
that could be imposed on the Company and that could reasonably
give rise to a right of indemnity hereunder, provided that
Purchaser and the Company will not be required to expend more
than nominal amounts of money to effect same, unless their
reasonable costs of doing so are reimbursed by Seller.
(f)
256(9) Election
. Upon request of
Seller, Purchaser and the Company will effect the election
described in subsection 256(9) of the ITA.
(g)
Section 338 Notice; Post-Closing
Actions
. Purchaser covenants that it will, no
later than January 31, 2009, provide a written notice to
Seller of whether Purchaser has or will make an election under
Section 338 of the Code with respect to the Company (the
Section 338 Election
). Purchaser further
covenants that: (i) if Purchaser makes the Section 338
Election, it will indemnify Seller for the increase in
U.S. federal income tax imposed as a result of the
distribution or deemed distribution for U.S. tax purposes
of any amounts with respect to the stock of the Company that
directly results from an action of the Company after the Closing
but before the day after the Closing Date; or (ii) if
Purchaser does not make the Section 338 Election, Purchaser
will indemnify Seller against the increase in the
U.S. federal, state or local income tax of Seller for the
taxable
A-30
year that includes the Closing Date that is directly caused by
actions of Purchaser or the Company after the Closing but before
the end of the calendar year which includes the Closing Date.
(h)
Termination of Existing Tax Sharing
Agreements
. Any and all existing Tax sharing
agreements or arrangements, written or oral, between Seller and
the Company, shall terminate as of the Closing.
(i)
Certain Post-Closing
Events
. Purchaser agrees that Seller is to have
no liability for any increase in Pre-Closing Period Taxes that
results from any action by Purchaser or the Company after the
Closing (including making or changing any Tax election or deemed
Tax election, amending any Tax Return or taking any position on
any Tax Return) and agrees to indemnify and hold harmless Seller
and its Affiliates against any such increase in Tax imposed
directly on Seller or Sellers Affiliates.
Section 5.9
Publicity
. The
initial press release with respect to the execution of this
Agreement shall be a joint press release acceptable to Purchaser
and Seller. Each of Purchaser and Seller shall, and shall cause
each of its Affiliates to, not issue or cause the publication of
any press release or disclosure with respect to this Agreement
or the transactions contemplated hereby without prior
consultation with the other party, except as may be required by
Law or by any listing agreement with a national securities
exchange or trading market.
Section 5.10
Transition
Services
. Except as agreed to in writing by
Seller and Purchaser, all data processing, cash management,
accounting, insurance, banking, personnel, legal, communications
and other products and services provided to the Company by
Seller or any Affiliate of Seller (other than the Company),
including any agreements or understandings (written or oral)
with respect thereto, shall terminate simultaneously with the
Closing without any further action or liability on the part of
the parties thereto.
Section 5.11
Intercompany
Arrangements
. Seller shall arrange, in a manner
that has no adverse Tax effects upon the Company, for
Intercompany Accounts to be entirely settled effective as of the
Closing, without any further liability of any kind on the part
of the Company. In addition, except as otherwise expressly
contemplated by this Agreement, all agreements and commitments,
whether written, oral or otherwise, which are solely between the
Company, on the one hand, and Seller and its Affiliates
(excluding the Company), on the other hand, shall be terminated
and of no further effect, simultaneously with the Closing
without any further action or liability of any kind on the part
of the Company.
Section 5.12
Maintenance of Books and
Records
. After the Closing, each of the parties
hereto shall preserve, until at least the eighth anniversary of
the Closing Date, all pre-Closing Date records possessed or to
be possessed by such party relating to the Company. After the
Closing Date and up until at least the eighth anniversary of the
Closing Date, upon any reasonable request from a party hereto or
its representatives, the party holding such records shall
(a) provide to the requesting party or its representatives
reasonable access to such records during normal business hours
and (b) permit the requesting party or its representatives
to make copies of such records, in each case at no cost to the
requesting party or its representatives (other than for
reasonable out-of-pocket expenses);
provided
,
however
, that nothing herein shall require either party
to disclose any information to the other if such disclosure
would jeopardize any attorney-client or other legal privilege or
contravene any applicable Law. Such records may be sought under
this Section for any reasonable purpose, including to the extent
reasonably required in connection with the audit, accounting,
tax, litigation, federal securities disclosure or other similar
needs of the party seeking such records. Notwithstanding the
foregoing, any and all such records may be destroyed by a party
not less than three (3) years from the Closing Date, if
such destroying party sends to the other party hereto written
notice of its intent to destroy such records, specifying in
reasonable detail the contents of the records to be destroyed;
such records may then be destroyed after the 60th day
following such notice unless the other party hereto notifies the
destroying party that such other party desires to obtain
possession of such records, in which event the destroying party
shall transfer the records to such requesting party and such
requesting party shall pay all reasonable expenses of the
destroying party in connection therewith.
Section 5.13
Insurance Policies
.
(a) If (i) the Company would be entitled to the
proceeds of a claim made after Closing under an occurrence-based
insurance policy held by Seller or any of its Subsidiaries
(other than the Company and the
A-31
Company Subsidiaries) before Closing and (ii) Purchaser
informs Seller in a timely manner of such claim, Seller shall
report and pursue such claim.
(b) Notwithstanding anything herein to the contrary, all
proceeds paid out under insurance policies of Seller and its
Subsidiaries from and after the Closing shall be for the benefit
of Purchaser to the extent such proceeds are in respect of the
Company or the Business, and Seller shall cause such proceeds to
be transferred to Purchaser within five Business Days after
receipt.
Section 5.14
Bank
Accounts
. Seller shall provide Purchaser with a
complete list of each of the bank accounts of the Company and
the authorized signatories for each such account as soon as
practicable before the Closing Date. The parties shall cooperate
in connection with the replacement or supplementation of such
signatories effective as of the Closing.
Section 5.15
Notices of Certain
Events
. From and after the date of this Agreement
until the earlier of the Closing and the termination of this
Agreement, Seller shall promptly notify Purchaser of:
(a) any change or event that would cause any of the
conditions in Article VI of this Agreement not to be
satisfied; (b) any event that would constitute a breach or
default by Seller of any representation, warranty, agreement or
covenant of such Party contained in this Agreement; (including
inaccuracies in representations and warranties as if made and
restated on and as of a date between the date hereof and
Closing); (c) any written notice or other written
communication from any Person alleging that the consent of such
Person is or may be required in connection with the transactions
contemplated by this Agreement; and (d) any Proceeding or
investigation commenced or, to the Knowledge of Seller,
threatened against, relating to or involving this Agreement, any
Related Document or any transaction contemplated hereby or
thereby;
provided
,
however
, that, (x) no such
notice will be deemed to cure any breach or inaccuracy of any
representation or warranty made pursuant to this Agreement or
limit any rights or remedies and (y) no such notice will
relieve any party of any obligation or liability under this
Agreement.
Section 5.16
Further
Assurances
. (a) From and after the Closing,
each of Seller and Purchaser shall furnish or cause to be
furnished to the other party and its employees, counsel,
auditors and other representatives such information and
assistance relating to the Company (to the extent within the
control of such other party) as is reasonably necessary for
financial reporting and accounting matters of the other party,
including the furnishing of such documentation and information
relating to the Company as may be reasonably requested in
connection with the preparation of reports, accounts and other
documents and materials to be filed with or submitted to the SEC
or any stock exchange. In order to facilitate the resolution of
any claims made against or incurred by Seller, for a period of
five years following the Closing, Purchaser shall provide Seller
and its Representatives reasonable access (for the purposes of
examining and copying at the sole cost and expense of Seller),
during normal business hours and on at least two
(2) Business Days prior written notice, to those
portions of the books and records of the Business kept by
Purchaser solely with respect to periods prior to the Closing
Date. In order to facilitate the resolution of any claims made
against or incurred by Purchaser, for a period of five years
following the Closing, Seller shall provide Purchaser and its
Representatives reasonable access (for the purposes of examining
and copying at the sole cost and expense of Purchaser), during
normal business hours and on at least two (2) Business
Days prior written notice, to those portions of the books
and records of Seller solely with respect to periods prior to
the Closing Date. Any information obtained by either party
pursuant to this Section 5.16(a) shall be subject to the
terms and conditions of the Confidentiality Agreement.
(b) At any time and from time to time, each party to this
Agreement agrees, subject to the terms and conditions of this
Agreement, to take such actions and to execute and deliver such
documents as may be necessary to effectuate the purposes of this
Agreement at the earliest practicable time.
Section 5.17
Change in Control
Payments
. Notwithstanding anything in this
Agreement to the contrary, Seller shall retain all liability
with respect to, and shall indemnify and hold harmless
Purchaser, the Company, and their respective Affiliates, for,
any change in control payment, transaction bonus, retention
bonus or similar payment to which any director, employee or
former employee of the Company may be entitled in connection
with the transactions contemplated by this Agreement (whether
contingent or otherwise), including, without limitation, those
payments which may be due under the plans, programs, agreements
and
A-32
arrangements set forth on
Section 5.17(a) of the
Disclosure Schedule
(collectively, the
Change in
Control Payments
); provided that Seller shall have no
liability for amounts to the extent included in Closing Date Net
Indebtedness. Purchaser agrees to assume the terms of the
employment agreements listed on
Section 5.17(b) of the
Disclosure Schedule
.
Section 5.18
Confidentiality
. Seller
shall, and shall cause its Affiliates and its and their
respective agents, representatives, employees, officers and
directors to, from and after the Closing Date: (a) treat
and hold as confidential all (and not disclose or provide any
third party access to any) information relating to Trade Secrets
and all other confidential or proprietary information of the
Company and the Business (collectively,
Confidential
Information
), (b) in the event that Seller, any
of its Affiliates or any of its or their respective agents,
representatives, employees, officers or directors becomes
legally compelled to disclose any such information, provide
Purchaser with prompt written notice of such requirement (to the
extent legally permissible) so that Purchaser may seek (at
Purchasers cost) a protective order or other remedy or
waive compliance with this Section 5.18, and (c) in
the event that such protective order or other remedy is not
obtained, or Purchaser waives compliance with this
Section 5.18, furnish only that portion of such
Confidential Information that is legally required to be provided
and cooperate with Purchaser (at Purchasers cost) to
obtain assurances that confidential treatment will be accorded
such Confidential Information;
provided
,
however
,
that this Section 5.18 shall not apply to any information
that, at the time of disclosure, (i) is available publicly
or otherwise known to the public other than as a result of
disclosure in breach of this Agreement or (ii) is required
to be disclosed by applicable Law (subject to compliance with
clauses (b) and (c) of this Section 5.18).
Section 5.19
Non-competition and
Non-solicitation
.
(a) To induce Purchaser to enter into the Agreement and
consummate the transactions contemplated hereby and more
effectively to protect the value of the Company, Seller shall
not from the Closing until the date that is four years after the
Closing Date, directly or indirectly, on its own behalf or for
the benefit of any other Person:
(i) engage directly or indirectly in Competitive
Activities, it being agreed that for purposes of the Agreement,
a Person shall be deemed to be engaged in
Competitive
Activities
if it, directly or indirectly, participates
with, controls or has an ownership interest in, any Person that
is engaged in the business of manufacturing, selling, financing,
supplying, marketing or distributing Business Products or
products that compete with Business Products, anywhere in the
world; or
(ii) solicit, induce, encourage or attempt to persuade any
employee of the Company to terminate his or her relationship
with the Company, or offer employment to, or offer to conclude
any Contract of services with, or hire or employ, any such
Person.
(b) Seller acknowledges and agrees that the restrictions
contained in this Section 5.19 are reasonable in scope and
duration, and are necessary to protect Purchaser and the Company
after the Closing Date. If any provision of this
Section 5.19 as applied to any party or to any circumstance
is adjudicated by a court to be invalid or unenforceable, the
same will in no way affect any other circumstance or the
validity or enforcement of this Agreement or this
Section 5.19. If any such provision, or any part thereof,
is held to be unenforceable because of the duration of such
provision or the area covered thereby, the parties agree that
the court making such determination shall have the power to
reduce the duration
and/or
area
of such provision
and/or
to
delete specific words or phrases, to the extent necessary to
make it enforceable, and in its reduced form, such provision
shall then be enforceable and shall be enforced. Seller further
acknowledges and agrees that if it breaches or threatens to
breach the provisions of this Section 5.19, then, in
addition to monetary damages, Purchaser shall be entitled to
specific performance and injunctive and other equitable relief
to prevent or restrain a breach or threatened breach of such
provision or to enforce its terms.
(c) Seller and each of its Affiliates and Purchaser confirm
that the covenants not to compete and not to solicit granted
pursuant to the Noncompete Agreement attached hereto as
Exhibit G was granted to maintain and preserve the fair
market value as of the date hereof of the Shares sold to
Purchaser hereunder and does not relate to any events after the
date hereof or the impact such events may have on such fair
market value.
A-33
Seller agrees to indemnify and hold Purchaser harmless if
Purchaser becomes subject to, or becomes liable for the payment
of, any Tax in respect of Seller (and/or Parent) relying, in
respect of the granting of such covenants, on proposed
subsection 56.4(8) of the ITA and on any comparable provision
under any applicable Canadian provincial statute.
Section 5.20
Antitakeover
Statutes
. Following the date hereof, Seller shall
not, and shall cause the Company not to, take any action to
render inapplicable, or to exempt any third party from any
provisions of any moratorium, control share
acquisition, business combination, fair
price or other form of anti-takeover Laws or regulations.
ARTICLE VI
CONDITIONS
Section 6.1
Conditions to Each Partys
Obligation to Effect the Closing
. The obligation
of each party to consummate the Closing shall be subject to the
satisfaction or waiver on or prior to the Closing Date of each
of the following conditions:
(a)
Stockholder Approval
. The Stockholder
Approval shall have been obtained.
(b)
Statutes; Court Orders
. No Law shall
have been enacted or promulgated by any Governmental Entity in
the U.S. or Canada which prohibits the consummation of the
Closing; and there shall be no Order of a court of competent
jurisdiction in the U.S. or Canada in effect precluding
consummation of the Closing.
(c)
Regulatory Approval
. The waiting
period under the HSR Act, only if applicable, shall have expired
or been terminated, and all other consents or approvals of any
Governmental Entity necessary for the consummation of the
transactions contemplated hereby, including in connection with
any foreign investment Laws or any other antitrust Laws, shall
have been obtained and be in full force and effect.
Section 6.2
Conditions to Obligations of
Purchaser to Effect the Closing
. The obligation
of Purchaser to consummate the Closing shall be subject to the
satisfaction or waiver on or prior to the Closing Date of each
of the following conditions:
(a) Subject to the standards set forth in
Section 10.1(a), the representations and warranties of
Seller set forth in Article III shall be true and correct
as of the Closing Date as though made on and as of the Closing
Date (except that representations and warranties that by their
terms speak specifically as of the date of this Agreement or
another date shall be true and correct as of such date subject
to the standards set forth in Sections 10.1(a)).
(b) Seller shall have performed and complied with, in all
material respects, all covenants and obligations required by
this Agreement to be performed or complied with by it prior to
or at the Closing (except that the agreements and covenants set
forth in Sections 5.5 and 5.6 shall have been performed or
complied with by Seller in all respects).
(c) Purchaser shall have received a certificate signed by a
senior officer of Seller to the effect that the conditions set
forth in clauses (a) and (b) above have been satisfied.
(d) Seller shall have delivered to Purchaser all of the
items specified to be delivered by Seller in Section 2.1(c).
(e) Purchaser shall have received (at Purchasers sole
cost and expense) an executed opinion dated as of the Closing
from a firm reasonably satisfactory to Purchaser that Seller
will be Solvent following the Closing, and such opinion shall be
in a form reasonably satisfactory to Purchaser.
(f) Parent shall not have (i) applied for, consented
to, or suffered to exist the appointment of, or the taking of
possession by, a receiver, custodian, trustee, liquidator or
other fiduciary of itself or of all or a substantial part of its
property, (ii) made a general assignment for the benefit of
creditors, (iii) commenced a voluntary case under any state
or federal bankruptcy laws (as now or hereafter in effect),
(iv) been
A-34
adjudicated a bankrupt or insolvent, (v) filed a petition
seeking to take advantage of any other law providing for the
relief of debtors, (vi) acquiesced to, or failed to have
dismissed, within thirty (30) days, any petition filed
against it in any involuntary case under such bankruptcy laws,
or (vii) taken any action for the purpose of effecting any
of the foregoing, and Purchaser shall have received a
certificate signed by a senior officer of Seller to the effect
that the condition set forth in this clause (f) has been
satisfied.
Section 6.3
Conditions to Obligations of
Seller to Effect the Closing
. The obligations of
Seller to consummate the Closing shall be subject to the
satisfaction or waiver on or prior to the Closing Date of each
of the following conditions:
(a) Subject to the standards set forth in
Section 10.1(b), the representations and warranties of
Purchaser set forth in Article IV shall be true and correct
as of the Closing Date as though made on and as of the Closing
Date (except that representations and warranties that by their
terms speak specifically as of the date of this Agreement or
another date shall be true and correct as of such date subject
to the standards set forth in Section 10.1(b)).
(b) Purchaser shall have performed and complied with, in
all material respects, all covenants and obligations required by
this Agreement to be performed or complied with by it prior to
or at the Closing.
(c) Seller shall have received a certificate signed by an
officer of Purchaser to the effect that the conditions set forth
in clauses (a) and (b) above have been satisfied.
(d) Purchaser shall have delivered to Seller all of the
items specified to be delivered by Purchaser in
Section 2.1(b).
ARTICLE VII
TERMINATION
Section 7.1
Termination
. This
Agreement may be terminated at any time prior to the Closing,
whether before or after receipt of the Stockholder Approval:
(a) by the mutual written consent of Seller and
Purchaser; or
(b) by either of Seller or Purchaser, upon written prior
notice to the other:
(i) if the Closing shall not have occurred on or before
January 14, 2009 (the
Walk-Away Date
);
provided, however, that the right to terminate this Agreement
under this Section 7.1(b)(i) shall not be available to a
party if the failure of the Closing to have occurred on or
before the Walk-Away Date was primarily due to the failure of
such party to perform any of its obligations under this
Agreement; and provided, further, that the right to terminate
this Agreement under this Section 7.1(b)(i) shall not be
available to Seller if a vote on the approval of this Agreement
and the transactions contemplated hereby shall not yet have
occurred at a duly convened Stockholder Meeting;
(ii) if any Law or Order having the effect set forth in
Section 6.1(b) shall be in effect and shall have become
final and nonappealable; or
(iii) if Stockholder Approval shall not have been obtained
at the Stockholders Meeting duly convened therefor or at any
adjournment or postponement thereof (the effectiveness of such
termination being subject to compliance with Section 7.3(a)
if Seller is the terminating party).
(c) by Purchaser, upon prior written notice to Seller:
(i) if Seller shall have breached or failed to perform any
of its representations, warranties, covenants or agreements set
forth in this Agreement (other than those set forth in
Section 5.3 or 5.4), which breach or failure to perform
(x) would give rise to the failure of a condition set forth
in Section 6.2(a) or (b) and (y) cannot be cured
by Seller by the Walk-Away Date or, if curable, is not cured
within 45 days after Seller receives written notice from
Purchaser of such breach,
provided
A-35
that Purchaser shall not have the right to terminate this
Agreement pursuant to this Section 7.1(c)(i) if Purchaser
is then in material breach of any of its covenants or agreements
contained in this Agreement;
(ii) (x) if Purchaser shall have received a Company
Adverse Recommendation Notice, provided that Purchaser shall be
permitted to terminate this Agreement pursuant to this
Section 7.1(c)(ii) only on or before the end of the fifth
(5th) Business Day after Purchasers receipt of the related
Adverse Recommendation Notice, or (y) at any time after an
Adverse Recommendation shall have occurred;
(iii) if any of the conditions set forth in
Section 6.1 or 6.2 shall have become incapable of
satisfaction before the Walk-Away Date; provided that a breach
by Purchaser is not the cause thereof;
(iv) if Seller or the Company shall have breached in any
material respect any of their respective obligations under
Section 5.3 or Section 5.4.
(d) by Seller, upon prior written notice to Purchaser:
(i) if Purchaser shall have breached or failed to perform
any of its representations, warranties, covenants or agreements
set forth in this Agreement, which breach or failure to perform
(x) would give rise to the failure of a condition set forth
in Section 6.3(a) or (b) and (y) cannot be cured
by Purchaser by the Walk-Away Date or, if curable, is not cured
within 45 days after Purchaser receives written notice from
Seller of such breach,
provided
that Seller shall not
have the right to terminate this Agreement pursuant to this
Section 7.1(d)(i) if Seller is then in material breach of
any of its covenants or agreements contained in this Agreement;
(ii) prior to Stockholder Approval, if Seller (A) has
complied with its obligations under Sections 5.3 and 5.4,
(B) has paid the Initial Termination Fee pursuant to
Section 7.3(a) or Termination Fee pursuant to
Section 7.3(b), as applicable, and (C) in compliance
with Section 5.4, concurrently enters into a definitive
written Acquisition Agreement providing for a Superior Proposal,
provided that
Seller may not terminate this Agreement
pursuant to this Section 7.1(d)(ii) until at least five
Business Days have passed since the date of the most recent
Adverse Recommendation Notice; or
(iii) if any of the conditions set forth in
Section 6.1 or 6.3 shall have become incapable of
satisfaction before the Walk-Away Date; provided that a breach
by Seller is not the cause thereof.
Section 7.2
Effect of
Termination
. In the event of the termination of
this Agreement as provided in Section 7.1, written notice
thereof shall be given to the other party or parties, specifying
the provision hereof pursuant to which such termination is made,
and this Agreement shall forthwith become null and void (other
than Sections 7.2 and 7.3, and Article X, all of which
shall survive termination of this Agreement), and there shall be
no liability on the part of Purchaser or Seller except
(i) Seller may have liability as provided in
Section 7.3 and (ii) nothing shall relieve any party
from liability for fraud or any willful or intentional breach of
this Agreement.
Section 7.3
Termination Fee
.
(a) In the event that this Agreement is terminated by
Seller pursuant to Section 7.1(d)(ii) prior to the time
that a Pledge Default shall have occurred, then Seller shall pay
to Purchaser the Initial Termination Fee, which Initial
Termination Fee shall be paid concurrently with such
termination, payable by wire transfer of same day funds, and
such termination shall not be effective prior to such payment.
(b) In the event that this Agreement is terminated by
Seller pursuant to Section 7.1(d)(ii), after a Pledge
Default shall have occurred, then Seller shall pay to Purchaser
the Termination Fee, which Termination Fee shall be paid
concurrently with such termination, payable by wire transfer of
same day funds, and such termination shall not be effective
prior to such payment.
(c) In the event that this Agreement is terminated pursuant
to Section 7.1(b)(iii) (regardless of whether a Pledge
Default shall have occurred prior to such time), Seller shall
pay to Purchaser the Initial Termination
A-36
Fee, which Initial Termination Fee shall be paid concurrently
with such termination, payable by wire transfer of same day
funds, and such termination shall not be effective prior to such
payment.
(d) In the event that this Agreement is terminated by
Purchaser pursuant to Section 7.1(c)(ii) or
Section 7.1(c)(iv) in each case prior to the time that a
Pledge Default shall have occurred, Seller shall pay to
Purchaser the Initial Termination Fee within two Business Days
of such termination, payable by wire transfer of same day funds.
(e) In the event that this Agreement is terminated by
Purchaser pursuant to Section 7.1(c)(ii) or
Section 7.1(c)(iv) in each case after the time that a
Pledge Default shall have occurred, Seller shall pay to
Purchaser the Termination Fee within two Business Days of such
termination, payable by wire transfer of same day funds.
(f) In the event this Agreement is terminated by Seller or
Purchaser pursuant to Section 7.1(b)(i) or by Purchaser
pursuant to Section 7.1(c)(i) in each case prior to the
time that a Pledge Default shall have occurred and
(A) after the date of this Agreement but prior to the date
of such termination a Takeover Proposal or a communication
relating to a potential Takeover Proposal shall have been made
known to Seller (or any director or officer of Seller) or shall
have been made directly to its stockholders generally or any
Person shall have publicly announced an interest in making or an
intention (whether or not conditional) to make a Takeover
Proposal and (B) Seller enters into an Acquisition
Agreement with respect to, or consummates the transaction
contemplated by, a Takeover Proposal within twelve months of the
date this Agreement is so terminated, then Seller shall pay to
Purchaser the Initial Termination Fee concurrently with (and as
a condition to) the event under clause (B), payable by wire
transfer of same day funds. For purposes of this
Section 7.3(f), all references to 20% in the
definition of Takeover Proposal shall be deemed to
be references to 50%.
(g) In the event this Agreement is terminated by Seller or
Purchaser pursuant to Section 7.1(b)(i) or
Section 7.1(b)(iii), or by Purchaser pursuant to
Section 7.1(c)(i), in each case after the time that a
Pledge Default shall have occurred and (A) after the date
of this Agreement but prior to the date of such termination a
Takeover Proposal or a communication relating to a potential
Takeover Proposal shall have been made known to Seller (or any
director or officer of Seller) or shall have been made directly
to its stockholders generally or any Person shall have publicly
announced an interest in making or an intention (whether or not
conditional) to make a Takeover Proposal and (B) Seller
enters into an Acquisition Agreement with respect to, or
consummates the transaction contemplated by, a Takeover Proposal
within twelve months of the date this Agreement is so
terminated, then Seller shall pay to Purchaser the Termination
Fee (less any amounts already paid pursuant to
Section 7.3(c)) concurrently with (and as a condition to)
the event under clause (B), payable by wire transfer of same day
funds. For purposes of this Section 7.3(g), all references
to 20% in the definition of Takeover
Proposal shall be deemed to be references to
50%.
(h) Each of Seller and Purchaser acknowledges that the
agreements contained in this Section 7.3 are an integral
part of the Agreement. Following termination of this Agreement,
amounts paid pursuant to this Section 7.3 shall constitute,
for the party receiving the fee, such partys sole and
exclusive remedy following such termination (other than as
provided in Section 7.2 above). If Seller shall fail to pay
the Initial Termination Fee or the Termination Fee, as
applicable, when due, Seller shall reimburse Purchaser for all
reasonable costs and expenses actually incurred or accrued by
Purchaser (including reasonable fees and expenses of counsel) in
connection with the collection under and enforcement of this
Section 7.3 together with interest on the amount of the
Initial Termination Fee or the Termination Fee, as applicable,
from the date such payment was required to be made until the
date of payment at the annual Prime Rate as announced by
JPMorgan Chase on the date such payment was required to be made.
ARTICLE VIII
INDEMNIFICATION
Section 8.1
Indemnification;
Remedies
. (a) From and after the Closing,
Seller shall indemnify, defend and hold harmless Purchaser, the
Company, the respective Affiliates of each of the foregoing, and
the
A-37
respective officers, directors, employees and agents of each of
the foregoing (
Purchaser Indemnified Persons
)
from and against any and all Losses arising out of or relating
to:
(i) any breach or inaccuracy of any of the representations
and warranties of Seller contained in this Agreement by virtue
of such breach or inaccuracy on and as of the Closing Date with
the same effect as though made on such date or, in the case of
any representation or warranty that speaks as of a specific date
or time, on and as of such specific date or time;
(ii) any breach by Seller of its covenants or obligations
contained in this Agreement;
(iii) (A) any Excluded Liabilities, or (B) any
claims or threatened claims of any kind against any Person by
any holders or purported holders of any securities or rights to
acquire securities of Seller, Parent or any of their respective
Affiliates in connection with the transactions contemplated by
this Agreement, the Voting Agreements or the Guarantee,
including without limitation claims alleging violation of
fiduciary duties or securities laws or related to appraisal or
dissenters rights;
(iv) except as required pursuant to the last sentence of
Section 5.17, any representation or statement made by
Seller or any of its Affiliates in any agreement, program,
policy, arrangement or communication with its employees relating
to stay pay, retention, change in control or similar
payments or benefits; and
(v) the litigation matters included by Seller on
Section 8.1(a)(v) of the Disclosure Schedule
to be
included as matters for which Purchaser shall be indemnified;
(vi) (A) any Pre-Closing Period Taxes (except to the
extent that the amount of such Taxes has already been reflected
in the Financial Statements
and/or
in
the calculation of the Aggregate Adjustment) (B) any Taxes
that are payable by Seller pursuant to Section 5.8,
(C) any Taxes that are imposed on the Company or for which
the Company may be liable as a result of being included in a
consolidated group of which the Company was a member prior to
the Closing Date pursuant to any provision of any U.S. or
Canadian federal, provincial, state, local or foreign Tax Law
(except to the extent that the amount of such Taxes has already
been reflected in the Financial Statements
and/or
in
the calculation of the Aggregate Adjustment), (D) from the
breach or inaccuracy of any representation or warranty contained
in Section 3.21 (Tax Matters) by virtue of such breach or
inaccuracy on and as of the Closing Date with the same effect as
though made on such date or, in the case of any representation
or warranty that speaks as of a specific date or time, on and as
of such specific date or time, (E) any breach by Seller or
the Company of the covenants contained in Section 5.1(e)
(Tax Elections), or (F) any Taxes that are payable by
Purchaser by virtue of and as set forth in, Section 5.19(c);
(vii) the matter included by Seller on
Section 8.1(a)(vii) of the Disclosure Schedule
.
(b) Sellers indemnification obligation under
Section 8.1(a) shall be subject to each of the following
limitations:
(i) with respect to indemnification under
Sections 8.1(a)(i) and 8.1(a)(vii), such obligation to
indemnify shall terminate on the first anniversary of the
Closing Date (the
Cut-Off Date
) unless before
such date Purchaser has provided Seller with an applicable Claim
Notice,
provided that
(x) the representations and
warranties in Section 3.2 (Authorization), 3.3 (Execution;
Validity of Agreement), 3.5 (Ownership of Shares), 3.6
(Capitalization), 3.7 (Subsidiaries), 3.25 (Brokers or Finders),
3.28 (Separation; Excluded Liabilities) and 3.29 (Solvency) (the
foregoing, collectively, the
Fundamental
Representations
) shall survive the Closing
indefinitely and (y) the representations and warranties in
Section 3.21 (Tax Matters) and Section 3.18
(Environmental Matters) shall survive until 30 days after
the expiration of the relevant statute of limitations;
(ii) there shall be no obligation to indemnify under
Section 8.1(a)(i) for any item where the Losses relating
thereto are less than $20,000;
(iii) there shall be no obligation to indemnify under
Section 8.1(a)(i) for any Losses for which Seller, but for
this Section 8.1(b)(iii), would be liable in excess of the
Escrow Amount,
provided
,
however
, that that the
limitation on indemnification set forth in this
Section 8.1(b)(iii) shall not apply to
A-38
any Losses arising out of or relating to breaches or
inaccuracies of the Fundamental Representations or the
representations and warranties in Section 3.18
(Environmental Matters) or 3.21 (Tax Matters); and
(iv) there shall be no obligation to indemnify under
Section 8.1(a)(i) until the aggregate amount of all Losses
exceeds $500,000, in which event only the first $250,000 of such
aggregate amount of all Losses shall not be recoverable and
amounts in excess of the first $250,000 shall be recoverable,
provided
,
however
, that the limitation on
indemnification set forth in this Section 8.1(b)(iv) shall
not apply to any Losses arising out of or relating to breaches
or inaccuracies of the Fundamental Representations or the
representations and warranties in Section 3.18
(Environmental Matters) or 3.21 (Tax Matters).
(c) From and after the Closing, Purchaser shall indemnify,
defend and hold harmless Seller, the Company, the respective
Affiliates of each of the foregoing and the respective officers,
directors, employees and agents of each of the foregoing from
and against any and all Losses arising out of or relating to
(i) any breach or inaccuracy of any of the representations
and warranties of Purchaser contained in this Agreement by
virtue of such breach or inaccuracy on and as of the Closing
Date with the same effect as though made on such date or, in the
case of any representation or warranty that speaks as of a
specific date or time, on and as of such specific date or time,
(ii) any breach by Purchaser of its covenants or
obligations contained in this Agreement, or (iii) the
ownership, lease, use or operation of the Company or the
Business from and after the Closing (provided, that
indemnification of Losses shall not be available under this
clause (iii) to the extent such Losses are attributable to
matters indemnifiable pursuant to Section 8.1(a)(i),
8.1(a)(ii), 8.1(a)(iii), 8.1(a)(iv), 8.1(a)(v) or 8.1(a)(vi)).
(d) Purchasers indemnification obligation under
Section 8.1(c)(i) shall be subject to each of the following
limitations:
(i) such obligation to indemnify shall terminate on the
Cut-Off Date unless before such date Seller has provided
Purchaser with an applicable Claim Notice,
provided
that
the representations and warranties in Sections 4.2
(Authorization; Validity of Agreement) and 4.5 (Brokers or
Finders), shall survive the Closing indefinitely;
(ii) there shall be no obligation to indemnify under
Section 8.1(c)(i) for any item where the Losses relating
thereto are less than $20,000; and
(iii) there shall be no obligation to indemnify under
Section 8.1(c)(i) until the aggregate amount of all Losses
exceeds $500,000, in which event only the first $250,000 of such
aggregate amount of all Losses shall not be recoverable and
amounts in excess of the first $250,000 shall be recoverable,
provided
,
however
, that that the limitation on
indemnification set forth in this Section 8.1(d)(iii) shall
not apply to any Losses arising out of or relating to breaches
or inaccuracies of the representations and warranties contained
in Sections 4.2 (Authorization; Validity of Agreement) and
4.5 (Brokers or Finders).
Section 8.2
Notice of Claim; Defense
.
(a) If (i) any third-party institutes or asserts any
claim, demand, investigation, action or proceeding (each of the
foregoing, a
Proceeding
) that may give rise
to Losses for which a party (an
Indemnifying
Party
) may be liable for indemnification under this
Article VIII (a
Third-Party Claim
) or
(ii) any Person entitled to indemnification under this
Agreement (an
Indemnified Party
) shall have a
claim to be indemnified by an Indemnifying Party that does not
involve a Third-party Claim (a
Direct Claim
),
then, in case of clause (i) or (ii), the Indemnified Party
shall promptly send to the Indemnifying Party a written notice
specifying the nature of such claim and the amount of all
related Losses (a
Claim Notice
). The
Indemnifying Party shall be relieved of its indemnification
obligations under this Article VIII only to the extent that
it is materially prejudiced by the failure of the Indemnified
Parties to provide a timely and adequate Claim Notice. No Person
shall be liable for any claim for indemnification under the
Article VIII unless such claim arises prior to the
applicable survival period and the applicable Claim Notice is
delivered by the Indemnified Party to the Indemnifying Party
prior to the expiration of the applicable survival period.
A-39
(b) In the event of a Third-Party Claim, the Indemnifying
Party may elect to retain counsel of its choice, reasonably
acceptable to the relevant Indemnified Parties, to represent
such Indemnified Parties in connection with such Proceeding and
shall pay the reasonable fees and expenses of such counsel. The
Indemnified Parties may participate, at their own expense and
through legal counsel of their choice, in any such Proceeding,
provided that (i) the Indemnifying Party may elect to
control the defense of the Indemnified Parties in connection
with such Proceeding and (ii) the Indemnified Parties and
their counsel shall cooperate with the Indemnifying Party and
its counsel in connection with such Proceeding. The Indemnifying
Party shall not settle any such Proceeding without the
Indemnified Partys prior written consent (which shall not
be unreasonably withheld), unless the terms of such settlement
provide for no relief other than the payment of monetary damages
that are fully indemnified pursuant to this Article VIII.
Notwithstanding the foregoing, if (x) the Indemnifying
Party elects not to retain counsel and assume control of such
defense, (y) both the Indemnifying Party and any
Indemnified Party are or may be parties to or subjects of such
Proceeding or conflicts of interests exist between the
Indemnifying Party and such Indemnified Party or (z) the
Proceeding is reasonably likely to establish a precedential
custom or practice that is detrimental to the continuing
business interests of the Indemnified Party, then the
Indemnified Parties shall retain counsel reasonably acceptable
to the Indemnifying Party in connection with such Proceeding and
assume control of the defense in connection with such
Proceeding, and the reasonable fees and expenses of no more than
one such counsel per jurisdiction selected by the Indemnified
Parties shall be reimbursed by the Indemnifying Party. Under no
circumstances will the Indemnifying Party have any liability in
connection with any settlement of any Proceeding that is entered
into without its prior written consent (which shall not be
unreasonably withheld).
(c) From and after the delivery of a Claim Notice, at the
reasonable request of the Indemnifying Party, each Indemnified
Party shall grant the Indemnifying Party and its counsel,
experts and representatives full access, during normal business
hours, to the books, records, personnel and properties of the
Indemnified Party to the extent reasonably related to the Claim
Notice at no cost to the Indemnifying Party (other than for
reasonable out-of-pocket expenses of the Indemnified Parties).
Section 8.3
Reductions for Insurance Proceeds
and Other Recoveries
.
(a) The amount of any Loss subject to indemnification
hereunder or of any claim therefor shall be calculated net of
any insurance proceeds (net of direct collection expenses)
actually received by the Indemnified Party on account of such
Loss. Each Indemnified Party shall use commercially reasonable
efforts to seek full recovery under all insurance policies that
such Person reasonably believes cover any Loss to the same
extent as they would if such Loss were not subject to
indemnification hereunder. Any Losses shall be reduced
(retroactively or prospectively) by any insurance proceeds,
proceeds of subrogation and any indemnity, contribution or other
similar payment from third parties actually recovered (net of
direct collection expenses). The existence of a claim for monies
by an Indemnified Party against an insurer or other third party
in respect of any Losses shall not, however, delay any payment
otherwise due and owing under this
Article VIII
. In such event, the
Indemnifying Party shall make payment in full to the applicable
Indemnified Party of the amount due and owing under this
Article VIII
against an assignment by the
Indemnified Party to the Indemnifying Party of the entire claim
for insurance proceeds or against such third party.
Notwithstanding any other provisions of this Agreement, the
parties intend that no insurer or any other third party shall be
(i) entitled to a benefit it would not be entitled to
receive in the absence of the provisions of this
Article VIII
or (ii) relieved of the
responsibility to pay any claims for which it is obligated. If
an Indemnified Party has received the payments required by this
Article VIII
from an Indemnifying Party in respect
of any Losses and later receives insurance proceeds or other
amounts in respect of such Losses, then the Indemnified Party
shall as promptly as practicable pay to the Indemnifying Party a
sum equal to the amount of insurance proceeds or other amounts
received, net of any costs incurred in connection with such
insurance or other third-party recoveries, up to the aggregate
amount of any payments received from the Indemnifying Party
pursuant to this
Article VIII
in respect of such
Losses (or if there is more than one Indemnifying Party, the
Indemnified Party shall pay each Indemnifying Party its
proportionate share, based on the payments received from the
Indemnifying Party, of such insurance or other proceeds).
(b) All indemnity payments made pursuant to this
Article VIII
shall be treated for all Tax purposes
as adjustments to the consideration paid with respect to the
Shares.
A-40
Section 8.4
No Duplication
.
(a) Any liability for indemnification hereunder shall be
determined without duplication of recovery by reason of the
state of facts giving rise to such liability constituting a
breach of more than one representation, warranty, covenant or
agreement.
(b) Nothing in this Agreement shall prejudice any action by
Seller or Purchaser for fraud.
Section 8.5
Rights Under Escrow
Agreement
. In the event Seller has any liability
to any Purchaser Indemnified Person pursuant to
Section 8.1(a)(i) for any Losses, the Purchaser Indemnified
Person shall receive payment thereof, first, against and to the
extent of the balance of the Escrow Amount under the Escrow
Agreement, and, thereafter, from any other Person from whom
Purchaser may be entitled to recover. In the event Seller has
any liability to any Purchaser Indemnified Person pursuant to
Sections 8.1(a)(ii), 8.1(a)(iii), 8.1(a)(iv), 8.1(a)(v),
8.1(a)(vi) or for fraud, for any Losses, the Purchaser
Indemnified Person shall receive payment thereof, first, against
and to the extent of the balance of the Escrow Amount under the
Escrow Agreement, and, thereafter, from any other Person from
whom Purchaser may be entitled to recover.
Section 8.6
Tax Treatment of
Payments
. Seller, Purchaser, the Company and
their respective Affiliates shall treat any and all payments
under this Article VIII as an adjustment to the Purchase
Price for Tax purposes unless they are required to treat such
payments otherwise by applicable Tax Laws.
ARTICLE IX
DEFINITIONS
AND INTERPRETATION
Section 9.1
Definitions
. For
all purposes of this Agreement, except as otherwise expressly
provided or unless the context clearly requires otherwise:
Accounting Arbitrator
has the meaning set
forth in Section 2.2(c).
Acquisition Agreement
shall have the meaning
set forth in Section 5.4(c).
Adverse Recommendation Change
shall have the
meaning set forth in Section 5.4(c).
Adverse Recommendation Notice
shall have the
meaning set forth in Section 5.4(c).
Affiliate
shall have the meaning set forth in
Rule 12b-2
of the Exchange Act.
Aggregate Adjustment
shall have the meaning
set forth in Section 1.2(a).
Agreement
or
this
Agreement
shall mean this Stock Purchase Agreement,
together with the Exhibits and Schedules hereto and the
Disclosure Schedule.
Audits
shall have the meaning set forth in
Section 3.21(d).
Balance Sheet Date
shall mean the date of the
most recent audited balance sheet included in the Financial
Statements.
Base Purchase Price
shall have the meaning
set forth in Section 1.2(b).
Beneficially Owned
or
Beneficial
Ownership
shall have the meaning given to such term in
Rule 13d-3
under the Exchange Act.
Board Recommendation
shall have the meaning
set forth in Section 5.4(c).
Business
shall mean the development,
manufacture, distribution and sale of (i) infant security
systems; (ii) wander prevention systems;
(iii) asset/personnel location and identification systems;
and (iv) vibration monitoring instruments, but shall
exclude the Toolhound Business and the Implantable Chip Business.
Business Products
shall mean infant security
systems, wander prevention systems, asset/personnel location and
identification systems and vibration monitoring instruments.
A-41
Business Day
shall mean a day other than
Saturday, Sunday or any day on which the principal commercial
banks located in the State of New York are authorized or
obligated to close under the laws of such state.
Canada Revenue Agency
shall have the meaning
set forth in Section 2.3(d).
Change in Control Payments
shall have the
meaning set forth in Section 5.17.
Claim Notice
shall have the meaning set forth
in Section 8.2(a).
Closing
shall have the meaning set forth in
Section 2.1(a).
Closing Certificate
shall have the meaning
set forth in Section 2.2(a).
Closing Date
shall mean the date on which the
Closing occurs.
Closing Date Balance Sheet
shall have the
meaning set forth in Section 2.2(a).
Closing Date Net Indebtedness
shall have the
meaning set forth in Section 1.2(a).
Closing Net Tangible Asset Value
shall have
the meaning set forth in Section 1.2(a).
Code
shall mean the Internal Revenue Code of
1986, as amended.
Company
shall have the meaning set forth in
the recitals.
Company Intellectual Property
shall have the
meaning set forth in Section 3.22(b).
Company Predecessor
shall mean any
predecessors of the Company as a result of one or more
amalgamations or
wind-up.
Competition Act
shall mean the Competition
Act (Canada), as amended.
Competitive Activities
shall have the meaning
set forth in Section 5.19(a)(i).
Computer Software
shall mean the source code,
object code, the media on which such programs are recorded, and
materials and information and other supporting documentation
relating thereto, including without limitation all related:
functional, technical and performance specifications; scripts,
files, databases, flow charts, logic diagrams, interfaces,
software tools, components and keys; installation,
configuration, administration, operation and maintenance
procedures and instructions; and training guides and user
manuals and documentation.
Confidential Information
shall have the
meaning set forth in Section 5.18.
Confidentiality Agreement
shall mean the
letter agreement dated November 28, 2007 between Seller and
Purchaser.
Contest
shall have the meaning set forth in
Section 5.8(e)(i).
Contract
shall have the meaning set forth in
Section 3.4.
Copyrights
shall mean U.S. and foreign
registered and unregistered copyrights (including those in
Computer Software and databases), rights of publicity and, if
applicable, all registrations and applications to register the
same.
Credit Support Obligation
shall have the
meaning set forth in Section 3.26(b).
Customer Information
shall have the meaning
set forth in Section 3.22(k).
Cut-Off Date
shall have the meaning set forth
in Section 8.1(b)(i).
Direct Claim
shall have the meaning set forth
in Section 8.2(a).
Disclosure Schedule
shall mean the disclosure
schedule of even date herewith delivered by Seller to Purchaser
simultaneously with the execution hereof.
A-42
Encumbrances
shall mean any and all liens,
charges, security interests, options, claims, mortgages,
pledges, proxies, voting trusts or agreements, obligations,
understandings or arrangements or other restrictions on title or
transfer of any nature whatsoever.
Environmental Laws
shall have the meaning set
forth in Section 3.18(i)(i).
ERISA
shall mean the Employee Retirement
Income Security Act of 1974, as amended.
ERISA Affiliate
shall mean any trade or
business, whether or not incorporated, that together with the
Company would be deemed a
single employer
within the meaning of Section 4001(b) of ERISA.
Escrow Account
shall have the meaning set
forth in Section 2.1(b)(ii).
Escrow Agent
shall have the meaning set forth
in Section 2.1(b)(ii).
Escrow Agreement
shall have the meaning set
forth in Section 2.1(b)(ii).
Escrow Amount
shall have the meaning set
forth in Section 2.1(b)(ii).
Estimated Aggregate Adjustment
shall have the
meaning set forth in Section 1.2(b).
Estimated Closing Date Net Indebtedness
shall
have the meaning set forth in Section 1.2(b).
Estimated Net Tangible Asset Value
shall have
the meaning set forth in Section 1.2(b).
Exchange Act
shall mean the Securities
Exchange Act of 1934, as amended.
Excluded Liabilities
shall mean any and all
liabilities, whether primary or secondary, known or unknown,
accrued or contingent, of any kind or nature, other than
liabilities to the extent incurred solely as a result of the
operation of the Business. Without limiting the generality of
the foregoing, Excluded Liabilities shall include
any and all liabilities incurred as a result of the operation of
or in connection with the Implantable Chip Business or the
Toolhound Business.
Financial Statements
shall mean (a) the
audited consolidated balance sheets of Seller as at
December 31, 2007 and December 31, 2006, together with
the audited consolidated statements of income and cash flows of
Seller for the years ended December 31, 2005, 2006 and
2007, (b) the unaudited consolidated balance sheet of
Seller as at March 31, 2008 together with the unaudited
consolidated statements of income and cash flows of Seller for
the quarter ended March 31, 2008, and (c) the
unaudited balance sheet of the Company on a standalone basis as
at March 31, 2008 together with the unaudited statements of
income and cash flows of the Company on a standalone basis for
the quarter ended March 31, 2008.
Fundamental Representations
shall have the
meaning set forth in Section 8.1(b)(i).
GAAP
shall mean U.S. generally accepted
accounting principles, consistently applied throughout the
periods presented in accordance with Sellers accounting
policies and practices.
Governmental Entity
shall mean a court,
arbitral tribunal, administrative agency, commission,
governmental or department, regulatory authority, agency or any
stock exchange or self-regulatory authority, including NASDAQ.
Guarantee
shall have the meaning set forth in
the recitals.
Hazardous Substances
shall have the meaning
set forth in Section 3.18(i)(ii).
HSR Act
shall mean the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
Implantable Chip Business
shall mean the
development, manufacture, distribution or sale of implantable
microchips.
Indebtedness
of any Person shall mean, as of
any date, the amount equal to the sum (without any
double-counting) of the following obligations (whether or not
then due and payable), to the extent they are of such Person or
its Subsidiary or guaranteed by such Person or its Subsidiary,
including through the
A-43
grant of a security interest upon any assets of such Person:
(i) all outstanding indebtedness for borrowed money owed to
third parties, (ii) accrued interest payable with respect
to Indebtedness referred to in clause (i), (iii) all
obligations for the deferred purchase price of property or
services (including any potential future earn-out, purchase
price adjustment, releases of holdbacks or similar
payments, but excluding any such obligations to the extent there
is cash being held in escrow exclusively for purposes of
satisfying such obligations) (
Deferred Purchase
Price
), (iv) all obligations evidenced by notes,
bonds, debentures or other similar instruments (whether or not
convertible) or arising under indentures, (v) all
obligations arising out of any financial hedging, swap or
similar arrangements, (vi) all obligations as lessee that
would be required to be capitalized in accordance with
U.S. GAAP and (vii) all obligations in connection with
any letter of credit, bankers acceptance, guarantee,
surety, performance or appeal bond, or similar credit
transaction. For purposes of determining the Deferred Purchase
Price obligations as of a specified date, such obligations shall
be deemed to be the maximum amount of Deferred Purchase Price
owing as of such specified date (whether or not then due and
payable) or potentially owing at a future date. For the
avoidance of doubt, the credit card charges secured by the
deposited amounts referred to in Section 3.8(c) shall be
deemed to be Indebtedness.
Indemnified Party
shall have the meaning set
forth in Section 8.2(a).
Indemnifying Party
shall have the meaning set
forth in Section 8.2(a).
Initial Termination Fee
means $450,000 in
cash.
Intellectual Property
shall mean all of the
following: Trademarks, Patents, Copyrights, Trade Secrets,
Internet domain names and Licenses.
Intercompany Accounts
shall mean all balances
related to indebtedness, including any intercompany
indebtedness, loan, guaranty, receivable, payable or other
account between Seller and the Company.
Investment Canada Act
shall mean the
Investment Canada Act, as amended.
IRS
shall mean the U.S. Internal Revenue
Service.
IT Contract
shall have the meaning set forth
in Section 3.23(a).
IT Systems
shall have the meaning set forth
in Section 3.23(a).
ITA
means the Income Tax Act (Canada), as
from time to time amended.
Kalina Pledge
shall mean the pledge of
Company Shares by Parent under the Amended and Restated Stock
Pledge Agreement dated as of December 28, 2007 among
Applied Digital, Kallina Corporation, Valens
U.S. SPV I, LLC, Valens Offshore SPV I, Ltd.,
Valens Offshore SPV II, Corp., Psource Structured Debt Limited,
Computer Equity Corporation, Digital Angel Corporation and
Digital Angel Technology Corporation.
Knowledge of Seller
shall mean the actual
knowledge of Scott R. Silverman, Sellers Chief Executive
Officer, William J. Caragol, Sellers Chief Financial
Officer, Daniel Gunther, the Companys President and Chief
Executive Officer, and Eric Graham, the Companys
Vice-President, Finance and Administration, and such knowledge
that any such person would have acquired upon reasonable inquiry
of those in the Company with relevant subject matter
responsibility.
Laurus Pledge
shall mean the pledge of
Company Shares by Parent under the Amended and Restated Stock
Pledge Agreement, dated as of December 28, 2007, among
Applied Digital, Laurus Master Fund, Ltd., Valens Offshore
SPV I, Ltd., Valens U.S. SPV I, LLC, Psource
Structured Debt Limited and Computer Equity Corporation.
Law
shall have the meaning set forth in
Section 3.4.
Licenses
shall mean all licenses and
agreements pursuant to which the Company has acquired rights in
or to any Intellectual Property, or licenses and agreements
pursuant to which the Company has licensed or transferred the
right to use any Intellectual Property.
A-44
Losses
shall mean any and all damages,
losses, actions, Proceedings, causes of action, obligations,
liabilities, claims, encumbrances, penalties, demands,
assessments, settlements, judgments, costs and expenses,
including court costs and reasonable attorneys and
disbursements and costs of litigation;
provided
,
however
, that Losses shall not include punitive, special,
consequential, treble or exemplary damages or damages for
business interruption or lost profits (except to the extent such
damages are awarded in connection with a Third Party Claim for
which indemnification is available to an Indemnified Party).
Material Adverse Effect
shall mean any event,
change, effect, development, condition or occurrence that has
had or would reasonably be expected to have, individually or in
the aggregate, a material adverse effect on (a) the
business, financial or other condition, or results of operations
of the Company or the Business,
provided
,
however
,
that, for purposes of this clause (a), except (other than in the
case of clause (v) or (vi) below) to the extent such
event, change, effect, development, condition or occurrence has
a disproportionate effect on the Company or the Business when
compared to other companies in the industry in which the Company
or the Business operates, none of the following shall be deemed
to constitute, and none of the following shall be taken into
account in determining whether there has been, a Material
Adverse Effect: any event, change, effect, development,
condition or occurrence arising from or relating to
(i) general business or economic conditions not specific or
peculiar to the Company or the Business, (ii) national or
international political or social conditions, including the
engagement by the U.S. in hostilities, whether or not
pursuant to the declaration of a national emergency or war, or
the occurrence of any military or terrorist attack upon the
U.S., or any of its territories, possessions, or diplomatic or
consular offices or upon any military installation, equipment or
personnel of the U.S., (iii) financial, banking, or
securities markets in general (including any disruption thereof
and any decline in the price of any security or any market
index) (provided that this clause (iii) shall not preclude
the events, changes, effects, developments, conditions and
occurrences that underlie or give rise to such disruption or
such other events, changes, effects, developments, conditions
and occurrences under clause (iii) from constituting, or
being taken into account in determining whether there has been,
a Material Adverse Effect), (iv) changes in GAAP,
(v) the taking of any action required by this Agreement and
the Related Documents (other than obligations to operate in the
ordinary course of business
and/or
consistent with past practice or to comply with Section 5.1
hereof), or (vi) the announcement or disclosure of the
transactions contemplated herein, or (b) the ability of
Seller to perform its obligations hereunder or to consummate the
transactions contemplated hereby without delay, or the ability
of Parent or the Voting Stockholder to perform their respective
obligations under the Guarantee or the Voting Agreements.
Material Contract
shall have the meaning set
forth in Section 3.11(a).
Net Indebtedness
shall mean the amount (which
may be a positive or a negative number), as of a specified time,
equal to the difference of (i) the aggregate amount of all
(A) unrestricted cash and cash equivalents (determined in
accordance with U.S. GAAP) of the Company
plus
(B) restricted cash deposited with Royal Bank of Canada
pursuant to the agreements referred to in Section 3.8(c)
hereof;
minus
(ii) the aggregate amount, without
double counting, of (A) all Indebtedness of the Company,
plus
(B) the aggregate amount of all prepayment
premiums, penalties, breakage costs, make whole
amounts, costs, expenses and other payment obligations of
the Company that would arise (whether or not then due and
payable) if all Indebtedness of the Company were prepaid (or, in
the case of hedging, swap or similar arrangements, unwound and
fully settled) in full at such specified time,
plus
(C) to the extent any item of such Indebtedness or any item
described in the preceding clause (B) cannot be repaid at
such specified time (e.g., as a result of an irrevocable advance
notice requirement), all interest on and other accretion of such
Indebtedness or other item that occurs between such specified
time and the earliest date that repayment may occur (e.g., if
notice were delivered at such specified time),
plus
(D) all amounts owing by the Company (whether or not then
due and payable) to Seller or any of its Affiliates (other than
the Company) or any directors, officers or employees of the
Company who are also directors, officers or employees of Seller
or any of its Affiliates (other than the Company), including in
respect of any management, advisory or other fees, preferential
payments, or other obligations of any kind,
plus
(E) all
A-45
amounts owing (whether or not then due and payable) by the
Company to any advisor or other Person (other than the Company)
in connection with any actual or contemplated underwriting,
capital markets financing, refinancing, recapitalization, change
in control transaction, business combination transaction, sale
of all or substantially all of the assets or equity of the
Company, or similar matter, including in connection with this
Agreement and the transactions contemplated hereby,
plus
(F) all amounts (whether or not then due and payable),
where one of the conditions to the payment of such amount by the
Company to any Person (other than the Company) is the execution,
delivery, performance, or consummation of the transactions
contemplated by this Agreement, including without limitation the
Change in Control Payments,
plus
(G) the aggregate
accrued and unpaid amount (whether or not then due and payable)
of any bonuses that are as of such specified time or will be as
of any later time owing by the Company to any director, officer
or employee of the Company; provided, however, that
clauses (F) and (G) above shall not include amounts
required to be paid under the employment agreements listed on
Section 5.17(b) of the Disclosure
Schedule
. Notwithstanding anything herein to the
contrary, Net Indebtedness of the Company as of the
Closing shall exclude obligations to the extent repaid or
terminated without further obligation before Closing (or to the
extent repaid at the Closing with funds that are both
(x) not included as cash of the Company in the Closing Date
Net Indebtedness and (y) not provided by Purchaser on
behalf of the Company or Seller). Notwithstanding anything
herein to the contrary, any obligations of the Company whether
or not set forth as of any prior Balance Sheet date which are
paid at or after Closing by Seller or any Affiliate thereof
(other than the Company) shall be excluded from the Closing Date
Balance Sheet.
Net Tangible Asset Value
shall have the
meaning set forth in
Exhibit C
.
Net Tangible Asset Value Adjustment
shall
have the meaning set forth in Section 1.2(a).
Notice of Dispute
shall have the meaning set
forth in Section 2.2(b).
Order
shall have the meaning set forth in
Section 3.17.
Owned Intellectual Property
shall mean
Intellectual Property owned by the Company, excluding
Intellectual Property associated with the Toolhound Business.
Parent
shall have the meaning set forth in
the recitals.
Patents
shall mean issued U.S. and
foreign patents and pending patent applications, patent
disclosures, and any and all divisions, continuations,
continuations-in-part,
reissues, reexaminations, and extensions thereof, any
counterparts claiming priority therefrom, utility models,
patents of importation/confirmation, certificates of invention
and similar statutory rights.
PBGC
shall mean the Pension Benefit Guaranty
Corporation.
Permits
shall have the meaning set forth in
Section 3.19(a).
Permitted Encumbrances
shall have the meaning
set forth in Section 3.10(b).
Person
shall mean a natural person,
partnership, corporation, limited liability company, business
trust, joint stock company, trust, unincorporated association,
joint venture, Governmental Entity or other entity or
organization.
Personal Information
means information about
an identifiable individual as defined in Privacy Law.
Plan
shall mean each deferred compensation,
incentive compensation, bonus, stock purchase, stock option,
other equity compensation, employee benefit, supplemental
unemployment benefit, severance or termination pay, salary
continuation, medical, dental, surgical, disability,
hospitalization, life insurance, welfare, profit-sharing, stock
bonus, pension, savings, retirement, supplementary retirement,
employment, termination, change in control or severance
agreement plan, fund, program, agreement or arrangement, in each
case, that is sponsored, maintained or contributed to or
required to be contributed to by the Company, or by any ERISA
Affiliate, or to which the Company, or an ERISA Affiliate is
party or has
A-46
any liability with respect to, whether written or oral, for the
benefit of any director, employee or former employee of the
Company.
Pledge Default
shall mean the exercise by any
creditor of Parent of any rights to Beneficial Ownership of the
Seller Shares subject to the Parent Voting Agreement, to
foreclose on such Seller Shares owned by Parent or to transfer
or cause the transfer of such Seller Shares after foreclosure,
including without limitation, the exercise of any rights
(x) under Section 8 of the Kallina Pledge by the
Pledgee thereunder or (y) under Section 8
of the Laurus Pledge by the Pledgee thereunder;
provided, that a Pledge Default shall be deemed not to have
occurred if, at all times following such exercise of rights,
each Beneficial Owner of any Seller Share or Seller Shares
subject to the Parent Voting Agreement shall have delivered to
and for the benefit of Purchaser a binding and irrevocable
written undertaking agreeing to be bound (without giving effect
to any qualifications or limitations related to the Kallina
Pledge or the Laurus Pledge set forth in such Parent Voting
Agreement) by all terms and provisions applicable to Parent
pursuant to the Parent Voting Agreement and restating, as of the
date of the execution and delivery of such undertaking, the
representations and warranties set forth therein (without giving
effect to any qualifications or limitations related to the
Kallina Pledge or the Laurus Pledge set forth in such Parent
Voting Agreement), and which undertaking shall be otherwise in a
form and substance reasonably satisfactory to Purchaser.
Pre-Closing Period Taxes
shall have the
meaning set forth in Section 5.8(a)(ii).
Pre-Closing Straddle Taxes
shall have the
meaning set forth in Section 5.8(a)(ii)(B).
Privacy Law
means the Personal Information
Protection and Electronic Documents Act (Canada), the Personal
Information Protection Act (British Columbia) and any comparable
Law of any other province or territory of Canada.
Proceeding
shall have the meaning set forth
in Section 8.2(a).
Proxy Statement
shall have the meaning set
forth in Section 3.4.
Purchase Price
shall have the meaning set
forth in Section 1.2(a).
Purchaser
shall have the meaning set forth in
the opening paragraph.
Purchaser Indemnified Persons
shall have
meaning set forth in Section 8.1(a).
Real Property
shall mean all real property
that is owned or leased by the Company or the Business.
Related Documents
means the Escrow Agreement,
the Section 116 Escrow Agreement the Voting Agreements and
the Guarantee.
Related Party
shall have the meaning set
forth in Section 3.26(a).
Release
shall have the meaning set forth in
Section 3.18(i)(iii).
Remittance Deadline
shall have the meaning
set forth in Section 2.3(d).
Representatives
shall have the meaning set
forth in Section 5.4(a).
SEC
shall mean the U.S. Securities and
Exchange Commission.
Seller
shall have the meaning set forth in
the opening paragraph.
Seller Shares
shall have the meaning set
forth in Section 3.6(b).
Shares
shall mean the outstanding common
shares, no par value, issued by the Company.
Short Period
shall have the meaning set forth
in Section 5.8(a)(i).
Solvent
shall have the meaning set forth in
Section 3.29.
Stockholder Approval
shall have the meaning
set forth in Section 3.2(d).
A-47
Stockholders Meeting
shall have the meaning
set forth in Section 5.3(b).
Stockholder Voting Agreement
shall have the
meaning set forth in the recitals.
Straddle Period
shall have the meaning set
forth in Section 5.8(a)(ii)(B).
Subsidiary
shall mean, with respect to any
Person, any corporation or other organization, whether
incorporated or unincorporated, of which (a) at least a
majority of the securities or other interests having by their
terms ordinary voting power to elect a majority of the board of
directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly
owned or controlled by such Person or by any one or more of its
Subsidiaries, or by such Person and one or more of its
Subsidiaries or (b) such Person or any other Subsidiary of
such Person is a general partner (excluding any such partnership
where such Person or any Subsidiary of such Person does not have
a majority of the voting interest in such partnership).
Superior Proposal
shall have the meaning set
forth in Section 5.4(d)(ii).
Takeover Proposal
shall have the meaning set
forth in Section 5.4(d)(i).
Tax
or
Taxes
shall mean
all taxes, however denominated, including without limiting the
generality of the foregoing, any U.S. and Canadian federal,
provincial, state, county, municipal or local income, gross
receipts, net worth, capital, license, payroll, estimated,
employment, employer, health, excise, severance, stamp, business
and occupation, payroll, premium, windfall profits,
environmental, franchise, profits, withholding, social security
(or similar), disability, real and personal property, sales,
use, transfer, registration, goods and services, harmonized
sales, ad valorem, customs duties or value added tax or any
other taxes, assessments, fees and other charges of any kind
imposed by a Governmental Entity, including contributions to the
Canada Pension Plan, Canada pension plan premiums, employment
insurance premiums and workers compensation premiums, and
also including any charges, interest, penalty, or addition
thereto, whether disputed or not and including any tax liability
arising as the result of having joined in the filing of any
combined, consolidated, unitary or similar return, whether
arising before, on, or after the Closing Date.
Tax Benefit
shall have the meaning set forth
in Section 8.3.
Tax Return
means any report, return or other
information (including any amendments) required to be supplied
to any Governmental Entity with respect to Taxes including,
where permitted or required, combined or consolidated returns
for any group of entities that includes the Company.
Termination Fee
means $1,500,000 in cash.
Third-Party Claim
shall have the meaning set
forth in Section 8.2(a).
Third-Party Consents
shall have the meaning
set forth in Section 5.7(d).
Title IV Plan
shall mean a Plan that is
subject to Section 302 or Title IV of ERISA or
Section 412 of the Code.
Toolhound Business
shall mean the RFID/bar
code based tool management and loss prevention systems
developed, manufactured, sold and marketed by the Company.
Trademarks
shall mean U.S. and foreign
registered and unregistered trademarks, trade dress, service
marks, logos, trade names, corporate names and all registrations
and applications to register the same.
Trade Secrets
shall mean all categories of
trade secrets as defined in the Uniform Trade Secrets Act,
including business information and industrial designs,
discoveries, improvements, ideas, designs, models, formulae,
patterns, compilations, data collections, drawings, blueprints,
mask works, devices, methods, techniques, processes, know-how,
proprietary information, customer lists, technical information
and trade secrets.
Transaction Value
shall have the meaning set
forth in Section 1.2(a).
A-48
Transfer Taxes
shall have the meaning set
forth in Section 5.8(b).
U.S.
shall mean the United States of America.
U.S. Dollar
or
$
means the lawful currency of the United States of America.
Voting Agreement
shall have the meaning set
forth in the recitals.
Voting Stockholder
shall have the meaning set
forth in the recitals.
Walk-Away Date
shall have the meaning set
forth in Section 7.1(b)(i).
WARN Act
shall mean the Worker Adjustment and
Retraining Notification Act.
Withheld Amount
shall have the meaning set
forth in Section 2.3(h).
Section 9.2
Interpretation
. (a) The
headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or
interpretation of this Agreement.
(b) Whenever the words
include
,
includes
or
including
are
used in this Agreement they shall be deemed to be followed by
the words
without limitation
.
(c) The words
hereof
,
herein
and
herewith
and
words of similar import shall, unless otherwise stated, be
construed to refer to this Agreement as a whole and not to any
particular provision of this Agreement, and article, section,
paragraph, exhibit and schedule references are to the articles,
sections, paragraphs, exhibits and schedules of this Agreement
unless otherwise specified.
(d) The meaning assigned to each term defined herein shall
be equally applicable to both the singular and the plural forms
of such term, and words denoting any gender shall include all
genders. Where a word or phrase is defined herein, each of its
other grammatical forms shall have a corresponding meaning.
(e) A reference to any party to this Agreement or any other
agreement or document shall include such partys successors
and permitted assigns.
(f) A reference to any legislation or to any provision of
any legislation shall include any amendment to, and any
modification or re-enactment thereof, any legislative provision
substituted therefor and all regulations and statutory
instruments issued thereunder or pursuant thereto.
(g) A reference herein to any other agreement or document
shall be to such agreement or document as it may have been or
may hereafter be amended, modified, supplemented, waived or
restated from time to time in accordance with its terms and, to
the extent applicable, the terms of this Agreement, and shall
include all annexes, exhibits, schedules and other documents or
agreements attached thereto.
(h) The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the
parties, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of
any provisions of this Agreement.
(i) All payments and adjustments under this Agreement shall
be made in U.S. Dollars.
A-49
ARTICLE X
MISCELLANEOUS
Section 10.1
Representations and
Warranties
.
(a) For purposes of determining whether any representation
or warranty contained in Article III is untrue or
incorrect, or whether Seller shall have breached any such
representation or warranty, for any purpose under this Agreement
other than Article VIII, the following standards shall
apply:
(i) any Fundamental Representation and the representation
contained in Section 3.9(a) shall be deemed to be untrue
and incorrect if such representation or warranty is untrue or
incorrect in any respect; and
(ii) any representation or warranty contained in
Sections 3.1 (Organization), 3.4 (Consents and Approvals;
No Violations), clause (b) of Section 3.17
(Deal-Related Litigation) or 3.26 (Affiliate Transactions) shall
be deemed to be untrue and incorrect only if such representation
or warranty is untrue or incorrect in any material respect
(disregarding for this purpose any reference to material or
Material Adverse Effect contained in any such representation or
warranty); and
(iii) any representation or warranty contained in
Article III (other than those referred to in
clause (i) or (ii) above) shall be deemed to be untrue
or incorrect only if the event, change, effect, development,
condition or occurrence that resulted in such untruth or
incorrectness, individually or when taken together with all
other facts, circumstances, changes or events that result in any
and all other untruth or incorrectness in the representations
and warranties contained in Article III (other than those
referred to in clause (ii) or (iii) below), has had or
would reasonably be expected to have a Material Adverse Effect
(disregarding for this purpose any reference to material or
Material Adverse Effect contained in any such representation or
warranty).
(b) No representation or warranty of Purchaser contained in
Article IV shall be deemed untrue or incorrect for any
purpose under this Agreement, and Purchaser shall not be deemed
to have breached any such representation or warranty for any
purpose under this Agreement other than Article VIII, in
any case as a consequence of the existence or absence of any
fact, circumstance, change or event unless such fact,
circumstance, change or event, individually or when taken
together with all other facts, circumstances, changes or events
that result in any and all other untruth or incorrectness in the
representations and warranties contained in Article IV has
had or would be reasonably likely to have a material adverse
effect on the ability of Purchaser to consummate the Closing or
otherwise perform its obligations hereunder.
Section 10.2
Fees and
Expenses
. All costs and expenses incurred in
connection with this Agreement and the consummation of the
Closing shall be paid by the party incurring such expenses,
except as specifically provided to the contrary in this
Agreement.
Section 10.3
Amendment and
Modification
. This Agreement may be amended,
modified and supplemented in any and all respects, but only by a
written instrument signed by all of the parties hereto expressly
stating that such instrument is intended to amend, modify or
supplement this Agreement.
Section 10.4
Notices
. All
notices, requests and other communications hereunder to a party
shall be in writing and shall be deemed given: (1) on the
date of delivery, if personally delivered, (2) on the day
of receipt, if delivered by a nationally recognized
next-day
courier service, or (3) on the third Business Day following
the date of mailing, if mailed by registered or certified mail
(return receipt requested), in each case to such party at its
address set forth below or such other address as such party may
specify by notice to the parties hereto.
if to Purchaser, to:
A-50
The Stanley Works
1000 Stanley Drive
New Britain, Connecticut 06053
Attention: Corporate Secretary
Telecopy:
(860) 827-3911
with a copy to:
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
Attention: Ethan Klingsberg, Esq.
Telephone:
(212) 225-2000
Telecopy:
(212) 225-3999
and
if to Seller, to:
VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attention: William J. Caragol
Telephone:
(561) 805-8008
Telecopy:
(561) 805-8001
with a copy to:
Holland & Knight LLP
One East Broward Boulevard, Suite 1300
Fort Lauderdale, Florida 33301
Attention: Tammy Knight, Esq.
Telephone:
(954) 525-1000
Telecopy:
(954) 463-2030
Section 10.5
Counterparts;
Facsimile
. This Agreement may be executed in two
or more counterparts, all of which shall be considered one and
the same agreement and shall become effective when two or more
counterparts have been signed by each of the parties and
delivered to the other parties. Any signature page of any such
counterpart, or any electronic facsimile thereof, may be
attached or appended to any other counterpart to complete a
fully executed counterpart of this Agreement, and any telecopy
or other facsimile transmission of any signature shall be deemed
an original and shall bind such party.
Section 10.6
Entire Agreement; No Third Party
Beneficiaries
. This Agreement, together with and
the Related Documents (a) constitute the entire agreement
and supersede all prior agreements and understandings, both
written and oral, between the parties with respect to the
subject matter hereof and thereof and (b) are not intended
to confer upon any Person other than the parties hereto and
thereto any rights or remedies hereunder (except that the
Purchaser Indemnified Persons are intended to be third party
beneficiaries of Article VIII hereof); provided that this
Agreement shall not supersede or in any way modify the terms of
the Confidentiality Agreement.
Section 10.7
Severability
. Any
term or provision of this Agreement that is held by a court of
competent jurisdiction or other authority to be invalid, void or
unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the
offending term or provision in any other situation or in any
other jurisdiction. If the final judgment of a court of
competent jurisdiction or other authority declares that any term
or provision hereof is invalid, void or unenforceable, the
parties agree that the court making such determination shall
have
A-51
the power to reduce the scope, duration, area or applicability
of the term or provision, to delete specific words or phrases,
or to replace any invalid, void or unenforceable term or
provision with a term or provision that is valid and enforceable
and that comes closest to expressing the intention of the
invalid or unenforceable term or provision.
Section 10.8
Governing
Law
. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York
without giving effect to the principles of conflicts of law
thereof.
Section 10.9
Jurisdiction
. To
the fullest extent permitted by applicable Law, each party
hereto (i) agrees that any claim, action or proceeding by
such party seeking any relief whatsoever arising out of, or in
connection with, this Agreement or the transactions contemplated
hereby shall be brought only in the U.S. District Court for
the Southern District of New York or any New York State court,
in each case, located in the Borough of Manhattan and not in any
other State or Federal court in the U.S. or any court in
any other country, (ii) agrees to submit to the exclusive
jurisdiction of such courts located in the Borough of Manhattan
for purposes of all legal proceedings arising out of, or in
connection with, this Agreement or the transactions contemplated
hereby, (iii) waives and agrees not to assert any objection
that it may now or hereafter have to the laying of the venue of
any such proceeding brought in such a court or any claim that
any such proceeding brought in such a court has been brought in
an inconvenient forum, (iv) agrees that mailing of process
or other papers in connection with any such action or proceeding
in the manner provided in Section 10.4 (Notices) or any
other manner as may be permitted by Law shall be valid and
sufficient service thereof and (v) agrees that a final
judgment in any such action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by applicable Law. The
preceding sentence shall not limit the jurisdiction of the
Accounting Arbitrator as set forth in Section 2.2, although
claims may be asserted in such courts described in the preceding
sentence for purposes of enforcing the jurisdiction of the
Accounting Arbitrator.
Section 10.10
Time of
Essence
. Each of the parties hereto hereby agrees
that, with regard to all dates and time periods set forth or
referred to in this Agreement, time is of the essence.
Section 10.11
Extension;
Waiver
. At any time prior to the Closing Date,
either party hereto may extend the time for the performance of
any of the obligations or other acts of the other party. Any
agreement on the part of a party to any such extension shall be
valid only if set forth in an instrument in writing signed by or
on behalf of such party. The failure of either party to this
Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
Section 10.12
Assignment
. Neither
this Agreement nor any of the rights, interests or obligations
hereunder shall be transferred by either party (whether by
operation of law or otherwise) without the prior written consent
of the other party,
provided
,
however
, that
Purchaser may transfer any of its rights and obligations to any
Affiliate of Purchaser, but no such assignment shall relieve
Purchaser of its obligations hereunder; and
provided
,
further
, that Seller may assign any of its rights (but
not its obligations) hereunder (including its rights pursuant to
Article 8) to Parent, but no such assignment shall
relieve Seller of any of its obligations hereunder. Any transfer
of any rights, interests or obligations hereunder in violation
of this Section shall be null and void.
Section 10.13
Preservation of
Obligations
. Promptly after entering into any
agreement or arrangement with respect to, or effecting, any
proposed sale, exchange, dividend or other distribution or
liquidation of all or a significant portion of its assets in one
or a series of transactions, any significant recapitalization or
reclassification of its outstanding securities or any
extraordinary transaction, Seller will notify Purchaser in
writing thereof pursuant to Section 10.4 (if not previously
so notified).
Section 10.14
Specific
Performance
. Each party shall be entitled to
equitable relief, including specific performance, in the event
of any breach or threatened breach of this Agreement.
A-52
IN WITNESS WHEREOF, Purchaser and Seller have executed this
Agreement or caused this Agreement to be executed by their
respective officers thereunto duly authorized as of the date
first written above.
THE STANLEY WORKS
Name: John F. Lundgren
|
|
|
|
Title:
|
Chairman and Chief Executive Officer
|
VERICHIP CORPORATION
|
|
|
|
By
|
/s/
William J. Caragol
|
Name: William J. Caragol
|
|
|
|
Title:
|
President and Chief Financial Officer
|
A-53
Exhibit C
Net
Tangible Asset Value
Net Tangible Asset Value means an aggregate dollar amount equal
to (a) the aggregate dollar amount of the total assets of
the Company set forth on the Closing Balance Sheet (excluding
the line items on the Closing Balance Sheet entitled
Cash, Intangibles,
Inter-company and Income Tax Related
Assets)
minus
(b) the aggregate dollar amount
of the total liabilities of the Company set forth on the Closing
Balance Sheet (excluding the line items on the Closing Balance
Sheet entitled Inter-Company, Credit
Facility and Income Tax Related Liabilities).
A-54
Appendix B
EXECUTION
VERSION
VOTING
AGREEMENT
This VOTING AGREEMENT, dated as of May 15, 2008 (this
Agreement
), is made by and between Applied
Digital Solutions, Inc., a Delaware Corporation
(
Applied Digital
) and The Stanley Works, a
Connecticut corporation (
Purchaser
).
RECITALS
WHEREAS, concurrently with the execution and delivery of this
Agreement, VeriChip Corporation, a Delaware corporation
(
Seller
), and Purchaser are entering into a
Stock Purchase Agreement, dated as of the date hereof (as
amended from time to time, the
Purchase
Agreement
), which provides, among other things, for
Purchaser to acquire 100% of the outstanding capital stock of
X-Mark Corporation (the
Company
), a
corporation governed under the laws of Canada and a wholly owned
subsidiary of Seller (the transactions contemplated by the
Purchase Agreement and this Agreement, the
Transactions
);
WHEREAS, as a condition to entering into the Purchase Agreement,
Purchaser has required that Applied Digital enter into this
Agreement, and Applied Digital desires to enter into this
Agreement to induce Purchaser to enter into the Purchase
Agreement; and
WHEREAS, as of the date hereof, Applied Digital is the legal,
record and Beneficial Owner (as defined below) of
5,355,556 shares of common stock, par value $0.01 per
share, of Seller (
Shares
) (together with such
additional Shares as they become Beneficially Owned by Applied
Digital after the date hereof, the
Owned
Shares
), which Shares are all issued and outstanding
and represent 48.6% of the outstanding Shares and voting power
of the outstanding capital stock of Seller.
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
1.
Certain Definitions
. Capitalized terms
used but not defined in this Agreement shall have the meanings
given to such terms in the Purchase Agreement. In addition, for
purposes of this Agreement:
Affiliate
shall have the meaning set forth in
the Purchase Agreement, except that, for purposes of this
Agreement, with respect to Applied Digital,
Affiliate shall not include Seller or any of the
Persons that are directly or indirectly controlled by Seller.
Agreement
shall have the meaning set forth in
the opening paragraph.
Applied Digital
shall have the meaning set
forth in the opening paragraph.
Beneficially Owned
or
Beneficial
Ownership
shall have the meaning given to such term in
Rule 13d-3
under the Exchange Act.
Beneficial
Owner
shall mean, with respect to any securities, a
Person who has Beneficial Ownership of such securities.
Company
shall have the meaning set forth in
the recitals.
Currently Owned Shares
shall have the meaning
set forth in Section 7(c).
Owned Shares
shall have the meaning set forth
in the recitals.
Pledge
shall mean the pledge of Company
Shares by Applied Digital under (i) the Amended and
Restated Stock Pledge Agreement, dated as of December 28,
2007, among Applied Digital, Laurus Master Fund, Ltd., Valens
Offshore SPV I, Ltd., Valens U.S. SPV I, LLC,
PSource Structured Debt Limited and Computer Equity Corporation,
as amended, modified, restated
and/or
superseded from time to time and (ii) the Amended and
Restated Stock Pledge Agreement dated as of December 28,
2007 among Applied Digital, Kallina Corporation, Valens
U.S. SPV I, LLC, Valens Offshore SPV I, Ltd.,
Valens Offshore SPV II, Corp.,
B-1
PSource Structured Debt Limited, Computer Equity Corporation,
Digital Angel Corporation and Digital Angel Technology
Corporation, as amended, modified, restated
and/or
superseded from time to time.
Purchase Agreement
shall have the meaning set
forth in the recitals.
Purchaser
shall have the meaning set forth in
the opening paragraph.
Recommendation Change
means if (i) the
Board of Directors of Seller has received a Takeover Proposal
that such Board determines, in good faith by resolution duly
adopted, constitutes a Superior Proposal and (ii) the Board
determines (after receiving the advice of its outside counsel)
in good faith by resolution duly adopted that it is reasonably
necessary to withdraw or modify the Board Recommendation to
comply with its fiduciary duties to the stockholders of Seller
under applicable Law.
Seller
shall have the meaning set forth in
the recitals.
Shares
shall have the meaning set forth in
the recitals.
Transactions
shall have the meaning set forth
in the recitals.
Transfer
shall mean, with respect to a
security, the sale, transfer, pledge, hypothecation,
encumbrance, assignment or disposition of such security, rights
relating thereto or the Beneficial Ownership of such security or
rights relating thereto, the offer to make such a sale,
transfer, pledge, hypothecation, encumbrance, assignment or
disposition, and each option, agreement, arrangement or
understanding, whether or not in writing, to effect any of the
foregoing. As a verb, Transfer shall have a
correlative meaning.
2.
No Disposition or Solicitation
.
(a) Except as set forth in Section 5 of this
Agreement, Applied Digital undertakes that Applied Digital shall
not, except as provided under the Pledge, (i) Transfer or
agree to Transfer any Owned Shares or (ii) grant or agree
to grant any proxy or power-of- attorney with respect to any
Owned Shares. The restrictions in this Section 5 shall
remain valid until this Agreement terminates pursuant to
Section 9 hereof.
(b) Applied Digital undertakes that, in its capacity as a
stockholder of the Company and except as contemplated by
Section 10, Applied Digital shall not, and shall cause its
investment bankers, financial advisors, attorneys, accountants
and other advisors, agents and representatives not to, directly
or indirectly solicit, initiate, facilitate or encourage any
inquiries or proposals from, discuss or negotiate with, or
provide any non-public information to, any Person relating to,
or otherwise facilitate, any Takeover Proposal. Notwithstanding
the foregoing, if the Board of Directors of Seller determines,
after consultation with outside counsel, in good faith by
resolution duly adopted that an unsolicited written Takeover
Proposal received after the date hereof other than in breach of
Section 5.4 of the Purchase Agreement leads to or is
reasonably likely to lead to a Superior Proposal and the Board
of Directors of Seller determines that it is reasonably
necessary to take the actions described in clauses (A) and
(B) of Section 5.4(a) of the Purchase Agreement to
comply with its fiduciary duties to the stockholders of Seller
under applicable Law, Applied Digital (and its investment
bankers, financial advisors, attorneys, accountants and other
advisors, agents and representatives) shall be entitled (for so
long as, to the knowledge of Applied Digital, such Takeover
Proposal remains outstanding and such determination of the Board
of Directions of Seller remains applicable and has not been
reversed by a subsequent determination) to participate in
discussions and negotiations with the Person making such
Takeover Proposal (and its representatives). Applied Digital
shall keep Purchaser reasonably apprised on a reasonably prompt
basis as to the status of any such discussions
and/or
negotiations and shall promptly (within 48 hours) provide
to Purchaser copies of any material written communications
delivered or received by Applied Digital in connection with such
discussions
and/or
negotiations.
3.
Stockholder Vote
. Applied Digital
undertakes that (a) unless there shall have been a
Recommendation Change, at such time as the Seller conducts a
meeting of, or otherwise seeks a vote or consent of, its
stockholders for the purpose of approving the Purchase Agreement
and/or
any
of the Transactions contemplated thereby, Applied Digital shall
vote, or provide a consent with respect to, all then-outstanding
Shares Beneficially Owned by Applied Digital in favor of the
Purchase Agreement and the Transactions and (b) Applied
Digital shall (at each meeting of stockholders and in connection
with each consent solicitation) vote all then-outstanding Shares
Beneficially Owned by Applied Digital against, and not provide
consents to, (i) any and all Takeover Proposals, and
(ii) any and all
B-2
actions that would reasonably be expected to delay, prevent or
frustrate the Transactions or the transactions contemplated by
this Agreement or the satisfaction of any of the conditions set
forth in Article VI of the Purchase Agreement. Without
limiting the foregoing and subject to Section 9 hereto, it
is understood that except as and to the extent set forth in
clause (a) above, the obligations under this Section 3
shall not be affected by any Adverse Recommendation Change or
other recommendation or position of the Sellers Board of
Directors.
4.
Reasonable Efforts to Cooperate
.
(a) Applied Digital hereby consents to the publication and
disclosure in the Proxy Statement (and, as and to the extent
otherwise required by securities Laws or the SEC or securities
authorities, any other documents or communications provided by
Seller, Purchaser or the Company to any Governmental Entity or
to securityholders of the Seller) of Applied Digitals
identity and Beneficial Ownership of the Owned Shares and the
nature of Applied Digitals commitments, arrangements and
understandings under and relating to this Agreement and, if
deemed appropriate by Seller, a copy of this Agreement. Applied
Digital will promptly provide any information reasonably
requested by the Company, Seller or Purchaser for any regulatory
application or filing made or approval sought in connection with
the Transactions (including filings with the SEC).
5.
Irrevocable Proxy
.
(a) In furtherance of the agreements contained in
Section 3 of this Agreement, Applied Digital hereby
irrevocably grants to, and appoints, each of Purchaser and each
of the executive officers of Purchaser, in their respective
capacities as officers of Purchaser, as the case may be, and any
individual who shall hereafter succeed to any such office of
Purchaser, and each of them individually, Applied Digitals
proxy and attorney-in-fact (with full power of substitution),
for and in the name, place and stead of Applied Digital, to vote
all Shares Beneficially Owned by Applied Digital that are
outstanding from time to time, to grant or withhold a consent or
approval in respect of such Shares and to execute and deliver a
proxy to vote such Shares, in each case solely to the extent and
in the manner specified in Section 3 and subject to the
exceptions set forth in Section 3. It being understood that
the proxy granted pursuant to this Section 5 shall be
solely with regard to the approval of the Purchase Agreement and
the transactions contemplated thereby and the other matters set
forth in Section 3, and any other matter to be voted on by
Applied Digital as a stockholder of the Seller shall not be
subject to the proxy granted herein.
(b) Applied Digital represents and warrants to Purchaser
that, except for the proxy given in connection with the Pledge,
all proxies heretofore given in respect of the Owned Shares are
not irrevocable and that all such proxies have been properly
revoked or are no longer in effect as of the date hereof.
(c) Applied Digital hereby affirms that the irrevocable
proxy set forth in this Section 5 is given by Applied
Digital in connection with, and in consideration of, the
execution of the Purchase Agreement by Purchaser, and that such
irrevocable proxy is given to secure the performance of the
duties of Applied Digital under this Agreement. Applied Digital
hereby further affirms that the irrevocable proxy is coupled
with an interest and, except as set forth in Section 9, may
under no circumstances be revoked. Subject to the rights of the
pledgees under the Pledge, such irrevocable proxy is executed
and intended to be irrevocable in accordance with the provisions
of Section 212 of the Delaware General Corporation Law.
(d) The proxy granted in this Section 5 shall remain
valid until this Agreement terminates pursuant to Section 9
hereof.
6.
Further Action
. If any further action
is necessary or desirable to carry out the purposes of this
Agreement, Applied Digital shall, and shall cause its Affiliates
to, take all such action reasonably requested by Purchaser
except as otherwise contemplated by Section 10.
7.
Representations and Warranties of Applied
Digital
. Applied Digital represents and warrants
to Purchaser as follows:
(a) Applied Digital has all necessary power and authority
and legal capacity to execute and deliver this Agreement and
perform its obligations hereunder. The execution, delivery and
performance of this Agreement by Applied Digital and the
consummation by Applied Digital of the transactions contemplated
hereby have been duly authorized by all necessary action on the
part of Applied Digital and no further proceedings or
B-3
actions on the part of Applied Digital are necessary to
authorize the execution, delivery or performance of this
Agreement or the consummation of the transactions contemplated
hereby.
(b) This Agreement has been duly and validly executed and
delivered by Applied Digital and, assuming it has been duly and
validly authorized, executed and delivered by Purchaser,
constitutes the valid and binding agreement of Applied Digital,
enforceable against Applied Digital in accordance with its
terms, except to the extent that enforceability may be limited
by (i) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in
effect relating to creditors rights generally and
(ii) general principles of equity.
(c) As of the date hereof, Applied Digital is the sole
Beneficial Owner of 5,355,556 Owned Shares (the
Currently Owned Shares
). Applied Digital has
legal, good and marketable title (which may include holding in
nominee or street name) to all of the Currently
Owned Shares, free and clear of all liens, claims, options,
proxies, voting agreements and security interests (other than as
created by this Agreement, the Pledge, the agreements listed in
Schedule A
and the restrictions on Transfer under
applicable securities Laws). The Currently Owned Shares
constitute all of the capital stock of Seller that is
Beneficially Owned by Applied Digital as of the date hereof.
(d) The execution and delivery of this Agreement by Applied
Digital does not and the performance of this Agreement by
Applied Digital will not (i) conflict with, result in any
violation of, require any consent under or constitute a default
(whether with notice or lapse of time or both) under any
mortgage, bond, indenture, agreement, instrument or obligation
to which Applied Digital is a party or by which Applied Digital
or any of its properties (including the Owned Shares) is bound,
(ii) conflict with, result in any violation of, require any
consent under or constitute a default (whether with notice or
lapse of time or both) under Applied Digitals constituent
documents, (iii) violate any judgment, order, injunction,
decree or award of any court, administrative agency or other
Governmental Entity that is binding on Applied Digital or any of
its properties or (iv) constitute a violation by Applied
Digital of any Law applicable to Applied Digital, except in the
case of clause (i) for any conflict with the Pledge and for
any consent that has previously been obtained and except for any
violation, conflict or consent in clause (i), (iii) and
(iv) as would not reasonably be expected to materially
impair the ability of Applied Digital to perform its obligations
hereunder or to consummate the transactions contemplated herein
on a timely basis.
(e) Applied Digital understands and acknowledges that
Purchaser is entering into the Purchase Agreement in reliance
upon Applied Digitals execution, delivery and performance
of this Agreement.
8.
Representations and Warranties of
Purchaser
. Purchaser represents and warrants to
Applied Digital as follows:
(a) Purchaser has all necessary power and authority and
legal capacity to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and
performance of this Agreement by Purchaser and the consummation
by Purchaser of the transactions contemplated hereby have been
duly authorized by all necessary action on the part of Purchaser
and no further proceedings or actions on the part of Purchaser
are necessary to authorize the execution, delivery or
performance of this Agreement or the consummation of the
transactions contemplated hereby.
(b) This Agreement has been duly and validly executed and
delivered by Purchaser and, assuming it has been duly and
validly authorized, executed and delivered by Applied Digital,
constitutes the valid and binding agreement of Purchaser,
enforceable against Purchaser in accordance with its terms,
except to the extent that enforceability may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in
effect relating to creditors rights generally and
(ii) general principles of equity.
(c) The execution and delivery of this Agreement by
Purchaser does not and the performance of this Agreement by
Purchaser will not (i) conflict with, result in any
violation of, require any consent under or constitute a default
(whether with notice or lapse of time or both) under any
mortgage, bond, indenture, agreement, instrument or obligation
to which Purchaser is a party or by which Purchaser or any of
its properties is bound (or any of the constituent documents of
Purchaser), (ii) violate any judgment, order, injunction,
decree
B-4
or award of any court, administrative agency or other
Governmental Entity that is binding on Purchaser or any of its
properties or (iii) constitute a violation by Purchaser of
any Law applicable to Purchaser, except for any violation,
conflict or consent in clause (i), (ii) and (iii) as
would not reasonably be expected to materially impair the
ability of Purchaser to perform its obligations hereunder or to
consummate the transactions contemplated herein on a timely
basis.
9.
Termination
. This Agreement shall
terminate upon the earliest of (a) the Closing Date,
(b) in the event that the Purchase Agreement is validly
terminated pursuant to Section 7.1(b)(iii), 7.1(c)(ii),
7.1(c)(iv) or 7.1(d)(ii), the date that is seven months and
fifteen days after the date of such termination, (c) in the
event that the Purchase Agreement is validly terminated pursuant
to Section 7.1(b)(i) or Section 7.1(c)(i) and after
the date of the Purchase Agreement but prior to the date of such
termination a Takeover Proposal or a communication relating to a
potential Takeover Proposal shall have been made known to Seller
(or any director or officer of Seller) or shall have been made
directly to Sellers stockholders generally or any Person
shall have publicly announced an interest in making or an
intention (whether or not conditional) to make a Takeover
Proposal, the date that is seven months and fifteen days after
the date of such termination, (d) in the event that the
Purchase Agreement is validly terminated in accordance with its
terms other than pursuant to those sections listed in
clause (b) or (c) above, concurrently with the
termination of the Purchase Agreement and (e) the date of
amendment of the Purchase Agreement, unless such amendment has
been previously agreed to in writing by Applied Digital. Any
such termination of this Agreement shall be without prejudice to
liabilities arising hereunder before such termination of this
Agreement.
10.
Stockholder Capacity
.
Notwithstanding anything herein to the contrary, Applied Digital
has entered into this Agreement solely in Applied Digitals
capacity as the Beneficial Owner of Shares and nothing herein
shall limit or affect any actions taken or omitted to be taken
at any time by any Affiliate of Applied Digital that is an
officer or director of the Seller in his or her capacity as such
and any such actions taken or omitted to be taken by such Person
shall not be deemed to constitute a breach of this Agreement.
11.
Miscellaneous
.
(a)
Entire Agreement; No Third Party
Beneficiaries
. This Agreement,
(a) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof
and thereof and (b) is not intended to confer upon any
Person other than the parties hereto and thereto any rights or
remedies hereunder.
(b)
Expenses
. All costs and expenses
incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such
expenses.
(c)
Assignment
. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall
be transferred by either party (whether by operation of law or
otherwise) without the prior written consent of the other party,
provided, however
, that Purchaser may transfer any of its
rights and obligations to any Affiliate of Purchaser, but no
such assignment shall relieve Purchaser of its obligations
hereunder. Any transfer of any rights, interests or obligations
hereunder in violation of this Section shall be null and void.
(d)
Amendment and Modification
. This
Agreement may be amended, modified and supplemented in any and
all respects, but only by a written instrument signed by all of
the parties hereto expressly stating that such instrument is
intended to amend, modify or supplement this Agreement.
(e)
Extension; Waiver
. At any time prior
to the Closing Date, either party hereto may extend the time for
the performance of any of the obligations or other acts of the
other party. Any agreement on the part of a party to any such
extension shall be valid only if set forth in an instrument in
writing signed by or on behalf of such party. The failure of
either party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of
those rights.
(f)
Notices
. All notices and other
communications hereunder shall be in writing and shall be deemed
given if mailed, delivered personally, telecopied (which is
confirmed) or sent by an overnight courier service, such as
B-5
Federal Express, to the parties at the following addresses (or
at such other address for a party as shall be specified by like
notice):
If to Applied Digital, to:
Applied Digital Solutions, Inc.
1690 South Congress Ave., #201
Delray Beach, FL 33445
Attention: Lorraine Breece
Facsimile:
561-805-8001
with a copy to:
Baker Botts L.L.P.
2001 Ross Avenue
Dallas, Texas 75225
Attention: Sarah M. Rechter
Facsimile:
214-661-4419
If to Purchaser, to:
The Stanley Works
1000 Stanley Drive
New Britain, Connecticut 06053
Attention: Corporate Secretary
Facsimile:
860-827-3911
with a copy to:
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
Attention: Ethan Klingsberg
Facsimile:
212-225-3999
(g)
Severability
. Any term or provision
of this Agreement that is held by a court of competent
jurisdiction or other authority to be invalid, void or
unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the
offending term or provision in any other situation or in any
other jurisdiction. If the final judgment of a court of
competent jurisdiction or other authority declares that any term
or provision hereof is invalid, void or unenforceable, the
parties agree that the court making such determination shall
have the power to reduce the scope, duration, area or
applicability of the term or provision, to delete specific words
or phrases, or to replace any invalid, void or unenforceable
term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision.
(h)
Specific Performance
. In addition to
any remedies available at law or otherwise, each party shall be
entitled to equitable relief, including specific performance, in
the event of any breach or threatened breach of this Agreement.
(i)
Governing Law; Jurisdiction
.
(1) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving
effect to the principles of conflicts of law thereof.
(2) To the fullest extent permitted by applicable Law, each
party hereto (i) agrees that any claim, action or
proceeding by such party seeking any relief whatsoever arising
out of, or in connection with, this Agreement or the
transactions contemplated hereby shall be brought only in the
United States District Court for the Southern District of New
York or any New York State court, in each case, located in the
Borough of Manhattan and not in any other State or Federal court
in the United States of America or any court in any other
country, (ii) agrees to
B-6
submit to the exclusive jurisdiction of such courts located in
the Borough of Manhattan for purposes of all legal proceedings
arising out of, or in connection with, this Agreement or the
transactions contemplated hereby, (iii) waives and agrees
not to assert any objection that it may now or hereafter have to
the laying of the venue of any such proceeding brought in such a
court or any claim that any such proceeding brought in such a
court has been brought in an inconvenient forum,
(iv) agrees that mailing of process or other papers in
connection with any such action or proceeding in the manner
provided in Section 11(f) (Notices) or any other manner as
may be permitted by Law shall be valid and sufficient service
thereof and (v) agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other
manner provided by applicable Law.
(j)
Descriptive Headings
. The headings
contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement.
(k)
Counterparts
. This Agreement may be
executed in two or more counterparts, all of which shall be
considered one and the same agreement and shall become effective
when two or more counterparts have been signed by each of the
parties and delivered to the other parties.
B-7
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be duly executed as of the day and year first above
written.
Applied Digital Solutions, Inc.
Name: Joseph J. Grillo
The Stanley Works
Name: John F. Lundgren
B-8
Appendix C
EXECUTION
VERSION
VOTING
AGREEMENT
This VOTING AGREEMENT, dated as of May 15, 2008 (this
Agreement
), is made by and between Scott R.
Silverman, an individual (
Stockholder
) and
The Stanley Works, a Connecticut corporation
(
Purchaser
).
RECITALS
WHEREAS, concurrently with the execution and delivery of this
Agreement, VeriChip Corporation, a Delaware corporation
(
Seller
), and Purchaser are entering into a
Stock Purchase Agreement, dated as of the date hereof (as
amended from time to time, the
Purchase
Agreement
), which provides, among other things, for
Purchaser to acquire 100% of the outstanding capital stock of
Xmark Corporation (the
Company
), a
corporation governed under the laws of Canada and a wholly-owned
subsidiary of Seller (the transactions contemplated by the
Purchase Agreement and this Agreement, the
Transactions
);
WHEREAS, as a condition to entering into the Purchase Agreement,
Purchaser has required that Stockholder enter into this
Agreement, and Stockholder desires to enter into this Agreement
to induce Purchaser to enter into the Purchase
Agreement; and
WHEREAS, as of the date hereof, Stockholder is the record and
Beneficial Owner (as defined below) of 866,111 shares of
common stock, par value $0.01 per share, of Seller
(
Shares
) (together with such additional
Shares as they become Beneficially Owned by Stockholder after
the date hereof, the
Owned Shares
),
which Shares represent 5.0% of the outstanding shares and voting
power of the outstanding capital stock of Seller.
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
1.
Certain Definitions
. Capitalized terms
used but not defined in this Agreement shall have the meanings
given to such terms in the Purchase Agreement. In addition, for
purposes of this Agreement:
Agreement
shall have the meaning set forth in
the opening paragraph.
Beneficially Owned
or
Beneficial
Ownership
shall have the meaning given to such term in
Rule 13d-3
under the Exchange Act.
Beneficial Owner
shall mean, with respect to
any securities, a Person who has Beneficial Ownership of such
securities.
Company
shall have the meaning set forth in
the recitals.
Currently Owned Shares
shall have the meaning
set forth in Section 7(c).
Owned Shares
shall have the meaning set forth
in the recitals.
Purchase Agreement
shall have the meaning set
forth in the recitals.
Purchaser
shall have the meaning set forth in
the opening paragraph.
Recommendation Change
means if (i) the
Board of Directors of Seller has received a Takeover Proposal
that such Board determines, in good faith by resolution duly
adopted, constitutes a Superior Proposal and (ii) the Board
determines (after receiving the advice of its outside counsel)
in good faith by resolution duly adopted that it is reasonably
necessary to withdraw or modify the Board Recommendation to
comply with its fiduciary duties to the stockholders of Seller
under applicable Law.
Seller
shall have the meaning set forth in
the recitals.
Shares
shall have the meaning set forth in
the recitals.
C-1
Stockholder
shall have the meaning set forth
in the opening paragraph.
Transactions
shall have the meaning set forth
in the recitals.
Transfer
shall mean, with respect to a
security, the sale, transfer, pledge, hypothecation,
encumbrance, assignment or disposition of such security, rights
relating thereto or the Beneficial Ownership of such security or
rights relating thereto, the offer to make such a sale,
transfer, pledge, hypothecation, encumbrance, assignment or
disposition, and each option, agreement, arrangement or
understanding, whether or not in writing, to effect any of the
foregoing. As a verb,
Transfer
shall have a
correlative meaning.
2.
No Disposition or
Solicitation
. (a) Except as set forth in
Section 5 of this Agreement, Stockholder undertakes that
Stockholder shall not (i) Transfer or agree to Transfer any
Owned Shares or (ii) grant or agree to grant any proxy or
power-of-attorney with respect to any Owned Shares. The
restrictions in Section 5 shall remain valid until this
Agreement terminates pursuant to Section 9 hereof.
(b) Stockholder undertakes that, in his capacity as a
stockholder of the Company and except as contemplated by
Section 10, Stockholder shall not, and shall cause his
investment bankers, financial advisors, attorneys, accountants
and other advisors, agents and representatives not to, directly
or indirectly solicit, initiate, facilitate or encourage any
inquiries or proposals from, discuss or negotiate with, or
provide any non-public information to, any Person relating to,
or otherwise facilitate, any Takeover Proposal. Notwithstanding
the foregoing, if the Board of Directors of Seller determines,
after consultation with outside counsel, in good faith by
resolution duly adopted that an unsolicited written Takeover
Proposal received after the date hereof other than in breach of
Section 5.4 of the Purchase Agreement constitutes or is
reasonably likely to lead to a Superior Proposal and the Board
of Directors of Seller determines that it is reasonably
necessary to take the actions described in clauses (A) and
(B) of Section 5.4(a) of the Purchase Agreement to
comply with its fiduciary duties to the stockholders of Seller
under applicable Law, Stockholder (and his investment bankers,
financial advisors, attorneys, accountants and other advisors,
agents and representatives) shall be entitled (for so long as,
to the knowledge of Stockholder, such Takeover Proposal remains
outstanding and such determination of the Board of Directors of
Seller remains applicable and has not been reversed by a
subsequent determination) to participate in discussions and
negotiations with the Person making such Takeover Proposal (and
its representatives). Stockholder shall keep Purchaser
reasonably apprised on a reasonably prompt basis as to the
status of any such discussions
and/or
negotiations and shall promptly (within 48 hours) provide
to Purchaser copies of any material written communications
delivered or received by Stockholder in connection with such
discussions
and/or
negotiations.
3.
Stockholder Vote
. Stockholder
undertakes that (a) unless there shall have been a
Recommendation Change, at such time as the Seller conducts a
meeting of, or otherwise seeks a vote or consent of, its
stockholders for the purpose of approving the Purchase Agreement
and/or
any
of the Transactions contemplated thereby, Stockholder shall
vote, or provide a consent with respect to, all then-outstanding
Shares Beneficially Owned by Stockholder in favor of the
Purchase Agreement and the Transactions and (b) Stockholder
shall (at each meeting of stockholders and in connection with
each consent solicitation) vote all then-outstanding Shares
Beneficially Owned by Stockholder against, and not provide
consents to, (i) any and all Takeover Proposals, and
(ii) any and all actions that would reasonably be expected
to delay, prevent or frustrate the Transactions or the
transactions contemplated by this Agreement or the satisfaction
of any of the conditions set forth in Article VI of the
Purchase Agreement. Without limiting the foregoing and subject
to Section 9 hereto, it is understood that except as and to
the extent set forth in clause (a) above, the obligations
under this Section 3 shall not be affected by any Adverse
Recommendation Change or other recommendation or position of the
Sellers Board of Directors.
4.
Reasonable Efforts to
Cooperate
. (a) Stockholder hereby consents
to the publication and disclosure in the Proxy Statement, if any
(and, as and to the extent otherwise required by securities Laws
or the SEC or securities authorities, any other documents or
communications provided by Seller, Purchaser or the Company to
any Governmental Entity or to securityholders of the Seller), of
Stockholders identity and Beneficial Ownership of the
Owned Shares and the nature of Stockholders commitments,
arrangements and understandings under and relating to this
Agreement and, if deemed appropriate by Seller, a copy of this
Agreement. Stockholder will promptly provide any information
reasonably requested by the Company, Seller or Purchaser for any
regulatory application or filing made or approval sought in
connection with the Transactions (including filings with the
SEC).
C-2
5.
Irrevocable Proxy
. (a) In
furtherance of the agreements contained in Section 3 of
this Agreement, Stockholder hereby irrevocably grants to, and
appoints, each of Purchaser and each of the executive officers
of Purchaser, in their respective capacities as officers of
Purchaser, as the case may be, and any individual who shall
hereafter succeed to any such office of Purchaser, and each of
them individually, Stockholders proxy and
attorney-in-fact
(with full power of substitution), for and in the name, place
and stead of Stockholder, to vote all Shares Beneficially Owned
by Stockholder that are outstanding from time to time, to grant
or withhold a consent or approval in respect of such Shares and
to execute and deliver a proxy to vote such Shares, in each case
solely to the extent and in the manner specified in
Section 3. It being understood that the proxy granted
pursuant to this Section 5 shall be solely with regard to
the approval of the Purchase Agreement and the transactions
contemplated thereby and the other matters set forth in
Section 3, and any other matter to be voted on by
Stockholder as a stockholder of the Seller shall not be subject
to the proxy granted herein.
(b) Stockholder represents and warrants to Purchaser that
all proxies heretofore given in respect of the Owned Shares are
not irrevocable and that all such proxies have been properly
revoked or are no longer in effect as of the date hereof.
(c) Stockholder hereby affirms that the irrevocable proxy
set forth in this Section 5 is given by Stockholder in
connection with, and in consideration of, the execution of the
Purchase Agreement by Purchaser, and that such irrevocable proxy
is given to secure the performance of the duties of Stockholder
under this Agreement. Stockholder hereby further affirms that
the irrevocable proxy is coupled with an interest and, except as
set forth in Section 9, may under no circumstances be
revoked. Such irrevocable proxy is executed and intended to be
irrevocable in accordance with the provisions of
Section 212 of the Delaware General Corporation Law.
(d) The proxy granted in this Section 5 shall remain
valid until this Agreement terminates pursuant to Section 9
hereof.
6.
Further Action
. If any further action
is necessary or desirable to carry out the purposes of this
Agreement, Stockholder shall take all such action reasonably
requested by Purchaser except as otherwise contemplated by
Section 10.
7.
Representations and Warranties of
Stockholder
. Stockholder represents and warrants
to Purchaser as follows:
(a) Stockholder has all necessary power and authority and
legal capacity to execute and deliver this Agreement and perform
his obligations hereunder.
(b) This Agreement has been duly and validly executed and
delivered by Stockholder and, assuming it has been duly and
validly authorized, executed and delivered by Purchaser,
constitutes the valid and binding agreement of Stockholder,
enforceable against Stockholder in accordance with its terms,
except to the extent that enforceability may be limited by
(i) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in
effect relating to creditors rights generally and
(ii) general principles of equity.
(c) As of the date hereof, Stockholder is the sole
Beneficial Owner of 866,111 Owned Shares (the
Currently
Owned Shares
), and currently has the power to vote
555,000 of such Currently Owned Shares. The number of such
Currently Owned Shares that are issued and outstanding is
555,000. Stockholder has legal, good and marketable title (which
may include holding in nominee or street name) to
all of the Currently Owned Shares, free and clear of all liens,
claims, options, proxies, voting agreements and security
interests (other than as created by this Agreement, and the
restrictions on Transfer under applicable securities Laws). The
Currently Owned Shares constitute all of the capital stock of
Seller that is Beneficially Owned by Stockholder as of the date
hereof.
(d) The execution and delivery of this Agreement by
Stockholder does not and the performance of this Agreement by
Stockholder will not (i) conflict with, result in any
violation of, require any consent under or constitute a default
(whether with notice or lapse of time or both) under any
mortgage, bond, indenture, agreement, instrument or obligation
to which Stockholder is a party or by which Stockholder or any
of its
C-3
properties is bound, (ii) violate any judgment, order,
injunction, decree or award of any court, administrative agency
or other Governmental Entity that is binding on Stockholder or
any of its properties or (iii) constitute a violation by
Stockholder of any Law applicable to Stockholder, except for any
violation, conflict or consent in clause (i), (ii) and
(iii) as would not reasonably be expected to materially
impair the ability of Stockholder to perform its obligations
hereunder or to consummate the transactions contemplated herein
on a timely basis.
(e) Stockholder understands and acknowledges that Purchaser
is entering into the Purchase Agreement in reliance upon
Stockholders execution, delivery and performance of this
Agreement.
8.
Representations and Warranties of
Purchaser
. Purchaser represents and warrants to
Stockholder as follows:
(a) Purchaser has all necessary power and authority and
legal capacity to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and
performance of this Agreement by Purchaser and the consummation
by Purchaser of the transactions contemplated hereby have been
duly authorized by all necessary action on the part of Purchaser
and no further proceedings or actions on the part of Purchaser
are necessary to authorize the execution, delivery or
performance of this Agreement or the consummation of the
transactions contemplated hereby.
(b) This Agreement has been duly and validly executed and
delivered by Purchaser and, assuming it has been duly and
validly executed and delivered by Stockholder, constitutes the
valid and binding agreement of Purchaser, enforceable against
Purchaser in accordance with its terms, except to the extent
that enforceability may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws now or hereafter in effect relating to
creditors rights generally and (ii) general
principles of equity.
(c) The execution and delivery of this Agreement by
Purchaser does not and the performance of this Agreement by
Purchaser will not (i) conflict with, result in any
violation of, require any consent under or constitute a default
(whether with notice or lapse of time or both) under any
mortgage, bond, indenture, agreement, instrument or obligation
to which Purchaser is a party or by which Purchaser or any of
its properties is bound (or any of the constituent documents of
Purchaser), (ii) violate any judgment, order, injunction,
decree or award of any court, administrative agency or other
Governmental Entity that is binding on Purchaser or any of its
properties or (iii) constitute a violation by Purchaser of
any Law applicable to Purchaser, except for any violation,
conflict or consent in clause (i), (ii) and (iii) as
would not reasonably be expected to materially impair the
ability of Purchaser to perform its obligations hereunder or to
consummate the transactions contemplated herein on a timely
basis.
9.
Termination
. This Agreement shall
terminate upon the earliest of (a) the Closing Date,
(b) in the event that the Purchase Agreement is validly
terminated pursuant to Section 7.1(b)(iii), 7.1(c)(ii),
7.1(c)(iv) or 7.1(d)(ii), the date that is seven months and
fifteen days after the date of such termination, (c) in the
event that the Purchase Agreement is validly terminated pursuant
to Section 7.1(b)(i) or Section 7.1(c)(i) and after
the date of the Purchase Agreement but prior to the date of such
termination a Takeover Proposal or a communication relating to a
potential Takeover Proposal shall have been made known to Seller
(or any director or officer of Seller) or shall have been made
directly to Sellers stockholders generally or any Person
shall have publicly announced an interest in making or an
intention (whether or not conditional) to make a Takeover
Proposal, the date that is seven months and fifteen days after
the date of such termination, (d) in the event that the
Purchase Agreement is validly terminated in accordance with its
terms other than pursuant to those sections listed in
clause (b) or (c) above, concurrently with the
termination of the Purchase Agreement and (e) the date of
amendment of the Purchase Agreement, unless such amendment has
been previously agreed to in writing by Stockholder. Any such
termination of this Agreement shall be without prejudice to
liabilities arising hereunder before such termination of this
Agreement.
10.
Stockholder Capacity
. Notwithstanding
anything herein to the contrary, Stockholder has entered into
this Agreement solely in Stockholders capacity as the
Beneficial Owner of Shares, and nothing herein shall limit or
affect any actions taken or omitted to be taken at any time by
Stockholder in his capacity as such and any such actions taken
or omitted to be taken by Stockholder shall not be deemed to
constitute a breach of this Agreement.
C-4
11.
Miscellaneous
.
(a)
Entire Agreement; No Third Party
Beneficiaries
. This Agreement,
(a) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof
and thereof and (b) is not intended to confer upon any
Person other than the parties hereto and thereto any rights or
remedies hereunder.
(b)
Expenses
. All costs and expenses
incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such
expenses.
(c)
Assignment
. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall
be transferred by either party (whether by operation of law or
otherwise) without the prior written consent of the other party,
provided
,
however
, that Purchaser may transfer any
of its rights and obligations to any Affiliate of Purchaser, but
no such assignment shall relieve Purchaser of its obligations
hereunder. Any transfer of any rights, interests or obligations
hereunder in violation of this Section shall be null and void.
(d)
Amendment and Modification
. This
Agreement may be amended, modified and supplemented in any and
all respects, but only by a written instrument signed by all of
the parties hereto expressly stating that such instrument is
intended to amend, modify or supplement this Agreement.
(e)
Extension; Waiver
. At any time prior
to the Closing Date, either party hereto may extend the time for
the performance of any of the obligations or other acts of the
other party. Any agreement on the part of a party to any such
extension shall be valid only if set forth in an instrument in
writing signed by or on behalf of such party. The failure of
either party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of
those rights.
(f)
Notices
. All notices and other
communications hereunder shall be in writing and shall be deemed
given if mailed, delivered personally, telecopied (which is
confirmed) or sent by an overnight courier service, such as
Federal Express, to the parties at the following addresses (or
at such other address for a party as shall be specified by like
notice):
If to Stockholder, to:
VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attention: Scott R. Silverman
Facsimile:
561-805-8001
with a copy to:
Holland & Knight LLP
One East Broward Boulevard, Suite 1300
Fort Lauderdale, Florida 33301
Attention: Tammy Knight
Facsimile:
954-463-2030
If to Purchaser, to:
The Stanley Works
1000 Stanley Drive
New Britain, Connecticut 06053
Attention: Corporate Secretary
Facsimile:
860-827-3911
with a copy to:
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
Attention: Ethan Klingsberg
Facsimile:
212-225-3999
C-5
(g)
Severability
. Any term or provision
of this Agreement that is held by a court of competent
jurisdiction or other authority to be invalid, void or
unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the
offending term or provision in any other situation or in any
other jurisdiction. If the final judgment of a court of
competent jurisdiction or other authority declares that any term
or provision hereof is invalid, void or unenforceable, the
parties agree that the court making such determination shall
have the power to reduce the scope, duration, area or
applicability of the term or provision, to delete specific words
or phrases, or to replace any invalid, void or unenforceable
term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision.
(h)
Specific Performance
. In addition to
any remedies available at law or otherwise, each party shall be
entitled to equitable relief, including specific performance, in
the event of any breach or threatened breach of this Agreement.
(i)
Governing Law;
Jurisdiction
. (1) This Agreement shall be
governed by and construed in accordance with the laws of the
State of New York without giving effect to the principles of
conflicts of law thereof.
(2) To the fullest extent permitted by applicable Law, each
party hereto (i) agrees that any claim, action or
proceeding by such party seeking any relief whatsoever arising
out of, or in connection with, this Agreement or the
transactions contemplated hereby shall be brought only in the
United States District Court for the Southern District of New
York or any New York State court, in each case, located in the
Borough of Manhattan and not in any other State or Federal court
in the United States of America or any court in any other
country, (ii) agrees to submit to the exclusive
jurisdiction of such courts located in the Borough of Manhattan
for purposes of all legal proceedings arising out of, or in
connection with, this Agreement or the transactions contemplated
hereby, (iii) waives and agrees not to assert any objection
that it may now or hereafter have to the laying of the venue of
any such proceeding brought in such a court or any claim that
any such proceeding brought in such a court has been brought in
an inconvenient forum, (iv) agrees that mailing of process
or other papers in connection with any such action or proceeding
in the manner provided in Section 11(f) (Notices) or any
other manner as may be permitted by Law shall be valid and
sufficient service thereof and (v) agrees that a final
judgment in any such action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by applicable Law.
(j)
Descriptive Headings
. The headings
contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of
this Agreement.
(k)
Counterparts
. This Agreement may be
executed in two or more counterparts, all of which shall be
considered one and the same agreement and shall become effective
when two or more counterparts have been signed by each of the
parties and delivered to the other parties.
C-6
EXECUTION
VERSION
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be duly executed as of the day and year first above
written.
Name: Scott R. Silverman
The Stanley Works
Name: John F. Lundgren
C-7
Appendix D
EXECUTION
VERSION
[Applied
Digital Letterhead]
May 15,
2008
The Stanley Works
1000 Stanley Drive
New Britain, Connecticut 06053
Attention: Corporate Secretary
Ladies and Gentlemen:
Reference is made to that certain Stock Purchase Agreement (as
amended, restated, supplemented or otherwise modified from time
to time, the Agreement), dated as of the date
hereof, by and among The Stanley Works (the
Beneficiary) and VeriChip Corporation (the
Seller). Capitalized terms used but not defined in
this guarantee (this Guarantee) are used as defined
in the Agreement.
|
|
|
|
1.
|
To induce the Beneficiary to enter into the Agreement, the
undersigned (the Guarantor) hereby agrees to cause
the Seller to comply with its obligations under
Section 8.1(a)(iii) of the Agreement to the extent such
obligations relate to Third-Party Claims (the
Obligations), and shall be directly liable from and
after the Closing, as a primary obligor, to the Beneficiary for
the amount of any Obligations that are not completely paid by
the Seller when due. This is an unconditional guarantee of
payment and not of collectibility. It is understood that each of
the obligations of Seller under the Agreement (other than under
Section 8.1(a)(iii) of the Agreement) shall not, by itself
or themselves, constitute a liability under
Section 8.1(a)(iii), although it is possible that the
existence of a liability that is indemnifiable under
Section 8.1(a)(iii) may arise from the same set of facts
that give rise to a breach of a representation, warranty or
covenant under the Agreement.
|
|
|
2.
|
The Guarantor hereby waives notice of acceptance of this
Guarantee and notice of any Obligations, and waives presentment,
demand for payment, protest, notice of dishonor or non-payment
with respect to any of the Obligations or any suit or the taking
of other action by Beneficiary against, and any other notice to,
the Seller, the Guarantor or others (other than as required by
the Agreement). The Beneficiary shall have the right to proceed
first and directly against the Guarantor under this Guarantee
without proceeding against any other Person or exhausting any
other remedies that it may have and without resorting to any
other security held by it.
|
|
|
3.
|
The Beneficiary may at any time and from time to time without
notice to or consent of the Guarantor and without impairing or
releasing the obligations of the Guarantor hereunder:
(1) agree with the Seller to make any change in the terms
of any obligation or liability of the Seller to the Beneficiary,
(2) take or fail to take any action of any kind in respect
of any security for any obligation or liability of the Seller to
the Beneficiary, (3) exercise or refrain from exercising
any rights against the Seller or others, or (4) compromise
or subordinate any obligation or liability of the Seller to the
Beneficiary including any security therefor; provided, however,
that Beneficiary and Seller may not make any change to
Section 8.1(a)(iii) of the Agreement, or any change to the
scope of this Guarantee without the prior written consent of the
Guarantor. All suretyship defenses are hereby waived by the
Guarantor (except as set forth clauses (a) or (b) in
the next paragraph).
|
|
|
4.
|
The Guarantors obligations under this Guarantee are
absolute, irrevocable and unconditional and shall not be
affected by the validity or enforceability of any Obligation or
any instrument evidencing any Obligation, or by the
validity, enforceability, perfection or existence of any
collateral therefor or by any other circumstance relating to any
Obligation that might otherwise constitute a legal or equitable
discharge of or defense of a guarantor or surety (other than as
a result of the payment of the Obligations), provided that
(a) the Guarantor may interpose any counterclaim or setoff
that the Seller is or would have been entitled to interpose,
except for so long as, and to the extent, such counterclaim or
setoff has already reduced the amount of the Obligations or
(b) the Guarantor may interpose any defense that the Seller
is or would have been entitled to interpose (other than any
defense arising by reason of any disability, incapacity,
bankruptcy or insolvency of the Seller, including by reason of
any lack of authorization of the Obligations by the
|
D-1
|
|
|
|
|
Seller). The Guarantor agrees that this Guarantee shall be
reinstated if at any time payment, or any part thereof, of any
of the Obligations, or interest thereon is rescinded or must
otherwise be restored or returned by the Beneficiary upon the
bankruptcy, insolvency, dissolution or reorganization of the
Seller.
|
|
|
|
|
5.
|
The Guarantor agrees to pay all reasonable out-of-pocket
expenses incurred by the Beneficiary (including the reasonable
fees and expenses of counsel), to the extent incurred after
demand under this Guarantee has been made and not timely
honored, in connection with a breach of this Guarantee by the
Guarantor.
|
|
|
6.
|
The Guarantor hereby represents as follows:
|
|
|
|
|
a.
|
The Guarantor has full power and authority to execute and
deliver this Guarantee.
|
|
|
b.
|
No action on the part of the Guarantor is required to authorize
the execution and delivery of this Guarantee (other than such
actions that have been taken prior to the date hereof). The
execution, delivery and performance of this Guarantee do not
contravene the organizational documents of the Guarantor, any
Law or any contractual restriction binding on the Guarantor or
the Guarantors assets.
|
|
|
c.
|
No actions by, notices to, filings with, consents, licenses,
clearances, authorizations, and approvals of, and registration
and declarations with, any governmental or regulatory authority
are necessary for the due execution and delivery of this
Guarantee.
|
|
|
|
|
d.
|
This Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor, enforceable against the Guarantor
in accordance with all of its terms and conditions (subject to
the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar Law affecting
creditors rights generally). The enforceability of the
Guarantors obligations is also subject to the effect of
general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at
law).
|
|
|
|
|
e.
|
The Guarantor currently has the financial capacity to pay and
perform the Guarantors obligations under this Guarantee.
|
|
|
|
|
7.
|
Neither this Guarantee nor any of the rights, interests or
obligations hereunder shall be transferred by either party
(whether by operation of law or otherwise) without the prior
written consent of the other party,
provided
,
however
, that the Beneficiary may transfer any of its
rights and obligations to any Affiliate of the Beneficiary, but
no such assignment shall relieve the Beneficiary of its
obligations hereunder. Any transfer of any rights, interests or
obligations hereunder in violation of this section shall be null
and void.
|
|
|
8.
|
This Guarantee may not be revoked or terminated and shall remain
in full force and effect and shall be binding on the Guarantor,
the Guarantors successors and permitted assignees until
all of the Obligations to the extent payable under this
Guarantee have been paid in full. Notwithstanding the foregoing,
this Guarantee shall terminate and the Guarantor shall have no
further obligation or liability under this Guarantee as of the
termination of the Agreement in accordance with its terms;
provided, that this Guarantee shall not so terminate as to any
claim for which a notice setting forth in reasonable detail the
basis for such claim has been given to the Guarantor prior to
such termination until final resolution of such claim.
Notwithstanding the foregoing, in the event that the Beneficiary
asserts in any litigation or other proceeding relating to this
Guarantee that any other provision of this Guarantee is illegal,
invalid or unenforceable in whole or in part, or asserts any
theory of liability against the Guarantor or any other Person
with respect to this Guarantee, the Agreement or the
transactions contemplated hereby or thereby other than the
liability of the Guarantor under this Guarantee or the liability
of the Seller under the Agreement, then (i) the obligations
of the Guarantor under this Guarantee shall terminate
ab
initio
and shall thereupon be null and void, and
(ii) if the Guarantor has previously made any payments
under this Guarantee, the Guarantor shall be entitled to recover
such payments from the Beneficiary.
|
|
|
9.
|
All notices and other communications hereunder shall be in
writing and shall be deemed given if mailed, delivered
personally, telecopied (which is confirmed) or sent by an
overnight courier service, such as
|
D-2
|
|
|
|
|
Federal Express, to the parties at the following addresses (or
at such other address for a party as shall be specified by like
notice):
|
If to the Guarantor:
Applied Digital Solutions, Inc.
1690 South Congress Ave., #201
Delray Beach, FL 33445
Attention: Lorraine Breece
Facsimile:
561-805-8001
with a copy to:
Baker Botts L.L.P.
2001 Ross Avenue
Dallas, Texas 75225
Attention: Sarah M. Rechter
Facsimile:
214-661-4419
If to the Beneficiary, as provided in the Agreement.
|
|
|
|
10.
|
To the fullest extent permitted by applicable Law, each party
hereto (i) agrees that any claim, action or proceeding by
such party seeking any relief whatsoever arising out of, or in
connection with, this Guarantee or the transactions contemplated
hereby shall be brought only in the United States District Court
for the Southern District of New York or any New York State
court, in each case, located in the Borough of Manhattan and not
in any other State or Federal court in the United States of
America or any court in any other country, (ii) agrees to
submit to the exclusive jurisdiction of such courts located in
the Borough of Manhattan for purposes of all legal proceedings
arising out of, or in connection with, this Guarantee or the
transactions contemplated hereby, (iii) waives and agrees
not to assert any objection that it may now or hereafter have to
the laying of the venue of any such proceeding brought in such a
court or any claim that any such proceeding brought in such a
court has been brought in an inconvenient forum,
(iv) agrees that mailing of process or other papers in
connection with any such action or proceeding in the manner
provided in Section 10 or any other manner as may be
permitted by Law shall be valid and sufficient service thereof
and (v) agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner
provided by applicable Law.
|
|
|
11.
|
This Guarantee (a) constitutes the entire agreement and
supersede all prior agreements and understandings, both written
and oral, between the parties with respect to the subject matter
hereof and thereof and (b) are not intended to confer upon
any Person other than the parties hereto and thereto any rights
or remedies hereunder.
|
|
|
|
|
12.
|
This Guarantee may be amended, modified and supplemented in any
and all respects, but only by a written instrument signed by all
of the parties hereto expressly stating that such instrument is
intended to amend, modify or supplement this Guarantee. Either
party hereto may extend the time for the performance of any of
the obligations or other acts of the other party. Any agreement
on the part of a party to any such extension shall be valid only
if set forth in an instrument in writing signed by or on behalf
of such party. The failure of either party to this Guarantee to
assert any of its rights under this Guarantee or otherwise shall
not constitute a waiver of those rights.
|
|
|
13.
|
This Guarantee may be executed in two or more counterparts, all
of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been
signed by each of the parties and delivered to the other parties.
|
|
|
14.
|
Promptly after entering into any agreement or arrangement with
respect to, or effecting, any proposed sale, exchange, dividend
or other distribution or liquidation of all or a significant
portion of its assets in one or a series of transactions, any
significant recapitalization or reclassification of its
outstanding securities or any extraordinary transaction, the
Guarantor will notify the Beneficiary in writing thereof
pursuant to Section 9.
|
|
|
15.
|
Each party shall be entitled to equitable relief, including
specific performance, in the event of any breach or threatened
breach of this Guarantee.
|
[
remainder of page intentionally left blank
]
D-3
Very truly yours,
APPLIED DIGITAL SOLUTIONS, INC.
Name: Joseph J. Grillo
|
|
|
|
Title:
|
President and Chief Executive Officer
|
Accepted and Agreed:
THE STANLEY WORKS
Name: John F. Lundgren
|
|
|
|
Title:
|
Chairman and Chief Executive Officer
|
D-4
Appendix E
ESCROW
AGREEMENT
among
THE STANLEY WORKS,
VERICHIP CORPORATION
and
CITIBANK, N.A., as Escrow Agent
Dated as of
[ ]
E-1
ESCROW AGREEMENT
(this Agreement), dated as
of
[ ],
by and among The Stanley Works, a Connecticut corporation
(
Purchaser
), VeriChip Corporation, a Delaware
corporation (
Seller
) and Citibank, N.A., a
national banking association organized and existing under the
laws of the United States of America
(
Citibank
) and acting through its Agency and
Trust Division and solely in its capacity as escrow agent
under the Agreement, and any successors appointed pursuant to
the terms hereof (Citibank in such capacity, the
Escrow
Agent
). Purchaser and Seller are sometimes
collectively referred to herein as the Interested
Parties and the Interested Parties and the Escrow Agent
are sometimes collectively referred to herein as the
Parties
.
WHEREAS,
pursuant to the Stock Purchase Agreement, dated
as of May [ ], 2008, (the
Purchase
Agreement
), by and among the Interested Parties
(attached hereto as
Schedule A
), the Interested
Parties have agreed to establish an escrow arrangement for the
purposes set forth therein;
WHEREAS,
the Interested Parties wish to appoint Citibank
as Escrow Agent and Citibank is willing to accept such
appointment and to act as Escrow Agent, in each case upon the
terms and conditions of the Agreement; and
WHEREAS
, each capitalized term used and not defined
herein shall have the meaning ascribed thereto in the Purchase
Agreement.
NOW, THEREFORE,
for good and valuable consideration, the
receipt and adequacy of which is hereby irrevocably
acknowledged, the parties hereto agree as follows
:
1.
Deposit of Escrow Funds or Property
.
At the Closing, Purchaser shall deposit with the Escrow Agent in
immediately available funds the amount of Four Million Five
Hundred Thousand Dollars ($4,500,000.00) (the
Escrow
Deposit
, and together with any investment income or
proceeds received by the Escrow Agent from the investment
thereof from time to time pursuant to Section 3 below,
collectively, the
Escrow Property
), and the
Escrow Agent agrees to open and maintain a separate account to
hold the Escrow Property (the
Escrow
Account
), and to administer the Escrow Property in
accordance with the terms of this Agreement.
2.
Claims and Payment; Release from Escrow
.
2.1
Release of Escrow Property
. The
Escrow Property shall be distributed by the Escrow Agent in
accordance with the following:
(a)
Final Resolution
.
(i) Following a Final Resolution, the Interested Parties
shall deliver joint written instructions in the form attached
hereto as
Exhibit B
, which have been signed by an
Authorized Person of each of Purchaser and Seller
(
Joint Written Instructions
), to the Escrow
Agent directing the Escrow Agent to release to Purchaser an
amount from the Escrow Account equal to the amount that is
ordered or agreed to be paid to Purchaser, if any, in such Final
Resolution. Promptly following receipt of such Joint Written
Instructions, the Escrow Agent shall release to Purchaser an
amount from the Escrow Account equal to the amount that is
ordered or agreed to be paid to Purchaser in such Joint Written
Instructions.
Final Resolution
means (i) a final,
non-appealable order or judgment from a court of competent
jurisdiction that resolves any dispute arising under, in
connection with or relating to the Purchase Agreement or the
transactions contemplated thereby, including any such final,
non-appealable order or judgment from a court of competent
jurisdiction that orders that Purchaser is entitled to recover
monetary damages from the Escrow Account under the terms of the
Purchase Agreement or (ii) a written agreement executed by
Purchaser and Seller that resolves any dispute arising under, in
connection with or relating to the Purchase Agreement or the
transactions contemplated hereby, including any such written
agreement that specifies that Purchaser is entitled to recover
monetary damages from the Escrow Account under the terms of this
Agreement.
(b)
Cut-Off Date
.
(i) No later than five (5) Business Days after the
Cut-Off Date, the Interested Parties shall deliver Joint Written
Instructions to the Escrow Agent directing the Escrow Agent to
release to Seller all of the
E-2
funds then remaining in the Escrow Account, including all
accrued interest on such amount, unless any outstanding claim
under Section 8.1(a) of the Purchase Agreement or for fraud
is still pending and unresolved, in which case the Interested
Parties shall deliver Joint Written Instructions to the Escrow
Agent directing the Escrow Agent to release to Seller all of the
funds then remaining in the Escrow Account other than the amount
for which a claim is outstanding under Section 8.1(a) of
the Purchase Agreement or for fraud. Following receipt of such
Joint Written Instructions, the Escrow Agent shall pay and
distribute to Seller the amount specified in the Joint Written
Instruction (any amount not so released to Seller, the
Retained Amount
). Any Retained Amount shall
remain in the Escrow Account until released pursuant to
clause (ii) immediately below.
(ii) If, following the Cut-Off Date, there is a Final
Resolution of any claim to which the Retained Amount relates,
the Interested Parties shall deliver Joint Written Instructions
to the Escrow Agent directing the Escrow Agent to release to
Purchaser the that portion of the Escrow Amount, if any, to
which Purchaser is entitled in accordance with such Final
Resolution. Following the Final Resolution of all outstanding
claims by a Purchaser Indemnified Person under
Section 8.1(a) of the Purchase Agreement or for fraud and
payment therefor from the Retained Amount in respect of such
claim, the Interested Parties shall deliver Joint Written
Instructions to the Escrow Agent directing the Escrow Agent to
release to Seller no later than five (5) Business Days
after the date of such Joint Written Instructions the remainder
of the Retained Amount, if any.
(c)
Joint Written
Instructions
. Notwithstanding anything to the
contrary contained in this Agreement, the Escrow Agent shall
deliver or distribute all or any portion of the Escrow Property
in accordance with, and only in accordance with, any Joint
Written Instructions executed and delivered by both Purchaser
and Seller.
3.
Investment of Funds
.
(a) The Escrow Agent shall invest the Escrow Property in
[Fidelity Institutional Prime Money Market
Fund Class IV (2015)] and shall invest the Escrow
Property on the date of deposit provided that it is received on
or before 11:00 a.m. (E.S.T.). Any Escrow Property received
by the Escrow Agent after 11:00 a.m. (E.S.T.) shall be
treated as if received on the following Business Day. For
purposes of this Agreement
Business Day
shall
mean any day that the Escrow Agent is open for business.
(b) Any investment direction contained herein may be
executed through an affiliated broker dealer of the Escrow Agent
and will be entitled to such usual and customary fee. Neither
Escrow Agent nor any of its affiliates assume any duty or
liability for monitoring the investment rating.
(c)
Tax Reporting
. The Interested Parties
agree that, for tax reporting purposes, the Escrow Property
shall be allocated to the Party to whom the Escrow Property is
disbursed and shall be reported in the year of disbursement on a
Form 1099 B, if applicable, in relation to principal and on
a Form 1099 INT for interest earned or on a Form 1099
DIV for dividends earned in the case of Money Market investments.
(d)
Certification of Tax Identification
Number
. The Interested Parties shall promptly
provide the Escrow Agent with a duly completed and properly
executed IRS
Form W-9
(or
Form W-8
BEN, in case of
non-U.S. entity)
certifying the Interested Parties status as a beneficial
owner of the Escrow Property for federal income tax purposes. In
the event the payee is not an Interested Party nor a party to
this Agreement, the Interested Parties shall provide the Escrow
Agent with a duly completed and properly executed IRS
Form W-9
(or
Form W-8
BEN, in case of
non-U.S. entity)
on such payee prior to payment being made. The Interested
Parties understand that, in the event tax identification numbers
are not certified to the Escrow Agent, the Internal Revenue
Code, as amended from time to time, may require withholding of a
portion of any interest or other income earned on the investment
of the Escrow Property.
(e)
IRS Circular 230 Disclosure
. The
Escrow Agent, its affiliates, and its employees are not in the
business of providing tax or legal advice to any taxpayer
outside of the Escrow Agent and its affiliates. This Agreement
and any amendments or attachments are not intended or written to
be used, and cannot be used or relied upon, by any such taxpayer
or for the purpose of avoiding tax penalties. Any such taxpayer
should seek advice based on the taxpayers particular
circumstances for an independent tax advisor.
E-3
4.
Concerning the Escrow Agent
.
(a)
Escrow Agent Duties
. Each Interested
Party acknowledges and agrees that (i) the duties,
responsibilities and obligations of the Escrow Agent shall be
limited to those expressly set forth in the Agreement and no
duties, responsibilities or obligations shall be inferred or
implied, (ii) the Escrow Agent shall not be responsible for
any of the agreements referred to or described herein (including
without limitation the Purchase Agreement), or for determining
or compelling compliance therewith, and shall not otherwise be
bound thereby, (iii) this Agreement shall constitute the
entire agreement of the parties with respect to the subject
matter and supersedes all prior oral or written agreements in
regard thereto, (iv) the Escrow Agent shall not be required
to expend or risk any of its own funds or otherwise incur any
financial or other liability in the performance of any of its
duties hereunder, and (v) the Escrow Agent shall not be
obligated to take any legal or other action hereunder which
might in its judgment involve or cause it to incur any expense
or liability unless it shall have been furnished with acceptable
indemnification.
(b)
Standard of Care
. The Escrow Agent
shall be under no duty to afford the Escrow Property any greater
degree of care than it gives its own similar property. The
Escrow Agent shall not be liable for any damage, loss or injury
resulting from any action taken or omitted in the absence of
gross negligence or willful misconduct.
(c)
Limitation on
Liability
. Notwithstanding any other provision of
the Agreement, the Escrow Agent shall not be liable (i) for
any indirect, incidental, consequential, punitive or special
losses or damages, regardless of the form of action and whether
or not any such losses or damages were foreseeable or
contemplated, (ii) for the acts or omissions of any
nominees, correspondents, designees, agents, subagents or
subcustodians, or (iii) for the investment or reinvestment
of any Escrow Property, or any liquidation of such investment or
reinvestment, executed in accordance with the terms of the
Agreement, including, without limitation, any liability for any
delays (not resulting from its gross negligence or willful
misconduct as adjudicated by a court of competent jurisdiction)
in the investment or reinvestment of the Escrow Property, any
loss of interest incident to any such delays, or any loss or
penalty as a result of the liquidation of any investment before
its stated maturity date.
(d)
Reliance
. The Escrow Agent shall be
entitled to rely upon any order, judgment, certification,
demand, instruction, notice, instrument, certification, consent,
authorization, receipt, power of attorney,
e-mail,
.pdf
or other writing delivered to it without being required to
determine the authenticity or validity thereof, or the
correctness of any fact stated therein or the propriety or
validity or the service thereof or the jurisdiction of the court
issuing any judgment or order. The Escrow Agent may act in
reliance upon any signature believed by it to be genuine and may
assume that any person purporting to make any statement or
execute any document in connection with the provisions hereof
has been duly authorized to do so.
(e)
Consultation
. The Escrow Agent may
consult with counsel satisfactory to it, and the opinion or
advice of such counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or
omitted by it in good faith and in accordance with the opinion
and advice of such counsel.
5.
Compensation, Expense Reimbursement and
Indemnification
.
(a)
Compensation
: Each of Purchaser and
Seller covenants and agrees, jointly and severally, to pay the
fifty percent (50%) of the Escrow Agents fees and expenses
specified in
Schedule C
. In the event that such fees
or expenses, or any other obligations owed to the Escrow Agent
(or its counsel) are not paid to the Escrow Agent within 30
calendar days following the presentment of an invoice for the
payment of such fees and expenses or the demand for such
payment, then the Escrow Agent may, without further action or
notice, pay such fees from the Escrow Property and may sell,
convey or otherwise dispose of any Escrow Property for such
purpose. The Escrow Agent may in its sole discretion withhold
from any distribution of the Escrow Property, an amount of such
distribution it reasonably believes would, upon sale or
liquidation, produce proceeds equal to any unpaid amounts to
which the Escrow Agent is entitled to hereunder.
(b)
Indemnification
: Each of the
Interested Parties covenants and agrees, jointly and severally,
to indemnify the Escrow Agent and its employees, officers and
directors (each, an
Indemnified Party
) for,
hold each Indemnified Party harmless from, and defend each
Indemnified Party against, any and all claims, losses, actions,
liabilities, costs, damages and expenses of any nature incurred
by the Escrow Agent arising out of or in connection with this
Agreement or with the administration of its duties hereunder,
including but not limited to attorneys fees, tax
liabilities (other than income tax liabilities associated with
the Escrow Agents fees), any liabilities or damages
E-4
that may result from any inaccuracy or misrepresentation made in
any tax certification provided to the Escrow Agent, and other
costs and expenses of defending or preparing to defend against
any claim of liability, except to the extent such loss,
liability, damage, cost and expense shall be caused by the
Indemnified Partys own gross negligence or willful
misconduct. The foregoing indemnification and agreement to hold
harmless shall survive the termination of the Agreement and the
resignation or removal of the Escrow Agent.
6.
Dispute Resolution
. In the event
of any disagreement among any of the Interested Parties to the
Agreement, or between any of them and any other person,
resulting in adverse claims or demands being made with respect
to the subject matter of the Agreement, or in the event that the
Escrow Agent, in good faith, is in doubt as to any action it
should take hereunder, the Escrow Agent may, at its option,
refuse to comply with any claims or demands and refuse to take
any other action hereunder, so long as such disagreement
continues or such doubt exists, and in any such event, the
Escrow Agent shall not be liable in any way or to any person for
its failure or refusal to act, and the Escrow Agent shall be
entitled to continue to so refuse to act and refrain from acting
until (i) the rights of all parties having or claiming an
interest in the Escrow Property or the Escrow Account shall have
been fully and finally adjudicated by a court of competent
jurisdiction, or all differences and doubts shall have been
resolved by agreement among all of the Interested Parties, and
(ii) the Escrow Agent shall, in the case of adjudication by
a court of competent jurisdiction, have received a final order,
judgment or decree by such court of competent jurisdiction,
which order, judgment or decree is not subject to appeal, and in
the case of resolution of differences and doubts by agreement,
have received a notice in writing signed by an Authorized Person
(as defined below) of each of the Interested Parties setting
forth in detail the agreement. The Escrow Agent shall have the
option, after 30 calendar days notice to the Interested
Parties of its intention to do so, to file an action in
interpleader requiring the Interested Parties hereto to answer
and litigate any claims and rights among themselves. The costs
and expenses (including reasonable attorneys fees and
expenses) incurred by the Escrow Agent in connection with such
proceeding shall be paid by, and be the joint and several
obligation of, the Interested Parties. The rights of the Escrow
Agent under this Section 6 are cumulative of all other
rights which it may have by law or otherwise.
7.
Exclusive Benefit
. Except as
specifically set forth in the Agreement, the Agreement is for
the exclusive benefit of the parties to the Agreement and their
respective permitted successors, and shall not be deemed to
give, either expressly or implicitly, any legal or equitable
right, remedy, or claim to any other entity or person
whatsoever. No Party may assign any of its rights or obligations
under the Agreement without the prior written consent of the
other parties except that the Escrow Agent may resign upon the
terms described in the Agreement.
8.
Force Majeure
. Notwithstanding
anything contained in the Agreement to the contrary, the Escrow
Agent shall not incur any liability for not performing any act
or fulfilling any obligation hereunder by reason of any
occurrence beyond its control (including, without limitation,
any provision of any present or future law or regulation or any
act of any governmental authority, any act of God or war or
terrorism, or the unavailability of the Federal Reserve Bank
wire services or any electronic communication facility).
9.
Resignation and Removal
.
(a) The Interested Parties may remove the Escrow Agent at
any time by giving to the Escrow Agent thirty (30) calendar
days prior written notice of removal signed by an
Authorized Person of each of the Interested Parties. The Escrow
Agent may resign at any time by giving to each Interested
Parties thirty (30) calendar days prior written
notice of resignation.
(b) Within thirty (30) calendar days after giving the
foregoing notice of removal to the Escrow Agent or within thirty
(30) calendar days after receiving the foregoing notice of
resignation from the Escrow Agent, the Interested Parties shall
appoint a successor escrow agent and give notice of such
successor escrow agent to the Escrow Agent. If a successor
escrow agent has not accepted such appointment by the end of
such
(i) 30-day
period, in the case of the Escrow Agents removal, or
(ii) 30-day
period, in the case of the Escrow Agents resignation, the
Escrow Agent may either (x) deliver the Escrow Property to
one of the Interested Parties at the address set forth on the
signature page to the Agreement, or (y) apply to a court of
competent jurisdiction for the appointment of a successor escrow
agent or for other appropriate relief.
(c) Upon receipt of notice of the identity of the successor
escrow agent, the Escrow Agent shall either deliver the Escrow
Property then held hereunder to the successor escrow agent, less
the Escrow Agents fees, costs,
E-5
expenses and the value of other obligations owed to the Escrow
Agent hereunder, or hold such Escrow Property (or any portion
thereof) pending distribution, until all such fees, costs and
expenses or the value of other obligations are paid to it.
(d) Upon delivery of the Escrow Property to the successor
escrow agent or to an Interested Party, the Escrow Agent shall
have no further duties, responsibilities or obligations
hereunder.
10.
Governing Law; Jurisdiction; Waivers
.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving
effect to the principles of conflicts of law thereof.
(b) To the fullest extent permitted by applicable Law, each
Party hereto (i) agrees that any claim, action or
proceeding by such Party seeking any relief whatsoever arising
out of, or in connection with, this Agreement or the
transactions contemplated hereby shall be brought only in the
U.S. District Court for the Southern District of
New York or any New York State court, in each case, located
in the Borough of Manhattan and not in any other State or
Federal court in the U.S. or any court in any other
country, (ii) agrees to submit to the exclusive
jurisdiction of such courts located in the Borough of Manhattan
for purposes of all legal proceedings arising out of, or in
connection with, this Agreement or the transactions contemplated
hereby, (iii) waives and agrees not to assert any objection
that it may now or hereafter have to the laying of the venue of
any such proceeding brought in such a court or any claim that
any such proceeding brought in such a court has been brought in
an inconvenient forum, (iv) agrees that mailing of process
or other papers in connection with any such action or proceeding
in the manner provided in Section 12 below or any other
manner as may be permitted by Law shall be valid and sufficient
service thereof and (v) agrees that a final judgment in any
such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in
any other manner provided by applicable Law.
(c) The parties irrevocably and unconditionally waive, to
the fullest extent permitted by law, and agree not to plead or
claim, any right of immunity from legal action, suit or
proceeding, from setoff or counterclaim, from the jurisdiction
of any court, from service of process, from attachment upon or
prior to judgment, from attachment in aid of execution or
judgment, from execution of judgment, or from any other legal
process or proceeding for the giving of any relief or for the
enforcement of any judgment, and consents to such relief and
enforcement against it, its assets and its revenues in any
jurisdiction, in each case with respect to any matter arising
out of, or in connection with, the Agreement.
(d) The parties irrevocably and unconditionally waive any
right to trial by jury with respect to any proceeding relating
to the Agreement.
11.
Instructions, Verification, Communications
.
(a) All instructions required under the Agreement shall be
delivered to the Escrow Agent in writing, in English, in
facsimile form and, if so requested by the Escrow Agent, an
original, executed by an Authorized Person (as hereinafter
defined) of each of the Interested Parties or an entity acting
on its behalf. The identity of such Authorized Persons, as well
as their specimen signatures, title, telephone number and
e-mail
address, shall be delivered to the Escrow Agent in the list of
authorized signers form as set forth on
Schedules D and E,
respectively,
and shall remain in effect until the
applicable Interested Party, or an entity acting on its behalf,
notifies Escrow Agent of any change thereto (the person(s) so
designated from time to time, the
Authorized
Persons
). The Escrow Agent and the Interested Parties
agree that the above constitutes a commercially reasonable
security procedure and further agree to comply with any
direction or instruction (other than those contained herein or
delivered in accordance with the Agreement) from any Interested
Party.
(b) In the event funds transfer instructions are given
(other than in writing at the time of execution of this
Agreement), whether in writing, by telecopier, .pdf,
e-mail,
or
otherwise, such funds transfer instructions should contain a
selected test word also evidenced on
Schedules D and E
.
Test Words must contain at least 8 alphanumeric characters,
established at document execution and changed each time
Schedule B is updated in accordance with (a) above. In
addition or in lieu of test words, the Escrow Agent is
authorized to seek confirmation of such instructions by
telephone call back to the applicable person(s) specified to the
Escrow Agent from time to time by an Authorized Person and the
Escrow Agent may rely upon the confirmations of anyone
purporting to be the person(s)
E-6
so designated. To ensure the accuracy of the instructions it
receives, the Escrow Agent may record such call backs. If the
Escrow Agent is unable to verify the instruction, or is not
satisfied in its sole discretion with the verification it
receives, it will not execute the instruction until all issues
have been resolved to its satisfaction. The persons and
telephone numbers for call backs may be changed only in writing,
signed by an Authorized Person, actually received and
acknowledged by the Escrow Agent. The Interested Parties to the
Agreement acknowledge that these security procedures for funds
transfers are commercially reasonable.
(c) To help the U.S. government fight the funding of
terrorism and money laundering activities, Federal law requires
all financial institutions to obtain, verify, and record
information that identifies each person who opens an account.
When an account is opened, the Escrow Agent will ask for
information that will allow the Escrow Agent to identify
relevant parties. The Interested Parties hereby acknowledge such
information disclosure requirements and agree to comply with all
such information disclosure requests from time to time from the
Escrow Agent.
(d) Notwithstanding anything to the contrary herein, any
and all email communications (both text and attachments) by or
from the Escrow Agent that the Escrow Agent deems to contain
confidential, proprietary,
and/or
sensitive information shall be encrypted. The recipient (the
Email Recipient) of the encrypted email
communication will be required to complete a registration
process. Instructions on how to register
and/or
retrieve an encrypted message will be included in the first
secure email sent by the Escrow Agent to the Email Recipient.
Additional information and assistance on using the encryption
technology can be found at Citibanks Secure Email website
at
www.citigroup.com/citigroup/citizen/privacy/email.htm
or by calling
(866) 535-2504
(in the U.S.) or
(904) 954-6181.
(e) The provisions of this
Section 11(a)-(d)
may be amended by the Escrow Agent unilaterally upon prior
written notice to the Interested Parties.
12.
Notices; Wiring Instructions
.
(a) Any notice permitted or required hereunder shall be in
writing in English, and shall be sent (i) by personal
delivery, overnight delivery by a recognized courier or delivery
service, or (ii) mailed by registered or certified mail,
return receipt requested, postage prepaid, or
(iii) confirmed telecopy accompanied by mailing of the
original on the same day by first class mail, postage prepaid,
in each case addressed to the address and person(s) designated
below their respective signature hereto (or to such other
address as any such Party may hereafter designate by written
notice to the other parties). Notices to the Escrow Agent shall
only be deemed given upon actual receipt by the Escrow Agent.
Whenever under the terms hereof the time for giving a notice or
performing an act falls upon a Saturday, Sunday, or a banking
holiday in New York, such time shall be extended to the next day
on which the Escrow Agent is open for business.
(b) Any funds to be paid to or by the Escrow Agent
hereunder shall be sent by wire transfer pursuant to the
following instructions (or by such method of payment and
pursuant to such instruction as may have been given in advance
and in writing to or by the Escrow Agent, as the case may be, in
accordance with Section 12(a) above):
If to Purchaser:
Bank: Citibank NA, New York
ABA#: 021000089
A/C#: [
]
Attn: Craig A. Douglas
Ref: A1 Escrow
If to Seller:
Bank: Citibank, F.S.B
400 Royal Palm Way; Suite 110
Palm Beach, FL 33480
ABA#: 266086554
Account #: [
]
Attn: William J. Caragol
Ref: VeriChip Corporation
E-7
If to the Escrow Agent:
CITIBANK, N.A.
ABA:
0210-0008-9
Account Name: Escrow Concentration Account
CREDIT A/C No.: [
]
Reference: 796489
13.
Amendment
. Except as
specifically set forth in the Agreement, any amendment of the
Agreement shall be binding only if evidenced by a writing signed
by each of the parties to the Agreement.
14.
Severability
. The invalidity,
illegality or unenforceability of any provision of the Agreement
shall in no way affect the validity, legality or enforceability
of any other provision. If any provision of the Agreement is
held to be unenforceable as a matter of law, the other
provisions shall not be affected thereby and shall remain in
full force and effect.
15.
Termination
. The Agreement
shall terminate upon the distribution of all Escrow Property
from the Escrow Account established hereunder in accordance with
the terms of the Instructions set forth in the Agreement,
subject, however, to the survival of obligations after
specifically contemplated in the Agreement to so survive.
16.
Use of Name
. No printed or
other material in any language, including prospectuses, notices,
reports, and promotional material which mentions
Citibank, or Citigroup or
Citi by name or the rights, powers, or duties of the
Escrow Agent under the Agreement shall be issued by any
Interested Parties hereto, or on such Partys behalf,
without the prior written consent of the Escrow Agent.
17.
Counterparts
. The Agreement may
be executed simultaneously in two or more counterparts, any one
of which need not contain the signatures of more than one Party,
but all such counterparts taken together shall constitute one
and the same agreement. Facsimile signatures on counterparts of
the Agreement shall be deemed original signatures with all
rights accruing thereto except in respect to any Non-US entity,
whereby originals are required.
18.
Mergers and Conversions
. Any
corporation into which the Escrow Agent may be merged or
converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or
consolidation to which the Escrow Agent will be a party, or any
corporation succeeding to the business of the Escrow Agent will
be the successor of the Escrow Agent hereunder without the
execution or filing of any paper with any Party hereto or any
further act on the part of any of the parties hereto except
where an instrument of transfer or assignment is required by law
to effect such succession, anything herein to the contrary
notwithstanding.
E-8
IN WITNESS WHEREOF, each of the parties has caused the Escrow
Agreement to be executed by a duly authorized officer
and/or
representative as of the day and year first written above.
CITIBANK, N.A.,
as Escrow Agent
Name:
Title:
Date:
Notice to:
Citibank, N.A.
Agency & Trust
388 Greenwich Street, 14th Floor
New York, NY 10013
Attn.:
Phone:
Facsimile:
THE STANLEY WORKS
Name:
Title:
Date:
Notice to:
c/o The
Stanley Works
1000 Stanley Drive
New Britian, CT 06053
Attn.: General Counsel
Phone:
860-225-5111
Facsimile:
260-827-3911
With a copy to:
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
Attention: Ethan Klingsberg, Esq.
Telephone:
(212) 225-2000
Telecopy:
(212) 225-3999
E-9
VERICHIP CORPORATION
Name:
Title:
Date:
Notice to:
VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attention: William J. Caragol
Telephone:
(561) 805-8008
Telecopy:
(561) 805-8001
With a copy to:
Holland & Knight LLP
One East Broward Boulevard, Suite 1300
Fort Lauderdale, Florida 33301
Attention: Tammy Knight, Esq.
Telephone:
(954) 525-1000
Telecopy:
(954) 463-2030
List of Schedules
|
|
|
A
|
|
Purchase Agreement
|
B
|
|
Form of Joint Written Instruction
|
C
|
|
Escrow Agent Fee Schedule
|
D
|
|
Purchaser Incumbency Certificate
|
E
|
|
Seller Incumbency Certificate
|
E-10
Appendix F
ESCROW
AGREEMENT
among
THE STANLEY WORKS,
VERICHIP CORPORATION
and
CITIBANK, N.A., as Escrow Agent
Dated as of May , 2008
F-1
ESCROW AGREEMENT
(this
Agreement
),
dated as of May , 2008, by and among The
Stanley Works, a Connecticut corporation,
(
Purchaser
), VeriChip Corporation, a Delaware
corporation, (
Seller
) and Citibank, N.A., a
national banking association organized and existing under the
laws of the United States of America,
(
Citibank
) acting through its Agency and
Trust Division and solely in its capacity as escrow agent
under this Agreement, and any successors appointed pursuant to
the terms hereof (Citibank in such capacity,
Escrow
Agent
). Purchaser and Seller are sometimes
collectively referred to herein as the
Interested
Parties
and the Interested Parties and Escrow Agent
are sometimes collectively referred to herein as the
Parties
.
WHEREAS,
the Interested Parties have entered into that
certain Stock Purchase Agreement (together with the Annexes,
Exhibits and Schedules thereto, the
Purchase
Agreement
), dated as of May , 2008, a
copy of which is attached hereto as
Schedule A
,
pursuant to which, among other things, Purchaser will acquire
all of the issued and outstanding shares in the capital of Xmark
Corporation, a Canada corporation, from Seller
(
Shares)
;
WHEREAS,
Seller is a non-resident of Canada for the
purposes of the
Income Tax Act
(Canada) (the
ITA
) and the Shares are and will be
taxable Canadian property (within the meaning of the
ITA) of Seller at Closing;
WHEREAS,
pursuant to Section 2.3 of the Purchase
Agreement, the Interested Parties have agreed to enter into this
Agreement to provide for the remittance to, and the holding and
release by, Escrow Agent of certain amounts to be paid by
Purchaser to Escrow Agent on the terms set out herein; and
WHEREAS,
the Interested Parties wish to appoint Citibank
as Escrow Agent and Citibank is willing to accept such
appointment and to act as Escrow Agent, in each case upon the
terms and conditions of this Agreement.
NOW, THEREFORE,
for good and valuable consideration, the
receipt and adequacy of which is hereby irrevocably
acknowledged, the Parties agree as follows
:
1.
Definitions
.
(a) In this Agreement, the following terms shall have the
meanings set out below unless the context requires otherwise:
(i)
116 Certificate
means a
certificate issued by the CRA under subsection 116(2) or
subsection 116(4) of the ITA;
(ii)
Canadian Purchase Price
means the Canadian dollar amount representing the Purchase
Price converted into Canadian dollars, using the noon exchange
rate of the Bank of Canada at Closing;
(iii)
CRA
means the Canada
Revenue Agency;
(iv)
Escrow Property
means,
collectively, the Escrowed Funds (as hereinafter defined) and
the Accrued Income (as hereinafter defined); and
(v)
Escrowed Funds
means an
amount equal to 25% of the Purchase Price (as may increase or
decrease, in accordance with the Aggregate Adjustment under
Section 2.2 of the Purchase Agreement) or a lesser amount
equal to 25% of the difference between the Canadian Purchase
Price and the certificate limit of a certificate issued before
Closing under subsection 116(2) of the ITA.
(b) Unless the context otherwise requires or unless
otherwise defined herein, all other capitalized terms used in
this Agreement shall have the meanings ascribed to them in the
Purchase Agreement.
2.
Deposit
.
At Closing, Purchaser shall remit the Escrowed Funds to Escrow
Agent, the receipt of which will be acknowledged by a separate
receipt by Escrow Agent, which Escrowed Funds shall be held by
the Escrow Agent in a separate account established with Escrow
Agent (the
Escrow Account
)
,
pending
disbursement in accordance with, and on the terms set out in,
this Agreement.
F-2
3.
Release of Escrow Property
.
(a) Escrow Agent shall hold the Escrowed Funds deposited
with it and any interest or other income or gains accrued or
earned thereon (the
Accrued Income
) in trust
to be disbursed by Escrow Agent subject to Section 3(c) and
only on the following terms:
(i) Within three (3) Business Days of the receipt by
Escrow Agent from Purchaser or the CRA of written confirmation
from the CRA that, on receipt of an amount not greater than the
amount of the Escrowed Funds, the CRA will issue a 116
Certificate, Escrow Agent shall disburse to the Receiver General
for Canada, out of the Escrow Property, an amount equal to the
amount specified by the CRA in such written confirmation and,
upon the receipt of the written consent of Purchaser, shall
disburse to Seller the balance of the Escrow Property.
(ii) Notwithstanding Section 3(a)(iii), if Purchaser
is informed by a letter issued by the CRA to Purchaser and
delivered by Seller or Purchaser to Escrow Agent before the
Remittance Date (as hereinafter defined) stating that the CRA
will not apply penalties or interest to Purchaser for any
failure to remit the amount specified in subsection 116(5) of
the ITA in respect of the Purchase Price paid to Seller by
Purchaser under the Purchase Agreement (a
CRA Comfort
Letter
), then Escrow Agent will not remit all or a
portion of the Escrowed Funds to the Receiver General for
Canada, if at all, until the earlier of:
(A) being directed to do so in writing by either the CRA
directly or by Purchaser acting on the written consent of the
CRA, in which case Escrow Agent will then pay the balance, if
any, of the Escrow Property to the Seller, less any applicable
taxes, all within three (3) Business Days of receipt of
such direction; and
(B) Seller delivering a 116 Certificate, in which case the
Escrow Agent will pay out the Escrow Property in accordance with
section 3(a)(iv).
(iii) Subject to Section 3(a)(ii), Escrow Agent shall
remit to the Receiver General for Canada an amount equal to all
or a portion of the Escrowed Funds in order to discharge the
obligation of Purchaser to withhold and remit under
section 116 of the ITA, on the later of:
(A) the 28th day of the month following the month in
which the Closing occurs or, if not a Business Day, the
preceding Business Day (the
Remittance Date
),
if neither Seller nor the CRA, as the case may be, has delivered
to Escrow Agent, before the Remittance Date, a 116 Certificate
showing a certificate limit or proceeds of disposition in an
amount not less than the Canadian Purchase Price or a CRA
Comfort Letter; and
(B) within three (3) Business Days of Purchaser being
informed by the CRA or Seller that a 116 Certificate will not be
issued in respect of the disposition of the Shares by Seller to
Purchaser under the Purchase Agreement or that a CRA Comfort
Letter is no longer valid for any reason whatsoever.
Escrow Agent shall disburse to Seller any amount, if any,
remaining in the Escrow Property after such remittance to the
Receiver General for Canada, less any applicable withholding
taxes, if any;
(iv) Escrow Agent shall, within three (3) Business
Days of the receipt from Seller or the CRA, and of the written
consent of Purchaser thereto:
(A) of a 116 Certificate showing a certificate limit or
proceeds of disposition in an amount not less than an amount
equal to the Canadian Purchase Price, disburse to Seller the
Escrow Property, less any applicable withholding taxes, if
any; and
(B) of a 116 Certificate showing a certificate limit or
proceeds of disposition in an amount less than the Canadian
Purchase Price, remit to Receiver General for Canada an amount
equal to twenty-five percent (25%) of the amount by which the
Canadian Purchase Price exceeds the certificate limit or
proceeds of disposition, and shall further disburse to Seller
any amount, if any, remaining in the Escrow Property after such
remittance to the Receiver General for Canada, less any
applicable taxes, if any.
F-3
(b) Where Escrow Agent remits an amount to the Receiver
General for Canada pursuant to this Agreement, Escrow Agent
shall, within three (3) Business Days thereafter, furnish
to Seller the written confirmation received from the CRA that
such remittance has been made to Receiver General for Canada.
(c) For purposes of this Agreement, any written
confirmation contemplated in Section 3(a), any 116
Certificate, and any CRA Comfort Letter shall be deemed not to
be delivered unless Purchaser confirms to Escrow Agent in
writing that such document is in form and substance reasonably
satisfactory to Purchaser. Purchaser shall act promptly, and in
any event no later than three (3) Business Days of the
receipt of any written confirmation contemplated in
Section 3(a), any 116 Certificate, and any CRA Comfort
Letter, in respect of any such written confirmation.
(d) Without altering or limiting the indemnity in
Section 6(b), Seller shall indemnify, hold harmless and
defend Purchaser and Escrow Agent from and against any and all
actions, causes of action, claims, demands, damages, losses,
costs, liabilities, expenses, taxes and penalties, and any
interest thereon, of any nature or kind, including reasonable
legal fees, which may be made or brought against Purchaser or
Escrow Agent or which Purchaser or Escrow Agent may suffer or
incur as a result of or in respect of any reliance on a CRA
Comfort Letter.
(e) In the event that Escrow Agent is required to disburse
any or all of the Escrow Property in a currency which is not the
deposited currency of the deposited Escrow Property, Escrow
Agent shall convert such amount from the amount in the Escrow
Property to the amount to be so disbursed at the Citigroup spot
rate. Escrow Agent may rely conclusively on the determination of
the spot rate provided to it and shall not be liable for losses
associated with the determination of such rate. If Escrow Agent
is required to make a remittance to the Receiver General for
Canada under Section 3(a), it will convert into Canadian
dollars, the amount of the Escrowed Funds that is necessary to
obtain the amount of Canadian dollars required to be remitted
under Section 3(a). Should there be an insufficient amount
of Escrowed Funds to make the remittance under Section 3(a),
after the currency conversion, Seller will promptly deposit with
Escrow Agent such required additional amount of Canadian
dollars. Escrow Agent is not required to make the remittance
under Section 3(a) until such additional amount of Canadian
dollars is deposited by Seller.
(f) If there is an Aggregate Adjustment payable by Seller
to Purchaser under Section 2.2 of the Purchase Agreement,
Escrow Agent, upon receipt of written instructions from Seller
and Purchaser, will disburse to Seller, from the Escrow
Property, an amount equal to 25% of the Aggregate Adjustment
within three (3) Business Days after the date on which the
Aggregate Adjustment is paid to Purchaser.
(g) The provisions of this Agreement shall apply,
mutatis, mutandis
, to any portion of the Purchase Price
paid or payable to Seller at any time after Closing.
4.
Investment of Funds
.
(a)
Investment
.
Escrow Agent shall
invest the Escrow Property in Fidelity Institutional Prime Money
Market Fund Class IV (2015) and shall invest the
Escrowed Funds on the date of deposit provided that it is
received on or before 11:00 a.m. (E.S.T.). Any Escrowed
Funds received by Escrow Agent after 11:00 a.m. (E.S.T.)
shall be treated as if received on the following Business Day.
(b)
Affiliates
.
Any investment
direction contained herein may be executed through an affiliated
broker dealer of Escrow Agent, who will be entitled to such
usual and customary fee. Neither Citigroup nor any of its
affiliates assume any duty or liability for monitoring the
investment rating.
(c)
Tax Ownership and
Reporting
.
The Interested Parties agree that,
for tax purposes, the Escrowed Funds shall be allocated to
Seller as the beneficial owner and shall be reported on an IRS
Form 1099 B, if applicable, in relation to principal in the
year of disbursement, and annually on a Form 1099 INT for
interest earned or on a Form 1099 DIV for dividends earned
in the case of Money Market investments.
(d)
Certification of Tax Identification
Number
.
Seller shall promptly provide Escrow
Agent with a duly completed and properly executed IRS
Form W-9
(or
Form W-8
BEN, in case of
non-U.S. entity)
certifying Sellers status as a beneficial owner of the
Escrow Property for U.S. federal income tax purposes.
Seller understands that, in the event tax identification numbers
are not certified to Escrow Agent, Escrow Agent shall be
entitled to withhold
F-4
such amounts as may be required to be withheld by the United
States Internal Revenue Code, as amended from time to time, from
any interest or other income earned on the investment of the
Escrowed Funds.
(e)
IRS Circular 230
Disclosure
.
Citigroup, Inc., its affiliates,
and its employees are not in the business of providing tax or
legal advice to any taxpayer outside of Citigroup, Inc. and its
affiliates. This Agreement and any amendments or attachments are
not intended or written to be used, and cannot be used or relied
upon, by any such taxpayer or for the purpose of avoiding tax
penalties. Any such taxpayer should seek advice based on the
taxpayers particular circumstances for an independent tax
advisor.
5.
Concerning Escrow Agent
.
(a)
Escrow Agent Duties
.
Each
Interested Party acknowledges and agrees that (i) the
duties, responsibilities and obligations of Escrow Agent shall
be limited to those expressly set forth in this Agreement and no
duties, responsibilities or obligations shall be inferred or
implied, (ii) Escrow Agent shall not be responsible for any
of the agreements referred to or described herein (including
without limitation the Purchase Agreement), or for determining
or compelling compliance therewith, and shall not otherwise be
bound thereby, (iii) this Agreement shall constitute the
entire agreement of the parties with respect to the subject
matter hereof and supersedes all prior oral or written
agreements in regard thereto, (iv) Escrow Agent shall not
be required to expend or risk any of its own funds or otherwise
incur any financial or other liability in the performance of any
of its duties hereunder and (v) Escrow Agent shall not be
obligated to take any legal or other action hereunder which
might in its judgment involve or cause it to incur any expense
or liability unless it shall have been furnished with acceptable
indemnification.
(b)
Standard of Care
.
Escrow Agent
shall be under no duty to afford the Escrow Property any greater
degree of care than it gives its own similar property. Escrow
Agent shall not be liable for any damage, loss or injury
resulting from any action taken or omitted in the absence of
gross negligence or willful misconduct.
(c)
Limitation on
Liability
.
Notwithstanding any other
provision of this Agreement, Escrow Agent shall not be liable
(i) for any indirect, incidental, consequential, punitive
or special losses or damages, regardless of the form of action
and whether or not any such losses or damages were foreseeable
or contemplated, (ii) for the acts or omissions of any
nominees, correspondents, designees, agents, subagents or
subcustodians, or (iii) for the investment or reinvestment
of any Escrow Property, or any liquidation of such investment or
reinvestment, executed in accordance with the terms of this
Agreement, including, without limitation, any liability for any
delays (not resulting from its gross negligence or willful
misconduct as adjudicated by a court of competent jurisdiction)
in the investment or reinvestment of the Escrow Property, any
loss of interest incident to any such delays, or any loss or
penalty as a result of the liquidation of any investment before
its stated maturity date.
(d)
Reliance
.
Escrow Agent shall
be entitled to rely upon any order, judgment, certification,
demand, instruction, notice, instrument, certification, consent,
authorization, receipt, power of attorney,
e-mail,
.pdf
or other writing delivered to it without being required to
determine the authenticity or validity thereof, or the
correctness of any fact stated therein or the propriety or
validity or the service thereof or the jurisdiction of the court
issuing any judgment or order. Escrow Agent may act in reliance
upon any signature believed by it to be genuine and may assume
that any person purporting to make any statement or execute any
document in connection with the provisions hereof has been duly
authorized to do so.
(e)
Consultation
.
Escrow Agent may
consult with counsel satisfactory to it, and the opinion or
advice of such counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or
omitted by it in good faith and in accordance with the opinion
and advice of such counsel.
6.
Compensation, Expense Reimbursement and
Indemnification
.
(a)
Compensation
:
Each of
Purchaser and Seller covenants and agrees, jointly and
severally, to pay the fifty percent (50%) of Escrow Agents
fees and expenses specified in
Schedule B
. In the
event that such fees or expenses, or any other obligations owed
to Escrow Agent (or its counsel) are not paid to Escrow Agent
within 30 calendar days following the presentment of an invoice
for the payment of such fees and expenses or the demand for such
payment, then Escrow Agent may, without further action or
notice, pay such fees from the Escrow Property and may sell,
convey or otherwise dispose of any Escrow Property for such
purpose. Escrow Agent may in its sole discretion withhold from
any distribution of the Escrow Property an amount of such
distribution it reasonably believes would,
F-5
upon sale or liquidation, produce proceeds equal to any unpaid
amounts to which Escrow Agent is entitled to hereunder.
(b)
Indemnification
:
Each of the
Interested Parties covenants and agrees, jointly and severally,
to indemnify Escrow Agent and its employees, officers and
directors (each, an
Indemnified Party
) for,
hold each Indemnified Party harmless from, and defend each
Indemnified Party against, any and all claims, losses, actions,
liabilities, costs, damages and expenses of any nature incurred
by Escrow Agent arising out of or in connection with this
Agreement or with the administration of its duties hereunder,
including but not limited to attorneys fees, tax
liabilities (other than income tax liabilities associated with
Escrow Agents fees), any liabilities or damages that may
result from any inaccuracy or misrepresentation made in any tax
certification provided to Escrow Agent, and other costs and
expenses of defending or preparing to defend against any claim
of liability, except to the extent such loss, liability, damage,
cost and expense shall be caused by the Indemnified Partys
own gross negligence or willful misconduct. The foregoing
indemnification and agreement to hold harmless shall survive the
termination of this Agreement and the resignation or removal of
Escrow Agent.
7.
Dispute Resolution
.
In the event of any disagreement among any of the Interested
Parties to this Agreement, or between any of them and any other
person, resulting in adverse claims or demands being made with
respect to the subject matter of this Agreement, or in the event
that Escrow Agent, in good faith, is in doubt as to any action
it should take hereunder, Escrow Agent may, at its option,
refuse to comply with any claims or demands and refuse to take
any other action hereunder, so long as such disagreement
continues or such doubt exists, and in any such event, Escrow
Agent shall not be liable in any way or to any person for its
failure or refusal to act, and Escrow Agent shall be entitled to
continue to so refuse to act and refrain from acting until
(i) the rights of all parties having or claiming an
interest in the Escrow Property or the Escrow Account shall have
been fully and finally adjudicated by a court of competent
jurisdiction, or all differences and doubts shall have been
resolved by agreement among all of the Interested Parties, and
(ii) Escrow Agent shall, in the case of adjudication by a
court of competent jurisdiction, have received a final order,
judgment or decree by such court of competent jurisdiction,
which order, judgment or decree is not subject to appeal, and in
the case of resolution of differences and doubts by agreement,
have received a notice in writing signed by an Authorized Person
(as defined below) of each of the Interested Parties setting
forth in detail the agreement. Escrow Agent shall have the
option, after 30 calendar days notice to the Interested
Parties of its intention to do so, to file an action in
interpleader requiring the Interested Parties hereto to answer
and litigate any claims and rights among themselves. The costs
and expenses (including reasonable attorneys fees and
expenses) incurred by Escrow Agent in connection with such
proceeding shall be paid by, and be the joint and several
obligation of, the Interested Parties. The rights of Escrow
Agent under this Section 7 are cumulative of all other
rights which it may have by law or otherwise.
8.
Exclusive Benefit
.
Except as specifically set forth in this Agreement, this
Agreement is for the exclusive benefit of the parties to this
Agreement and their respective permitted successors, and shall
not be deemed to give, either expressly or implicitly, any legal
or equitable right, remedy, or claim to any other entity or
person whatsoever. No Party may assign any of its rights or
obligations under this Agreement without the prior written
consent of the other parties except that Escrow Agent may resign
upon the terms described in this Agreement.
9.
Force Majeure
.
Notwithstanding anything contained in this Agreement to the
contrary, Escrow Agent shall not incur any liability for not
performing any act or fulfilling any obligation hereunder by
reason of any occurrence beyond its control (including, without
limitation, any provision of any present or future law or
regulation or any act of any governmental authority, any act of
God or war or terrorism, or the unavailability of the Federal
Reserve Bank wire services or any electronic communication
facility).
10.
Resignation and Removal
.
(a) The Interested Parties may remove Escrow Agent at any
time by giving to Escrow Agent thirty (30) calendar
days prior written notice of removal signed by an
Authorized Person of each of the Interested
F-6
Parties. Escrow Agent may resign at any time by giving to each
Interested Parties thirty (30) calendar days prior
written notice of resignation.
(b) Within thirty (30) calendar days after giving the
foregoing notice of removal to Escrow Agent or within thirty
(30) calendar days after receiving the foregoing notice of
resignation from Escrow Agent, the Interested Parties shall
appoint a successor escrow agent and give notice of such
successor escrow agent to Escrow Agent. If a successor escrow
agent has not accepted such appointment by the end of such
(i) 30-day
period, in the case of Escrow Agents removal, or
(ii) 30-day
period, in the case of Escrow Agents resignation, Escrow
Agent may either (x) deliver the Escrow Property to one of
the Interested Parties at the address set forth on the signature
page to the Agreement, or (y) apply to a court of competent
jurisdiction for the appointment of a successor escrow agent or
for other appropriate relief.
(c) Upon receipt of notice of the identity of the successor
escrow agent, Escrow Agent shall either deliver the Escrow
Property then held hereunder to the successor escrow agent, less
Escrow Agents fees, costs, expenses and the value of other
obligations owed to Escrow Agent hereunder, or hold such Escrow
Property (or any portion thereof) pending distribution, until
all such fees, costs and expenses or the value of other
obligations are paid to it.
(d) Upon delivery of the Escrow Property to the successor
escrow agent or to an Interested Party, Escrow Agent shall have
no further duties, responsibilities or obligations hereunder.
11.
Governing Law; Jurisdiction;
Waivers
.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving
effect to the principles of conflicts of law thereof.
(b) To the fullest extent permitted by applicable Law, each
Party (i) agrees that any claim, action or proceeding by
such Party seeking any relief whatsoever arising out of, or in
connection with, this Agreement or the transactions contemplated
hereby shall be brought only in the U.S. District Court for
the Southern District of New York or any New York State court,
in each case, located in the Borough of Manhattan and not in any
other State or Federal court in the U.S. or any court in
any other country, (ii) agrees to submit to the exclusive
jurisdiction of such courts located in the Borough of Manhattan
for purposes of all legal proceedings arising out of, or in
connection with, this Agreement or the transactions contemplated
hereby, (iii) waives and agrees not to assert any objection
that it may now or hereafter have to the laying of the venue of
any such proceeding brought in such a court or any claim that
any such proceeding brought in such a court has been brought in
an inconvenient forum, (iv) agrees that mailing of process
or other papers in connection with any such action or proceeding
in the manner provided in Section 13 or any other manner as
may be permitted by Law shall be valid and sufficient service
thereof and (v) agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other
manner provided by applicable Law.
(c) Each of the Parties irrevocably and unconditionally
waives, to the fullest extent permitted by law, and agrees not
to plead or claim, any right of immunity from legal action, suit
or proceeding, from setoff or counterclaim, from the
jurisdiction of any court, from service of process, from
attachment upon or prior to judgment, from attachment in aid of
execution or judgment, from execution of judgment, or from any
other legal process or proceeding for the giving of any relief
or for the enforcement of any judgment, and consents to such
relief and enforcement against it, its assets and its revenues
in any jurisdiction, in each case with respect to any matter
arising out of, or in connection with, this Agreement.
(d) Each of the Parties irrevocably and unconditionally
waives any right to trial by jury with respect to any proceeding
relating to this Agreement.
12.
Instructions, Verification,
Communications
.
(a) All instructions required under the Agreement shall be
delivered to Escrow Agent in writing, in English, in facsimile
form and, if so requested by Escrow Agent, an original, executed
by an Authorized Person of each of the Interested Parties or an
entity acting on its behalf. The identity of such Authorized
Persons, as well as their specimen signatures, title, telephone
number and
e-mail
address, shall be delivered to Escrow Agent in the list of
authorized signers form as set forth on
Schedules C and
D
, respectively
,
and shall remain in effect until the
applicable Interested Party, or an entity acting on its behalf,
notifies Escrow Agent of any change thereto (the person(s) so
F-7
designated from time to time, the
Authorized
Persons
). Escrow Agent and the Interested Parties
agree that the above constitutes a commercially reasonable
security procedure and further agree to comply with any
direction or instruction (other than those contained herein or
delivered in accordance with this Agreement) from any Interested
Party.
(b) In the event funds transfer instructions are given
(other than in writing at the time of execution of this
Agreement), whether in writing, by telecopier, .pdf,
e-mail,
or
otherwise, such funds transfer instructions should contain a
selected test word also evidenced on
Schedules C and D
.
Test Words must contain at least 8 alphanumeric characters,
established at document execution. In addition or in lieu of
test words, Escrow Agent is authorized to seek confirmation of
such instructions by telephone call back to the applicable
person(s) specified to Escrow Agent from time to time by an
Authorized Person and Escrow Agent may rely upon the
confirmations of anyone purporting to be the person(s) so
designated. To ensure the accuracy of the instructions it
receives, Escrow Agent may record such call backs. If Escrow
Agent is unable to verify the instruction, or is not satisfied
in its sole discretion with the verification it receives, it
will not execute the instruction until all issues have been
resolved to its satisfaction. The persons and telephone numbers
for call backs may be changed only in writing, signed by an
Authorized Person, actually received and acknowledged by Escrow
Agent. The Interested Parties to this Agreement acknowledge that
these security procedures for funds transfers are commercially
reasonable.
(c) To help the U.S. government fight the funding of
terrorism and money laundering activities, Federal law requires
all financial institutions to obtain, verify, and record
information that identifies each person who opens an account.
When an account is opened, Escrow Agent will ask for information
that will allow Escrow Agent to identify relevant parties. The
Interested Parties hereby acknowledge such information
disclosure requirements and agree to comply with all such
information disclosure requests from time to time from Escrow
Agent.
(d) Notwithstanding anything to the contrary herein, any
and all email communications (both text and attachments) by or
from Escrow Agent that Escrow Agent deems to contain
confidential, proprietary,
and/or
sensitive information shall be encrypted. The recipient (the
Email Recipient
) of the encrypted email
communication will be required to complete a registration
process. Instructions on how to register
and/or
retrieve an encrypted message will be included in the first
secure email sent by Escrow Agent to the Email Recipient.
Additional information and assistance on using the encryption
technology can be found at Citibanks Secure Email website
at
www.citigroup.com/citigroup/citizen/privacy/email.htm
or by calling
(866) 535-2504
(in the U.S.) or
(904) 954-6181.
(e) The provisions of this Section 12 may be amended
by Escrow Agent unilaterally upon notice to the Interested
Parties.
13.
Notices; Wiring
Instructions
.
(a) Any notice permitted or required hereunder shall be in
writing in English, and shall be sent (i) by personal
delivery, overnight delivery by a recognized courier or delivery
service, or (ii) mailed by registered or certified mail,
return receipt requested, postage prepaid, or
(iii) confirmed telecopy accompanied by mailing of the
original on the same day by first class mail, postage prepaid,
in each case addressed to the address and person(s) designated
below their respective signature hereto (or to such other
address as any such Party may hereafter designate by written
notice to the other parties). Notices to Escrow Agent shall only
be deemed given upon actual receipt by Escrow Agent. Whenever
under the terms hereof the time for giving a notice or
performing an act falls upon a Saturday, Sunday, or a banking
holiday in New York, such time shall be extended to the next day
on which Escrow Agent is open for business.
F-8
(b) Any funds to be paid to or by Escrow Agent hereunder
shall be sent by wire transfer pursuant to the following
instructions (or by such method of payment and pursuant to such
instruction as may have been given in advance and in writing to
or by Escrow Agent, as the case may be, in accordance with
Section 13(a)):
If to Purchaser
:
Bank: Citibank NA, New York
ABA#: 021000089
A/C#: [
]
Attn: Craig A. Douglas
Ref: A1 Escrow
with a copy to
:
Blake, Cassels Graydon LLP
Attn: John Leopardi
Fax:
514-982-4099
Email: john.leopardi@blakes.com
If to Seller
:
VeriChip Corporation
C/O McCarthy Tétrault LLP
Attn: Patrick Boucher
Fax:
514-875-6246
Email: pboucher@mccarthy.ca
If to Escrow Agent
:
CITIBANK, N.A.
ABA:
0210-0008-9
Account Name: Escrow Concentration Account
CREDIT A/C No.: [
]
Reference: 796489
14.
Amendment
.
Except as specifically set forth in this Agreement, any
amendment of this Agreement shall be binding only if evidenced
by a writing signed by each of the Parties.
15.
Severability
.
The invalidity, illegality or unenforceability of any provision
of this Agreement shall in no way affect the validity, legality
or enforceability of any other provision of this Agreement. If
any provision of this Agreement is held to be unenforceable as a
matter of law, the other provisions shall not be affected
thereby and shall remain in full force and effect.
16.
Termination
.
This Agreement shall terminate upon the distribution of all
Escrow Property from the Escrow Account established hereunder in
accordance with the terms of the instructions set forth in this
Agreement, subject, however, to the survival of obligations
after specifically contemplated in this Agreement to so survive.
17.
Use of Name
.
No printed or other material in any language, including
prospectuses, notices, reports, and promotional material which
mentions Citibank, or Citigroup or
Citi by name or the rights, powers, or duties of
Escrow Agent under this Agreement shall be issued by any
Interested Parties hereto, or on such Partys behalf,
without the prior written consent of Escrow Agent.
18.
Counterparts
.
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures
of more than one Party, but all such counterparts taken together
shall constitute one and the
F-9
same agreement. Facsimile signatures on counterparts of this
Agreement shall be deemed original signatures with all rights
accruing thereto except in respect to any non-US entity, whereby
originals are required.
19.
Mergers and Conversions
.
Any corporation into which Escrow Agent may be merged or
converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or
consolidation to which Escrow Agent will be a party, or any
corporation succeeding to the business of Escrow Agent will be
the successor of Escrow Agent hereunder without the execution or
filing of any paper with any Party or any further act on the
part of any of the Parties except where an instrument of
transfer or assignment is required by law to effect such
succession, anything herein to the contrary notwithstanding.
IN WITNESS WHEREOF, each of the Parties has caused this
Agreement to be executed by a duly authorized officer
and/or
representative as of the day and year first written above.
CITIBANK, N.A.,
as Escrow Agent
Name:
Title:
Date:
Notice to:
Citibank, N.A.
Agency & Trust
388 Greenwich Street, 14th Floor
New York, NY 10013
Attn.:
Phone:
Facsimile:
THE STANLEY WORKS
Name:
Title:
Date:
Notice to:
c/o The
Stanley Works
1000 Stanley Drive
New Britian, CT 06053
Attn.: General Counsel
Phone:
860-225-5111
Facsimile:
260-827-3911
With a copy to:
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
Attention: Ethan Klingsberg, Esq.
Telephone:
(212) 225-2000
Telecopy:
(212) 225-3999
F-10
VERICHIP CORPORATION
Name:
Title:
Date:
Notice to:
VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
Attention: William J. Caragol
Telephone:
(561) 805-8008
Telecopy:
(561) 805-8001
With a copy to:
Holland & Knight LLP
One East Broward Boulevard, Suite 1300
Fort Lauderdale, Florida 33301
Attention: Tammy Knight, Esq.
Telephone:
(954) 525-1000
Telecopy:
(954) 463-2030
List of Schedules
|
|
|
A
|
|
Purchase Agreement
|
B
|
|
Escrow Agent Fee Schedule
|
C
|
|
Purchaser Incumbency Certificate
|
D
|
|
Seller Incumbency Certificate
|
F-11
Appendix G
CONFIDENTIAL
May 13, 2008
Board of Directors
VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, FL 33445
Dear Members of the Board:
You have requested our opinion as to the fairness, from a
financial point of view, to VeriChip Corporation, a Delaware
corporation (VeriChip), of the consideration to be
paid to VeriChip for the sale of Xmark Corporation, a Canadian
corporation and a wholly owned subsidiary of VeriChip
(Xmark), to The Stanley Works, a Connecticut
corporation (Stanley), pursuant to a Stock Purchase
Agreement to be executed on or around May 14, 2008 (the
Agreement) between VeriChip and Stanley (the
Transaction). All capitalized terms used and not
otherwise defined herein have the respective meanings assigned
to such terms in the Agreement.
The Agreement provides for the sale by VeriChip to Stanley of
all of the issued and outstanding shares of capital stock of
Xmark in exchange for the payment by Stanley to VeriChip of cash
in the amount of $45.0 million subject to a net
Aggregate Adjustment (the Purchase
Price). The Agreement further provides that
$4.5 million of the Purchase Price will be held in escrow
to secure VeriChips indemnity obligations under the
Agreement, and that Applied Digital Solutions, Inc. will execute
a guarantee (the Guarantee) in favor of Stanley
guaranteeing VeriChips indemnity obligations under the
Agreement, and that both Applied Digital Solutions, Inc. and
Scott R. Silverman will execute a Voting Agreement in favor of
Stanley (the Voting Agreement) obligating both to,
among other things, vote in favor of the approval and adoption
of the Agreement.
In arriving at our opinion, we have, among other things:
(i) reviewed a draft of the Agreement dated May 11,
2008 (the Draft Agreement), and the financial terms
and conditions set forth therein;
(ii) reviewed drafts of the Voting Agreement and the
Guarantee;
(iii) reviewed certain financial information, including
information with respect to Xmarks historical and
projected financial performance for the fiscal years ending
December 31, 2003 through December 31, 2012, prepared
and furnished to us by VeriChips management;
(iv) reviewed certain publicly available information
concerning Xmark, including information set forth in
VeriChips Annual Report on
Form 10-K
for the year ended December 31, 2007;
600
California
Street,
9
th
Floor
San
Francisco, CA 94108
(415) 248-5600
Main
(415) 248-5692
Fax
G-1
(v) interviewed VeriChips Chief Executive Officer and
Chief Financial Officer and discussed with them the business and
prospects of Xmark;
(vi) reviewed certain publicly available information with
respect to Xmark and certain other companies deemed to be
comparable to Xmark and trading markets for certain of such
other companies securities;
(vii) compared the proposed financial terms of the
Transaction with certain publicly available information
concerning the nature and terms of certain other transactions
that we considered to be relevant; and
(viii) reviewed other financial studies, analyses and
investigations, and considered such other information we deemed
necessary or appropriate, including our assessment of general
financial, economic, market and other conditions.
In our review and analysis and in arriving at our opinion, we
have relied upon, without any independent verification or
liability therefor, the accuracy and completeness of all of the
financial and other information that was publicly available or
supplied or otherwise made available to us by or on behalf of
VeriChip or Xmark, and upon the assurances of the management of
VeriChip that no relevant information has been omitted or
remains undisclosed to us. We have also relied upon the
management of VeriChip as to the reasonableness of the
assumptions, and bases therefor, of the financial and operating
projections provided to us. We also have held discussions with
members of the management of VeriChip regarding their views with
respect to a number of risks and uncertainties associated with
projections provided to us. We have not been engaged to assess
the reasonableness of such projections, of the timeframe for
achieving them or of the assumptions on which they were based.
We express no view as to such projections or assumptions, but we
have taken into account, for purposes of our analysis, the risks
and uncertainties described above.
In addition, we have not evaluated or appraised any of the
assets, properties or facilities of Xmark nor have we been
furnished with any such evaluation or appraisal. We have also
not been requested to assume, and have not assumed, any
obligation to conduct any inspection of the properties or
facilities of Xmark or to evaluate any assets or liabilities,
including any litigation, nor were we furnished with any such
evaluation. We have not evaluated the solvency of VeriChip or
Xmark or the fair value of Xmark under any state or federal laws
relating to bankruptcy, insolvency or similar matters.
At your direction, we do not offer any opinion as to the
material terms of the Agreement or the form of the Transaction.
We have assumed with your consent, however, that the Aggregate
Adjustment will not be a negative number, that there will be no
post-closing adjustment to the Purchase Price pursuant to
Section 2.2 of the Agreement, that any Canadian taxes
withheld from the Purchase Price at closing will be promptly
refunded to VeriChip pursuant to the
Canada and United States
Income Tax Convention
, and that the intangible assets,
including goodwill, currently on the books of VeriChip will be
transferred to Stanley as part of the Transaction. We have also
assumed, with your consent, that the Transaction will be
consummated as promptly as practicable, with no unanticipated
delays in the consummation of the Transaction. We have also
assumed, with your consent, that the final executed form of the
Agreement will not differ in any material respect from the form
of the Draft Agreement furnished to and reviewed by us, that the
final forms of all agreements, instruments and certificates
relating to the Transaction will not differ in any material
respect from the forms thereof furnished to and reviewed by us,
that the conditions to the Transaction as set forth in the
Agreement will be satisfied and that the Transaction will be
consummated on a timely basis in the manner contemplated by the
Agreement.
Without limiting the generality of the foregoing, for purposes
of rendering our opinion, we have assumed, in all respects
material to our analysis, with your consent, (a) that the
proposed Transaction will be consummated as described in the
Agreement and in compliance with all applicable laws,
(b) that all of the representations and warranties of each
party contained in the Agreement are true, correct and complete
and do not omit to state any material fact required to be stated
or incorporated by reference therein or necessary in order to
make the statements therein, in light of the circumstances under
which they are made, not misleading, (c) that each party to
the Agreement will perform all of the covenants and agreements
required to be performed by it thereunder without any
600
California
Street,
9
th
Floor
San
Francisco, CA 94108
(415) 248-5600
Main
(415) 248-5692
Fax
G-2
consents or waivers of the other parties thereto, and
(d) that all conditions to the consummation of the proposed
Transaction will be satisfied without waiver thereof. We note
that we are not legal, tax, accounting or regulatory experts,
and have made no independent investigation of any legal matters
involving VeriChip, Xmark or the Transaction, and we have
assumed the correctness of all statements with respect to legal
matters made or otherwise provided to you and us by
VeriChips counsel. We do not express any opinion as to any
legal, tax, accounting or regulatory matters involving VeriChip,
Xmark or the Transaction, as to which we understand that
VeriChip has conducted such investigations, and has obtained
such advice from qualified professionals, as it has deemed
necessary. We have assumed, with your consent, that all
governmental, regulatory or other consents and approvals
(contractual or otherwise) necessary for, or in connection with,
the consummation of the proposed Transaction will be obtained
without any adverse effect on VeriChip on the contemplated
benefits of the proposed Transaction to VeriChip, in any respect
material to our analysis.
This opinion is necessarily based on the economic, monetary,
market and other conditions as in effect on, and the information
made available to us, as of the date hereof and does not address
any matters subsequent to such date. Although subsequent
developments may affect this opinion, we do not have any
obligation to update, revise or reaffirm our opinion after the
date hereof. We disclaim any undertaking or obligation to advise
any person of any change in any fact or matter affecting the
opinion which may come or be brought to our attention after the
date hereof. Without limiting the foregoing, in the event that
in our judgment there is any material change in any fact,
assumption upon which our opinion is based or matter affecting
the opinion after the date hereof, we reserve the right to
withdraw, revise or modify our opinion.
Our opinion is limited to the fairness of the Purchase Price,
from a financial point of view, to VeriChip. This opinion does
not address the underlying or relative merits of the Transaction
or any related transaction and any other transactions or
business strategies discussed by the Board of Directors of
VeriChip or that might be available as alternatives to the
Transaction, or the decision of VeriChip to proceed with the
Transaction or any related transaction. Our opinion is not, and
should not be construed as, a valuation of Xmark or its assets
or any class or series of securities of Xmark.
We will receive a fee for our services in rendering this
opinion, none of which is contingent on the consummation of the
Transaction. In addition, VeriChip has agreed to indemnify us
for, and exculpate us from, certain liabilities arising out of
our engagement. We and our affiliates have in the past provided
investment banking services to VeriChip, for which we and our
affiliates received compensation, including acting as lead
managing underwriter in VeriChips initial public offering.
We and our affiliates currently and in the past, have made a
market in VeriChips common stock and we and our affiliates
provide research on VeriChip. We are a full service securities
firm engaged in securities trading and brokerage activities, as
well as providing investment banking and other financial
services. In the ordinary course of business, we and our
affiliates may acquire, hold or sell securities of VeriChip or
Stanley.
This opinion has been prepared solely for the information of the
Board of Directors of VeriChip for its confidential use in
connection with its consideration of the proposed Transaction
and may not, in whole or in part, be reproduced, disseminated,
quoted, summarized, described or referred to at any time,
communicated or provided to any person or otherwise made public
or used for any other purpose without our prior written consent.
You have not asked us to address, and this opinion does not
address, the fairness of the Transaction to the holders of any
class of securities, creditors or other constituencies of
VeriChip, and this letter does not address the fairness of any
specific portion of the Transaction. In rendering this opinion,
we express no view or opinion with respect to the fairness
(financial or otherwise) of the amount or nature or any other
aspect of any compensation payable to or to be received by any
officers, directors, or employees of Xmark or any parties to the
Transaction, or any class of such persons, relative to the
Purchase Price or otherwise. Our opinion has been authorized for
issuance by a fairness committee of Merriman Curhan
Ford & Co.
600
California
Street,
9
th
Floor
San
Francisco, CA 94108
(415) 248-5600
Main
(415) 248-5692
Fax
G-3
We are not expressing any opinion herein as to the prices at
which any securities of VeriChip will trade following the
announcement or consummation of the Transaction.
Based upon and subject to the foregoing and such other matters
as we consider relevant, it is our opinion that, as of the date
hereof, the Purchase Price is fair, from a financial point of
view, to VeriChip.
Very truly yours,
MERRIMAN CURHAN FORD & CO.
600
California
Street,
9
th
Floor
San
Francisco, CA 94108
(415) 248-5600
Main
(415) 248-5692
Fax
G-4
Appendix H
VeriChip Corporation
1690 South Congress Avenue, Suite 200
Delray Beach, Florida 33445
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Scott R. Silverman and William J. Caragol, and each of them,
with full power of substitution, proxies of the undersigned, to attend and vote all the shares of
common stock, $0.01 par value, of VeriChip Corporation, a Delaware corporation, or VeriChip, which
the undersigned would be entitled to vote at the Special Meeting of Stockholders to be held at
,
at 9:00 a.m., Eastern Time, on July
, 2008, or any adjournment or postponement of the special
meeting, according to the number of votes the undersigned would be entitled to cast if personally
present upon the matters referred to on this proxy and, in their discretion, upon any other
business as may come before the meeting.
You can vote your proxy by either (i) internet; (ii) telephone; or (iii) mail. Internet and
telephone voting is available through 11:59 p.m. (ET) on July
, 2008. To vote by telephone, use
any touch-tone telephone and dial 1-800-690-6903. Please have your proxy card and the last four
digits of your social security number available when you call. Follow the instructions the recorded
voice provides. In order to vote by internet, access the following website
www.proxyvote.com
. Please have your proxy card and last four digits of your social security
number available. Follow the instructions provided to create an electronic ballot.
If you have voted by internet or telephone, there is no need to mail back your proxy card.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. NO POSTAGE
IS REQUIRED.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE UNDER A FOR THE APPROVAL
OF THE STOCK PURCHASE AGREEMENT, DATED MAY 15, 2008, BETWEEN
VERICHIP CORPORATION AND THE STANLEY WORKS AND THE TRANSACTIONS
CONTEMPLATED BY THE STOCK PURCHASE AGREEMENT.
A.
|
|
Approval of the Stock Purchase Agreement, dated May 15, 2008, between VeriChip Corporation and
The Stanley Works and the transactions contemplated by the Stock Purchase Agreement.
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
o
|
|
o
|
|
o
|
In their discretion the individuals designated to vote this proxy are authorized to vote upon such
other matters as may properly come before the special meeting or any adjournment or postponement
thereof.
C.
|
|
Authorized SignaturesSign HereThis section must be completed for your instructions to be
executed.
|
This proxy when properly executed will be voted in the manner directed herein by the undersigned
stockholder. If no direction is made, this proxy will be voted FOR the proposals as set forth
herein. The undersigned acknowledges receipt of Notice of Special Meeting of Stockholders, dated
June
, 2008, and the accompanying proxy statement.
Please sign exactly as name appears on this proxy. When shares are held by joint tenants, both
should sign. When signing as attorney, executor, administrator, trustee or guardian, please give
full title as such. If a corporation, please sign in full corporate name by the president or other
authorized officer. If a partnership, please sign in partnership name by authorized person.
H-1
Verichip (MM) (NASDAQ:CHIP)
과거 데이터 주식 차트
부터 6월(6) 2024 으로 7월(7) 2024
Verichip (MM) (NASDAQ:CHIP)
과거 데이터 주식 차트
부터 7월(7) 2023 으로 7월(7) 2024