SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only
(as permitted by rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
SANDATA TECHNOLOGIES, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] 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:
Sandata Technologies, Inc. Common Stock, par value $.001 per share
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(2) Aggregate number of securities to which transaction applies:
2,481,806 shares of Sandata Technologies, Inc. Common
Stock, par value $.001 per share
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(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): The filing fee was determined
based upon the sum of (a) the product of 665,208 shares of common stock and the
merger consideration of $1.91 per share and (b) the product of options to
purchase 20,000 shares of common stock and $.91 (which is the difference between
the merger consideration of $1.91 per share of common stock and the exercise
price of $1.00 per share of common stock of each of the 20,000 shares covered by
the outstanding options) . In accordance with Rule 0-11 under the Securities
Exchange Act of 1934, as amended, the filing fee represents one-50th of one
percent of the total transaction fee.
(4) Proposed maximum aggregate value of transaction: $1,288,747
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(5) Total fee paid: $258
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[ ] Fee paid previously with preliminary materials.
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[ ] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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________________, 2002
Sandata Technologies, Inc.
26 Harbor Park Drive
Port Washington, NY 11050
Dear Stockholder:
You are cordially invited to attend a special meeting of the stockholders
of Sandata Technologies, Inc. ("Sandata") to be held at 10:00 a.m. local time,
on __________, 2002, at 26 Harbor Park Drive, Port Washington, New York 11050.
As described in the enclosed proxy statement, at the special meeting, you
will be asked to consider and vote on a proposal to adopt an Agreement and Plan
of Merger, dated as of October 28, 2002, by and among Sandata Acquisition Corp.,
a Delaware corporation, Bert E. Brodsky, Hugh Freund, Gary Stoller and Sandata.
Pursuant to the merger agreement, prior to the effective time of the merger,
Messrs. Brodsky, Freund and Stoller and members of their immediate families will
contribute all Sandata common stock owned by them into Sandata Acquisition Corp.
and at the effective time of the merger, Sandata Acquisition Corp. will merge
with and into Sandata, with Sandata being the surviving corporation. If the
merger and merger agreement are adopted, at the effective time, each share of
Sandata common stock issued and outstanding immediately prior to the merger
(excluding shares contemplated to be contributed to Sandata Acquisition Corp. by
Messrs. Brodsky, Freund and Stoller and members of their immediate families and
shares held by stockholders who perfect their appraisal rights under Delaware
law) will be converted into the right to receive $1.91 in cash. A copy of the
merger agreement is attached as Appendix A to the accompanying proxy statement,
and we urge you to read it carefully.
A special committee of the Board of Directors of Sandata, consisting of two
non-management directors who are not materially interested in the merger, was
formed to consider, evaluate and negotiate the merger and the merger agreement.
The special committee unanimously recommended to the Board of Directors of
Sandata that the Board adopt the merger agreement. In connection with its
evaluation, the special committee engaged Brean Murray & Co., Inc. to act as its
financial advisor and to opine as to the fairness of the merger from a financial
point of view. In rendering its opinion, Brean Murray indicated that the merger
consideration of $1.91 in cash per share is fair from a financial point of view
to the stockholders of Sandata. The written opinion of Brean Murray is attached
as Appendix B to the accompanying proxy statement, and we urge you to read it
carefully.
The Board of Directors has unanimously concluded that the merger
consideration is fair to, and the merger agreement is advisable and in the best
interests of, our public stockholders other than Messrs. Brodsky, Freund and
Stoller and members of their immediate families, and therefore, the Board
recommends that you vote "FOR" adoption of the merger agreement.
Details of the merger and other important information are described in the
accompanying notice of special meeting and proxy statement. You are urged to
read these important documents carefully before casting your vote.
Whether or not you plan to attend the special meeting, we urge you to
complete, sign, date and promptly return the enclosed proxy card.
We thank you for your prompt attention to this matter and appreciate your
support.
Very truly yours,
/s/ Hugh Freund
Secretary
SANDATA TECHNOLOGIES, INC.
26 Harbor Park Drive
Port Washington, NY 11050
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ____________, 2002
To the Stockholders of
SANDATA TECHNOLOGIES, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of SANDATA
TECHNOLOGIES, INC. ("Sandata" or the "Company") will be held on ____________,
2002 beginning at 10:00 a.m. at 26 Harbor Park Drive, Port Washington, New York
11050, to consider and vote on a proposal to approve an Agreement and Plan of
Merger, dated as of October 28, 2002, by and among Sandata Acquisition Corp., a
Delaware corporation, Bert E. Brodsky, Hugh Freund, Gary Stoller and Sandata.
Pursuant to the merger agreement, prior to the effective time, Messrs. Brodsky,
Freund and Stoller and members of their immediate families will contribute all
Sandata common stock owned by them into Sandata Acquisition Corp., and at the
effective time of the merger, Sandata Acquisition Corp. will merge with and into
Sandata, with Sandata being the surviving corporation. If the merger and merger
agreement are adopted, at the effective time of the merger, each share of
Sandata common stock, par value $.001 per share, issued and outstanding
immediately prior to the merger (excluding shares contemplated to be contributed
to Sandata Acquisition Corp. by Messrs. Brodsky, Freund and Stoller and members
of their immediate families and shares held by stockholders who perfect their
appraisal rights under Delaware law) will be converted into the right to receive
$1.91 in cash. A copy of the merger agreement is attached to the proxy statement
as Appendix A and is incorporated in the attached proxy statement by reference.
Any stockholder who does not vote in favor of adopting the merger agreement
and who properly demands appraisal under Delaware law will have the right to
have the fair value of his shares determined by a Delaware court. A copy of
Section 262 of the Delaware General Corporation Law is included in the attached
proxy statement as Appendix C. Appraisal rights are subject to a number of
restrictions and technical requirements described in the attached proxy
statement.
Only stockholders of record as of the close of business on ____________,
2002 are entitled to notice of the special meeting and to vote at the special
meeting and any adjournment of this meeting. Any stockholder will be able to
examine a list of stockholders of record, for any purpose germane to the special
meeting, for ten (10) days prior to the special meeting and continuing through
the meeting and any adjournment of the meeting. The list will be available at
our corporate headquarters located at 26 Harbor Park Drive, Port Washington, New
York 11050, during ordinary business hours.
Adoption of the merger agreement requires the approval by the affirmative
vote of a majority of the outstanding shares of our common stock entitled to
vote at the special meeting. The number of shares of Sandata common stock
contemplated to be contributed to Sandata Acquisition Corp. by Messrs. Brodsky,
Freund and Stoller and members of their immediate families is sufficient to
obtain such approval. Under the merger agreement, Messrs. Brodsky, Freund and
Stoller agreed to vote, and they agreed to cause Sandata Acquisition Corp. and
the members of their immediate families to vote, all shares of Sandata owned by
them and by Sandata Acquisition Corp. at the effective time, in favor of the
merger.
By Order of the Board of Directors,
/s/ Hugh Freund
Secretary
Port Washington, New York
______________,2002
EACH STOCKHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. IF A STOCKHOLDER DECIDES TO ATTEND THE SPECIAL MEETING, HE, SHE
OR IT MAY, IF SO DESIRED, REVOKE THE PROXY AND VOTE THE SHARES IN PERSON. PLEASE
DO NOT SEND IN ANY CERTIFICATES FOR YOUR COMMON STOCK AT THIS TIME. AFTER THE
MEETING, IF THE MERGER IS APPROVED, STOCKHOLDERS WILL RECEIVE A LETTER OF
TRANSMITTAL AND RELATED INSTRUCTIONS.
[PRELIMINARY COPIES]
SANDATA TECHNOLOGIES, INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _____________, 2002
This proxy statement is being furnished to the holders of common stock, par
value $.001 per share, of Sandata Technologies, Inc. ("Sandata"), in connection
with the solicitation of proxies by our Board of Directors for use at the
special meeting of stockholders, and at any adjournment of the meeting, to be
held at 26 Harbor Park Drive, Port Washington, New York 11050, on ____________,
2002 beginning at 10:00 a.m. The special meeting has been called to consider and
vote on a proposal to approve an Agreement and Plan of Merger, dated as of
October 28, 2002, by and among Sandata Acquisition Corp., a Delaware
corporation, Bert E. Brodsky, Hugh Freund, Gary Stoller and Sandata. Pursuant to
the merger agreement, prior to the effective time of the merger, Messrs.
Brodsky, Freund and Stoller and members of their immediate families will
contribute all Sandata common stock owned by them into Sandata Acquisition Corp.
and at the effective time of the merger, Sandata Acquisition Corp. will merge
with and into Sandata, with Sandata being the surviving corporation. If the
merger and merger agreement are adopted, at the effective time of the merger
each share of Sandata common stock, par value $.001 per share, issued and
outstanding immediately prior to the merger (excluding shares contemplated to be
contributed to Sandata Acquisition Corp. by Messrs. Brodsky, Freund and Stoller
and members of their immediate families and shares held by stockholders who
perfect their appraisal rights under Delaware law) will be converted into the
right to receive $1.91 in cash. A copy of the merger agreement is attached as
Appendix A and is incorporated herein by reference.
Only stockholders of record on ________, 2002 are entitled to receive
notice of and vote at the meeting. On that record date, there were ___________
shares of our common stock outstanding (including the shares owned by Messrs.
Brodsky, Freund and Stoller and members of their immediate families) held by
approximately ___________ record holders.
Each share of our common stock will be entitled to one vote. The merger
agreement provides that the merger must be approved by the affirmative vote of a
majority of the outstanding shares of our common stock entitled to vote at the
special meeting. Under the merger agreement, Messrs. Brodsky, Freund and Stoller
agreed to vote, and they agreed to cause Sandata Acquisition Corp. and the
members of their immediate families to vote, all shares of Sandata owned by them
and Sandata Acquisition Corp. at the effective time, in favor of the merger. The
number of shares of Sandata common stock owned by Messrs. Brodsky, Freund and
Stoller and members of their immediate families is sufficient to obtain approval
of the merger.
A quorum for the special meeting requires that holders of a majority of the
outstanding shares of our common stock must be present in person or by proxy.
The Board of Directors recommends that you vote "FOR" approval of the
merger agreement.
Proxies will be voted in the manner you specify in the proxy card. You must
sign and date your proxy. If you return your proxy but do not specify how it
should be voted, your shares will be voted FOR approval of the merger agreement.
If your stock is held by a broker or other custodian in "street name," your
shares will not be voted ("broker non-votes") unless you provide specific
instructions to the broker or custodian. Proxies submitted by brokers or
custodians who have not received voting instructions will be counted for the
purposes of determining a quorum, but will not be voted for or against adoption
of the merger agreement. The failure to submit a proxy card, the abstention from
voting by a stockholder, broker non-votes, or the failure to vote in person at
the special meeting, will result in your vote not being counted either for or
against adoption of the merger and the merger agreement. Abstentions and broker
non-votes will be counted as present at the special meeting for quorum purposes.
Abstentions are counted as present for the purpose of determining whether the
merger agreement has been approved. Broker non-votes will not be counted for the
purpose of determining whether the merger agreement has been approved. Since the
merger agreement requires the approval of a majority of the outstanding common
stock of Sandata, abstentions and broker non-votes will have the effect of a
negative vote. You are urged to complete and return your proxy or, if your
shares are held in street name, to provide voting instructions in accordance
with the materials you receive from your broker or other custodian.
This proxy statement and the accompanying form of proxy are dated
_________, 2002 and are first being mailed to stockholders on or about
__________, 2002.
No person has been authorized to give any information or make any
representation other than those contained in this proxy statement, and, if given
or made, such information or representation must not be relied upon as having
been authorized. This proxy statement does not constitute a solicitation of a
proxy in any jurisdiction from any person to whom it is unlawful to make a proxy
solicitation in such jurisdiction. The information in this proxy statement may
only be accurate on the date of this proxy statement.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF THE TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER.......................................5
SUMMARY TERM SHEET...........................................................8
The Special Meeting.......................................................8
Date, Time, Place and Matters to be Considered............................8
Record Date for Voting....................................................8
Procedures Relating to Your Vote at the Special Meeting...................9
Reasons for Engaging in the Transaction.....................................9
Parties to the Transaction.................................................10
Sandata Technologies, Inc................................................10
Sandata Acquisition Corp.................................................10
The Merger Agreement.....................................................11
Effective Time of Merger.................................................11
Effects of the Merger....................................................11
Recommendations of the Special Committee and Our Board of Directors......12
Opinion of Brean Murray & Co., Inc.......................................12
Interests of our Directors and Executive Officers in the Merger..........13
Material United States Federal Income Tax Consequences...................13
Financing of the Merger..................................................14
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE.............................15
INTRODUCTION................................................................15
SPECIAL MEETING.............................................................16
Proposal to be Considered at the Special Meeting.........................16
Voting Rights; Vote Required for Approval................................17
Voting and Revocation of Proxies.........................................18
Solicitation of Proxies..................................................19
Trading Market and Price; Dividends; Stock Repurchases...................19
SPECIAL FACTORS.............................................................20
Background of the Merger.................................................20
Opinion of Brean Murray..................................................30
Reasons for the Recommendations of the Special Committee
and our Board of Directors..............................................34
Sandata's Position as to the Fairness of the Merger......................38
Sandata Acquisition Corp.'s Position as to the Fairness of the Merger;
Sandata Acquisition Corp.'s Reasons for the Merger...................... 40
Purpose and Structure of the Merger; Certain Effects of the Merger;
Plans or Proposals After the Merger......................................42
Interests of Executive Officers and Directors in the Merger..............43
Director and Executive Officer Stock Options.............................43
Security Ownership of Certain Beneficial Owners and Management...........43
Transactions in Common Stock by Certain Persons..........................45
Special Committee........................................................46
Indemnification; Directors' and Officers' Insurance......................47
Certain Relationships Between Sandata and Sandata Acquisition Corp.......48
IDA/SBA Financing........................................................48
Revolving Credit Agreement...............................................49
National Medical Health Card Systems, Inc................................50
Leases...................................................................51
Medical Arts Office Services, Inc........................................51
Material United States Federal Income Tax Consequences of the Merger
to our Stockholders...................................................51
Non-continuing Stockholders..............................................52
Continuing Stockholders..................................................53
THE MERGER..................................................................53
Effective Time of the Merger.............................................53
Payment of Merger Consideration and Surrender of Stock Certificates......54
Financing of the Merger; Fees and Expenses of the Merger.................55
Appraisal Rights.........................................................56
Regulatory Approvals and Legal Proceedings...............................60
THE MERGER AGREEMENT........................................................60
General..................................................................60
Consideration to be Received by the Stockholders.........................61
Stock Options............................................................61
Representations and Warranties...........................................61
Covenants................................................................63
Indemnification; Directors' and Officers' Insurance......................64
Conditions to the Merger.................................................64
Termination of the Merger Agreement......................................66
Effect on Termination; Termination Fees; Expenses........................67
Amendment to the Merger Agreement........................................67
OTHER MATTERS...............................................................67
Other Matters for Action at the Special Meeting..........................67
Proposals by Holder of Shares of Common Stock............................68
Expenses of Solicitation.................................................68
Independent Auditors.....................................................68
Available Information....................................................69
Information Incorporated by Reference....................................69
Financial Disclosure.....................................................70
Appendix A - Agreement and Plan of Merger, dated as of October 28, 2002,
by and among Sandata Technologies, Inc., Sandata Acquisition Corp.,
Bert E. Brodsky, Hugh Freund and Gary Stoller A-1
Appendix B - Opinion of Brean Murray, dated October 28, 2002 B-1
Appendix C - Section 262 Delaware General Corporation Law C-1
Appendix D - Sandata Annual Report on Form 10-KSB for the fiscal year
ended May 31, 2002 ("Form 10-KSB") D-1
Appendix E - Amendment Number 1 to Sandata's Form 10-KSB E-1
Appendix F - Sandata Quarterly Report on Form 10-QSB for the
Quarter ended August 31, 2002 F-1
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers, together with the Summary Term Sheet
that follows, briefly address certain aspects of the merger. These questions and
answers may not address all questions that may be important to you as a
stockholder. Please refer to the more detailed information contained elsewhere
in this proxy statement, the annexes to this proxy statement, and the documents
referred to or incorporated by reference in this proxy statement. In this proxy
statement, "we", "us" and "our" refer to Sandata Technologies, Inc ("Sandata").
What is the proposed transaction?
Our Board of Directors is asking you to vote to approve a merger agreement
which provides that Sandata Acquisition Corp. will merge with and into Sandata,
with Sandata being the surviving corporation. If the merger agreement is
adopted, each share of our common stock issued and outstanding immediately prior
to the merger (excluding shares contemplated to be contributed to Sandata
Acquisition Corp. by Messrs. Brodsky, Freund and Stoller and members of their
immediate families and shares held by stockholders who perfect their appraisal
rights under Delaware law) will be converted into the right to receive $1.91 in
cash. See "Special Meeting - Proposal to be Considered at the Special Meeting."
What does our Board of Directors recommend?
Our Board of Directors recommends that you vote "FOR" adoption of the
merger agreement. In the opinion of the Board of Directors, the merger
consideration of $1.91 per share of common stock in cash, is fair to, and the
merger agreement is advisable and in the best interests of, the holders of
Sandata common stock other than Sandata Acquisition Corp. and Messrs. Brodsky,
Freund and Stoller and members of their immediate families. All references
throughout this proxy statement to our public stockholders means all of our
stockholders other than Sandata Acquisition Corp. and Messrs. Brodsky, Freund
and Stoller and members of their immediate families. See "Special Factors -
Reasons for the Recommendations of the Special Committee and our Board of
Directors."
What vote is required to approve the merger agreement?
Under Delaware law and our bylaws, the merger must be approved by the
affirmative vote of at least a majority of the outstanding shares of common
stock entitled to vote at the special meeting. On the record date, _______
shares of our common stock were outstanding of which approximately ___% are
owned by Messrs. Brodsky, Freund and Stoller and members of their immediate
families, all of which will contributed to Sandata Acquisition Corp. prior to
the effective time of the merger. Under the merger agreement, Messrs. Brodsky,
Freund and Stoller agreed to vote, and they agreed to cause Sandata Acquisition
Corp. and the members of their immediate families to vote, all shares of Sandata
owned by them and Sandata Acquisition Corp. at the effective time in favor of
the merger. Messrs. Brodsky, Freund and Stoller and members of their immediate
families own a sufficient number of shares of our common stock to approve the
merger agreement. See "Introduction - Special Meeting - Voting Rights; Vote
Required for Approval."
If my shares are held in "Street Name" by my broker, will my broker vote my
shares for me?
Your broker will vote your shares ONLY if you instruct your broker how to
vote. You should fill out, sign, date and return the proxy card and otherwise
follow the directions provided by your broker regarding how to vote your shares.
See "Special Meeting - Voting Rights; Vote Required for Approval" and "Special
Meeting - Voting and Revocation of Proxies."
What do I need to do now?
Please mark your vote on, sign, date and mail your proxy card in the
enclosed return envelope as soon as possible, so that your shares may be
represented at the special meeting.
May I change my vote after I have mailed my signed proxy card?
Yes, your vote can be changed at any time before the proxy is voted at the
special meeting. This can be done in one of two ways. First, you may send in a
written revocation or another signed proxy card with a later date to our
Corporate Secretary at 26 Harbor Park Drive, Port Washington, New York 11050; it
must be received by us before the special meeting. Second, you may attend the
special meeting and vote in person, as long as you, and not your broker, are a
record holder of our stock. See "Special Meeting - Voting and Revocation of
Proxies."
Should I send my stock certificates now?
No. After the merger is completed, our exchange agent will send you a
transmittal form and written instructions for exchanging your share
certificates. See "The Merger - Payment of Merger Consideration and Surrender of
Stock Certificates."
What rights do I have if I oppose the Merger?
You may oppose the merger and seek appraisal of the fair value of your
Sandata shares, but only if you comply with all of the Delaware law procedures
explained in this proxy statement. In order to qualify for appraisal rights, you
must not vote in favor of the merger. See "The Merger - Appraisal Rights" and
Appendix C.
When do you expect the merger to be completed?
We hope to complete the merger as soon as possible. For the merger to
occur, it must be approved by our stockholders. If our stockholders adopt the
merger agreement, we expect to complete the merger on or about _________, 2002.
What are the tax consequences of the merger to me?
The receipt of cash in exchange for common stock surrendered in the merger
will constitute a taxable transaction for United States Federal income tax
purposes and under most state, local, foreign and other tax laws. In general, a
stockholder who surrenders common stock pursuant to the merger will recognize a
gain or loss equal to the difference, if any, between $1.91 per share and such
stockholder's adjusted basis in such share. Each holder of an option to acquire
common stock who receives a cash payment equal to the difference between $1.91
and the exercise price per share of such option will have ordinary income to the
extent of the cash received. We urge you to consult your own tax advisor
regarding the specific tax consequences that may result from your individual
circumstances. For a more detailed discussion see "Special Factors - Material
United States Federal Income Tax Consequences of the Merger to our
Stockholders."
Who can help answer my questions?
If you have more questions about the merger or would like additional copies
of this proxy statement, you should contact our Vice President of Legal Affairs
and Compliance, Jonathan Friedman, Esq. at (516) 484-4400.
SUMMARY TERM SHEET
The following summary, together with the previous Question and Answer
section, provides an overview of all information discussed in this proxy and
presented in the documents annexed to this proxy statement. This summary is
qualified by the more detailed information contained elsewhere in this proxy
statement, the annexes and the documents we refer to in this proxy statement,
all of which we urge you to review carefully.
The Special Meeting
Date, Time, Place and Matters to be Considered
- The special meeting of stockholders of Sandata Technologies, Inc. will be
held on ______________, 2002 at 10:00 a.m. local time at 26 Harbor Park Drive,
Port Washington, New York 11050. At the special meeting, stockholders will
consider and vote upon a proposal to adopt an Agreement and Plan of Merger,
dated as of October 28, 2002, by and among Sandata Acquisition Corp., a Delaware
corporation, Bert E. Brodsky, Hugh Freund, Gary Stoller and Sandata, pursuant to
which Sandata Acquisition Corp. will merge with and into Sandata, with Sandata
being the surviving corporation. Pursuant to the merger agreement, prior to the
effective time of the merger, Messrs. Brodsky, Freund and Stoller and members of
their immediate families will contribute all Sandata common stock owned by them
to Sandata Acquisition Corp. A copy of the merger agreement is attached as
Appendix A to this proxy statement. For additional information regarding the
matters to be considered at the special meeting see "Special Meeting - Proposal
to be Considered at the Special Meeting."
Record Date for Voting
- Only stockholders of record as of the close of business on ___________,
2002 are entitled to notice of and to vote at the special meeting. On that date,
____________ shares of our common stock were outstanding that were held by
approximately ______ record holders of which approximately ___% are owned by
Messrs. Brodsky, Freund and Stoller and members of their immediate families.
Pursuant to the merger agreement, all shares of Sandata common stock owned by
Messrs. Brodsky, Freund and Stoller and members of their immediate families will
be contributed to Sandata Acquisition Corp. prior to the effective time of the
merger. For additional information regarding the record date for voting see
"Special Meeting - Voting Rights; Vote Required for Approval."
Procedures Relating to Your Vote at the Special Meeting
- Adoption of the merger agreement requires the affirmative vote of the
holders of a majority of all outstanding shares of common stock of Sandata. Each
share of common stock entitles the holder to cast one vote at the special
meeting. Abstentions and broker non-votes will result in your shares not being
voted either for or against adoption of the merger agreement. Abstentions and
broker non-votes will be counted as present at the special meeting for quorum
purposes. Abstentions are counted as present for the purpose of determining
whether the merger agreement has been approved. Broker non-votes will not be
counted for the purpose of determining whether the merger agreement has been
approved. Since the merger agreement requires the approval of a majority of the
outstanding common stock of Sandata, abstentions and broker non-votes will have
the effect of a negative vote.
- The presence, in person or by proxy, at the special meeting of the
holders of at least a majority of the shares of our common stock entitled to
vote is necessary to constitute a quorum for the transaction of business.
- Proxy cards that are properly signed and received at or prior to the
special meeting will result in the voting of shares represented thereby in
accordance with the instructions indicated on the proxy card. Proxy cards that
are received without any instructions will result in a vote "FOR" the adoption
of the merger agreement.
- A proxy may be revoked by delivering to our secretary prior to the
special meeting a later dated, signed proxy card or a written revocation of your
proxy; or delivering a notice of revocation of the proxy at the special meeting
prior to the vote on the merger agreement; or attending the special meeting in
person and voting your stock, provided you, not your broker, are the record
holder of such stock. For additional information regarding the procedures
relating to your vote at the special meeting, see "Special Meeting - Voting and
Revocation of Proxies" and "Special Meeting - Solicitation of Proxies."
Reasons for Engaging in the Transaction
The principal purposes of this merger are to enable Messrs. Brodsky, Freund
and Stoller and members of their immediate families to acquire all of the equity
interests in Sandata not already owned by them through Sandata Acquisition
Corp., and to provide Sandata stockholders, other than Sandata Acquisition Corp.
and Messrs. Brodsky, Freund and Stoller and members of their immediate families,
the opportunity to receive a cash price for their shares at a significant
premium over the market price at which the common stock traded prior to the
public announcement of their proposal to acquire all of Sandata's outstanding
stock for $1.91 per share in cash. Our Board of Directors believes that the
merger consideration is fair to, and the merger is advisable and in the best
interests of, the holders of our common stock, other than Sandata Acquisition
Corp. and Messrs. Brodsky, Freund and Stoller and members of their immediate
families. For additional information regarding the reasons for engaging in the
transaction, see "Special Factors - Reasons for the Recommendation of the
Special Committee and our Board of Directors" and "Special Factors - Purpose and
Structure of the Merger; Certain Effects of the Merger; Plans or Proposals After
the Merger."
Parties to the Transaction
Sandata Technologies, Inc.
Sandata Technologies, Inc. is a Delaware corporation with its principal
business address at 26 Harbor Park Drive, Port Washington, New York 11050. Its
business telephone is (516) 484-4400. The principal business of Sandata
Technologies, Inc. is providing technology services to its customers. These
services include either the utilization of software products that have been
developed, acquired or licensed by Sandata or the leveraging of technology-based
core competencies that Sandata has developed in formulating and delivering its
software services.
Applications of Sandata's software include an automated payroll processing
and Medicaid billing service delivered via leased lines or over the internet,
computerized preparation of management reports, telephone-based data collection
services, and automated database-driven outbound telephone notification.
Services that leverage Sandata's core competencies are driven by its
information technology support services. These services include facilities
outsourcing for database and operating system support, technology consulting,
custom software development and support, resale and implementation of software
written and distributed by others, website development and hosting, help desk
services, and hardware maintenance and related administrative services.
Sandata Acquisition Corp.
Sandata Acquisition Corp. is a Delaware corporation which has its principal
business address at 26 Harbor Park Drive, Port Washington, New York 11050. Its
business telephone is (516) 484-4400. Sandata Acquisition Corp. was formed
solely for the purpose of effecting the transactions contemplated by the merger
and has not engaged in any business except in furtherance of this purpose.
Pursuant to the merger agreement, prior to the effective time, Messrs. Brodsky,
Freund and Stoller and members of their immediate families will contribute all
shares of Sandata common stock owned by them to Sandata Acquisition Corp. The
merger agreement contemplates that, at the effective time of the merger, Messrs.
Brodsky, Freund and Stoller and members of their immediate families will own all
of the outstanding common stock of Sandata Acquisition Corp.
The Merger Agreement
Sandata, Sandata Acquisition Corp. and Messrs. Brodsky, Freund and Stoller
have entered into the merger agreement, a copy of which is attached as Appendix
A to this proxy statement. In general, the merger agreement provides that,
subject to the approval of Sandata stockholders and the satisfaction of other
conditions to the merger, Sandata Acquisition Corp. will merge with and into
Sandata, with Sandata being the surviving corporation. Under the merger
agreement, Messrs. Brodsky, Freund and Stoller agreed to vote, and they agreed
to cause Sandata Acquisition Corp. and the members of their immediate families
to vote, all shares of Sandata owned by them and Sandata Acquisition Corp. at
the effective time in favor of the merger. For additional information regarding
the terms of the merger agreement see "The Merger - The Merger Agreement."
Effective Time of Merger
The merger will become effective upon the filing with, and acceptance by,
the Secretary of State of Delaware of a duly executed certificate of merger. At
the effective time of the merger, each share of Sandata (excluding shares
contemplated to be contributed to Sandata Acquisition Corp. by Messrs. Brodsky,
Freund and Stoller and members of their immediate families and shares held by
stockholders who perfect their appraisal rights under Delaware law) will be
converted into the right to receive $1.91 in cash. For additional information
regarding the effective time of the merger, see "The Merger - Effective Time of
the Merger."
Effects of the Merger
After the merger is effective, shares of Sandata will no longer be traded
on the Nasdaq SmallCap Market and the registration of the shares under the
Securities and Exchange Act of 1934 will be terminated. Following the merger,
there will be no publicly traded common stock of Sandata outstanding. For
additional information regarding the effects of the merger, see "Special Factors
- Purpose and Structure of the Merger; Certain Effects of the Merger; Plans or
Proposals After the Merger."
Recommendations of the Special Committee and Our Board of Directors
A special committee of our Board of Directors, consisting of two
non-management directors of Sandata who are not materially interested in the
merger, was formed to consider, evaluate and negotiate the merger and the merger
agreement. The special committee unanimously determined that the merger
consideration of $1.91 in cash per share is fair to the holders of Sandata
common stock. other than Sandata Acquisition Corp. and Messrs. Brodsky, Freund
and Stoller and members of their immediate families, and recommended to our
Board of Directors that it approve the merger agreement and recommend to our
public stockholders that they approve the merger agreement. The Board of
Directors, based upon the recommendation of the special committee, has
unanimously determined that the merger consideration is fair to, and the merger
is advisable and in the best interests of, Sandata and the holders of Sandata
common stock, other than Sandata Acquisition Corp. and Messrs. Brodsky, Freund
and Stoller and members of their immediate families. Accordingly, our Board of
Directors has approved the merger agreement and unanimously recommends that you
vote "FOR" the proposal to adopt it. For additional information regarding the
material factors considered by the special committee and the Board of Directors
in reaching their conclusions and the reasons why the special committee and the
Board of Directors determined that the merger is fair to our public
stockholders, see "Special Factors - Background of the Merger" and "Special
Factors - Reasons for the Recommendations of the Special Committee and our Board
of Directors."
Opinion of Brean Murray & Co., Inc.
The special committee retained Brean Murray & Co., Inc. ("Brean Murray") as
its financial advisor regarding the value of the merger consideration and to
opine as to the fairness of the merger consideration from a financial point of
view. On October 28, 2002, Brean Murray delivered its written opinion to the
special committee that, as of the date of the opinion, and based on and subject
to the assumptions, limitations and qualifications contained in that opinion,
the merger consideration that each of our public stockholders will have the
right to receive in the proposed merger is fair, from a financial point of view,
to such stockholders. For additional information regarding the Opinion of Brean
Murray, see "Special Factors - Opinion of Brean Murray."
A copy of Brean Murray's written fairness opinion is attached to this proxy
statement as Appendix B. We urge you to read Brean Murray's opinion carefully.
Interests of our Directors and Executive Officers in the Merger
You should be aware that, in addition to the matters discussed above, our
executive officers and some members of our Board of Directors have various
interests in the merger that are in addition to, or different from, the
interests of our stockholders generally and that such interests create potential
conflicts of interest.
Pursuant to the merger agreement, prior to the effective time, Messrs.
Brodsky, Freund and Stoller and members of their immediate families will
contribute all shares of Sandata common stock owned by them to Sandata
Acquisition Corp. and, at the effective time of the merger, each outstanding
share of Sandata Acquisition Corp. will be converted into one share of common
stock of the surviving corporation. The merger agreement contemplates that, at
the effective time of the merger, Messrs. Brodsky, Freund and Stoller and
members of their immediate families will own all of the outstanding common stock
of Sandata Acquisition Corp. Since Sandata will be the surviving corporation, it
is contemplated that Messrs. Brodsky, Freund and Stoller and the members of
their immediate families will continue as the owners of Sandata as a private
company.
Our executive officers and directors also have options to purchase
1,016,500 shares of common stock of Sandata. Other than options held by Messrs.
Fish and Bernard, all of these options will be cancelled at the time of the
merger and the holders of these options will not receive any consideration for
the cancellation of their options.
Indemnification arrangements and directors' and officers' liability
insurance for our present and former directors and officers will be continued by
the surviving corporation after the merger.
The members of the special committee are being paid $1,000 per day for each
day of work related solely to serving on the special committee, pro-rated for
partial days.
For additional information regarding interests of our directors and
executive officers in the merger, see "Special Factors - Interests of Executive
Officers and Directors in the Merger."
Material United States Federal Income Tax Consequences
The receipt of $1.91 in cash for each share of common stock pursuant to the
merger will be a taxable transaction for United States Federal income tax
purposes and under most state, local, foreign and other tax laws. For United
States Federal income tax purposes, each of our public stockholders generally
will realize taxable gain or loss as a result of the merger measured by the
difference, if any, between the tax basis per share of our common stock owned by
such public stockholder and $1.91. Each holder of a compensatory option to
acquire our common stock who receives a cash payment equal to the difference
between $1.91 and the exercise price per share of such option will have ordinary
income to the extent of the cash received. For additional information regarding
material United States Federal income tax consequences of the merger to our
public stockholders, see "Special Factors - Material United States Federal
Income Tax Consequences."
Financing of the Merger
The total amount of funds required to consummate the merger and to pay
related fees and expenses is estimated to be approximately $_________. Pursuant
to the merger agreement, at the effective time of the merger, Messrs. Brodsky,
Freund and Stoller will contribute the necessary funds to Sandata Acquisition
Corp. and, at the effective time, Sandata Acquisition Corp. will have the funds
necessary to pay the purchase price and all related fees and expenses in cash.
The merger is not conditioned on any financing arrangements.
For additional information regarding the financing of the merger, see "The
Merger - Financing of the Merger"
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE
Certain information contained in this proxy statement includes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and is subject to the safe harbor created by that
act. Sandata cautions readers that certain important factors may affect its
actual results and could cause such results to differ materially from any
forward-looking statements which may be deemed to have been made in this proxy
statement or which are otherwise made by or on behalf of Sandata. For this
purpose, any statements contained in this proxy statement that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may", "will",
"expect", "believe", or "anticipate", or the negative variations thereof, or
comparable terminology, are intended to identify forward-looking statements.
Factors which may affect Sandata's results include, but are not limited to, the
risks and uncertainties associated with developments in and regulation of the
health-care industry, new technology developments, competitive bidding, risks
and uncertainties associated with the Internet and Internet-related products,
and other factors.
Sandata is also subject to other risks detailed herein or detailed from
time to time in its Securities and Exchange Commission ("SEC") filings. Readers
are also urged to carefully review and consider the various disclosures made by
Sandata which attempt to advise interested parties of the factors which affect
its business, including, without limitation:
o the anticipated timing of the completion of the merger;
o the effects of the merger once completed;
o the risks and uncertainties associated with development in and
regulation of the health-care industry;
o new technology developments;
o competitive bidding;
o risks and uncertainties associated with the Internet and Internet-
related products; and
o other factors.
INTRODUCTION
This proxy statement is being furnished in connection with the solicitation
of proxies by our Board of Directors for a special meeting of stockholders to be
held on ___________, 2002 at 10:00 a.m. local time, at the corporate offices of
Sandata Technologies, Inc., 26 Harbor Park Drive, Port Washington, New York
11050, or at any adjournment of the special meeting. Shares of our common stock,
par value $.001 per share, represented by properly executed proxies received by
us will be voted at the special meeting, or at any adjournment of the special
meeting, in accordance with the terms of such proxies, unless revoked.
SPECIAL MEETING
Proposal to be Considered at the Special Meeting
The purpose of the special meeting is for our stockholders to consider and
vote upon a proposal to adopt a merger agreement, dated as of October 28, 2002,
by and among Sandata Acquisition Corp., a Delaware corporation, Bert E. Brodsky,
Hugh Freund, Gary Stoller and Sandata. Under the merger agreement, prior to the
effective time, Messrs. Brodsky, Freund and Stoller and members of their
immediate families will contribute all shares of Sandata common stock owned by
them to Sandata Acquisition Corp.
The merger agreement provides for the merger of Sandata Acquisition Corp.
with and into Sandata. At the effective time of the merger, the separate
corporate existence of Sandata Acquisition Corp. will cease and Sandata will
continue as the surviving corporation. Pursuant to the merger:
- each share of Sandata common stock, par value $.001 per share, issued
and outstanding immediately prior to the effective time of the merger
(excluding shares contemplated to be contributed to Sandata Acquisition
Corp. by Messrs. Brodsky, Freund and Stoller and members of their immediate
families and shares held by stockholders who perfect their appraisal rights
under Delaware law), will be converted into the right to receive an amount
in cash, without interest, equal to $1.91 per share;
- each share of Sandata Acquisition Corp. common stock, par value $.01
per share, issued and outstanding immediately prior to the effective time
will be converted into and become one fully paid and nonassessable share of
common stock of the surviving corporation; and
- each outstanding option to purchase Sandata common stock, whether
vested or unvested (excluding options owned by Messrs. Brodsky, Freund,
Stoller and members of their immediate families which will be cancelled for
no consideration), will be cancelled and each holder thereof will be
entitled to receive a cash payment equal to the product of the number of
shares of Sandata subject to the option and the excess of the merger
consideration, if any, over the exercise price per share related to such
options.
Stockholders who perfect their appraisal rights under Delaware law will be
entitled to receive a cash payment in the amount of the "fair value" of such
shares, determined in accordance with Delaware law, but after the merger such
shares will not represent any interest in the surviving corporation other than
the right to receive such cash payment. If after the effective time a dissenting
stockholder properly withdraws a demand for appraisal, such dissenting
stockholder's shares will be deemed to be converted as of the effective time of
the merger into the right to receive the merger consideration. See "The Merger -
Appraisal Rights."
Representatives of Marcum & Kliegman LLP, our independent auditors, are
expected to be present at the special meeting.
The special committee and our Board of Directors have approved the merger
agreement and recommend a vote FOR its adoption and approval. Messrs. Brodsky,
Freund and Stoller, who, pursuant to the merger agreement, with members of their
immediate families, will own the surviving corporation after the effective time
of the merger, took part in the vote by the Board of Directors and voted to
approve the merger agreement.
Voting Rights; Vote Required for Approval
Under Delaware law (the State of our organization) and our bylaws, only
holders of shares of our common stock on the record date will be entitled to
receive notice of and to vote at the special meeting. If you own our stock
through your broker, you are a beneficial owner of our common stock, but are not
the record owner, and are not entitled to vote in person at the special meeting.
At the close of business on _____, 2002, the record date for the special
meeting, there were outstanding and entitled to vote ___________ shares of our
common stock. As of the record date, there were _________ shares of our common
stock outstanding not owned by Sandata Acquisition Corp. and Messrs. Brodsky,
Freund and Stoller and members of their immediate families which would be
entitled to vote on the merger and merger agreement. Each holder of record of
our common stock on the record date will be entitled to one vote for each share
held. The presence, in person or by proxy, at the special meeting of the holders
of at least a majority of the shares of our common stock entitled to vote
(______________ shares) is necessary to constitute a quorum for the transaction
of business.
Under Delaware law and our bylaws, the merger must be approved by the
affirmative vote of at least a majority of the outstanding shares of common
stock entitled to vote at the special meeting. Of the __________ shares of
Sandata common stock outstanding, approximately ___% are owned by Messrs.
Brodsky, Freund and Stoller and members of their immediate families, all of
which, pursuant to the merger agreement, will be contributed to Sandata
Acquisition Corp. prior to the effective time of the merger. Under the merger
agreement, Messrs. Brodsky, Freund and Stoller agreed to vote, and they agreed
to cause Sandata Acquisition Corp. and the members of their immediate families
to vote, all shares of Sandata owned by them and Sandata Acquisition Corp. at
the effective time in favor of the merger. Messrs. Brodsky, Freund and Stoller
and members of their immediate families own a sufficient number of Sandata
common stock to approve the merger agreement. See "Special Factors - Reasons for
the Recommendations of the Special Committee and our Board of Directors" and
"Special Factors - Interests of Executive Officers and Directors in the Merger."
Voting and Revocation of Proxies
Shares that are entitled to vote and represented by a proxy properly signed
and received at or prior to the special meeting, unless subsequently properly
revoked, will be voted in accordance with the instructions indicated thereon. If
a proxy is signed and returned without indicating any voting instructions,
shares represented by the proxy will be voted FOR the proposal to approve and
adopt the merger agreement and the merger. The failure to submit a proxy card,
the abstention from voting by a stockholder, broker non-votes, or the failure to
vote in person at the special meeting, will result in your vote not being
counted either for or against adoption of the merger and merger agreement.
Abstentions and broker non-votes will be counted as present at the special
meeting for quorum purposes. Abstentions are counted as present for the purpose
of determining whether the merger agreement has been approved. Broker non-votes
will not be counted for the purpose of determining whether the merger agreement
has been approved. Since the merger agreement requires the approval of a
majority of the outstanding common stock of Sandata, abstentions and broker
non-votes will have the effect of a negative vote.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the shares represented by the proxy are voted at
the special meeting by:
- delivering to our Corporate Secretary before the special meeting a duly
executed proxy relating to the same shares and matters to be considered at the
special meeting, bearing a date later than the proxy previously executed;
- delivering to our Corporate Secretary before the special meeting a
written notice of revocation;
- giving notice of revocation of the proxy at the special meeting before
the vote on the merger agreement and the merger; or
- attending and voting in person at the special meeting so long as you,
and not your broker, are the record holder of such stock.
Revocation of the proxy will not affect any vote previously taken.
Attendance at the special meeting will not in itself constitute the revocation
of a proxy; you must vote in person at the meeting.
The Board is not currently aware of any business to be acted upon at the
special meeting other than as described in this proxy statement. Proxies marked
"AGAINST" the proposal to adopt the merger agreement will not be voted in favor
of a motion to adjourn or postpone the special meeting for the purpose of
soliciting further proxies in favor of adoption of the merger agreement.
Solicitation of Proxies
Sandata will bear the cost of soliciting proxies from stockholders. In
addition to soliciting proxies by mail, some of our officers and directors may
solicit proxies by telephone, facsimile or in person, without receiving
additional compensation. Arrangements may also be made with brokerage firms and
other custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of shares held of record by such persons, and we will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses they incurred.
This proxy statement and the accompanying form of proxy are dated
____________ __, 2002 and are first being mailed to stockholders on or about
_____________ __, 2002.
Trading Market and Price; Dividends; Stock Repurchases
Our common stock trades on the Nasdaq SmallCap Market under the symbol
"SAND". The following table shows the quarterly high and low bid prices for the
last two fiscal years ended May 31, 2002 reported by Nasdaq. The prices reflect
inter-dealer prices, without retail mark-ups, markdowns or commissions, and may
not necessarily represent actual transactions.
Fiscal Year Ended May 31, 2002
High Low
First Quarter $1.35 $1.07
Second Quarter $1.18 $0.84
Third Quarter $1.67 $0.75
Fourth Quarter $1.02 $0.44
Fiscal Year Ended May 31, 2001
High Low
First Quarter $1.88 $1.25
Second Quarter $1.91 $0.53
Third Quarter $1.41 $0.84
Fourth Quarter $1.38 $0.86
On ________, 2002, the record date for the special meeting, we had issued
and outstanding ____________ shares of our common stock. On that date, there
were ____ holders of record of our common stock. This number includes
stockholders of record who hold stock for the benefit of others. On August 5,
2002, the last day the shares were traded prior to the announcement of the
merger proposal, the closing price per share as reported on the Nasdaq SmallCap
Market was $0.50. On ___________, 2002, the most recent practicable trading day
prior to the date of this proxy statement, the last reported sales price per
share of our common stock on the Nasdaq SmallCap Market was $_______.
We have not declared or paid any dividends on the shares of our common
stock since our inception. We do not anticipate paying cash dividends in the
foreseeable future. We intend to retain future earnings to finance our
operations and to fund the growth of the business. Any payment of future
dividends will be at the discretion of our Board of Directors and will depend
on, among other things, our earnings, financial condition, capital requirements,
level of indebtedness, contractual restrictions with respect to the payment of
dividends and other factors that our Board of Directors deems relevant. Pursuant
to a Guaranty Agreement, as amended, made and entered into as of June 1, 1994,
from Brodsky, Sibling Realty, Inc., as lessee, Sandata, Sandata Home Health
Systems, Inc., Sandata Spectrum, Inc. and Sandata Inteck, Inc., as guarantors,
to Marine Midland Bank, Sandata is restricted from declaring dividends on shares
of its common stock. Under the provisions of a Revolving Credit Agreement, as
amended, made as of the 18th day of April, 1997, by and among Sandsport Data
Services, Inc., Sandata, Sandata Home Health Systems, Inc., Sandata
Productivity, Inc., Sandata Spectrum, Inc., Sandata Inteck, Inc. and Santrax
Systems, Inc., as guarantors, and Marine Midland Bank, Sandata is restricted
from declaring dividends on shares of its common stock. See "Special Factors -
Certain Relationships Between Sandata and Sandata Acquisition Corp. - IDA/SBA
Financing" and "Special Factors - Certain Relationships Between Sandata and
Sandata Acquisition Corp. - Revolving Credit Agreement."
On December 18, 2001, Sandata entered into agreements with each of Gerald
Shapiro and Paul Konigsburg, two former directors of Sandata, whereby, in
exchange for the cancellation of promissory notes, Messrs. Shapiro and
Konigsburg surrendered 24,667 shares of Sandata common stock in the aggregate.
The value per share of Sandata common stock in this exchange was $1.54. The
common stock surrendered by each of Messrs. Shapiro and Konigsburg is now held
as Sandata treasury stock and will be cancelled at the effective time of the
merger.
Other than the share exchange described above, during the period September
1, 2000 to August 31, 2002, we have not purchased any shares of our common stock
on the open market or in privately negotiated transactions.
SPECIAL FACTORS
Background of the Merger
During the months of January and February of 2002, when Sandata common
stock traded at an average price of $1.31 on average daily volume of 971 shares,
Mr. Brodsky began to consider a transaction in which he could, either alone or
with others, obtain private ownership of Sandata. On April 5, 2002, Mr. Brodsky
sent a letter to Sandata proposing a "going private" transaction in which he and
a group of investors would purchase all of the outstanding Sandata common stock
not owned by them for $1.50 per share. Mr. Brodsky's valuation of $1.50 per
share of Sandata common stock was based upon his financial analysis of Sandata's
balance sheets, debt, earnings and capitalized software at the time the offer
was made. The letter outlined the following terms of a potential transaction:
the investment group would offer to purchase all of Sandata's outstanding common
stock not owned by them for a cash price equal to $1.50 per share; a new company
formed and owned by the investment group would purchase Sandata's stock pursuant
to an agreement incorporating standard provisions; the stock purchase would be
funded through the working capital of the newly formed company; and the proposal
was subject to satisfactory completion of legal and financial due diligence. The
letter also indicated that the offer would expire on April 12, 2002.
At a special meeting of our Board of Directors on April 17, 2002, Mr.
Brodsky directed the attention of the Board to his April 5, 2002 letter sent to
Sandata on behalf of Mr. Brodsky and the investment group which had been
distributed to the members of the Board at this meeting.
The Board engaged in a discussion regarding its fiduciary obligations to
the Company and its stockholders and the possibility of forming a special
committee. The Board also discussed the responsibilities and course of conduct
of the special committee. The Board agreed that, in order to ensure fairness of
the transaction to Sandata's public stockholders, Messrs. Fish and Bernard
(being Sandata's two board members not employed by Sandata), would be appointed
to the special committee, subject to an additional inquiry to ensure neither of
them were materially interested in the proposed transaction . The members of the
Board also agreed that the special committee should meet a soon as possible to
discuss the proposal, to retain its own legal and financial advisors, to analyze
information relative to the proposal and to negotiate the transaction with the
investment group. The Board also considered obtaining approval of the "going
private" offer from a majority of the minority stockholders of Sandata, but this
was rejected by the Board as impractical because given the lack of investor
interest in Sandata's stock, as indicated by its low trading volume, among other
things, it would be unlikely that a majority of the minority stockholders would
vote with respect to the proposed transaction.
After an additional discussion in which Mr. Brodsky clarified the terms of
the proposal, Mr. Brodsky indicated that the expiration date of the proposal
would be extended indefinitely, subject to the right to fix a new expiration
date upon reasonable notice to the Board, and that the transaction would
probably be a cash-out merger, not a stock purchase.
The Board then agreed to the following resolutions:
- to form the special committee for the purpose of evaluating the
proposal and inquiring into, considering and negotiating a "going private
transaction";
- to appoint Messrs. Fish and Bernard as members of the special
committee;
- to grant the special committee all of the necessary powers to carry
on such an inquiry, including, but not limited to, the power to reject Mr.
Brodsky's proposal and the power to negotiate and accept offers from
unaffiliated third-parties;
- that the special committee keep the president and the Board advised
regarding the progress of the inquiries and negotiations of the special
committee;
- that the "going private" proposal be submitted to the special
committee for such inquiry, consideration and negotiation as the special
committee may determine;
- the special committee specifically consider, among other things, the
fairness of the proposed transaction to the public stockholders of Sandata;
- that the special committee take all necessary action in order to
assess the proposal, including the expenditure of funds, retention of an
investment banker to prepare a fairness opinion, retention of legal counsel
to represent the special committee, and the negotiation of the terms of the
"going private" transaction with the group of investors;
- that Sandata waives all conflicts of interest that would exist
during any potential legal representation of the special committee by
Certilman Balin Adler & Hyman, LLP ("Certilman") in connection with the
"going private" transaction; and
- that, provided the special committee deems it to be in the best
interests of Sandata, the Board has no objections to the retention of
Certilman as legal advisor to the special committee.
On the same day, the special committee met to discuss the process they
would undertake to evaluate the "going private" proposal, including the
selection of a financial advisor and retention of legal counsel. The special
committee identified several potential financial advisors to contact. The
members of the special committee also discussed compensation and obtaining
officer and director insurance. After a discussion with a representative of
Certilman regarding potential conflicts of interest if the special committee
retained Certilman as its legal advisor, the special committee resolved to
retain Certilman as its legal advisor in connection with the "going private"
transaction.
On April 24, 2002, at a meeting of the special committee, the members of
the committee interviewed representatives of several potential financial
advisors, including Ladenburg Thalmann & Co., Inc.; Brooks, Houghton & Company,
Inc.; Fahnestock & Co., Inc.; and Capitalink, L.C. The special committee
discussed with representatives of each of the potential financial advisors their
experience in rendering fairness opinions to companies similar in size, business
and structure to Sandata, and in transactions similar to the proposed merger
transaction. The special committee also discussed the process such advisors used
and their fee structure, in the event one of them was chosen to represent the
special committee. Based upon the interviews and materials presented, the
special committee preliminarily identified Fahnestock & Co. and Capitalink as
potential financial advisors, but expressed concerns that the fees quoted by
Fahnestock & Co. were significantly higher than had been anticipated by the
special committee and that Capitalink was currently engaged by certain
affiliates of Mr. Brodsky in potential economically significant transactions and
that its representative had been a member of Sandata's placement agent with
respect to Sandata's 1995 private placement.
The special committee met again on April 30, 2002 and further discussed its
concerns about Fahnestock & Co.'s fees and Capitalink's relationship with
affiliates of Mr. Brodsky. The special committee decided to schedule additional
meetings with potential financial advisors and to advise the Board of Directors
of the status of the special committee's deliberations and to further consider
the matter of investment advisors.
On May 10, 2002, the Board of Directors of Sandata convened for another
special meeting at the request of the special committee to discuss the selection
of its financial advisor. Legal counsel to the special committee informed the
Board that the special committee had researched a number of financial advisors,
including Brooks, Houghton; Capitalink; Fahnestock; and Ladenburg Thalmann. Of
the potential financial advisors the special committee initially narrowed the
selection to Capitalink and Fahnestock, but decided against retaining Capitalink
due to its ongoing relationship with National Medical Health Card Systems, Inc.,
an affiliate of Mr. Brodsky. The special committee's counsel also indicated that
Fahnestock's fee was the highest of the financial advisors interviewed. The
members of the special committee informed the Board that the fees for the
fairness opinion that will be incurred in connection with the proposed
transaction could be considerable and that they were aware that the payment of a
large amount of fees might affect Mr. Brodsky's willingness to consummate the
transaction. The members of the special committee also informed the Board that
it was not comfortable retaining a financial advisor for such a high fee in the
context of the size of the proposed transaction and indicated that they thought
they should continue researching additional investment firms to find a financial
advisor at the lower or middle end of the cost spectrum and the Board raised no
objections. The special committee's legal counsel also informed the Board that,
based on the interviews with potential financial advisors held by the special
committee to date, the fee structure of these financial advisors would be
bifurcated, with a lower initial payment regarding an analysis of the structure
of an offer and a higher payment upon the issuance of a fairness opinion because
of the risk associated with the issuance of an opinion.
At this meeting, the members of the special committee informed the Board
that it wanted Sandata to enter into indemnification agreements with each of
them and that, in consideration for the extra work being done in connection with
the "going private" transaction, they each wanted to receive an hourly cash
stipend.
The Board then agreed to the following resolution:
that in consideration for the services to be rendered by the members of the
special committee in connection with the "going private" transaction, such
members each be paid a fee of $1,000 per day, pro-rated for the actual number of
hours devoted to the work of the special committee.
On May 20, 2002, the special committee, Sandata and Mr. Brodsky received a
letter from Certilman indicating that it has represented in the past, and
currently represents, each of Sandata and Mr. Brodsky. The letter requests that
each party waive any and all conflicts of interest that arise during the course
and as a result of Certilman's representation of the special committee in the
proposed transaction. This letter was executed by the special committee, Sandata
and the special committee on the same day.
On June 4, 2002, the special committee met again with representatives of
potential financial advisors, including, Ladenburg Thalmann & Co., Inc.; T.M.
Capital Corp.; Duff & Phelps, LLC; and Brooks, Houghton & Company, Inc. After
interviewing each of the potential advisors the special committee identified
T.M. Capital Corp. as a potential financial advisor and decided to advise the
full Board of Directors of its decision.
On June 6, 2002, another special meeting of the Board of Directors was held
to further discuss the recommendation of a financial advisor by the special
committee. Legal counsel for the special committee informed the Board that the
special committee had preliminarily chosen T.M. Capital Corp. to act as its
financial advisor, subject to the successful negotiation of an engagement
letter. Counsel to the special committee also informed the Board that following
the special committee's meeting with T.M. Capital Corp., T.M. Capital Corp.
advised the special committee of its fees if the special committee decided to
engage T.M. Capital Corp. The special committee's legal counsel indicated that
the special committee felt the fee was still a little higher than it had
anticipated, however, if T.M. Capital Corp. would agree to include its expenses
in the amount quoted, the special committee would be more comfortable retaining
it as financial advisor to the special committee. The special committee then
informed the Board that it was still interviewing other potential financial
advisors.
On June 18, 2002, the special committee met to discuss the status of its
discussions with T.M. Capital Corp. The special committee's legal counsel stated
that T.M. Capital Corp. would not agree to the special committee's comments to
its engagement letter and therefore declined the representation. At this
meeting, the special committee also met with representatives of ValueMetrics and
Brean Murray & Co., Inc. ("Brean Murray"), other potential financial advisors.
During this meeting, the special committee identified Brean Murray as a
potential financial advisor and decided to inform the full Board of Directors of
the status of its deliberations and to consider the matter of retaining an
investment advisor.
On July 15, 2002, the special committee met to discuss the engagement of
Brean Murray as its financial advisor. At this meeting, the special committee
adopted the following resolutions:
- that, subject to negotiating an engagement letter on terms acceptable to
the special committee, Brean Murray be selected as the financial advisor to the
special committee; and
- that the form of engagement letter between the special committee and
Brean Murray presented to the special committee be authorized and that the
execution of the same be approved.
On July 22, 2002, the special committee formally engaged Brean Murray to
provide financial advisory services and potentially render a fairness opinion.
The engagement consisted of Brean Murray conducting a due diligence review,
reviewing one or more proposed going-private transactions, developing a
financial valuation, assisting with transaction negotiations and other services
related to the proposal to take Sandata private.
On August 5, 2002, Sandata received another letter on behalf of Sandata
Acquisition Corp. offering to purchase the shares of Sandata common stock for a
cash price of $1.50 per share. On the same day, Sandata issued a press release
announcing that it had received an offer from a group of investors to engage in
a going private transaction in the form of a merger with an entity owned by an
investor group to be led by Mr. Brodsky. The investor group offered Sandata's
stockholders $1.50 per share of common stock. Sandata also disclosed that it had
formed a special committee to review the proposal and that the proposed
transaction was subject to (1) the negotiation, execution and delivery of a
definitive agreement, (2) approval of the transaction by the special committee,
the Board of Directors and Sandata's stockholders, (3) the receipt of a fairness
opinion by the special committee, (4) applicable regulatory approval and (5)
obtaining all necessary third-party consents or waivers.
On August 20, 2002, the special committee met with a representative of
Brean Murray to receive a presentation regarding the merger proposal made by
Messrs. Brodsky, Freund and Stoller. In providing an overview of the proposed
transaction, the representative of Brean Murray noted that Sandata is ignored by
public financial markets, Sandata's stock price is depressed and liquidity is
nominal, and the ratio of Sandata's market capitalization to its annual costs of
being a public company is excessive (representing 20% to 25% of Sandata's
pre-announcement market capitalization). Brean Murray's representative also
discussed various valuation models. The representative indicated that, based on
a discounted cash flow analysis, Sandata had a discounted cash flow value of
$2.05 per share, assuming a liquid marketplace. The representative also noted
that a terminal multiplier of more than four could not be used because of
Sandata's inefficient marketplace (small size and lack of growth). The
representative also felt it appropriate to place a 20% majority insider owned
discount and 20% illiquidity discount on the value of Sandata. Based upon these
factors, the representative indicated that the discounted cash flow value of
Sandata was $1.23 per share. Brean Murray's representative also informed the
special committee that based on a comparable company analysis, in which eight
companies that were selected by Brean Murray because they were deemed relatively
similar to Sandata, showed median values of approximately $1.55 per share. The
representative noted that this valuation over-stated the value of Sandata since
all of the comparable companies were larger and enjoyed more efficient markets
than Sandata. Brean Murray's representative also pointed out that the $1.50 per
share offer, a premium of approximately 200% over the pre-announcement price of
Sandata's stock, is substantial and not likely to be matched by another bidder
or be made available via the public markets in terms of stock price. The
representative noted that other valuation models, such as the book value or
appraised value, were not relevant to Sandata and expressed the opinion that the
discounted cash flow model was the most relevant model to Sandata. Brean
Murray's representative also indicated that the projections provided by Sandata
were reasonable. Based upon the information Brean Murray provided the special
committee, its representative advised the special committee that in its opinion
the $1.50 per share offer was a fair price. The members of the special committee
then engaged in a discussion with the Brean Murray representative and its legal
counsel about whether it should try to obtain a higher price per share in the
transaction despite the fact that the current offer of $1.50 was fair to
Sandata's stockholders from a financial point of view. The special committee
concluded, at the suggestion of Brean Murray's representative, that it would try
and negotiate for a price closer to $1.75 per share in order to obtain a higher
price for the stockholders of Sandata. Mr. Woodworth agreed to revise Brean
Murray's presentation so that the members of the special committee could support
a negotiation with the buy-out group at a higher price. Mr. Woodworth added that
any amount the special committee obtained above $1.50 per share would be
inherently fair.
On August 27, 2002, the special committee met to discuss a strategy of
negotiating with the buy-out group to obtain a higher price per share. Brean
Murray's representative distributed a presentation to the special committee
supporting an increased per share value. The special committee agreed to begin
negotiations at $2.00 per share, but also to accept a counteroffer at $1.75 or
higher. Brean Murray's representative noted to the special committee that, in
its opinion, the offer of $1.50 should be considered a significant enhancement
to stockholder value.
On the same day, a special meeting of the Board of Directors was held at
the request of the special committee to respond to the offer by Sandata
Acquisition Corp. to take Sandata private. Legal counsel for the special
committee informed the Board that the special committee believed that there was
more stockholder value in Sandata than was reflected in the "going private"
offer and requested that Brean Murray discuss the financial background to the
special committee's conclusion. A representative of Brean Murray presented a
brief overview of the transaction and pointed out that Sandata had no recent
history of growth, no coverage by financial industry analysts and has seen
little institutional interest in its current or future performance. The
representative also noted that Sandata's enterprise value prior to the
announcement of the "going private" offer was approximately $4.1 million. Brean
Murray's representative proceeded with a summary of the various analyses of
Sandata that it had performed. The first, the comparable-companies analysis,
included the review of publicly available information about eight companies. All
of the companies that were compared were in the same or similar lines of
business as Sandata, but were all larger than Sandata. Based upon this analysis,
Brean Murray concluded that the median price in the range of values resulting
from this analysis was $2.40, prior to factoring in an applicable discount due
to the large percentage of shares held by a single stockholder. The Brean Murray
representative then described differing rates of return that would accrue to the
acquiring group's members depending on the per-share price of the transaction.
Based upon a purchase price of $2.00 per share in the transaction, the investor
group would receive an estimated internal rate of return of approximately 27%
over a three-year period. The Brean Murray representative then described the
discounted cash flow analysis, which relied in part on financial projections
prepared by Sandata and included a capital-risk component which lead to a
discounting of the terminal value arrived at by Brean Murray. After an
additional 20% discount due to the fact that a large percentage of Sandata
common stock is held by a single stockholder, Brean Murray indicated that the
discounted cash flow analysis yielded a value of $1.91 per share.
After clarification by the Brean Murray representative and legal counsel to
the special committee that Brean Murray was not recommending an offer of $1.91
per share of Sandata common stock, Mr. Brodsky advised the Board that Sandata
Acquisition Corp. had increased its offer to $1.91 per share. After a brief
recess by Messrs. Fish and Bernard, they informed the Board that they considered
the $1.91 per share offer a fair price and that, subject to the receipt of a
fairness opinion from Brean Murray and the successful negotiation of a
definitive agreement, they would recommend a transaction at this price to the
Board and Sandata's unaffiliated stockholders.
On August 30, 2002, Sandata announced that it had accepted an offer from
Sandata Acquisition Corp. to take Sandata private pursuant to a transaction
whereby Sandata Acquisition Corp. would pay $1.91 per share in cash for each
outstanding share of Sandata common stock. The transaction remained subject to
the satisfaction of the same conditions contained in Sandata's August 5
announcement.
On September 2, 2002, a stockholder of Sandata filed a lawsuit in the
Delaware Chancery Court against the Company and the members of its Board of
Directors. (Eva Seitler v. Sandata Technologies, Inc., Bert E. Brodsky, Ronald
L. Fish, Martin Bernard, Hugh Freund, and Gary Stoller, Civil Action No.
19886-NC). The plaintiff alleges that the defendants breached their fiduciary
duties to Sandata and Sandata's public stockholders in connection with Sandata
Acquisition Corp.'s proposal to acquire all of the outstanding public shares of
Sandata. The plaintiffs also allege, among other things, that the directors
serving on the special committee are not independent, and that the merger
consideration is inadequate. The complaint seeks certification of the action as
a class action, both preliminary and permanent injunctive relief against the
proposed transaction, and rescission if it is not enjoined. On September 18,
another stockholder of Sandata, Stephen Yetzer, filed a separate lawsuit in the
same court, against the same defendants, making substantially identical
allegations and seeking substantially identical remedies (Civil Action No.
19903-NC). These actions were consolidated by the Delaware Chancery Court in an
order dated October 22, 2002 (Civil Action No. 19886-NC). Sandata and the
individual director defendants deny all liability and intend to vigorously
defend themselves.
On October 3, 2002, the special committee's legal counsel at Certilman
circulated a preliminary draft merger agreement on behalf of the special
committee to Sandata Acquisition Corp. and indicated that Sandata Acquisition
Corp. and its legal counsel should review the agreement and proceed with
negotiations. On October 16, Sandata Acquisition Corp.'s legal counsel requested
that the merger agreement be revised in the following respects:
- to reflect that Sandata Acquisition Corp. is a corporation formed under
the laws of the State of Delaware;
- to reflect that the merger consideration will be paid from the working
capital of Sandata Acquisition Corp. and that there will be no lenders or
financing conditions;
- that Sandata make representations and warranties with respect to (1) its
organization, standing and power; (2) its subsidiaries; (3) its capital
structure; (4) its authority to engage in the transaction; (5) the compliance of
its SEC filings during the last three years with all laws and that all of its
filings were timely; (6) the accuracy of the information in the proxy statement
and in the Schedule 13e-3; (7) the impact of any changes or events in operating
its business; (8) the presence of any litigation against Sandata; (9) the
compliance with Delaware law of the merger and the merger agreement; and (10)
the receipt of a fairness opinion from Sandata's financial advisor;
- that Sandata Acquisition Corp. will not close on the merger unless
Sandata's representations and warranties are true and correct as of the closing
date; and
- that the representations and warranties of either party under the merger
agreement will not survive beyond the effective time.
On October 23, 2002, the special committee's legal counsel at Certilman
contacted Sandata Acquisition Corp.'s legal counsel and indicated that the
special committee did not agree to any of the changes requested by Sandata
Acquisition Corp. The special committee's legal counsel further informed Sandata
Acquisition Corp.'s legal counsel that the special committee was requesting
additional information regarding the organizational and capital structure of
Sandata Acquisition Corp. The merger agreement was ultimately revised to provide
additional protections to Sandata regarding the following:
- the treatment of options to purchase Sandata common stock held by Messrs.
Brodsky, Freund and Stoller and members of their immediate families;
- the capitalization of Sandata Acquisition Corp. and beneficial ownership
of Sandata common stock by Messrs. Brodsky, Freund and Stoller and members of
their immediate families;
- the contribution of Sandata common stock to Sandata Acquisition Corp. by
Messrs. Brodsky, Freund and Stoller and members of their immediate families;
- that Messrs. Brodsky, Freund and Stoller will vote, and will cause
Sandata Acquisition Corp. and members of their immediate families to vote, all
of the Sandata common stock owned by them and it in favor of the merger, that
they will not take any action that would prevent Sandata Acquisition Corp. from
owning their Sandata common stock and that they would contribute sufficient
capital to Sandata Acquisition Corp. to pay the merger consideration; and
- that Messrs. Brodsky, Freund and Stoller will pay Sandata's expenses in
connection with the merger in the event the transaction is terminated for
reasons other than Sandata's failure to satisfy a condition.
On October 28, 2002, a meeting of the special committee was held with
representatives of Brean Murray and Certilman present. Counsel to the special
committee first discussed the terms of the indemnification agreements he had
prepared on behalf of the members of the special committee. The special
committee's legal counsel also presented the merger agreement to the members of
the committee explaining its material terms. At this meeting, Brean Murray
presented the special committee its financial analysis of the proposed
transaction which included a discussion of a discounted cash flow analysis, a
comparable company analysis and a comparable transaction valuation model of
Sandata. The special committee also engaged in a discussion of a number of
factors relative to the proposed merger. Based on Brean Murray's statement
regarding the fairness of the proposed merger consideration and subject to the
terms and conditions of the merger agreement, the special committee unanimously
determined that the $1.91 per share merger consideration was fair to the public
holders of Sandata common stock, other than Sandata Acquisition Corp. and its
affiliates, that the merger is advisable and in the best interests of Sandata
and the holders of Sandata's common stock, other than Sandata Acquisition Corp.
and its affiliates, and to recommend that the Board of Directors and
stockholders of Sandata vote to approve the merger agreement.
On the same day, a special meeting of the Board of Directors was held at
the request of the special committee in order for the full board to receive the
recommendation of the special committee and to vote upon the merger agreement.
Counsel to the special committee first discussed execution of the new
indemnification agreements with the members of the board to which no one
objected. The special committee's counsel then presented the merger agreement to
the full Board, in the form previously approved by the special committee. The
special committee's legal counsel explained the material terms of the merger
agreement to the Board and then indicated that the special committee, based upon
the fairness opinion from Brean Murray and in light of and subject to the terms
and conditions set forth in the merger agreement, had determined that the merger
consideration is fair to the holders of Sandata's common stock, other than
Sandata Acquisition Corp. and its affiliates, and that the merger is advisable
and in the best interests of Sandata and the holders of Sandata's common stock,
other than Sandata Acquisition Corp. and its affiliates. At this meeting, a
representative of Brean Murray presented the special committee its financial
analysis of the proposed transaction which included a discussion of a discounted
cash flow analysis, a comparable company analysis and a comparable transaction
valuation model of Sandata. Following this presentation, Brean Murray's
representative delivered to the special committee its opinion that, as of that
date and based on and subject to the matters described in the opinion, the
merger consideration to be paid by Sandata Acquisition Corp. in connection with
the proposed merger transaction was fair, from a financial point of view, to the
stockholders of Sandata. The members of the Board also discussed a number of
factors relative to the merger. After the discussion the Board of Directors
unanimously resolved, among other things:
- that, based on the recommendation and approval of the special committee,
the merger consideration is fair to the holders of the Company's common stock,
other than Sandata Acquisition Corp. and its affiliates;
- that the merger and the merger agreement are advisable and in the best
interests of Sandata and its stockholders, other than Sandata Acquisition Corp.
and its affiliates; and
- that the merger agreement is approved and that it be executed and
submitted to the stockholders of Sandata for their approval at a special
meeting.
On November 4, 2002, Sandata issued a press release announcing the
execution of the merger agreement with Sandata Acquisition Corp. and Messrs.
Brodsky, Freund and Stoller.
Opinion of Brean Murray
In connection with the merger, the special committee engaged Brean Murray
as its financial advisor to render an opinion as to the fairness to our public
stockholders, from a financial point of view, of the merger consideration. Brean
Murray is an investment banking firm that, as part of its investment banking
business, regularly is engaged in the evaluation of businesses and their
securities in connection with mergers, acquisitions, and private placements.
Neither we nor the special committee imposed any limitations on the scope
of Brean Murray's investigation or the procedures to be followed by Brean Murray
in rendering its opinion. The Brean Murray opinion was for the use and benefit
of the special committee in connection with its consideration of the merger and
was not intended to be and does not constitute a recommendation to any of our
stockholders as to how such stockholder should vote with respect to the merger.
Brean Murray was not requested to opine as to, and its opinion does not address,
our underlying business decision to effect the merger. Further, Brean Murray was
not asked to consider, and its opinion does not address, the relative merits of
the merger as compared to any alternative business strategy that might exist for
us.
The full text of the written opinion of Brean Murray, dated October 28,
2002, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with that opinion, is attached to this proxy
statement as Appendix B and is incorporated herein by reference. Sandata
stockholders are urged to, and should, read the Brean Murray opinion carefully.
The Brean Murray opinion was provided for the information of the special
committee in its evaluation of the merger, and the Brean Murray opinion is not
intended to be, nor does it constitute, a recommendation as to how any holder of
shares should vote with respect to the merger.
The following paragraphs summarize the financial and comparative analyses
performed by Brean Murray in connection with its opinion. The summary does not
represent a complete description of the analyses performed by Brean Murray and
is qualified in its entirety by reference to the full text of such opinion.
In arriving at its opinion, Brean Murray (a) reviewed publicly available
historical financial and operating data concerning Sandata, including the Annual
Reports on Form 10-KSB for the fiscal years ended May 31, 2000, May 31, 2001,
and May 31, 2002; the Quarterly Report on Form 10-QSB for the period ended
August 31, 2002; (b) reviewed projected financial information prepared by
Sandata management; (c) reviewed publicly available information concerning the
company; (d) conducted discussions with Sandata senior management concerning the
company's business prospects and historical financial results and projected
financial information; (e) reviewed the merger agreement dated October 28, 2002;
and (f) performed various financial analyses of the company, as Brean Murray
deemed appropriate.
In arriving at its opinion, Brean Murray assumed and relied on the accuracy
and completeness of the financial information the company provided and other
information used by Brean Murray without assuming any responsibility for
independent verification of such information. Brean Murray further relied on the
assurances of management that they were not aware of any facts that would make
the information provided inaccurate or misleading. With respect to the financial
projections, Brean Murray assumed that the projections were prepared in good
faith in accordance with industry practice on a basis reflecting the best
currently available estimates and judgments of Sandata's management as to
Sandata's future financial performance. In arriving at its opinion, Brean Murray
did not conduct any physical inspection of the properties or facilities of the
company, did not make any evaluations or appraisals of the assets or
liabilities, and was not presented with any appraisals. The Brean Murray opinion
was necessarily based on financial, economic, market and other conditions as
they existed on, and could be evaluated as of, its date.
The preparation of an opinion as to the fairness of the merger
consideration, from a financial point of view, involves various determinations
as to the most appropriate and relevant methods of financial and comparative
analysis and the application of those methods to the particular circumstances;
therefore, the opinion is not easily summarized. Furthermore, in arriving at its
opinion, Brean Murray did not attribute any particular weight to the analyses or
factors considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Brean
Murray believes that its analyses must be considered as a whole and that
considering any portions of its analyses or any of the factors considered by it,
without considering all analyses and factors, could create a misleading or
incomplete view of the process underlying the Brean Murray opinion. In its
analyses, Brean Murray made many assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond our control. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those estimates.
Additionally, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
Accordingly, the analyses and estimates are inherently subject to substantial
uncertainty.
The following is a summary of the material financial analyses performed and
presented by Brean Murray to the special committee on October 28, 2002.
In connection with its opinion, Brean Murray performed certain financial
and comparative analyses. Brean Murray considered several methods to evaluate
the fairness of the merger consideration. These methods included (a) a public
company trading analysis; (b) an analysis of premiums paid in this transaction
compared to average premiums paid; and (c) a discounted cash flow valuation
analysis. Brean Murray utilized a two-year financial forecast provided by
management and extrapolated a third projected year with Sandata's approval (the
"Projections"). These analyses were considered relevant to a financial review of
the terms of the merger agreement and the strategic alternatives available to
Sandata. The material analyses and their findings are summarized below.
PUBLIC COMPARABLE COMPANY ANALYSIS. Brean Murray reviewed publicly
available financial and stock market information relating to seven selected
companies in lines of business believed to be relatively similar to Sandata. The
companies selected were in the healthcare software solutions business and
related industries, however, it was noted that there were no public companies
with precisely the same mix of business or financial composition as Sandata. The
following table summarizes selected data reviewed as part of Brean Murray's
analysis. Projections for 2002 are based on estimates of First Call Corporation,
a data service that monitors and publishes compilations of earnings estimates
produced by selected research analysts regarding companies of interest to
investors, for the selected companies and management estimates for Sandata.
High Low Median Sandata
Price / LTM Earnings 27.4 x 7.3 x 21.6 x 16.0 x
Price / 2003 Earnings 23.8 x 8.3 x 18.0 x 11.7 x
Equity Value / Book Value 2.9 x 0.9 x 1.3 x 0.9 x
Enterprise Value / LTM Revenue 2.0 x 0.3 x 0.8 x 0.5 x
Enterprise Value / LTM EBITDA 9.3 x 2.7 x 7.2 x 2.6 x
Enterprise Value / LTM EBIT 10.5 x 4.4 x 8.8 x 9.7 x
Notes:
Enterprise Value = market value of equity plus net debt.
LTM = Last twelve months.
EBITDA = earnings before interest, taxes, depreciation and amortization.
EBIT = earnings before interest and taxes.
2003 Sandata earnings multiple based on the 12 months ended 5/31/03.
Outliers are excluded.
Applying the median multiples and a Majority Owner Discount of 20%
(appropriate due to the CEO's controlling stake in Sandata) to Sandata's
financial results, Brean Murray derived an equity value range of $2.06 to $2.92
per diluted share and a median value of $2.10. Brean Murray noted that the
merger consideration of $1.91 was substantially similar to the median value. In
particular, Brean Murray noted that, due to Sandata's sub-micro capitalization
status, Sandata should not be compared solely against a Public Comparable
Company Analysis as these companies were in general much larger and traded more
efficiently than the company, and instead should be compared as a whole against
all three analyses undertaken herein.
GOING PRIVATE TRANSACTION ANALYSIS. Brean Murray analyzed the premiums
offered in other going private transactions announced between January 1, 2001
and September 4, 2002. Brean Murray's analysis incorporated 11 announced
transactions, 2 of which are still pending. Brean Murray compared the share
premiums offered in those transactions with the closing prices for each of the
target company's stock prices one day and 4 weeks prior to the deal announcement
date, respectively. The following table summarizes selected data reviewed as
part of Brean Murray's analysis, including the premium offered to Sandata
stockholders.
Premium offered over: High Low Median Sandata
- closing price 1 day prior to deal announcement 150.0% 1.2% 26.1% 282.0%
- closing price 4 weeks prior to deal announcement 150.0% 11.3% 33.3% 377.5%
Brean Murray noted that the premium paid to the stockholders of Sandata is
substantially higher then those paid to the other companies analyzed and should
be taken as a direct indicator of the state of Sandata as a public entity and
that it was not and had not been receiving fair value in the public financial
markets.
DISCOUNTED CASH FLOW ANALYSIS. Brean Murray calculated the diluted per
share company value based upon a discounted cash flow analysis of the
Projections. Brean Murray calculated the net present value of the future cash
flows of Sandata and added the net present value of Sandata's terminal value
based on a range of multiples of projected 2005 EBITDA. In conducting this
analysis, Brean Murray applied various discount rates and terminal values and
determined that a discount rate range of 17.5% to 22.5% and terminal value
multiples ranging from 3x to 4x EBITDA were the most appropriate indicators of
value. Additionally, Brean Murray applied a 20% Majority Owner Discount to this
value. This analysis indicated a discounted cash flow valuation range of $1.54
per share to $2.35 per share, with a median value of $1.91. Brean Murray noted
that the merger consideration of $1.91 was within the indicated range and equal
to the median value.
Brean Murray was engaged to render the opinion referred to above because
Brean Murray regularly engages in the valuation of businesses and their
securities. Brean Murray is an investment bank whose corporate finance
activities are focused on small- to middle-market companies. Brean Murray
provides a full range of investment banking services to its clients including
merger and acquisition advice and services, equity underwritings, private
placements of debt and equity and other financial advisory services and
valuations.
In connection with advisory services related to the merger and the issuance
of its opinion, Brean Murray has received a fee of $50,000. We agreed to
indemnify Brean Murray in connection with any actions arising from the merger,
except in the event of Brean Murray's intentional misconduct or negligence in
the performance of its duties.
A copy of the written opinion of Brean Murray is attached as Appendix B to
this proxy statement. The opinion is also available for inspection and copying
during regular business hours at our principal executive offices by any
stockholder of ours or the representative of any stockholder who has been so
designated in writing.
Reasons for the Recommendations of the Special Committee and our
Board of Directors
In reaching its determinations, the special committee and the Board of
Directors relied on its knowledge of our business, information provided by our
officers, and the advice of its financial advisor and legal counsel and a number
of factors both for and against recommending the proposal. Except as disclosed
in this proxy statement, neither the special committee nor the Board of
Directors considered each factor separately, assigned relative weights to such
factors or made a determination as to why any factor should be assigned any
weight. Although a majority of these factors were generally believed by the
special committee and the Board of Directors to support their decision, certain
of such factors were generally believed not to support such decision. With
respect to certain of the factors specified, the special committee relied on the
presentations of Brean Murray described in this section under "Opinion of Brean
Murray."
The following factors supported the special committee's and board of
director's recommendation:
- during the 12 month trading period ended August 30, 2002, the shares
closed at a high of $1.61 per share (on January 14, 2002), and at a low of $0.31
per share (on July 29, 2002), which makes it unlikely that stockholders could
receive a higher price in the market for their shares;
- the merger consideration represents a 150% premium over the average price
of our common stock on the Nasdaq SmallCap Market for the 12-month period ended
August 2, 2002 (the last trading day before our August 5, 2002 announcement that
we had received an offer from Sandata Acquisition Corp.); a 282% premium over
the reported closing price of Sandata shares on August 2, 2002; and a 377.5%
premium over the reported closing price four weeks prior to our announcement;
- the historical trading activity of our common stock, including the fact
that the average daily trading volume of our common stock for the 12-month
period ended August 31, 2002 was only 1,340 shares per day, which makes it
unlikely that we can issue new equity;
- the public float for our common stock was approximately $332,604 as of
August 2, 2002, and we have limited prospects for creating institutional
interest in our stock or coverage by analysts, thereby making it difficult to
attract new investor interest;
- the special committee was delegated powers from the Board of Directors in
order to conduct an independent evaluation of Sandata Acquisition Corp.'s offer,
including the retention of independent financial advisors and independent legal
advisors;
- the special committee was granted broad authority to consider the
proposed transaction, including the right to consider competitive proposals from
unaffiliated third parties;
- the special committee never received an alternate proposal from an
unaffiliated third-party either prior to, or after, the August 5, 2002 public
announcement of Sandata Acquisition Corp.'s offer to take Sandata private for
$1.91 per share;
- the oral presentations of Brean Murray delivered to the special committee
on October 28, 2002 and its written opinion delivered to the special committee
on October 28, 2002, stating that, as of such date, and based on and subject to
the assumptions, limitations and qualifications contained in that opinion, the
merger consideration the public stockholders will have the right to receive in
the proposed merger is fair, from a financial point of view, to such
stockholders;
- the special committee engaged in negotiations with representatives of
Sandata Acquisition Corp. and, as a result of these negotiations, the special
committee believed that it received the highest price per share that Sandata
Acquisition Corp. is willing to pay;
- the merger consideration to be paid under the merger agreement is not
subject to any financing conditions; the special committee and the Board believe
that Sandata Acquisition Corp. will have sufficient financial resources
available to finance the merger;
- the significant costs of remaining a public company, including the legal,
accounting and transfer agent fees and expenses and printing costs necessary to
satisfy the reporting obligations of the Securities Exchange Act of 1934, as
amended, (which were approximately $90,000 in fiscal year ended May 31, 2002),
will be largely eliminated if we are a private company;
- becoming a private company would allow us to focus on long-term strategic
initiatives rather than quarter-to-quarter results;
- the judgment of the special committee that the merger consideration is
fair to our public stockholders for the reasons detailed above; and
- the right of any of our public stockholders to exercise his or her
appraisal rights under Delaware law if he or she does not believe the merger
consideration to be fair.
In reaching its decision to take Sandata private at this time, the special
committee and the Board considered the above factors, each of which in the view
of the special committee and the Board supported such decision. Neither the
special committee nor the Board of Directors considered alternative transactions
to the one described in this proxy statement, and they were aware of no
alternatives to the proposal from Sandata Acquisition Corp. In light of the
negotiations between the special committee and representatives of Sandata
Acquisition Corp. which resulted in an increase in the price per share offered
to the public stockholders, along with additional covenants in the merger
agreement, the special committee did not pursue any alternatives. In addition,
in view of the fact that Messrs. Brodsky, Freund and Stoller and members of
their immediate families had no interest in selling their shares to a third
party in the foreseeable future, the special committee did not consider
soliciting alternative transactions with third parties.
The special committee and the Board of Directors considered the following
negative factors in its determination to recommend the proposal:
- since Messrs. Brodsky, Freund and Stoller and members of their immediate
families do not have an interest in selling their shares of Sandata, it is
unlikely that an offer from an unaffiliated third party could be approved;
- the fact that since the August 5, 2002 announcement of the proposed
transaction, Sandata has not received a competing proposal from any unaffiliated
parties;
- the fact that, while the merger consideration represents a premium over
our historical trading price, the stock market has not performed well over the
past year, which may contribute to the depressed trading price of our common
stock;
- our public stockholders will not have the right to participate in our
future growth, if any; and
- the special committee considered the uncertainties associated with any
financial analysis, particularly those involving projections of future
performance. The special committee recognized that these analyses are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by the analyses and
therefore did not consider them to be material factors.
The special committee and our Board of Directors did not view the following
factors to be material in their consideration of the fairness of the merger:
- the net book value of our assets because they did not believe that
Sandata or related publicly traded companies trade on the basis of book value;
- the liquidation value of Sandata's assets, because they believed that the
value that could be obtained in liquidation would be less than the value that
could be achieved by selling Sandata as a going concern;
- the ability of Sandata Acquisition Corp. and Messrs. Brodsky, Freund and
Stoller and members of their immediate families to complete the merger without
the approval of the unaffiliated stockholders;
- the fact that the merger may be a taxable event to our public
stockholders; and
- the fact that Brean Murray was not asked to opine to or to consider (i)
the underlying business decision to effect the merger, or (ii) the relative
merits of the merger as proposed to any alternative business strategy that might
exist for the company.
The special committee is comprised of non-management directors of the Board
of Directors not affiliated with Sandata Acquisition Corp. or Messrs. Brodsky,
Freund, and Stoller, and it was authorized to retain its own legal counsel and
an independent financial advisor to assist it in assessing the fairness of the
transaction. In addition, the special committee was granted broad authority to
consider the proposal, including the right to consider competing offers from
unaffiliated third parties. Because of the foregoing, neither the special
committee nor the Board considered it necessary to retain an outside party to
negotiate on behalf of the unaffiliated stockholders, or to engage counsel or an
appraiser to represent unaffiliated stockholders.
Sandata's Position as to the Fairness of the Merger
We believe the merger to be fair to our public stockholders, other than
Sandata Acquisition Corp. and Messrs. Brodsky, Freund and Stoller and members of
their immediate families, based upon numerous factors, including the following
material factors:
- the merger consideration represents a 282% premium over the closing price
of our common stock on the last full trading day prior to our August 5, 2002
announcement of Sandata Acquisition Corp.'s preliminary proposal, a 377.5%
premium over the closing price four weeks prior to such announcement and exceeds
recent historical market prices of our common stock (see "Special Meeting -
Trading Market and Price; Dividends; Stock Repurchases");
- the approval of the merger by all of the members of the special committee
and the fact that the members of the special committee determined that the
merger consideration is fair to our stockholders and that the merger agreement
is advisable and in the best interests of Sandata and our public stockholders,
other than Sandata Acquisition Corp. and Messrs. Brodsky, Freund and Stoller and
members of their immediate families;
- the special committee was granted broad authority to consider the
proposal, including the right to consider competing proposals from unaffiliated
third parties;
- the special committee never received an alternate proposal from an
unaffiliated third party either prior to, or after, the August 5, 2002 public
announcement of Sandata Acquisition Corp.'s offer to take Sandata private for
$1.91 per share;
- the determination by the special committee that the merger agreement
should be ratified and approved by the stockholders;
- the fact that the special committee engaged Brean Murray, a leading
investment bank, and that Brean Murray rendered an opinion as to the fairness of
the merger consideration, from a financial point of view, to our public
stockholders;
- the fact that the merger agreement was negotiated between the
representatives of the special committee and representatives of Sandata
Acquisition Corp.; and
- the factors considered by the special committee and our Board of
Directors, and the analysis of the special committee and our Board of Directors
referred to under "Special Factors - Reasons for the Recommendations of the
Special Committee and our Board of Directors."
Sandata believes that the transaction was procedurally fair to Sandata's
public stockholders (other than Sandata Acquisition Corp. and Messrs. Brodsky,
Freund and Stoller and members of their immediate families) because:
- the powers delegated to the special committee included the right to
consider competitive proposals from unaffiliated third parties;
- the special committee never received an alternate proposal from an
unaffiliated third-party either prior to, or after, the public announcement of
Sandata Acquisition Corp.'s offer to take Sandata private for $1.91 per share of
common stock;
- the merger must be approved by holders of a majority of the outstanding
shares of Sandata common stock;
- the transaction was negotiated on behalf of the public stockholders of
Sandata by a special committee consisting of non-management directors who are
not employees of Sandata, who are not affiliated with Sandata Acquisition Corp.
and who are not, therefore, materially interested in the merger;
- the special committee retained Brean Murray, which is not affiliated with
Sandata or Sandata Acquisition Corp., to serve as independent financial advisor
to the special committee and to render a fairness opinion with respect to the
merger;
- the special committee engaged Certilman to serve as independent legal
advisor to the special committee; and
- the merger was recommended to the Board of Directors by the special
committee and subsequently was unanimously approved by the Board of Directors of
Sandata.
After considering the foregoing, we believe the merger consideration to be
fair to our public stockholders, other than Messrs. Brodsky, Freund and Stoller
and members of their immediate families, and that the merger agreement is
advisable and in the best interests of Sandata and the public stockholders,
other than Sandata Acquisition Corp. and Messrs. Brodsky, Freund and Stoller and
members of their immediate families. In reaching this determination we have not
assigned specific weights to particular factors, and considered all factors as a
whole. None of the factors that we considered led us to believe that the merger
was unfair to the public stockholders, other than Sandata Acquisition Corp. and
Messrs. Brodsky, Freund and Stoller and members of their immediate families.
None of the members of our Board of Directors received any reports,
opinions or appraisals from any outside party relating to the merger or the
fairness of the consideration to be received by the public stockholders, other
than those received by the special committee from Brean Murray. See "Special
Factors - Interests of Executive Officers and Directors in the Merger."
Sandata Acquisition Corp.'s Position as to the Fairness of the Merger;
Sandata Acquisition Corp.'s Reasons for the Merger
Sandata Acquisition Corp. believes that the consideration to be received in
the merger by the Sandata public stockholders (other than Sandata Acquisition
Corp. and Messrs. Brodsky, Freund and Stoller and members of their immediate
families) is fair to such holders. This belief is based on the following
factors:
- the consideration to be paid in the merger represents a 282% premium over
the reported closing price of Sandata shares on the last full trading day prior
to Sandata Acquisition Corp.'s August 5, 2002 announcement of the preliminary
proposal and a 377.5% premium over the reported closing price four weeks prior
to such announcement;
- the historical financial performance of Sandata and the risks associated
with Sandata achieving strong financial performance, including economic
conditions, industry pressures such as pricing volatility, and interest rate
fluctuations;
- the special committee was granted broad authority to consider alternate
proposals, but since August 5, 2002, Sandata Acquisition Corp.'s preliminary
proposal and Sandata's availability as an acquisition candidate have been known
in the investment and business communities, and neither Sandata nor its advisors
have received any proposals to date for the acquisition of Sandata;
- the special committee and its advisors successfully negotiated an
increase in the consideration to be paid to Sandata's public stockholders in the
merger from $1.50 to $1.91 per share;
- the merger will provide consideration to Sandata's public stockholders
entirely in cash and is not subject to any financing conditions; and
- the forecasts for Sandata provided to Sandata Acquisition Corp. by
Sandata's management which, when a range of price-to-earnings multiples were
applied to the estimated earnings in such forecasts, indicate possible future
values of Sandata as a going concern, and the risks associated with meeting
those projections.
Sandata Acquisition Corp. believes that the merger is procedurally fair to
the public stockholders of Sandata (other than Sandata Acquisition Corp. and
Messrs. Brodsky, Freund and Stoller and members of their immediate families).
This belief is based on the following factors:
- the special committee was granted broad authority to consider the
proposal, including the right to consider competing proposals from unaffiliated
third-parties;
- the merger consideration and the other terms and conditions of the merger
agreement were the result of good faith negotiations between Sandata Acquisition
Corp. and the special committee, consisting of non-management directors of
Sandata, who have no material interest in the merger, and their respective
advisors;
- the special committee retained Brean Murray, which is not affiliated with
Sandata or Sandata Acquisition Corp. management, to serve as its independent
financial advisor, and the special committee received a fairness opinion from
Brean Murray as to the fairness from a financial point of view of the $1.91
per-share merger consideration;
- the special committee engaged Certilman to serve as its independent legal
advisor;
- the merger was recommended to the Board of Directors by the special
committee and was subsequently unanimously approved by the Board of Directors of
Sandata;
- the merger is conditioned upon approval by the holders of a majority of
the outstanding shares of Sandata common stock; and
- the ability of dissenting stockholders to obtain "fair value" for their
shares if they exercise and perfect their appraisal rights under Delaware law.
Sandata Acquisition Corp. considered each of the foregoing factors to
support its determination as to the fairness of the merger. Sandata Acquisition
Corp. did not find it practicable to assign, nor did it assign, relative weights
to the individual factors considered in reaching its conclusion as to such
fairness. Sandata Acquisition Corp. does not consider the book value of Sandata
to be a material factor in its belief that the merger consideration is fair,
because it believes that book value is not a true indication of the value of
Sandata. While Brean Murray provided the special committee with a fairness
opinion with respect to the merger, Sandata Acquisition Corp. did not rely on
the analyses in such opinion since it was specifically addressed to the special
committee and Brean Murray was not retained by Sandata Acquisition Corp.
The foregoing discussion of the information and factors considered by
Sandata Acquisition Corp. is not intended to be exhaustive but includes all
material factors.
Purpose and Structure of the Merger; Certain Effects of the Merger; Plans or
Proposals After the Merger
The purpose of the merger is for Messrs. Brodsky, Freund and Stoller and
members of their immediate families to acquire all of the equity interests in
Sandata not already owned by them through Sandata Acquisition Corp. and to allow
Sandata stockholders to realize a significant premium over the market price for
their shares. Other than the transaction described in this proxy statement, no
other transaction was considered by the parties.
If the merger agreement is approved by our stockholders as described in
this proxy statement, and the other conditions to the completion of the merger
are satisfied or waived, we and Sandata Acquisition Corp. will close the merger.
At or soon after the closing of the merger:
- the public stockholders will cease to have any ownership interest in
Sandata or rights as holders of our common stock, other than holders of Sandata
common stock who perfect their appraisal rights under Delaware law;
- as the surviving corporation, Sandata will be owned by Messrs. Brodsky,
Freund and Stoller and members of their immediate families, each of whom will
benefit from Sandata's future earnings and profits;
- the public stockholders will no longer bear the risk of any decreases in
our financial health, profitability and cash flow, and will no longer bear the
risk that Sandata will be unable to pay the principal of or interest on its
debt;
- the public stockholders will no longer benefit from any increases in our
financial health or the payment of dividends, if any, on shares of our common
stock;
- Sandata common stock will no longer be traded on the Nasdaq SmallCap
Market;
- Sandata Acquisition Corp. will cause the company to terminate the
registration of our common stock under the Securities Exchange Act of 1934, as
amended, as soon as practicable; and
- we will no longer be required to file periodic reports with the SEC once
the registration of the shares has been terminated.
Following completion of the merger, the business and operations of Sandata
as the surviving corporation will be continued as they are currently being
conducted. It is anticipated that after the merger, the surviving corporation's
management will, from time to time, initiate a review of the assets, corporate
structure, capitalization, operations, properties and personnel to determine
what changes, if any, would be desirable following the merger to enhance
operations. Sandata has no present intentions of disposing any of its assets
following the merger, other than in the ordinary course of business, and except
for the merger and as otherwise described in this proxy statement, has no
present plans or proposals that would result in (i) an extraordinary
transaction, such as a merger, reorganization or liquidation, (ii) any purchase,
sale or transfer of a material amount of its assets, (iii) a material change in
our corporate structure or business, or (iv) a material change in the present
dividend policy, indebtedness or capitalization.
Under the terms of the merger agreement, the directors and officers of
Sandata will be the directors and officers of the surviving corporation.
We have not made any provision for our public stockholders to obtain access
to our corporate files, have their own counsel or their own appraisal. See
"Special Factors - Reasons for the Recommendations of the Special Committee and
our Board of Directors."
Interests of Executive Officers and Directors in the Merger
In considering the merger and the fairness of the consideration to be
received in the merger, you should be aware that certain of our officers and
directors have interests in the merger, as a result of certain relationships
with Sandata and some of its affiliates, that are in addition to or different
from the interests of our public stockholders generally and create potential
conflicts of interest. The details of these interests are described below.
Director and Executive Officer Stock Options
At the effective time of the merger, all outstanding options to purchase
common stock of Sandata will become fully vested, excluding options held by
Messrs. Brodsky, Freund and Stoller and members of their immediate families, and
converted into the right to receive a cash payment equal to the product of the
number of shares of Sandata subject to the options and the excess of the merger
consideration, if any, over the exercise price per share related to such
options. Pursuant to the merger agreement, at the effective time, options held
by Messrs. Brodsky, Freund and Stoller and members of their immediate families
will be cancelled and the holders of such options will not be entitled to
receive any of the merger consideration.
Security Ownership of Certain Beneficial Owners and Management
As of August 31, 2002, the non-management directors and executive officers
as a group beneficially owned 1,279,456 shares of our common stock (not
including presently exercisable options), or 51.6% of our shares. Mr. Brodsky's
adult children own another 21% of the outstanding stock. Pursuant to the merger
agreement, prior to the effective time, Messrs. Brodsky, Freund and Stoller and
members of their immediate families will contribute all shares of Sandata common
stock owned by them to Sandata Acquisition Corp. At the effective time of the
merger, Sandata Acquisition Corp., will own approximately 72% of the outstanding
shares of our common stock. Our board was aware of this actual conflict of
interest and considered it along with the other matters described under "Special
Factors - Recommendations of the Special Committee and Board of Directors," and
"Special Factors - Sandata's Position as to the Fairness of the Merger."
The following table sets forth the beneficial share ownership, as of August
31, 2002, of (i) each person who is known by Sandata to be the beneficial owner
of more than five percent (5%) of Sandata's common stock; (ii) each of Sandata's
current directors; and (iii) all of Sandata's executive officers and directors
as a group. The ownership percentages indicated are calculated, on a
fully-diluted basis, in accordance with Rule 13d-3 promulgated pursuant to the
Securities Exchange Act of 1934, as amended, which attributes beneficial
ownership of securities to a person or entity who holds options or warrants to
purchase such securities.
============================================== ============================== ======================================
Name of Management Person and Name and Approximate Percentage
Address of Beneficial Owner Number of Shares of Outstanding Shares
---------------------------------------------- ------------------------------ --------------------------------------
Bert E. Brodsky
26 Harbor Park Drive
Port Washington, NY 1,426,457 (1) 45.4%
---------------------------------------------- ------------------------------ --------------------------------------
Hugh Freund
26 Harbor Park Drive
Port Washington, NY 487,721 (2) 18.6%
---------------------------------------------- ------------------------------ --------------------------------------
Gary Stoller
26 Harbor Park Drive
Port Washington, NY 297,278 (3) 11.3%
---------------------------------------------- ------------------------------ --------------------------------------
Ronald L. Fish
46,500 (4) 1.8%
---------------------------------------------- ------------------------------ --------------------------------------
Martin Bernard
0 (5) *
---------------------------------------------- ------------------------------ --------------------------------------
Jessica Miller
26 Harbor Park Drive
Port Washington, NY 294,470 11.9%
---------------------------------------------- ------------------------------ --------------------------------------
Jeffrey Holden Brodsky
26 Harbor Park Drive
Port Washington, NY 184,925 7.5%
---------------------------------------------- ------------------------------ --------------------------------------
All executive officers and directors as a
group (4 persons) 2,257,956 (1) (2) (3) (4) 65.3%
============================================== ============================== ======================================
(1) Includes 18,684 shares of Sandata's common stock owned by Mr. Brodsky's
son living in his household; includes 20,500 shares of Sandata's common stock
owned by Mr. Brodsky's wife; includes 200,000 shares of common stock owned by
the Bert E. Brodsky Revocable Trust. Includes presently exercisable options to
purchase 310,000 shares of common stock at $1.41 per share under the 1995 Stock
Option Plan; includes presently exercisable options to purchase 350,000 shares
of common stock at $1.31 per share under the 1998 Stock Option Plan.
(2) Includes presently exercisable options to purchase 137,000 shares of
common stock at $1.41 per share under the 1995 Plan. Excludes 47,464 shares of
common stock owned by Mr. Freund's adult children. Mr. Freund disclaims any
beneficial interest in, or voting or dispositive control over, such shares.
(3) Includes presently exercisable options to purchase 20,000 shares of
common stock at $2.23 per share under the 1995 Plan, which options have been
extended to expire on March 14, 2006; includes presently exercisable options to
purchase 50,000 shares of common stock at $2.61 per share under the 1995 Plan,
which options have been extended to expire on June 10, 2006; includes presently
exercisable options to purchase 73,500 shares of common stock at $1.41 per share
under the 1995 Plan. Includes 21,000 shares of common stock owned by trusts
established for the benefit of Mr. Stoller's children of which Mr. Stoller is a
trustee.
(4) Includes presently exercisable options to purchase 38,000 shares of
common stock at $3.00 per share under the 1998 Plan. Includes 3000 shares owned
by RF Retirement Plan. Does not include an option to purchase 18,000 shares of
common stock at an exercise price of $3.00 per share under the 1998 Stock Option
Plan, none of which are presently exercisable. Does not include an option to
purchase 10,000 shares of common stock at an exercise price of $1.00 per share
under the 2000 Stock Option Plan, none of which are currently exercisable.
(5) Does not include an option to purchase 10,000 shares of common stock at
$1.00 per share under the 2000 Stock Option Plan, none of which are currently
exercisable.
* Less than one percent (1%)
Transactions in Common Stock by Certain Persons
Based on our records and on information provided to us by our directors,
executive officers and subsidiaries, neither the company nor any associate or
subsidiary of the company nor, to the best of our knowledge, any of our
directors or executive officers (who are also the directors and executive
officers of our subsidiaries), nor any associates or affiliates of any of the
foregoing, have effected any transactions involving Sandata common stock during
the 60 days prior to the date of this proxy statement.
Employment Agreements
On February 1, 1997, Sandata entered into an employment agreement with Mr.
Brodsky. The agreement was for a period of five years and provided for
compensation to Mr. Brodsky at an annual rate of $500,000 or a lesser amount if
mutually agreed. The agreement also provided for the payment of an annual bonus
at the sole discretion of the Board of Directors. Mr. Brodsky agreed to accept a
reduction in compensation for the fiscal years ended May 31, 2001 and 2000 and
has signed waivers evidencing his agreement to such reductions. On March 1,
2002, the agreement was renewed on identical terms and Mr. Brodsky again agreed
to accept a reduction in compensation for the fiscal year ended May 31, 2002. At
the effective time of the merger Mr. Brodsky will continue to be employed by the
surviving corporation pursuant to the terms of his employment agreement.
Special Committee
Messrs. Fish and Bernard are non-management directors of Sandata who are
not materially interested in the merger. Mr. Bernard is a sales executive for
The Rampart Group Insurance Associates, an insurance company from which Sandata
purchases insurance policies through Mr. Bernard. Mr. Bernard owns options to
purchase 10,000 shares of Sandata common stock. Pursuant to the merger
agreement, at the effective time, Mr. Bernard's options will automatically vest
and he will be entitled to receive an amount in cash equal to the product of (i)
the number of shares of Sandata common stock subject to the options and (ii) the
excess of the merger consideration over the exercise price per share related to
such options, or $9,100. Mr. Fish beneficially owns 46,500 shares of Sandata
common stock (calculated in accordance with Rule 13d-3, promulgated pursuant to
the Securities Exchange Act of 1934, as amended, which attributes beneficial
ownership of securities to a person or entity who holds presently exercisable
options or warrants to purchase such securities). 38,000 of Mr. Fish's shares
are covered by presently exercisable options to purchase Sandata common stock;
5,500 shares are owned by Mr. Fish individually; and 3,500 shares are owned by
the RF Retirement Plan. Mr. Fish also owns options to purchase 20,000 shares of
Sandata common stock, none of which are presently exercisable. Pursuant to the
merger agreement, at the effective time of the merger (i) Mr. Fish will be
entitled to receive the merger consideration in exchange for his common stock of
Sandata and (ii) all of Mr. Fish's options, vested and unvested, will be
cancelled and converted into the right to receive an amount in cash equal to the
product of (A) the number of shares of Sandata common stock subject to the
options and (B) the excess of the merger consideration over the exercise price
per share related to such options. If the merger is adopted, at the effective
time, Mr. Fish will receive $16,235 upon the exchange of his 8,500 shares of
common stock and $9,100 for his options. In addition to serving as a member of
the Board of Directors of Sandata, Mr. Fish is a member of the Board of
Directors of National Medical Health Card Systems, Inc., an affiliate of Mr.
Brodsky.
In addition to the foregoing, Messrs. Fish and Bernard each received
compensation of $1,000 for each day of work related solely to serving on the
special committee, pro-rated for partial days. As of the date of this proxy
statement the members of the special committee have each been paid $_________.
Sandata has also agreed to indemnify the members of the special committee
pursuant to the provisions of the indemnification agreements discussed below.
Indemnification; Directors' and Officers' Insurance
Pursuant to the merger agreement, at the effective time, the certificate of
incorporation and bylaws of the surviving corporation shall contain provisions
no less favorable with respect to indemnification and exculpation than are set
forth in Sandata's certificate of incorporation and/or bylaws prior to the
effective time, which provisions shall not be amended, repealed or otherwise
modified for a period of 6 years from the effective time in any manner that
would adversely affect the rights of individuals who at the effective time were
directors, officers, employees or agents of Sandata. The merger agreement
further provides that from and after the effective time, for a period of 6
years, the surviving corporation shall indemnify the directors and officers of
Sandata on terms no less favorable than the provisions with respect to
indemnification that are set forth in the certificate of incorporation and/or
bylaws of Sandata as of the effective time. Sandata and Sandata Acquisition
Corp. agree that the directors, officers and employees of Sandata covered by
these provisions are intended to be third party beneficiaries of these
provisions and shall have the right to enforce the obligations of Sandata
Acquisition Corp. under these provisions. The surviving corporation shall
maintain in effect, from the effective time until such time as claims could
legally made against any director or officer of Sandata, any and all directors'
and officers' liability insurance currently maintained by Sandata.
On July 31, 2002, Sandata entered into indemnification agreements with each
of Messrs. Fish and Bernard which provided that Sandata would indemnify each of
them for liabilities arising out of their service on the special committee. On
October 28, 2002, after further review by the special committee's legal counsel,
we entered into new indemnification agreements with each of Mr. Fish and Mr.
Bernard. Under each of these agreements, Sandata agrees to (i) limit the
liability of each of Messrs. Fish and Bernard for breaches of fiduciary duty in
connection with serving as directors of Sandata, except in cases involving (A)
breaches of the duty of loyalty, (B) bad faith acts or omissions, (C) unlawful
dividend payments, stock purchases or redemptions, or (D) transactions involving
improper personal benefits and (ii) indemnify each of Messrs. Fish and Bernard
to the fullest extent provided by law for all expenses and liabilities that may
arise in connection with their serving on the Board of Directors, including in
actions involving derivative lawsuits brought by Sandata stockholders. We are
obligated under the indemnification agreements to advance all expenses paid by
Mr. Fish or Mr. Bernard in connection with any lawsuit or proceeding against
them and to maintain any and all directors' and officers' liability insurance
maintained by Sandata on the date of the agreements. Sandata's obligations under
these agreements continue during the period each of Messrs. Fish and Bernard are
directors and/or officers of Sandata through any period that either of them
could be subject to any proceeding or lawsuit by reason of the fact that either
of them served on the Board of Directors. The October 28 agreements state that
the July 31 agreements shall survive and in the event of any inconsistency in
the provisions of the agreements, the terms that are more favorable to Messrs.
Fish and Bernard shall control.
Certain Relationships Between Sandata and Sandata Acquisition Corp.
Pursuant to the merger agreement, prior to the effective time of the
merger, Messrs. Brodsky, Stoller and Freund, who are directors and officers of
Sandata, and members of their immediate families, will exchange the shares of
Sandata common stock owned by them for shares of Sandata Acquisition Corp. Under
the merger agreement, at the effective time of the merger, Sandata Acquisition
Corp. will merge with and into Sandata, and Sandata will continue as the
surviving corporation and each outstanding share of Sandata Acquisition Corp.
common stock will be converted into one fully paid and nonassessable share of
the surviving corporation. Since Sandata will be the surviving corporation, as a
result of this transaction, it is contemplated that after the effective time
Messrs. Brodsky, Stoller and Freund, and members of their immediate families
will be the sole owners of Sandata's common stock and will have all of the
rights and benefits associated with such ownership.
Stephen Silverstein advised Sandata that he was appointed as a
representative of Sandata Acquisition Corp. to negotiate the terms of the merger
agreement with Sandata. Mr. Silverstein is a consultant to Sandata, although,
his duties in connection with being a consultant are not related to this
transaction.
IDA/SBA Financing
In November 1996, Sandata entered into an agreement with BFS Realty, LLC,
successor to BFS Sibling Realty, Inc. and an affiliate of Mr. Brodsky; the
Nassau County Industrial Development Agency ("NCIDA"); and Marine Midland Bank
(the "Bondholder"). Pursuant to this agreement, BFS Realty, LLC (i) assumed all
of Sandata's rights and obligations under a lease agreement that was previously
entered into between Sandata and the NCIDA (the "Lease"), and (ii) entered into
a sublease agreement with Sandata for the premises Sandata occupies. Pursuant to
the agreement, BFS Realty, LLC also obtained the right to become the owner of
the premises upon expiration of the Lease. Under the terms of the agreement,
Sandata is jointly and separately liable to the NCIDA for all obligations owed
by BFS Realty, LLC to the NCIDA under the Lease; however, BFS Realty, LLC has
indemnified Sandata with respect to certain obligations relative to the Lease
and the agreement. In addition, the agreement provides that Sandata is bound by
all the terms and conditions of the Lease, and that a security interest is
granted to BFS Realty, LLC in all of Sandata's fixtures constituting part of the
premises.
The foregoing transactions and agreements were the last in a series of
transactions involving Sandata, BFS Realty, LLC, NCIDA, the Bondholder and the
U.S. Small Business Administration. Chief among these was the borrowing by BFS
Realty, LLC in June of 1994 of $3,350,000 in the form of Industrial Development
Revenue Bonds (the "Bonds") to finance the acquisition of the facility.
Simultaneously with the issuance of the Bonds: (1) NCIDA obtained title to the
facility and leased it to BFS Realty, LLC, (2) BFS Realty, LLC subleased the
facility to Sandata, (3) the Bondholder bought the Bonds, and (4) the Bondholder
received a mortgage and security interest in the facility to secure the payment
of the Bonds. BFS Realty, LLC's obligations under the Lease were guaranteed by
Mr. Brodsky, Sandata, Sandsport Data Services, Inc. and others. BFS Realty,
LLC's obligations respecting repayment of the Bonds were also guaranteed by Mr.
Brodsky, Sandata, Sandsport Data Services, Inc. and others.
The Bonds currently bear interest at the rate of 9%, and the outstanding
balance due on the Bonds as of August 31, 2002 was $1,401,111. During the years
ended May 31, 2002 and 2001, Sandata paid rent to BFS Realty, LLC of
approximately $408,000 and $615,000, respectively.
On August 11, 1995, Sandata entered into a $750,000 loan agreement with the
Long Island Development Corporation ("LIDC"), under a guarantee by the U.S.
Small Business Administration ("SBA") (the "SBA Loan"). The SBA Loan was
assigned to BFS Realty, LLC in November 1996; however, repayment of the SBA Loan
is guaranteed by Sandata and various subsidiaries of Sandata. The entire
proceeds were used to repay a portion of the Bonds. The SBA Loan is payable in
240 monthly installments of $6,255, which includes principal and interest at a
rate of 7.015%. The balance of the SBA Loan as of August 31, 2002 was $592,036.
Revolving Credit Agreement
On April 18, 1997 Sandsport Data Services, Inc., an affiliate of Sandata
("Sandsport"), entered into a revolving credit agreement (the "Credit
Agreement") with HSBC, formerly Marine Midland Bank (the "Bank"), which allowed
Sandsport to borrow amounts up to $3,000,000. Interest accrues on amounts
outstanding under the Credit Agreement at a rate equal to the London Interbank
Offered Rate plus 2% and will be paid quarterly in arrears or, at Sandsport's
option, interest may accrue at the Bank's prime rate. The Credit Agreement
requires Sandsport to pay a fee equal to 1/4% per annum on the unused average
daily balance of amounts under the Credit Agreement. In addition, there are
other fees and charges imposed based upon Sandsport's failure to maintain
certain minimum balances. The Credit Agreement has been amended by HSBC to
permit Sandsport to borrow amounts up to $4,500,000 until June 14, 2003.
Interest accrues at the same rate as the original Credit Agreement. The
indebtedness under the Credit Agreement is guaranteed by Sandata, its affiliates
and Mr. Brodsky. All of the assets of each guarantor are pledged to HSBC as
collateral for amounts due under the Credit Agreement, which pledge is secured
by a first lien on all equipment owned by members of the guarantors, as well as
a collateral assignment of $2,000,000 of life insurance payable on the life of
Mr. Brodsky. The guarantees to HSBC were subsequently modified to include all
indebtedness incurred by Sandata under the amended Credit Agreement dated August
24, 2001 (see below).
In addition, pursuant to the Credit Agreement, the guarantors are required
to maintain certain levels of net worth and meet certain financial ratios in
addition to various other affirmative and negative covenants. At May 31, 2001,
the guarantors failed to meet these net worth and financial ratios, and HSBC
granted a waiver. As of August 24, 2001, Sandsport, Sandata and the other
guarantors, and HSBC entered into the Third Amendment and Waiver (the "Third
Amendment") to the Credit Agreement. Pursuant to the Third Amendment,
Sandsport's obligations to maintain a certain net worth and to maintain certain
financial ratios were revised, on a going-forward basis, and the noncompliance
with the existing covenants was waived by HSBC. In addition, in connection with
the Third Amendment, Sandsport and each guarantor executed and delivered to HSBC
a Collective Amended and Restated Security Agreement, pursuant to which HSBC's
security interest was extended to include a security interest in all of the
personal and fixture property of Sandsport, Sandata and the other guarantors. On
April 11, 2002, HSBC approved the extension of the termination date of the
Credit Agreement to June 14, 2003. There can be no assurance that HSBC will
continue to grant waivers if the guarantors fail to meet the net worth and
financial ratios in the future. If such waivers are not granted, any loans
outstanding under the Credit Agreement become immediately due and payable, which
may have an adverse effect on Sandata's business, operations or financial
condition. As of May 31, 2002, the outstanding balance on the Credit Agreement
with HSBC was $4,500,000 and Sandata was in compliance with the covenants.
National Medical Health Card Systems, Inc.
Sandata owed National Medical Health Card Systems, Inc. ("Health Card"), an
affiliate of Mr. Brodsky, $500,000 pursuant to a promissory note, dated May 31,
2000 and due June 1, 2001, plus interest at the rate of 9-1/2%; interest on such
note was payable quarterly. The Note was paid in May 2001. On June 9, 2001,
Sandata again issued a promissory note to Health Card in the principal amount of
$500,000, with interest at the rate of 7%, which was due on June 8, 2002. This
Note was paid in full on August 15, 2001.
Until January of 2002 Sandata derived revenue from Health Card for database
and operating system support, hardware leasing, and maintenance and related
administrative services. The revenues generated from Health Card amounted to
approximately $693,000 and $2,458,000 for the years ended May 31, 2002 and 2001,
respectively. For the years ended May 31, 2002 and 2001, respectively, Sandata
billed Health Card approximately $126,000 and $821,000 for quality assurance
testing and network support; $47,000 and $561,000 for help desk services;
$175,000 and $448,000 for data processing center; $305,000 and $534,000 for
certain computer equipment leases; and $40,000 and $95,000 for other services.
In addition, Sandata resells its telephone services to Health Card. The billings
for such telephone services amounted to approximately $124,000 and $134,000 for
the years ended May 31, 2002 and May 31, 2001 and are recorded as a reduction of
operating expense. Sandata was owed approximately $19,000 from Health Card at
May 31, 2002. Subsequent to May 31, 2002, Sandata received approximately $14,000
from Health Card, representing substantially complete payment of amounts due as
of that date. As of January 2002, Sandata ceased rendering services to Health
Card. Health Card continues to pay its allocable share of expenses for shared
services, which amounts to approximately $45,000 per month.
Leases
Sandata makes equipment lease payments to P.W. Capital Corp. and P.W.
Medical Management, Inc., both of which are affiliates of Mr. Brodsky. The
payments were $268,011 and $395,989 in fiscal 2002 and 2001, respectively. The
payments for the facility were made to BFS Realty, LLC, and were $408,000 and
$615,000 for the years ended May 31, 2002 and 2001, respectively. In June 2001
Sandata entered into a new lease for the facility which was revised in November
2001.
Medical Arts Office Services, Inc.
Medical Arts Office Services, Inc. ("MAOS"), of which Mr. Brodsky is the
sole stockholder, provided Sandata with accounting, bookkeeping and legal
services. For the fiscal years ended May 31, 2002 and 2001 the total payments
made by Sandata to MAOS were $340,869 and $279,894 respectively.
Material United States Federal Income Tax Consequences of the Merger to our
Stockholders
The following summary of certain United States Federal income tax
consequences relating to the merger is based upon the United States Internal
Revenue Code of 1986, as amended ("the Code"), regulations promulgated
thereunder, and judicial and administrative interpretations thereof as currently
in effect. These are subject to change, possibly with retroactive effect, and to
the possibility of differing interpretations. This summary may not be fully
applicable to persons in special tax situations, including financial
institutions, insurance companies, tax-exempt entities, persons receiving
Sandata stock as compensation, and other persons and entities. This summary does
not address the application of any foreign tax laws or tax laws of any State or
political subdivision of the United States.
This summary is not exhaustive. Tax matters are complicated. You should
consult your own tax advisor for a full understanding of the income tax
consequences of the merger to you under your individual circumstances.
As described below, the receipt of the merger consideration for shares of
Sandata common stock in the merger will be a taxable transaction for Federal
income tax purposes under the Code.
For purposes of the discussion below of Federal tax consequences of the
merger, Messrs. Brodsky, Freund and Stoller, and the members of their immediate
families, are collectively referred to as "Continuing Stockholders" and
stockholders, other than Messrs. Brodsky, Freund and Stoller, and the members of
their immediate families, are collectively referred to as "Non-continuing
Stockholders."
Non-continuing Stockholders
For United States Federal income tax purposes, a Non-continuing Stockholder
who receives only cash in exchange for shares of Sandata common stock in the
merger will generally recognize gain or loss equal to the difference between the
amount of cash received and the stockholder's tax basis in the shares
surrendered. Gain or loss will be capital gain or loss if the shares of Sandata
common stock constitute capital assets in the hands of the exchanging
stockholder. The capital gain or loss will be long-term capital gain or loss if
the shares of Sandata common stock surrendered have been held for more than one
year at the time of the merger. Such capital gain must be recognized for Federal
income tax purposes at the time of the merger.
Under current law, net long term capital gains recognized by an individual
are taxable at a maximum marginal Federal rate of 20% and net short term capital
gains for stock that has been held for one year or less will be subject to tax
at ordinary income rates. Depending on your particular circumstances, your
ability to deduct any loss recognized in the exchange of shares of Sandata
common stock for cash may be limited or deferred. This will depend on your
individual situation, stemming from items not related to the merger, including,
for example, capital loss limitations.
The tax consequences described in the immediately preceding paragraph may
not apply to a Non-continuing Stockholder that, immediately after the merger,
owns directly or is treated as owning constructively, pursuant to the
attribution rules of Section 318 of the Code, any shares of Sandata common
stock. Under Section 318, Non-continuing Stockholders may be treated as owning
Sandata stock that is actually owned by related parties. A related party
includes a person who is a member of a stockholder's family, or a legal entity
in which the stockholder or a member of his or her family directly or indirectly
owns an interest.
If a Non-continuing Stockholder is such a related party, that
Non-continuing Stockholder receiving cash in exchange for shares of Sandata
common stock in the merger may be treated as receiving ordinary income. Ordinary
income is taxable to individuals at a higher Federal income tax rate than
capital gains. A payment of cash to a Non-continuing Stockholder in exchange for
shares of Sandata common stock owned by the stockholder may be subject to a
backup withholding tax at a rate of 30.5% if found to constitute compensation, a
dividend distribution or another type of reportable payment, unless the
stockholder either: (a) is a corporation or comes within certain other exempt
categories or (b) provides a correct taxpayer identification number to the
payer, certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup withholding
rules.
Any Non-continuing Stockholders subject to backup withholding on a payment
of cash in the merger that constitutes compensation, a dividend distribution or
another type of reportable payment will receive the payment upon such
stockholder's payment of any required backup withholding. A stockholder who does
not provide a correct taxpayer identification number may be subject to penalties
imposed by the Internal Revenue Service.
Should a dissenting Non-continuing Stockholder exercise its appraisal
rights under Delaware law and be awarded consideration in exchange for its
Sandata common stock, whether in cash or other property, such stockholder's tax
treatment on receipt of such cash or other property would be the same as just
discussed for Non-continuing Stockholders approving the merger.
Continuing Stockholders
The following discussion concerning the United States Federal income tax
consequences to Continuing Stockholders assumes that the value of the Sandata
common stock received by a Continuing Stockholder in the merger is equal to the
value of the common stock surrendered by that Continuing Stockholder in the
merger, that the Continuing Stockholders formed Sandata Acquisition Corp. by
contributing Sandata common stock to Sandata Acquisition Corp. in exchange for
Sandata Acquisition Corp. common stock, and that the Continuing Stockholders do
not receive any common stock in any capacity other than as a stockholder. A
Continuing Stockholder generally will not recognize any gain or loss upon the
receipt of an interest in Sandata in exchange for its Sandata Acquisition Corp.
common stock.
The tax consequences described in the immediately preceding paragraph may
not apply to a Continuing Stockholder if that Continuing Stockholder has certain
legally enforceable obligations to any Non-continuing Stockholder. Such
Continuing Stockholder may, in some circumstances, be treated as receiving
ordinary dividend income.
THE MERGER
This section of the proxy statement describes certain aspects of the
merger, including certain provisions of the merger agreement. This description
of the merger agreement is qualified by reference to the merger agreement, a
copy of which is attached to this proxy statement as Appendix A and which is
incorporated herein by reference. You are urged to read the entire merger
agreement carefully.
Effective Time of the Merger
The merger agreement provides that, upon the terms and subject to the
conditions in the merger agreement, and in accordance with Delaware law, Sandata
Acquisition Corp. will merge with and into Sandata. As a result of the merger,
Sandata Acquisition Corp.'s corporate existence will cease and Sandata will
continue as the surviving corporation. The merger will become effective at the
time a certificate of merger is filed with and accepted by the Delaware
Secretary of State. The merger is expected to occur as soon as practicable after
all conditions to the merger have been satisfied or waived.
Prior to the effective time of the merger, Messrs. Brodsky, Freund and
Stoller, and members of their immediate families, will contribute all of the
common stock of Sandata owned by them to Sandata Acquisition Corp. At the
effective time of the merger, each issued and outstanding share of our common
stock (excluding shares being contributed to Sandata Acquisition Corp. by
Messrs. Brodsky, Freund and Stoller and members of their immediate families and
owned by holders who validly perfect their appraisal rights under Delaware law)
will be converted into the right to receive $1.91 in cash. Approximately
___________ shares of Sandata common stock (less any shares held by holders of
Sandata common stock who exercise their appraisal rights) will be converted into
the right to receive the merger consideration at the effective time.
The merger agreement provides that (i) the directors and officers of
Sandata immediately prior to the effective time of the merger will be the
directors and officers of the surviving corporation, (ii) the certificate of
incorporation of Sandata as in effect immediately prior to the effective time of
the merger, will continue to be the certificate of incorporation of the
surviving corporation after the merger and (iii) Sandata's bylaws, as in effect
immediately prior to the effective time of the merger, will continue to be the
bylaws of the surviving corporation after the merger.
Payment of Merger Consideration and Surrender of Stock Certificates
Once we and Sandata Acquisition Corp. complete the merger, the following
will occur:
- each share of our common stock issued and outstanding immediately prior
to the effective time of the merger, excluding shares contemplated to be
contributed to Sandata Acquisition Corp. by Messrs. Brodsky, Freund and Stoller
and members of their immediate families and stockholders who validly perfect
their appraisal rights under Delaware law, will automatically be converted into
the right to receive $1.91 in cash;
- each share of Sandata Acquisition Corp. common stock outstanding at the
effective time will be converted into one share of common stock of the surviving
corporation;
- each holder of a certificate formerly representing such shares of Sandata
common stock will cease to have any rights with respect to such shares, except
the right to receive the merger consideration;
- The exchange agent will send you a transmittal form and written
instructions for exchanging your share certificates for the merger
consideration;
- all shares of our common stock, including those contemplated to be owned
by Sandata Acquisition Corp., will no longer be outstanding and will be deemed
cancelled; and
- Our exchange agent will pay the merger consideration to our public
stockholders.
At the effective time of the merger, our public stockholders who have not
exercised appraisal rights will automatically become entitled to receive the
merger consideration. The actual physical exchange of certificates representing
shares of our common stock for the merger consideration will occur after the
effective time of the merger.
North American Transfer Co. will serve as the exchange agent. Shortly after
the completion of the merger, the exchange agent will send or cause to be sent
to all of our public stockholders (other than any dissenting stockholders who
have exercised their appraisal rights) a letter of transmittal with instructions
for exchanging shares of our common stock for the merger consideration. Upon
surrender of a certificate for cancellation by a stockholder to the exchange
agent along with an executed letter of transmittal, such stockholder will be
entitled to the merger consideration. Each of our stock certificates outstanding
immediately prior to the merger will be deemed for all purposes, after the
merger, to evidence the right to receive the merger consideration, regardless of
when the stock certificates are actually exchanged.
Our public stockholders should not send in their certificates for our
common stock until they have received a letter of transmittal and further
written instructions after the date of the completion of the merger.
Please do not send in your stock certificates with your proxy.
Public stockholders who cannot locate their stock certificates are urged to
contact the transfer agent for our common stock (the "Transfer Agent") at the
following address:
North American Transfer Trust Co.
147 West Merrick Road
Freeport, New York 11520
(516) 379-8051
The Transfer Agent will issue a new stock certificate to replace the lost
certificate only if the person who lost his or her stock certificate signs an
affidavit certifying that his or her stock certificate cannot be located, and
provides the Transfer Agent with such additional agreements and documentation as
may be required by the Transfer Agent. Our Transfer Agent may require any
stockholder who lost his or her stock certificate to post a bond.
Financing of the Merger; Fees and Expenses of the Merger
The total amount of funds required to consummate the merger and to pay
related fees and expenses is estimated to be approximately $____________.
Pursuant to the merger agreement, prior to effective time of the merger, Messrs.
Brodsky, Freund and Stoller will contribute the necessary funds to Sandata
Acquisition Corp. and, at the effective time, Sandata Acquisition Corp. will
have the funds necessary to pay the purchase price and all related fees and
expenses incurred by Sandata Acquisition Corp. in cash. The merger is not
conditioned on any financing arrangements.
The following is an estimate of expenses incurred or to be incurred in
connection with the merger which will be paid by Sandata:
Legal Fees(1) $__________
Accounting Fees $__________
Printing, Proxy Solicitation and Mailing Costs $__________
Filing Fees $__________
Financial Advisor Fees $__________
Special Committee $__________
Miscellaneous $__________
Total $__________
(1) Includes anticipated legal fees in connection with defending lawsuits
brought by two stockholders of Sandata in Delaware against Sandata and the
members of its Board of Directors alleging breaches of fiduciary duties to
Sandata and its stockholders.
Appraisal Rights
Under the Delaware General Corporation Law ("DGCL"), holders of shares of
Sandata common stock who do not want to accept the merger consideration, and who
follow the procedures set forth in Section 262 of the DGCL, will be entitled to
have their shares appraised by the Delaware Chancery Court and to receive
payment of the "fair value" of these shares, exclusive of any element of value
arising from the accomplishment or expectation of the merger, together with a
fair rate of interest, if any, as determined by such court.
The following discussion is a summary of the material provisions of Section
262 of the DGCL and is qualified in its entirety by the full text of Section 262
that is reprinted in Appendix C. All references in Section 262 of the DGCL and
in this summary to a "stockholder" or "holder" are to the record holder of the
shares of Sandata common stock as to which appraisal rights are asserted. A
person having a beneficial interest in shares of Sandata common stock held of
record in the name of another person, such as a broker or nominee, must act
promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect appraisal rights.
If you wish to exercise your appraisal rights or you wish to preserve your
right to do so, you should review the following discussion and Appendix C
carefully, because failure to timely and properly comply with the procedures
therein specified will result in the loss of appraisal rights under the DGCL.
Holders of record of Sandata common stock who do not vote in favor of the
merger agreement and who otherwise comply with the applicable statutory
procedures will be entitled to appraisal rights under Section 262 of the DGCL.
Under Section 262 of the DGCL, where a proposed merger is to be submitted for
approval at a meeting of stockholders, Sandata must, not less than 20 days prior
to the meeting, notify each of its stockholders who was a stockholder on the
record date for such meeting, that appraisal rights are available, and must
include in such notice a copy of Section 262 of the DGCL. This proxy statement
constitutes such notice.
A holder of shares for which appraisal rights are available who wishes to
exercise such rights:
- must not vote in favor of the merger agreement or consent thereto in
writing (including by returning a signed proxy without any voting instructions
as to the proposal); and
- must deliver to Sandata, prior to the vote on the merger agreement at the
special meeting, a written demand for appraisal of the holder's shares.
This written demand for appraisal must be in addition to and separate from
any proxy abstaining from or vote against the merger. This demand must
reasonably inform Sandata of the identity of the stockholder and of the
stockholder's intent to demand appraisal of his, her or its shares. A holder of
shares wishing to exercise such holder's appraisal rights must be the record
holder of such shares on the date the written demand for appraisal is made, and
must continue to hold such shares until the consummation of the merger.
Accordingly, a holder of shares for which appraisal rights are available who is
the record holder of shares on the date the written demand for appraisal is
made, but who thereafter transfers such shares prior to consummation of the
merger, will lose any right to appraisal in respect of such shares.
Only a holder of record of shares for which appraisal rights are available
is entitled to assert appraisal rights for the shares registered in that
holder's name. A demand for appraisal should be executed by or on behalf of the
holder of record, fully and correctly, as this holder's name appears on such
holder's stock certificates. If the shares for which appraisal rights are
available are owned of record in a fiduciary capacity, for example, by a
trustee, guardian or custodian, execution of the demand should be made in that
capacity, and if the shares are owned of record by more than one owner as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a holder of record. The
agent, however, must identify the record owner or owners and expressly disclose
the fact that, in executing the demand, the agent is agent for such owner or
owners. Those beneficial owners who wish to exercise appraisal rights under
Section 262 of the DGCL are urged to consult with their brokers to determine the
appropriate procedures for the making of a demand for appraisal by such a
nominee.
All written demands for appraisal should be sent or delivered to:
Sandata Technologies, Inc.
26 Harbor Park Drive
Port Washington, NY 11050
Attention: Corporate Secretary
Within 10 days after the effective time of the merger, Sandata will notify
each stockholder (i) that has properly asserted appraisal rights under Section
262 of the DGCL, and (ii) that has not voted in favor of the merger agreement,
of the date the merger became effective.
Within 120 days after the effective time of the merger, but not later,
Sandata, as the surviving corporation, or any stockholder who has complied with
the statutory requirements summarized above, may file a petition in the Delaware
Chancery Court demanding a determination of the fair value of the shares of
Sandata common stock that are entitled to appraisal rights. Sandata is under no
obligation, and has no present intention, to file a petition with respect to the
appraisal of the fair value of such shares. Accordingly, it will be the
obligation of stockholders wishing to assert appraisal rights to initiate all
necessary action to perfect their appraisal rights within the time prescribed in
Section 262 of the DGCL.
Within 120 days after the consummation of the merger, any stockholder that
has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from Sandata a statement setting
forth (i) the aggregate number of shares for which appraisal rights are
available not voted in favor of adoption of the merger agreement and for which
demands for appraisal have been received, and (ii) the aggregate number of
holders of these shares. These statements must be mailed within 10 days after a
written request has been received by Sandata, or within 10 days after expiration
of the period for delivery of demands for appraisal under Section 262 of the
DGCL, whichever is later.
If a petition for an appraisal is filed on a timely basis, after a hearing
on such petition, of which the Register in Chancery (if so ordered by the
Delaware Chancery Court) will give notice to stockholders, the Delaware Chancery
Court will determine the stockholders entitled to appraisal rights. The Delaware
Chancery Court will also appraise the "fair value" of the shares for which
appraisal rights are available, exclusive of any element of value arising from
the accomplishment or expectation of the merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
Stockholders considering seeking appraisal should be aware that the fair
value of their shares of Sandata common stock as determined under Section 262 of
the DGCL could be more than, the same as, or less than the merger consideration,
and that investment banking opinions as to fairness from a financial point of
view are not necessarily opinions as to fair value under Section 262 of the
DGCL. The Delaware Supreme Court has stated, however, that "proof of value by
any techniques or methods that are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered in
the appraisal proceedings.
The Delaware Chancery Court will determine the amount of interest, if any,
to be paid upon the amounts to be received by stockholders whose shares have
been appraised. The costs of the action may be determined by the Delaware
Chancery Court and allocated among the parties as the Delaware Chancery Court
deems equitable. The Delaware Chancery Court may also order that all or a
portion of the expenses incurred by any stockholder in connection with an
appraisal be charged pro rata against the value of all of the shares entitled to
appraisal.
Any holder of shares who has duly demanded an appraisal in compliance with
Section 262 of the DGCL will not, after the completion of the merger, be
entitled to vote the shares subject to such demand for any purpose, or be
entitled to the payment of dividends or other distributions on those shares
(except dividends or other distributions payable to holders of record as of a
record date prior to the completion of the merger).
If any stockholder that properly demands appraisal of his, her or its
shares under Section 262 of the DGCL fails to perfect, or effectively withdraws
or loses, his, her or its right to appraisal, as provided in Section 262 of the
DGCL, the shares of this stockholder will be converted into the right to receive
the merger consideration of $1.91 per share. A stockholder will fail to perfect,
or effectively lose or withdraw its right to appraisal if, among other things,
no petition for appraisal is filed within 120 days after the effective time of
the merger, or if this stockholder delivers to Sandata a written withdrawal of
his, her or its demand for appraisal. At any time within 60 days after the
effective time of the merger, any stockholder shall have the right to withdraw
such stockholder's demand for appraisal and to accept the merger consideration
of $1.91 per share. Any attempt to withdraw an appraisal demand more than 60
days after the effective time of the merger will require the written approval of
Sandata as the surviving corporation.
Cash received pursuant to the exercise of your appraisal rights will be
subject to income tax. We refer you to the information under the heading
"Special Factors - Material United States Federal Income Tax Considerations."
Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of your rights. Under these
circumstances, you will be entitled to receive the $1.91 merger consideration
with respect to your shares of Sandata common stock in accordance with the
merger agreement.
The foregoing summary of the rights of dissenting public stockholders does
not purport to be a complete statement of the procedures to be followed by
stockholders desiring to exercise any available appraisal rights. The
preservation and exercise of appraisal rights require strict adherence to the
applicable provisions of Section 262 of the DGCL, a copy of which is attached
hereto as Appendix C.
Regulatory Approvals and Legal Proceedings
We are not aware of any license or other regulatory permit that appears to
be material to our business that might be adversely affected by the merger, or
of any approval or other action by any Federal or state governmental,
administrative or regulatory authority or agency that would be required prior to
the merger. Should any such approval or other action be required, we will seek
such approval or action. There can be no assurance that any such approval or
other action, if needed, would be obtained without substantial effort and
expense or that adverse consequences might not result to our business, in order
to obtain such approval or other action or in the event that such approval was
not obtained or such other action was not taken.
The merger will not require a filing or approval under the
Hart-Scott-Rodino Act.
On September 2, 2002, a stockholder of Sandata filed a lawsuit in the
Delaware Chancery Court against the Company and the members of its Board of
Directors. (Eva Seitler v. Sandata Technologies, Inc., Bert E. Brodsky, Ronald
L. Fish, Martin Bernard, Hugh Freund, and Gary Stoller, Civil Action No.
19886-NC). The plaintiff alleges that the defendants breached their fiduciary
duties to Sandata and Sandata's public stockholders in connection with Sandata
Acquisition Corp.'s proposal to acquire all of the outstanding public shares of
Sandata. The plaintiffs also allege, among other things, that the directors
serving on the special committee are not independent, and that the merger
consideration is inadequate. The complaint seeks certification of the action as
a class action, both preliminary and permanent injunctive relief against the
proposed transaction, and rescission if it is not enjoined. On September 18,
another stockholder of Sandata, Stephen Yetzer, filed a separate lawsuit in the
same court, against the same defendants, making substantially identical
allegations and seeking substantially identical remedies (Civil Action No.
19903-NC). These actions were consolidated by the Delaware Chancery Court in an
order dated October 22, 2002 (Civil Action No. 19886-NC). Sandata and the
individual director defendants deny liability and intend to vigorously defend
themselves.
THE MERGER AGREEMENT
The following discussion of certain terms of the merger agreement is
qualified in its entirety by reference to the complete text of the merger
agreement, which is included in this proxy statement as Appendix A and is
incorporated herein by reference.
General
The merger agreement provides for Sandata Acquisition Corp. to merge with
and into Sandata, with Sandata continuing as the surviving corporation. Under
the merger agreement, at the effective time of the merger, the officers of
Sandata prior to the effective time will be the officers of the surviving
corporation and the directors of Sandata prior to the effective time will be the
directors of the surviving corporation. Pursuant to the merger agreement, prior
to the effective time of the merger, Messrs. Brodsky, Freund and Stoller, and
members of their immediate families, will contribute all Sandata common stock
owned by them to Sandata Acquisition Corp.
Consideration to be Received by the Stockholders
At the effective time of the merger, each share of Sandata then issued and
outstanding (excluding shares being contributed to Sandata Acquisition Corp. by
Messrs. Brodsky, Freund and Stoller and members of their immediate families and
owned by holders who validly perfect their appraisal rights under Delaware law)
will be converted into the right to receive $1.91 in cash.
Stock Options
At the effective time of the merger, all outstanding options to purchase
shares of Sandata common stock, whether they are vested or not vested (excluding
options held by Messrs. Brodsky, Freund and Stoller, and members of their
immediate families), will be cancelled and each holder of an option will be
entitled to receive a cash payment equal to the product of the number of shares
subject to the option, and the difference between the merger consideration and
the per share exercise price of the option, reduced by applicable withholding
tax. Outstanding options to purchase Sandata common stock held by Messrs.
Brodsky, Freund and Stoller, and members of their immediate families, will be
cancelled at the effective time and the holders of such options will not be
entitled to receive any consideration.
Representations and Warranties
Sandata does not make any representations or warranties under the merger
agreement.
Sandata Acquisition Corp. and Messrs. Brodsky, Stoller and Freund, make the
following representations and warranties to Sandata:
- Sandata Acquisition Corp. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, has the
power to carry on its business as now conducted and to own its assets and is not
required to be qualified to do business as a foreign corporation in any
jurisdiction;
- No consent of any governmental entity or other person is required to be
received by or on the part of Sandata Acquisition Corp. or Messrs. Brodsky,
Freund or Stoller to enable it or them to enter into and carry out the merger
agreement and the merger;
- Sandata Acquisition Corp. has the corporate power and authority to enter
into the merger agreement and to carry out its obligations;
- The merger agreement constitutes the valid and binding obligation of
Sandata Acquisition Corp. and each of Messrs. Brodsky, Freund and Stoller, and
is enforceable against it and them in accordance with its terms;
- The execution and delivery of the merger agreement and compliance by
Sandata Acquisition Corp. with any of the provisions will not:
-- violate or conflict with any provision of its certificate of
incorporation or bylaws;
-- violate or conflict with, result in the breach or termination of,
the terms of any contract to which Sandata Acquisition Corp. or any of
Messrs. Brodsky, Freund or Stoller is a party;
-- result in the creation of any lien upon any of the assets of
Sandata Acquisition Corp.;
-- violate any judgment, order, injunction, decree or award against,
or binding upon, Sandata Acquisition Corp. and/or Messrs. Brodsky, Freund
or Stoller or upon any of its or their assets; or
-- violate any law or regulation of any jurisdiction relating to
Sandata Acquisition Corp.
- The authorized capital stock of Sandata Acquisition Corp. is 100,000
shares of common stock of which none are outstanding, and there are no
derivative securities outstanding to purchase the common stock of Sandata
Acquisition Corp.;
- The number of shares of Sandata common stock owned by each of Messrs.
Brodsky, Freund and Stoller and the members of their immediate families;
- Except as previously disclosed to Sandata, none of Messrs. Brodsky,
Freund or Stoller nor the members of their immediate families own any derivative
securities entitling them to purchase Sandata common stock;
- Sandata Acquisition Corp. has not made any material untrue statement of
fact or omitted any material fact contained in this proxy statement;
- Sandata Acquisition Corp. was incorporated on April 17, 2002, has engaged
in no other business activities and has conducted its operations only as
contemplated by the merger agreement;
- Sandata Acquisition Corp. has, or will have at the effective time,
sufficient funds available to pay all of the merger consideration and any
payments required under the merger agreement;
- There are no pending legal actions relating to Sandata Acquisition Corp.
or any of its assets or business. Sandata Acquisition Corp. is not in violation
of any law, regulation, or other requirement of any governmental entity or court
relating to its assets;
- Sandata Acquisition Corp. or Messrs. Brodsky, Freund or Stoller have not
engaged, any broker or other third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the transactions
contemplated by the merger agreement;
- Sandata Acquisition Corp. has not paid any fees which are illegal under
any law; and
- No representation, warranty or statement by Sandata Acquisition Corp. or
Messrs. Brodsky, Freund or Stoller in the merger agreement contains any untrue
statement of a material fact, or omits to state a material fact.
Covenants
In the merger agreement, Sandata Acquisition Corp. and Messrs. Brodsky,
Freund and Stoller agreed that, among other things:
- they will not take any action that would result in any of its or
Sandata's representations and warranties set forth in the merger agreement being
or becoming untrue in any material respect, or in any of the conditions to the
merger not being satisfied;
- they will cooperate with Sandata in determining whether any filings are
required to be made with, or consents, authorizations or approvals required to
be obtained from, any third party or governmental entity prior to the effective
time in connection with the merger agreement, and will cooperate in making any
such filings promptly and in seeking to obtain timely any such consents,
authorizations or approvals;
- Messrs. Brodsky, Freund and Stoller, and the members of their immediate
families, will vote, and will cause Sandata Acquisition Corp. to vote, all
shares of Sandata owned by them and Sandata Acquisition Corp. in favor of
adopting the merger agreement; and
- Messrs. Brodsky, Freund and Stoller and the members of their immediate
families will (i) contribute all shares of Sandata owned by them to Sandata
Acquisition Corp. prior to the effective time, (ii) not take any action that
would prevent Sandata Acquisition Corp. from owning the shares of Sandata being
contributed and (iii) contribute an amount in cash to Sandata Acquisition Corp.
sufficient to pay the merger consideration.
In the merger agreement, Sandata agreed that, among other things:
- it will prepare and file a proxy or information statement relating to the
special meeting with the SEC and will use its best efforts to respond to the
comments of the SEC and to cause the proxy statement to be mailed to our
stockholders;
- it will jointly prepare and file with Sandata Acquisition Corp. a
transaction statement on Schedule 13e-3 under the Securities Exchange Act of
1934, as amended;
- it will call a stockholders' meeting to be held as promptly as
practicable for the purpose of voting upon the approval of the merger agreement
and the merger, and will recommend that our stockholders vote to approve the
merger agreement; and
- it will adopt resolutions canceling all outstanding stock options and
entitling each holder to receive the merger consideration payable on each
option.
Nothing contained in the merger agreement prohibits Sandata from, prior to
the date of the stockholder's meeting, furnishing information to, or entering
into discussions or negotiations with, any person that makes an unsolicited
written, bona fide proposal to Sandata with respect to a transaction which could
reasonably be expected to result in a competitive proposal, if the failure to
take such action would be inconsistent with the fiduciary duties of Sandata's
Board of Directors or the special committee to Sandata's stockholders under
applicable law.
Indemnification; Directors' and Officers' Insurance
- At the effective time, the certificate of incorporation and/or bylaws of
the surviving corporation will have the same provisions that are set forth in
the certificate of incorporation and/or bylaws of Sandata relating to the
indemnification of our officers and directors, and these provisions will not be
amended for a period of six years from the effective time in any manner that
would adversely affect the rights of these individuals; and
- the surviving corporation will maintain the directors' and officers'
liability insurance policies currently maintained by Sandata from the effective
time until such period of time during which claims could legally be made against
any director or officer, in their capacity as such.
Conditions to the Merger
The obligations of each of Sandata, Sandata Acquisition Corp. and Messrs.
Brodsky, Freund and Stoller to effect the merger are subject to the satisfaction
of the following conditions, unless waived by both of them:
- the merger agreement is approved and adopted by the affirmative vote of
the holders of a majority of the outstanding shares of Sandata common stock
entitled to vote;
- All authorizations, consents, orders or approvals of, or declarations or
filings with, and all expirations or early terminations of waiting periods
imposed by, any governmental entity which are necessary for the consummation of
the merger will have been filed;
- Sandata shall have obtained all consents or approvals from all persons
and governmental entities relating to any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement to which it is a party;
- No action, suit or proceeding shall have been instituted or be pending or
threatened seeking to prohibit the consummation of the merger or seeking to
obtain damages from Sandata that could be expected to result in a material
adverse effect;
- No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the merger will be in
effect; and
- Dissenting shares must constitute less than 25% of all shares of Sandata
outstanding immediately prior to the effective time.
The obligations of Sandata Acquisition Corp. and Messrs. Brodsky, Freund
and Stoller to effect the merger are subject to the satisfaction of the
following conditions unless waived by Sandata Acquisition Corp. and Messrs.
Brodsky, Freund and Stoller:
- Sandata will have performed and complied in all material respects with
all obligations required to be performed or complied with by it under the merger
agreement;
- Since the date of the merger agreement, there shall not have been any
event that has had, or is reasonably likely to have, a material adverse effect
on Sandata; and
- All proceedings to be taken by Sandata in connection with the
transactions contemplated by the merger agreement and all documents incident
thereto will be reasonably satisfactory in form and substance to Sandata
Acquisition Corp.
The obligation of Sandata to effect the merger is subject to the
satisfaction of the following conditions unless waived by Sandata:
- The representations and warranties of Sandata Acquisition Corp. are true
and correct in all respects at of the effective time in all material respects;
- Sandata Acquisition Corp. and Messrs. Brodsky, Freund and Stoller have
performed and complied in all material respects with all obligations required to
be performed by each of them under the merger agreement; and
- The special committee will have received a fairness opinion from Brean
Murray as of the effective time of the merger, and such opinion shall not have
been withdrawn, modified, repealed or revoked.
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the effective
time, whether before or after approval of the matters presented in connection
with the merger by the stockholders of Sandata:
- by mutual consent of Sandata Acquisition Corp. and Sandata in writing,
whether or not the merger has been approved by the stockholders of Sandata;
- by either Sandata or Sandata Acquisition Corp. and Messrs. Brodsky,
Freund and Stoller, if any of the conditions set forth in the merger agreement
would be incapable of being satisfied by April 15, 2002 and such conditions
shall not have been waived;
- by either Sandata Acquisition Corp. or Sandata if the merger shall not
have been consummated on or prior to April 15, 2002 (or such later date as may
be agreed to in writing by Sandata and Sandata Acquisition Corp.);
- by Sandata Acquisition Corp., if the special committee or the Board of
Directors withdraws, modifies, or changes its approval or recommendation of the
merger agreement or the merger, or approved or have recommended to the
stockholders of Sandata a competing proposal;
- by Sandata Acquisition Corp., if a tender offer or exchange offer or a
proposal by a third party to acquire Sandata or Sandata common stock pursuant to
a merger, consolidation, share exchange, business combination, tender or
exchange offer or similar transaction is commenced or publicly proposed which
contains a proposal as to price (without regard to the specificity of such price
proposal) and Sandata does not make a recommendation to its stockholders to
reject such proposal within ten (10) business days of its commencement or the
date such proposal first becomes publicly disclosed, if sooner;
- by Sandata, if the special committee and the Board of Directors authorize
Sandata to enter into a written agreement with respect to a competing proposal
that the special committee and the Board of Directors have determined is
superior to the proposal of Sandata Acquisition Corp.; and
- by Sandata in its sole discretion if it believes such termination is
necessary to discharge the fiduciary obligation of its Board of Directors and/or
special committee.
Effect of Termination; Expenses
In the event of the termination of the merger agreement, by either us or
Sandata Acquisition Corp., as provided in the merger agreement, the merger
agreement will become void and have no further effect, without any liability or
obligation on the part of either party, except that nothing in the merger
agreement relieves any party from liability or damages resulting from any breach
of the merger agreement.
Sandata Acquisition Corp. agreed to pay all of Sandata's costs and expenses
incurred in connection with the merger agreement and the transactions under the
merger agreement unless the merger agreement is terminated by (i) the mutual
consent of Sandata and Sandata Acquisition Corp. or (ii) Sandata Acquisition
Corp. and Messrs. Brodsky, Freund and Stoller because Sandata failed to comply
with certain conditions and such conditions are not capable of being complied
with prior to April 15, 2002.
Amendment to the Merger Agreement
To the extent permitted under the Delaware General Corporation Law, the
merger agreement may be amended by Sandata and Sandata Acquisition Corp., by
action taken or authorized by their respective boards of directors and the
special committee of Sandata's Board of Directors, at any time before the
effective time, regardless of approval of the matters presented in connection
with the merger by the stockholders of Sandata or of Sandata Acquisition Corp.
The merger agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties to the merger agreement.
OTHER MATTERS
Other Matters for Action at the Special Meeting
Our Board of Directors is not aware of any matters to be presented for
action at the special meeting other than those described herein and does not
intend to bring any other matters before the special meeting. However, if other
matters should come before the special meeting, it is intended that the holders
of proxies solicited by this document will vote thereon in their discretion.
Proposals by Holder of Shares of Common Stock
If the merger is completed, we will no longer have public stockholders or
public participation in any future meetings of our stockholders. However, if the
merger is not completed, our public stockholders will continue to be entitled to
attend and participate in our stockholders' meetings. Pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, promulgated by the SEC,
any stockholder who wishes to present a proposal at the next annual meeting of
stockholders, in the event the merger is not completed, and who wishes to have
the proposal included in our proxy statement for that meeting, must have
delivered a copy of the proposal to us at 26 Harbor Park Drive, Port Washington,
New York 11050, Attention: Corporate Secretary, so that it is received no later
than 120 days before the date of our proxy statement released in connection with
our 2002 annual meeting. Sandata, however, may hold next year's annual meeting
earlier in the year than this year's meeting. Accordingly, in such event,
Sandata suggests that stockholder proposals intended to be presented at next
year's annual meeting be submitted well in advance of July 31, 2003, the
earliest date upon which Sandata anticipates the proxy statement and form of
proxy relating to such meeting will be mailed to stockholders. In order for
proposals by the stockholders not submitted in accordance with Rule 14a-8 to
have been timely within the meaning of Rule 14a-4(c) under the Securities
Exchange Act of 1934, as amended, the proposal must have been submitted so that
it was received within a reasonable time before we mail our proxy materials for
the 2003 annual meeting.
Expenses of Solicitation
Sandata will bear the costs of preparing and mailing the proxy statement
and of soliciting proxies in support of the merger agreement. In addition to our
solicitations by mail, our directors, officers and regular employees may solicit
proxies personally and by telephone, facsimile, or other means, for which they
will receive no compensation in addition to their normal compensation.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of common stock held of record by such persons, and Sandata
may reimburse such persons for their reasonable transaction and clerical
expenses.
Independent Auditors
Marcum & Kliegman, LLP has served as our independent auditors since 1995.
Our consolidated financial statements and the related financial statement
schedules as of May 31, 2002 and 2001 and for each of the two fiscal years in
the period ended May 31, 2002 have been audited by Marcum & Kliegman, LLP, as
stated in its reports, which are included and incorporated by reference in this
proxy statement. It is expected that representatives of Marcum & Kliegman, LLP
will be present at the special meeting.
Available Information
We are subject to the informational filing requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, are required to
file periodic reports, proxy statements and other information with the SEC
relating to our business, financial condition and other matters. Information as
of particular dates concerning our directors and officers, their remuneration,
the principal holders of our securities and any material interest of such
persons in transactions with us is required to be disclosed in periodic reports
filed with the SEC. Such reports, proxy statements and other information should
be available for inspection at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and also
should be available for inspection at the SEC's regional office located at the
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may also be obtained by mail, upon payment of the SEC's
customary fees, by writing to its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549. These materials filed by us with the SEC are also
available on the website of the SEC at www.sec.gov.
Because the merger is a "going private" transaction, the company and
Sandata Acquisition Corp. have filed with the SEC a Rule 13e-3 Transaction
Statement on Schedule 13e-3 under the Securities Exchange Act of 1934, as
amended, (the "Schedule 13e-3"). This Proxy Statement does not contain all of
the information set forth in the Schedule 13e-3 and the exhibits thereto. Copies
of the Schedule 13e-3 and the exhibits thereto are available for inspection and
copying at our principal executive offices during regular business hours by any
of our stockholders, or a representative who has been so designated in writing,
and may be inspected and copied, or obtained by mail, by written request
directed to the same address given above, or from the SEC as described above.
Upon completion of the merger, we will seek to terminate the registration
of our common stock under the Securities Exchange Act of 1934, as amended, which
will relieve us of any obligation to file reports and forms, such as an Annual
Report on Form 10-KSB, with the SEC under the Securities Exchange Act of 1934,
as amended.
A copy of the written opinion of Brean Murray, the financial advisor to the
special committee, is attached as Appendix B to this proxy statement. The
opinion is also available for inspection and copying during regular business
hours at our principal executive offices by any stockholder of ours or the
representative of any stockholder who has been so designated in writing.
Information Incorporated by Reference
The SEC allows us to "incorporate by reference" information into this proxy
statement, which means that we can disclose important information by referring
you to another document filed separately with the SEC. The following documents
previously filed by us with the SEC are incorporated by reference in this proxy
statement and are deemed to be a part hereof:
- our Quarterly Report on Form 10-QSB as filed with the SEC on October 15,
2002;
- our Annual Report on Form 10-KSB for the fiscal year ended May 31, 2002,
filed with the SEC on August 27, 2002;
- Amendment Number One to our 2002 Annual Report, filed with the SEC on
October 25, 2002;
- our Annual Report on Form 10-KSB for the fiscal year ended May 31, 2001,
filed with the SEC on September 7, 2001;
- Amendment Number One to our Annual Report on Form 10-KSB/A for the fiscal
year ended May 31, 2001, filed with the SEC on October 23, 2001;
- Amendment Number Two to our Annual Report on Form 10-KSB/A for the fiscal
year ended May 31, 2001, filed with the SEC on October 30, 2001.
Specifically, the information set forth in the following sections of our
Annual Report on Form 10-KSB for the fiscal year ended May 31, 2002, as amended,
is incorporated by reference in this proxy statement and deemed to be a part
hereof:
Item 1: Business;
Item 2: Properties;
Item 3: Legal Proceedings;
Item 6: Management's Discussions and Analysis or Plan of Operations;
Item 7: Financial Statements and Supplementary Data; and
Item 9: Changes in and Disagreement with Accountants on Accounting.
Financial Disclosure
Our Annual Report on Form 10-KSB for the fiscal year ended May 31, 2002, is
enclosed with this proxy statement. See Appendix D. Amendment Number One to our
2002 Annual Report on Form 10-KSB/A filed with the SEC on October 25, 2002 is
enclosed with this proxy statement. See Appendix E. Our Quarterly Report on Form
10-QSB for the fiscal quarter ended August 31, 2002 is enclosed with this proxy
statement. See Appendix F. Any statement contained in a document incorporated by
reference in this proxy statement shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained in this proxy
statement modifies or supersedes the statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute part of this proxy statement.
We undertake to provide by first class mail, without charge and within two
business days of receipt of any written request, to any person to whom a copy of
this proxy statement has been delivered, a copy of any or all of the documents
referred to above which have been incorporated by reference in this proxy
statement, other than exhibits to the documents, unless the exhibits are
specifically incorporated by reference therein. Requests for copies should be
directed to Sandata Technologies, Inc., 26 Harbor Park Drive, Port Washington,
New York 11050; Attn: Corporate Secretary.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED, OR INCORPORATED BY REFERENCE, IN
THIS PROXY STATEMENT, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US OR ANY OTHER PERSON.
SANDATA HAS SUPPLIED ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT RELATING
TO SANDATA, AND SANDATA ACQUISITION CORP. HAS SUPPLIED ALL INFORMATION CONTAINED
IN THIS PROXY STATEMENT RELATING TO SANDATA ACQUISITION CORP. AND ITS
AFFILIATES.
By order of the Board of Directors
/s/ Hugh Freund
-------------------------------
Executive Vice President and
Secretary
November 15, 2002
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints [_________] and _____, and either of them,
proxies (each with full power of substitution) to vote, as indicated below and
in their discretion upon such other matters, not known or determined at the time
of solicitation of this proxy, as to which stockholders may be entitled to vote
at the special meeting of the stockholders of Sandata Technologies, Inc. to be
held on _________, 2002, at 10:00 a.m., local time, and at any adjournment or
postponement of the special meeting, as indicated on the reverse side.
1. A proposal to adopt the Agreement and Plan of Merger, dated as of
October 28, 2002, by and among Sandata Technologies, Inc., Sandata Acquisition
Corp., Bert E. Brodsky, Hugh Freund and Gary Stoller.
/ / FOR / / AGAINST / / ABSTAIN
(Continued and to be signed on the reverse side)
This proxy is solicited on behalf of the board of directors. This proxy
also delegates discretionary authority with respect to any matters which may
properly become before any adjournment or postponement of the meeting and
matters incident to the conduct of the special meeting.
The undersigned hereby acknowledges receipt of the notice of the special
meeting and the proxy statement.
PLEASE SIGN AND DATE THIS PROXY BELOW.
Date:
Please sign exactly as your name
appears on left. When signing as
attorney, executor, administrator,
guardian or corporate official, please
give full title.
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
SANDATA ACQUISITION CORP.
BERT E. BRODSKY
HUGH FREUND
GARY STOLLER
AND
SANDATA TECHNOLOGIES, INC.
Dated as of October 28, 2002
A-1
TABLE OF CONTENTS
ARTICLE I
DEFINED TERMS
1.1 Defined Terms........................................................2
-------------
ARTICLE II
MERGER
2.1 Merger and Surviving Corporation.....................................2
--------------------------------
(a) Merger......................................................2
------
(c) Certificate of Incorporation................................2
----------------------------
(d) By-Laws.....................................................2
-------
2.2 Effectiveness of Merger..............................................2
-----------------------
2.3 Effect on Capital Stock..............................................3
-----------------------
2.4 Delivery of Merger Consideration.....................................3
--------------------------------
(a) Payment Agent...............................................3
-------------
(b) Payment Procedures..........................................3
------------------
(c) No Further Ownership Rights in the Target Common Stock......4
------------------------------------------------------
(d) Termination of Payment Fund.................................4
---------------------------
(e) Investment of Payment Fund..................................4
--------------------------
(f) Withholding Rights..........................................5
------------------
2.5 Treatment of Options.................................................5
--------------------
(a) Options Generally...........................................5
-----------------
(b) Cancellation of Certain Options.............................5
-------------------------------
(c) Cancellation Procedures.....................................5
-----------------------
(d) Effect of Payments..........................................6
------------------
2.6 Effect of Merger.....................................................6
----------------
(a) Generally...................................................6
---------
(b) Certain Rights..............................................6
--------------
2.7 Directors of Surviving Corporation...................................7
----------------------------------
2.8 Officers of Surviving Corporation....................................7
---------------------------------
2.9 Closing..............................................................7
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND KEY STOCKHOLDERS
3.1 Valid Existence; Qualification.......................................7
------------------------------
3.2 Consents.............................................................8
--------
3.3 Authority; Binding Nature of Agreement...............................8
--------------------------------------
3.4 No Breach............................................................8
---------
3.5 Capitalization.......................................................8
--------------
(a) Purchaser...................................................8
---------
(b) Target Shares...............................................9
-------------
3.6 Information Supplied.................................................9
--------------------
3.7 Operations of Purchaser..............................................9
-----------------------
3.8 No Financing. ......................................................9
------------
3.9 Litigation; Compliance with Law.....................................10
-------------------------------
3.10 Brokers.............................................................10
-------
3.11 Payments............................................................10
--------
3.12 Untrue or Omitted Facts.............................................10
-----------------------
ARTICLE IV
PRE-CLOSING COVENANTS
4.1 Purchaser Covenants.................................................10
-------------------
(a) Certain Actions............................................10
---------------
(b) Government Filings.........................................11
------------------
(c) Voting.....................................................11
------
(d) Ownership in Target........................................11
-------------------
4.2 Competing Transactions..............................................11
----------------------
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of the Proxy Statement and Schedule 13E-3...............12
-----------------------------------------------------
5.2 Stockholders' Meeting...............................................12
---------------------
5.3 Legal Conditions to Merger..........................................13
--------------------------
5.4 Employee Stock Options; Employee Plans and Benefits.................13
---------------------------------------------------
(a) Options.....................................................13
-------
(b) Payments in Respect of Options..............................13
------------------------------
(c) Time of Payment.............................................13
---------------
(d) Withholding.................................................13
-----------
(e) Termination of Equity-Based Compensation....................13
----------------------------------------
(f) No Right to Employment......................................14
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5.5 Indemnification; Exculpation; Directors' and Officers' Insurance....14
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5.6 Communication to Employees..........................................14
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5.7 Additional Actions..................................................14
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ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger..........15
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(a) Stockholder Approval.......................................15
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(b) Government Approvals.......................................15
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(c) Consents Under Agreements..................................15
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(d) No Action..................................................15
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(e) No Injunctions or Restraints; Illegality...................15
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(f) Statutes...................................................15
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(g) Dissenting Shares. ........................................15
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6.2 Conditions to Obligations of the Key Stockholders and Purchaser.....16
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(a) Performance of Obligations of Target.......................16
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(b) Material Adverse Effect....................................16
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(c) Proceedings................................................16
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6.3 Conditions to Obligations of Target.................................16
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(a) Representations and Warranties.............................16
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(b) Performance of Obligations of the Key Stockholders
and Purchaser............................................16
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(c) Fairness Opinion...........................................16
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ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination.........................................................17
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7.2 Effect of Termination...............................................18
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7.3 Fees, Expenses and Other Payments...................................18
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(a) Generally..................................................18
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(b) Reimbursement..............................................18
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(c) Payment Obligations........................................18
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7.4 Amendment...........................................................18
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7.5 Extension; Waiver...................................................18
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ARTICLE VIII
DEFINITIONS
8.1 Certain Definitions.................................................19
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ARTICLE IX
GENERAL PROVISIONS
9.1 Survival of Representations, Warranties and Agreements..............22
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9.2 Notices.............................................................22
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9.3 Interpretation......................................................23
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9.4 Counterparts........................................................23
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9.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership.23
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9.6 Governing Law; Consent to Jurisdiction..............................23
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(a) Governing Law..............................................23
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(b) Jurisdiction and Venue.....................................23
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9.7 Severability; No Remedy in Certain Circumstances....................24
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9.8 Publicity...........................................................24
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9.9 Assignment..........................................................24
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9.10 Adjustment..........................................................24
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AGREEMENT AND PLAN OF MERGER dated as of October 28, 2002 (the "Agreement")
by and among SANDATA ACQUISITION CORP., a Delaware corporation ("Purchaser"),
BERT E. BRODSKY ("Brodsky"), HUGH FREUND ("Freund"), GARY STOLLER ("Stoller"),
(Brodsky, Freund and Stoller are sometimes collectively referred to as "Key
Stockholders") and SANDATA TECHNOLOGIES, INC., a Delaware corporation ("Target")
(Purchaser, Target and the Key Stockholders are sometimes collectively referred
to as the "Parties" and individually as a "Party").
RECITALS:
WHEREAS, it is the intention of the Parties that Purchaser shall merge with
and into the Target (the "Merger"), with the Target being the surviving
corporation;
WHEREAS, a special committee of the Board of Directors of the Target (the
"Board"), consisting entirely of non-management directors of the Target (the
"Special Committee"), was established for, among other purposes, the purpose of
evaluating the Merger and making a recommendation to the Board with regard to
the Merger.
WHEREAS, the Special Committee has received the opinion of Brean Murray &
Co., Inc. (the "Independent Advisor"), an independent financial advisor to the
Special Committee, that, as of October 28, 2002, the consideration to be
received by the holders of Target Common Stock (as hereinafter defined) pursuant
to the Merger is fair, from a financial point of view, to such holders (the
"Fairness Opinion").
WHEREAS, the Special Committee has, after consultation with the Independent
Advisor selected by the Special Committee and in light of and subject to the
terms and conditions set forth herein, (i) determined that (x) the Merger
Consideration (as defined below) is fair to the holders of Target Common Stock
and (y) the Merger is advisable and in the best interests of the Target and the
holders of Target Common Stock; (ii) approved, and declared the advisability of,
this Agreement and (iii) determined to recommend that the Board and the
stockholders of the Target vote to adopt this Agreement.
WHEREAS, the Board, based on the unanimous recommendation and approval of
the Special Committee, has, in light of and subject to the terms and conditions
set forth herein, (i) determined that (x) the Merger Consideration (as defined
below) is fair to the holders of Target Common Stock and (y) the Merger is
advisable and in the best interests of the Target and the holders of Target
Common Stock; (ii) approved, and declared the advisability of, this Agreement
and (iii) determined to recommend that the stockholders of the Target vote to
adopt this Agreement.
WHEREAS, the Board of Directors and stockholders of Purchaser have approved
this Agreement and the Merger and the transactions contemplated by this
Agreement;
WHEREAS, Purchaser and the Key Stockholders desire to make certain
representations and warranties and Purchaser, the Key Stockholders and Target
desire to make certain covenants and agreements in connection with the Merger
and also to prescribe certain conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual benefits to be derived
hereby and the representations, warranties, covenants and agreements herein
contained, the Parties agree as follows:
ARTICLE I
DEFINED TERMS
1.1 Defined Terms. Capitalized terms used in this Agreement will have the
meanings given such terms in Article VIII hereof or elsewhere in the text of
this Agreement, and variants and derivatives of such terms shall have
correlative meanings.
ARTICLE II
MERGER
2.1 Merger and Surviving Corporation.
(a) Merger. Pursuant to the General Corporation Law of the State of
Delaware (the "Delaware Statute"), Purchaser shall merge with and into Target,
and Target shall be the surviving corporation after the Effective Time of the
Merger (the "Surviving Corporation") and shall continue to exist as a
corporation created and governed by the laws of the State of Delaware.
(b) Tax Consequences. For Federal income tax purposes, the parties intend
the Merger to be treated as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended.
(c) Certificate of Incorporation. The Certificate of Incorporation of the
Target as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation from and after the
Effective Time.
(d) By-Laws. The By-Laws of the Target as in effect immediately prior to
the Effective Time shall be the By-Laws of the Surviving Corporation from and
after the Effective Time.
2.2 Effectiveness of Merger. If all of the conditions precedent to the
obligations of each of the Parties hereto as hereinafter set forth shall have
been satisfied or waived, a certificate of merger relating to the Merger (the
"Certificate of Merger") shall be delivered as soon as practicable after the
Closing to the Secretary of State of Delaware for filing in accordance with the
Delaware Statute. The Merger shall become effective upon the acceptance of such
filing by the Secretary of State of Delaware or at such later time as is
specified in the Certificate of Merger, which effective time shall be the
"Effective Time" of the Merger.
2.3 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger, and without any action on the part of the holder thereof:
(i) subject to Section 2.3(iv), and other than shares of common stock of
the Target, par value $.001 ("Target Common Stock"), owned by Purchaser, each
share of Target Common Stock issued and outstanding immediately prior to the
Effective Time, shall be converted into the right to receive an amount in cash,
without interest, equal to $1.91 (the "Merger Consideration") in the manner
provided in Section 2.4 hereof;
(ii) each share of Target Common Stock issued and held by the Purchaser
and/or in the Target's treasury or held by any Subsidiary of the Target
immediately prior to the Effective Time, shall, by virtue of the Merger, cease
to be outstanding and shall be cancelled and retired without payment of any
consideration therefor;
(iii) each share of common stock, par value $.01 per share, of Purchaser
that is issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of common stock
of the Surviving Corporation; and
(iv) notwithstanding anything in this Agreement to the contrary, to the
extent provided by the Delaware Statute, Purchaser will not make any payment of
Merger Consideration with respect to Target Common Stock held by any person (a
"Dissenting Stockholder") who elects to demand appraisal of such Dissenting
Stockholder's shares and duly and timely complies with all of the provisions of
the Delaware Statute concerning the right of holders of Target Common Stock to
require appraisal of their shares ("Dissenting Shares"), but such Dissenting
Stockholders shall have the right to receive such consideration as may be
determined to be due such Dissenting Stockholders pursuant to the laws of the
State of Delaware. If, after the Effective Time, a Dissenting Stockholder
withdraws such Dissenting Stockholder's demand for appraisal or fails to perfect
or otherwise loses such Dissenting Stockholder's right of appraisal, in any case
pursuant to the Delaware Statute, such Dissenting Shares will be deemed to be
converted as of the Effective Time into the right to receive the Merger
Consideration pursuant to Section 2.3(i).
2.4 Delivery of Merger Consideration.
(a) Payment Agent. As of the Effective Time, Purchaser shall deposit, or
shall cause to be deposited, with a bank or trust company designated by
Purchaser and satisfactory to the Special Committee (the "Payment Agent"), for
the benefit of the holders of Target Common Stock, for payment in accordance
with this Article II through the Payment Agent, the Merger Consideration to be
paid in respect of all Target Common Stock (such funds deposited with the
Payment Agent, the "Payment Fund").
(b) Payment Procedures. As soon as reasonably practicable after the
Effective Time, the Payment Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented Target Common Stock (the "Certificates"), the following documents:
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Payment Agent and shall be in such form and
have such other provisions as Purchaser may reasonably specify); and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for payment with respect thereto. Upon surrender of a Certificate for
cancellation to the Payment Agent together with such letter of transmittal, duly
executed, the holder of such Certificate shall be entitled to receive in
exchange therefor the Merger Consideration payable with respect to the Target
Common Stock represented by such Certificate pursuant to the provisions of this
Article II, and the Certificate so surrendered shall forthwith be cancelled. In
the event that a holder has lost or misplaced a Certificate, an affidavit of
loss thereof (together with an appropriate indemnity and/or bond if Purchaser so
requires by notice in writing to the holder of such Certificate) satisfactory in
form and substance to the Target's transfer agent and the Payment Agent shall
accept such letter of transmittal in lieu of the applicable Certificate. In the
event of a transfer of ownership of Target Common Stock which is not registered
in the transfer records of the Target, payment of the applicable Merger
Consideration may be made to a transferee if the Certificate representing such
Target Common Stock is presented to the Payment Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.4, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration with respect thereto as contemplated by this
Section 2.4. No interest shall accrue or be paid to any beneficial owner of
Target Common Stock or any holder of any Certificate with respect to the Merger
Consideration payable upon the surrender of any Certificate.
(c) No Further Ownership Rights in the Target Common Stock. The Merger
Consideration paid with respect to the cancellation of Target Common Stock in
accordance with the terms hereof shall be deemed to have been paid in full
satisfaction of all rights pertaining to such Target Common Stock and there
shall be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the Target Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be cancelled and exchanged as provided in this Article II, subject to
applicable law in the case of Dissenting Shares.
(d) Termination of Payment Fund. Any portion of the Payment Fund which
remains undistributed to the stockholders of the Target for six months after the
Effective Time shall be delivered to the Surviving Corporation, upon demand, and
any stockholders of the Target who have not theretofore complied with this
Article II shall thereafter look only to the Surviving Corporation for payment
of their claim for the Merger Consideration. Upon termination of the Payment
Fund pursuant to this subsection and upon delivery to the Surviving Corporation
of the balance thereof, the Surviving Corporation shall have the right to invest
any such amount delivered to it in its sole discretion.
(e) Investment of Payment Fund. The Payment Agent shall invest any cash
included in the Payment Fund as directed by the Surviving Corporation, in (i)
obligations of or guaranteed by the United States, and (ii) certificates of
deposit, bank repurchase agreements and bankers' acceptances of any bank or
trust company organized under federal law or under the law of any state of the
United States or of the District of Columbia that has capital, surplus and
undivided profits of at least $500 million or in money market funds which are
invested substantially in such investments, none of which shall have maturities
of greater than one year. Any interest or other income resulting from such
investments shall be paid to the Surviving Corporation. The Surviving
Corporation shall replace any net losses incurred by the Payment Fund as a
result of investments made pursuant to this Section 2.4(e).
(f) Withholding Rights. The Surviving Corporation or the Payment Agent
shall be entitled to deduct and withhold from the Merger Consideration payable
pursuant to this Agreement to any holder of Certificates or Target Common Stock
represented thereby such amounts (if any) as the Surviving Corporation or the
Payment Agent is required to deduct and withhold with respect to the making of
such payment under the Internal Revenue Code of 1986, as amended (the "Code"),
or any provision of state, local or foreign tax law. To the extent that amounts
are so withheld by the Surviving Corporation or the Payment Agent, such withheld
amounts shall be treated for all purposes of this Agreement as having been paid
to the holder of the Target Common Stock in respect of which such deduction and
withholding was made by the Surviving Corporation or the Payment Agent.
2.5 Treatment of Options.
(a) Options Generally. Prior to the Effective Time, except as provided in
Section 2.5(b) hereof, the Board of Directors of the Target (and/or, if
appropriate, the Special Committee) shall adopt appropriate resolutions and take
all other actions necessary to provide that each outstanding stock option or
warrant (each, an "Option") heretofore granted by the Target, whether under the
Target's 1995 Stock Option Plan, 1998 Stock Option Plan or 2000 Stock Option
Plan (collectively, the "Target Stock Plans"), or otherwise, whether or not then
vested or exercisable, shall, at the Effective Time, be cancelled, and each
holder thereof shall be entitled to receive a payment in cash as provided in
Section 5.3 hereof, if any (subject to any applicable withholding taxes, the
"Cash Payment"). As provided herein, unless otherwise determined by Purchaser,
the Target Stock Plans or other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the capital stock of the
Target) shall terminate as of the Effective Time. After the date hereof, the
Target will not issue any Options or other options, warrants, rights or
agreements which would entitle any person to acquire any capital stock of the
Target or, except as otherwise provided in this Section 2.5(a) or in Section
5.3, to receive any payment in respect thereof.
(b) Cancellation of Certain Options. At the Effective Time, any and all of
the Options held by Bert E. Brodsky, Hugh Freund, Gary Stoller, or any member of
the immediate family of any of them and/or trusts for their benefit (the
"Purchaser Group"), whether or not exercisable at such time, shall without any
action on part of the holder thereof be cancelled.
(c) Cancellation Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall mail or otherwise cause to be
delivered to each record Option holder (other than the Purchaser Group) as of
the Effective Time, a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Option shall pass,
only upon receipt of any originally-executed copy of the Option Agreement
between the Optionholder and the Target which evidences the Option (the "Option
Agreement") ) and instructions for use in effecting the surrender for
cancellation by the Surviving Corporation of the originally-executed Option
Agreement for payment therefor, all of which shall be in form and substance
reasonably satisfactory to the Target. Upon surrender to the Surviving
Corporation for cancellation of an Option Agreement, together with such letter
of transmittal duly executed and any other necessary documents reasonably
required by the Surviving Corporation, such Option Agreement shall forthwith be
cancelled. Payment with respect to each Option shall be made only to the person
in whose name the Option Agreement is registered. No interest shall be paid or
accrued on the cash payable upon the surrender of the Option Agreement. Until
surrender, in accordance with the provisions of this Section 2.5(c), the Option
Agreement which immediately prior to the Effective Time evidenced outstanding
Options (except for Option Agreements held by the Purchaser Group) shall
represent for all purposes the right to receive cash as herein provided. If any
holder of an Option shall not surrender to the Surviving Corporation his Option
Agreement on or before the fourth anniversary of the Effective Date, he shall
forfeit his interest in payment as provided in this Agreement which interest
shall revert to the Surviving Corporation.
(d) Effect of Payments. All payments made in accordance with the terms of
this Section 2.5 and Section 5.3 in respect of Options shall be deemed to have
been made in full satisfaction of all rights pertaining to such Option.
2.6 Effect of Merger.
(a) Generally. Except as herein otherwise specifically set forth, the
identity, existence, purposes, powers, franchises, rights and immunities of
Target shall continue unaffected and unimpaired by the Merger, and the corporate
identity, existence, purposes, powers, franchises and immunities of Purchaser
shall be merged into Target, and Target, as the Surviving Corporation, shall be
fully vested therewith at the Effective Time.
(b) Certain Rights. At the Effective Time:
(i) All rights, privileges, goodwill, franchises and property, real,
personal and mixed, and all debts due on whatever account and all other things
in action, belonging to Purchaser shall be, and they hereby are, bargained,
conveyed, granted, confirmed, transferred, assigned and set over to and vested
in Target, as the Surviving Corporation, by operation of law and without further
act or deed, and all property and rights, and all and every other interest of
Purchaser shall be the property, rights and interests of Target, as the
Surviving Corporation, as they were of Purchaser;
(ii) No Action or proceeding, whether civil or criminal, pending at the
Effective Time by or against either Purchaser or Target, or any stockholder,
officer or director thereof, shall abate or be discontinued by the Merger, but
may be enforced, prosecuted, settled or compromised as if the Merger had not
occurred, or the Surviving Corporation may be substituted in such Action or
proceeding in place of Purchaser; and
(iii) All rights of employees and creditors and all Liens (as hereinafter
defined) upon the property of Purchaser shall be preserved unimpaired, limited
to the property affected by such Liens at the Effective Time, and all the debts,
liabilities and duties of Purchaser shall attach to Target as the Surviving
Corporation and shall be enforceable against the Surviving Corporation to the
same extent as if all such debts, liabilities and duties had been incurred or
contracted by it.
2.7 Directors of Surviving Corporation. The persons comprising the Board of
Directors of the Purchaser immediately prior to the Effective Time shall be the
Board of Directors of the Surviving Corporation, who shall hold office from the
Effective Time in accordance with its By-Laws until the next annual meeting of
stockholders and until their respective successors shall have been elected and
shall have qualified, subject to the terms hereof.
2.8 Officers of Surviving Corporation. The officers of the Purchaser
immediately prior to the Effective Time shall be the Board of Directors of the
Surviving Corporation, who shall hold office from the Effective Time in
accordance with its By-Laws until the next annual meeting of directors and until
their respective successors shall have been elected or appointed and shall have
qualified, subject to the terms hereof.
2.9 Closing. Unless this Agreement shall have been terminated pursuant to
Article VII and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "Closing") will take place
as promptly as practicable (and in any event within five business days)
following satisfaction or waiver of the conditions set forth in Article VI (the
"Closing Date"), but in no event later than April 15, 2003, at the offices of
Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue, East Meadow, New York
11554, unless another date, time or place is agreed to in writing by the
Parties.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND KEY STOCKHOLDERS
Purchaser and the Key Stockholders, jointly and severally, make the
following representations and warranties to Target, each of which shall be
deemed Material, and Target in executing, delivering and consummating this
Agreement, has relied upon the correctness and completeness, in all Material
respects, of each of such representations and warranties:
3.1 Valid Existence; Qualification. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Purchaser has the power to carry on its business as now conducted and
to own its assets. Purchaser is not required to be qualified in any jurisdiction
in order to own its assets or carry on its business as now conducted, and there
has not been any claim by any other jurisdiction to the effect that Purchaser is
required to qualify or otherwise be authorized to do business as a foreign
corporation therein. The copies of Purchaser's Certificate of Incorporation, as
amended to date, certified by the Secretary of State of the State of Delaware,
and By-Laws, as amended to date (certified by the Secretary of Purchaser), which
have been delivered to Target, are true and complete copies of those documents
as in effect on the date hereof.
3.2 Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity or other
Person is required to be received by or on the part of Purchaser or any Key
Stockholder to enable Purchaser and/or such Key Stockholder to enter into and
carry out this Agreement and/or Purchaser to consummate the Merger.
3.3 Authority; Binding Nature of Agreement. Purchaser has the corporate
power and authority to enter into this Agreement and carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the board of
directors and stockholders of Purchaser, and no other corporate proceedings on
the part of Purchaser are necessary to authorize the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby.
This Agreement constitutes the valid and binding obligation of Purchaser and
each Key Stockholder and is enforceable against it in accordance with its terms.
3.4 No Breach. Neither the execution and delivery of this Agreement nor
compliance by Purchaser and/or any Key Stockholder with any of the provisions
hereof nor the consummation of the transactions contemplated hereby will:
(i) violate or conflict with any provision of the Certificate of
Incorporation or By-Laws of Purchaser;
(ii) violate or conflict with, or alone or with notice or the passage of
time, or both, result in the breach or termination of, or otherwise give any
party the right to terminate, or declare a Default under, the terms of any
Contract to which Purchaser and/or any Key Stockholder is a party or by which it
or he may be bound;
(iii) result in the creation of any Lien upon any of the assets of
Purchaser;
(iv) violate any judgment, order, injunction, decree or award against, or
binding upon, Purchaser and/or any Key Stockholder or upon any of its or his
assets; or
(v) violate any law or regulation of any jurisdiction relating to Purchaser
and/or any Key Stockholder.
3.5 Capitalization.
(a) Purchaser. The authorized capital stock of Purchaser consists of
100,000 shares of Common Stock, $.01 par value per share ("Purchaser Common
Stock"), of which no shares are issued and outstanding. At or prior to Closing,
Purchaser shall deliver to Target a true and complete list of the record holders
of such shares. At the time such shares are issued, all of such issued and
outstanding shares of Purchaser Common Stock shall be duly authorized, validly
issued, fully paid and nonassessable. There are no outstanding Derivative
Securities of Purchaser that are convertible into or exchangeable for any
securities of Purchaser and there are no outstanding subscriptions, options,
warrants, rights, calls or other commitment or agreements to which Purchaser or
any Key Stockholder or member of the Purchaser Group is a party or by which it
or he is bound calling for the issuance, transfer, sale or disposition of any
securities of Purchaser or Derivative Securities of Purchaser.
(b) Target Shares. Each of the members of the Purchaser Group, directly or
indirectly, Beneficially Owns the number of shares of Target Common Stock set
forth opposite his or her name below (in each case, the "Purchaser Group
Shares"):
Name Number of Shares
Bert E. Brodsky 747,773
Jessica Heather Brodsky 294,470
David Craig Brodsky 18,783
Jeffrey Holden Brodsky 184,925
Lee Jared Brodsky 18,684
Hugh Freund 350,721
Emily Freund 20,732
Leland Freund 20,732
Gertrude Kay 6,000
Gary Stoller 153,778
Except for the Options to be cancelled pursuant to Section 2.5(b), there
are no outstanding Derivative Securities of Target that are convertible into or
exchangeable for any securities of Target and there are no outstanding
subscriptions, options, warrants, rights, calls or other commitment or
agreements to which any member of the Purchaser Group is a party or by which it
or he is bound calling for the issuance, transfer, sale or disposition of any
securities of Target or Derivative Securities of Target.
3.6 Information Supplied. None of the information concerning the Key
Stockholders or Purchaser provided by or on behalf of the Key Stockholders
and/or Purchaser specifically for inclusion or incorporation by reference in the
Proxy Statement or the Schedule 13E-3 will, at the date of mailing to
stockholders and at the times of the meetings of stockholders to be held in
connection with the Merger, 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 were made, not misleading.
3.7 Operations of Purchaser. Purchaser was incorporated on April 17, 2002
has engaged in no business activities and has conducted its operations only as
contemplated hereby.
3.8 No Financing. Purchaser has, or will as of the Closing have, sufficient
funds available in the aggregate amount sufficient to pay all of the Merger
Consideration and any payments required under this Agreement. Immediately after
giving effect to the transactions contemplated hereby, Purchaser will not (i) be
insolvent (either because its financial condition is such that the sum of its
debts is greater than the fair value of its assets or because the fair salable
value of its assets is less than the amount required to pay its probable
liability on its existing debts as they mature), (ii) have unreasonably small
capital with which to engage in its business, or (iii) have incurred debts
beyond its ability to pay as they come due.
3.9 Litigation; Compliance with Law. There are no Actions relating to
Purchaser or any of its assets or business, pending or, to the knowledge of
Purchaser, threatened, or any order, injunction, award or decree outstanding
against Purchaser or against or relating to any of its assets or business; and
to the knowledge of Purchaser and the Key Stockholders, there exists no basis
for any such Action. The Purchaser is not in violation of any law, regulation,
ordinance, order, injunction, decree, award, or other requirement of any
Governmental Entity or court or arbitrator relating to its assets.
3.10 Brokers. Neither Purchaser nor any Key Stockholder has engaged,
consented to, or authorized any broker, finder, investment banker or other third
party to act on its or his behalf, directly or indirectly, as a broker or finder
in connection with the transactions contemplated hereby.
3.11 Payments. Purchaser has not directly or indirectly paid or delivered
any fee, commission or other sum of money or item or property, however
characterized, to any finder, agent, client, customer, supplier, government
official or other Person, in the United States or any other country, which is
illegal under any federal, state or local laws of the United States (including,
without limitation, the U.S. Foreign Corrupt Practices Act) or such other
country.
3.12 Untrue or Omitted Facts. No representation, warranty or statement by
Purchaser and/or any Key Stockholder in this Agreement contains any untrue
statement of a Material fact, or omits to state a Material fact necessary in
order to make such representations, warranties or statements not misleading.
Without limiting the generality of the foregoing, there is no fact known to
Purchaser and/or any Key Stockholder that has had, or which may be reasonably
expected to have, a Material Adverse Effect that has not been disclosed in this
Agreement.
ARTICLE IV
PRE-CLOSING COVENANTS
4.1 Purchaser Covenants. Except as expressly contemplated by this
Agreement, after the date hereof and prior to the Effective Time, without the
prior written consent of the Target:
(a) Certain Actions. The Purchaser shall not (and the Key Stockholders
shall not authorize or permit Purchaser to) take any action that would, or might
reasonably be expected to, result in any of its or the Target's representations
and warranties set forth in this Agreement being or becoming untrue in any
Material respect, or in any of the conditions to the Merger set forth in Article
VI not being satisfied, or which would adversely affect the ability of any of
them or of the Target to obtain any of the Requisite Regulatory Approvals.
(b) Government Filings. Purchaser shall (and the Key Stockholders shall
cause the Purchaser to) cooperate with the Target in determining whether any
filings are required to be made with, or consents, authorizations, orders,
approvals required to be obtained from, any third party or Governmental Entity
prior to the Effective Time in connection with this Agreement or the
transactions contemplated hereby, and shall cooperate in making any such filings
promptly and in seeking to obtain timely any such consents, authorizations,
orders and/or approvals. Purchaser shall (and the Key Stockholders shall cause
the Purchaser to) promptly provide the Target with copies of all other filings
made by the Purchaser with any Governmental Entity in connection with this
Agreement, the Merger or the other transactions contemplated hereby.
(c) Voting. The Purchaser shall (and the Key Stockholders shall cause the
Purchaser to) and the Key Stockholders shall (and shall cause all members of the
Purchaser Group to) vote all Target Common Stock standing in their respective
names on the books of the Target to approve this Agreement and the transactions
contemplated hereby.
(d) Ownership in Target.
(i) Prior to the Effective Time, the Key Stockholders shall (and shall
cause the other members of the Purchaser Group to) contribute their Purchaser
Group Shares to the Purchaser.
(ii) Between the date hereof and the Effective Time, the Key Stockholders
shall not take any action that would prevent the Purchaser from owning, and
shall cause the Purchaser to own, on or prior to the Effective Time, a number of
shares of Target Common Stock no less than the number of Purchaser Group Shares.
(iii) Prior to the Effective Time, the Key Stockholders shall (or shall
cause the Purchaser Group to) contribute to the capital of Purchaser an amount
of cash sufficient to pay the aggregate Merger Consideration and all reasonably
forseeable claims arising in connection with this Agreement and the Merger.
4.2 Competing Transactions. Nothing contained in this Agreement shall
prohibit the Target from, prior to the date of the Stockholders' Meeting, (i)
furnishing information to, or entering into discussions or negotiations with,
any person that makes an unsolicited written, bona fide proposal to the Target
with respect to a Competing Transaction which could reasonably be expected to
result in a Superior Proposal, if, (A) the failure to take such action would be
inconsistent with the Board's and the Special Committee's fiduciary duties to
the Target's stockholders under applicable law, and (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such person,
the Target (x) provides reasonable notice to Purchaser to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such person and (y) receives from such person a fully executed confidentiality
agreement, (ii) complying with the rules and regulations promulgated by the SEC,
including, without limitation, Rule 14d-9 or Rule 14e-2 promulgated under the
Exchange Act with regard to a tender or exchange offer, or (iii) failing to make
or withdrawing or modifying its recommendation referred to in Section 5.2, or
recommending an unsolicited, bona fide proposal with respect to a Competing
Transaction which could reasonably be expected to result in a Superior Proposal,
following the receipt of such a proposal, if the failure to take such action
would be inconsistent with the Board's and the Special Committee's fiduciary
duties to the Target's stockholders under applicable law.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of the Proxy Statement and Schedule 13E-3. (i) The Target
shall as promptly as practicable prepare and file a proxy or information
statement relating to the Stockholders' Meeting (together with all amendments,
supplements and exhibits thereto, the "Proxy Statement") with the SEC and will
use its best efforts to respond to the comments of the SEC and to cause the
Proxy Statement to be mailed to the Target's stockholders at the earliest
practical time. The Target will notify Purchaser promptly of the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff
for amendments or supplements to the Proxy Statement or for additional
information and will supply Purchaser with copies of all correspondence between
the Target or any of its representatives, on the one hand, and the SEC or its
staff, on the other hand, with respect to the Proxy Statement or the Merger. If
at any time prior to the Stockholders' Meeting there shall occur any event that
should be set forth in an amendment or supplement to the Proxy Statement, the
Target will promptly prepare and mail to its stockholders such an amendment or
supplement. The Target will not mail any Proxy Statement, or any amendment or
supplement thereto, to which Purchaser reasonably objects. The Target hereby
consents to the inclusion in the Proxy Statement of the recommendation of the
Board described in Section 5.2, subject to any modification, amendment or
withdrawal thereof, and represents that the Independent Advisor has, subject to
the terms of its engagement letter with the Target, consented to the inclusion
of references to the Fairness Opinion in the Proxy Statement.
(ii) The Target and Purchaser shall together prepare and file a Transaction
Statement on Schedule 13E-3 (together with all amendments and exhibits thereto,
the "Schedule 13E-3") under the Exchange Act. Each of the Key Stockholders and
Purchaser shall furnish all information concerning it, its Affiliates and the
holders of its capital stock required to be included in the Schedule 13E-3 and,
after consultation with each other, shall respond promptly to any comments made
by the SEC with respect to the Schedule 13E-3. All such information shall be in
accordance with and subject to Section 3.5 of this Agreement.
5.2 Stockholders' Meeting. The Target shall call the Stockholders' Meeting
to be held as promptly as practicable for the purpose of voting upon the
approval of this Agreement, the Merger and the other transactions contemplated
hereby. The Target will, through its Board and the Special Committee, recommend
to its stockholders approval of such matters, unless the taking of such action
would be inconsistent with the Board's and the Special Committee's fiduciary
duties to stockholders under applicable laws. The Target shall solicit from
Target stockholders entitled to vote at the Stockholders' Meeting proxies in
favor of such approval and shall take all other action necessary or helpful to
secure the vote or consent of such holders required by the Delaware Statute or
this Agreement to effect the Merger. The Target shall (and the Key Stockholders
shall cause the Target to) coordinate and cooperate with Purchaser with respect
to the timing of such meeting.
5.3 Legal Conditions to Merger. Each of the Target, the Key Stockholders
and Purchaser shall use all reasonable best efforts to take, or cause to be
taken, all actions necessary (i) to comply promptly with all legal requirements
which may be imposed on such party with respect to the Merger and to consummate
the transactions contemplated by this Agreement, subject to the approval of
stockholders of the Company described in Section 5.2, and (ii) to obtain (and to
cooperate with the other party to obtain) any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity and of any other
public or private third party which is required to be obtained or made by such
party in connection with the Merger and the transactions contemplated by this
Agreement.
5.4 Employee Stock Options; Employee Plans and Benefits.
(a) Options. Prior to the Effective Time, the Board of Directors of the
Target (or, if appropriate, the Special Committee or any committee administering
the Target Stock Option Plans) shall adopt such resolutions or take such other
actions as are required to effect the transactions contemplated by Section 2.5
in respect of all outstanding Options, and thereafter the Board of Directors of
the Target (or any such committee) shall adopt any such additional resolutions
and take such additional actions as are required in furtherance of the
foregoing.
(b) Payments in Respect of Options. Each Option cancelled pursuant to
Section 2.5(a) shall, upon cancellation, be converted into the right to receive
an amount in cash equal to the product of (i) the number of shares of Target
Common Stock subject to such Option, whether or not then exercisable, and (ii)
the excess, if any, of the Merger Consideration over the exercise price per
share subject or related to such Option (the "Option Consideration").
(c) Time of Payment. The cash amount described in paragraph (b) of this
Section 5.4 shall be paid as promptly as is practicable after the Effective
Time.
(d) Withholding. All amounts payable pursuant to Section 2.5(a) and
Sections 5.4(b) and (c) shall be subject to any required withholding of taxes
and shall be paid without interest. Payment shall, at Purchaser's request, be
withheld in respect of any Option until Purchaser has received documentation
that evidences such payment is in full satisfaction of all rights under such
Option.
(e) Termination of Equity-Based Compensation. No stock options or warrants
will be issued under the Target Stock Option Plans or otherwise after the date
hereof. Unless otherwise determined by Purchaser, any provision in any other
Benefit Plan providing for the potential issuance, transfer or grant of any
capital stock of the Target or any interest, or release of restrictions, in
respect of any capital stock of the Target shall be terminated as of the
Effective Time. The Target shall ensure that, as of the Effective Time, unless
otherwise determined by Purchaser, no holder of an Option, restricted stock or
Derivative Security or any participant in the Target Stock Option Plans or other
Benefit Plan or otherwise shall have any right thereunder to acquire any capital
stock of the Target or the Surviving Corporation, other than shares of Target
Common Stock issued or issuable upon exercise of Options that were issued and
outstanding on the date hereof. Holders of Options shall not be entitled to
receive any payment or benefit except as provided in Section 2.5(a) and this
Section 5.4.
(f) No Right to Employment. Other than as specifically contemplated in this
Agreement, nothing contained in this Agreement shall confer upon any employee of
the Target or any ERISA Affiliate any right with respect to employment by
Purchaser, the Surviving Corporation or any of its Affiliates, nor shall
anything herein interfere with any or create any additional right of Purchaser,
the Surviving Corporation or any of its Affiliates to terminate the employment
of any such employee at any time, with or without cause, or restrict Purchaser,
the Surviving Corporation or any of Purchaser's Affiliates in the exercise of
their independent business judgment in modifying any other terms and conditions
of the employment of any such employee.
5.5 Indemnification; Exculpation; Directors' and Officers' Insurance. (i)
As of the Effective Time, the certificate of incorporation and by-laws of the
Surviving Corporation shall contain provisions no less favorable with respect to
indemnification and exculpation than are set forth in the certification of
incorporation and/or by-laws of the Target, which provisions shall not be
amended, repealed or otherwise modified for a period of six years from the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who at the Effective Time were directors, officers, employees or
agents of the Target. From and after the Effective Time, for a period of six
years, Purchaser and the Surviving Corporation, jointly and severally, shall
indemnify the directors and officers of the Target on terms no less favorable
than the provisions with respect to indemnification that are set forth in the
certificate of incorporation and/or by-laws of the Target as of the Effective
Time. Purchaser and the Target agree that the directors, officers and employees
of the Target covered thereby are intended to be third party beneficiaries under
this Section 5.5 and shall have the right to enforce the obligations of the
Surviving Corporation and the Purchaser.
(ii) The Surviving Corporation shall maintain in effect, from the Effective
Time until such period of time during which claims could legally be made against
any director or officer of the Target, in their capacity as such, any and all
directors' and officers' liability insurance currently maintained by the Target.
5.6 Communication to Employees. The Target and Purchaser will cooperate
with each other with respect to, and endeavor in good faith to agree in advance
upon the method and content of, all written or oral communications or disclosure
to employees of the Target or any of its Subsidiaries with respect to the Merger
and any other transactions contemplated by this Agreement. Upon reasonable
notice, the Target shall (and the Key Stockholders shall cause the Target to)
provide Purchaser access to the Target's and its Subsidiaries' employees and
facilities.
5.7 Additional Actions. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all actions reasonably necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated by this Agreement.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each Party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions unless waived
by both Purchaser and Target:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of a majority of the outstanding
shares of Target Common Stock entitled to vote thereon.
(b) Government Approvals. All authorizations, consents, orders or approvals
of, or declarations or filings with, and all expirations or early terminations
of waiting periods imposed by, any Governmental Entity which are necessary for
the consummation of the Merger shall have been filed, occurred or been obtained
(all such permits, approvals, filings and consents and the lapse of all such
waiting periods being referred to as the "Requisite Regulatory Approvals") and
all such Requisite Regulatory Approvals shall be in full force and effect.
(c) Consents Under Agreements. The Target shall have obtained the consent
or approval of all persons and Governmental Entities relating to any loan or
credit agreement, note, mortgage, indenture, lease, license or other agreement,
Contract or instrument to which it or any of its subsidiaries is a party.
(d) No Action. No Action, suit or proceeding shall have been instituted, or
shall be pending or threatened (i) seeking to restrain in any Material respect
or prohibit the consummation of the Merger, (ii) seeking to obtain from the
Target, any of its directors, or Purchaser any damages which would reasonably be
expected to result in a Material Adverse Effect, or (iii) seeking to impose the
restrictions, prohibitions or limitations on the Merger.
(e) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor shall any proceeding by any
Governmental Entity seeking any of the foregoing be pending.
(f) Statutes. No statute, rule, regulation, executive order or decree or
order of any kind shall have been enacted by any Governmental Entity which would
make the consummation of the Merger illegal.
(g) Dissenting Shares. Dissenting Shares shall constitute less than 25% of
all shares of Target Common Stock outstanding immediately prior to the Effective
Time.
6.2 Conditions to Obligations of the Key Stockholders and Purchaser. The
obligations of the Key Stockholders and Purchaser to effect the Merger are
subject to the satisfaction of the following conditions unless waived by the Key
Stockholders and Purchaser:
(a) Performance of Obligations of Target. The Target shall have performed
and complied in all Material respects with all obligations required to be
performed or complied with by it under this Agreement at or prior to the Closing
Date, and Purchaser shall have received a certificate signed on behalf of the
Target by the President and Chief Executive Officer of the Target and by the
Chief Financial Officer of the Target to such effect.
(b) Material Adverse Effect. Since the date of this Agreement, there shall
not have occurred any Material Adverse Effect with respect to the Target and no
facts or circumstances arising after the date of this Agreement shall have
occurred which, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect with respect to the Target.
(c) Proceedings. All proceedings to be taken on the part of the Target in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Purchaser, and Purchaser shall have received copies of all such
documents and other evidences as Purchaser may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
6.3 Conditions to Obligations of Target. The obligation of the Target to
effect the Merger is subject to the satisfaction of the following conditions
unless waived by the Target:
(a) Representations and Warranties. The representations and warranties of
the Purchaser and the Key Stockholders set forth in this Agreement shall be true
and correct in all respects as of the Effective Time as though made on or as of
such time (ignoring for purposes of this determination any materiality or
Material Adverse Effect qualifiers contained within individual representations
and warranties), except for (i) those representations and warranties that
address matters only as of a particular date or only with respect to a specific
period of time which need only be true and correct as of such date or with
respect to such period and (ii) such failures to be true and correct as would
not, individually or in the aggregate, reasonably be expected to result in a
Material Adverse Effect on Purchaser.
(b) Performance of Obligations of the Key Stockholders and Purchaser. The
Key Stockholders and Purchaser shall have performed and complied in all Material
respects with all obligations required to be performed by them under this
Agreement at or prior to the Closing Date, and the Target shall have received a
certificate signed on behalf of Purchaser by the President and Chief Executive
Officer of Purchaser and by the Chief Financial Officer of Purchaser and by each
Key Stockholder to such effect.
(c) Fairness Opinion. The Special Committee shall have received the
Fairness Opinion of the Independent Advisor as of the Effective Time and the
Fairness Opinion of the Independent Advisor shall not have been withdrawn,
modified, repealed or revoked.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Target:
(i) by mutual consent of Purchaser and the Target in a written instrument,
whether or not the Merger has been approved by the stockholders of the Target;
(ii) by the Target, if any of the conditions set forth in Sections 6.1
and/or 6.3 would be incapable of being satisfied by April 15, 2003 and shall not
have been waived;
(iii) By the Purchaser and Key Stockholders, if any of the conditions set
forth in Sections 6.1 and/or 6.2 would be incapable of being satisfied by April
15, 2003, in each case, except as such shall have been the result of any action
or inaction by Purchaser or any Key Stockholder, and shall not have been waived
by Target;
(iv) by either Purchaser or the Target if the Merger shall not have been
consummated on or prior to April 15, 2003 (or such later date as may be agreed
to in writing by the Target and Purchaser) (other than due to the failure of the
party seeking to terminate this Agreement to perform its obligations under this
Agreement required to be performed at or prior to the Effective Time);
(v) by Purchaser, if the Special Committee or the Board shall have (i)
withdrawn, modified or changed its approval or recommendation of this Agreement,
the Merger or any of the other transactions contemplated herein in any manner
which is adverse to Purchaser or shall have resolved to do the foregoing; or
(ii) approved or have recommended to the stockholders of the Target a Competing
Transaction or a Superior Proposal, entered into an agreement with respect to a
Competing Transaction or Superior Proposal or shall have resolved to do the
foregoing;
(vi) by Purchaser, if (i) a tender offer or exchange offer or a proposal by
a third party to acquire the Target or the Target Common Stock pursuant to a
merger, consolidation, share exchange, business combination, tender or exchange
offer or similar transaction shall have been commenced or publicly proposed
which contains a proposal as to price (without regard to the specificity of such
price proposal) and (ii) the Target shall not have made a recommendation to the
stockholders of the Target to reject such proposal within ten (10) business days
of its commencement or the date such proposal first becomes publicly disclosed,
if sooner;
(vii) by the Target, if the Special Committee and the Board authorize the
Target to enter into a written agreement with respect to a Competing Transaction
that the Special Committee and the Board have determined is a Superior Proposal;
and
(viii) by Target, in its sole discretion, which shall be final, conclusive
and binding, to the extent it believes such termination to be reasonably
necessary to discharge the fiduciary obligation of its Board of Directors and/or
Special Committee under applicable law.
7.2 Effect of Termination. In the event of termination of this Agreement
and abandonment of the Merger by either the Target or Purchaser as provided in
Section 7.1, this Agreement shall forthwith terminate and there shall be no
liability or obligation on the part of Purchaser, the Key Stockholders or the
Target or their respective officers or directors except with respect to Sections
5.5 and 7.3; provided, however, that, subject to the provisions of Section 9.7,
nothing herein shall relieve any party of liability for any breach hereof,
except that in the event of a termination of this Agreement, no party shall have
any right to the recovery of expenses except as provided in Section 7.3.
7.3 Fees, Expenses and Other Payments.
(a) Generally. Except as otherwise provided in this Section 7.3, whether or
not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby (including, without
limitation, fees and disbursements of counsel, financial advisors and
accountants) shall be borne solely and entirely by the party which has incurred
such costs and expenses (with respect to such party, its "Expenses").
(b) Reimbursement. Purchaser and the Key Stockholders agree that if this
Agreement shall be terminated pursuant to Sections 7.1(ii), 7.1(iii) (but only
with respect to the failure of a condition set forth in 6.1) or 7.1(iv) through
(viii) then they shall pay to the Target an amount equal to Target's actual
Expenses.
(c) Payment Obligations. Any payment required to be made pursuant to this
Section 7.3 shall be made as promptly as practicable but not later than five
business days after termination of this Agreement and shall be made by wire
transfer of immediately available funds to an account designated by Target.
7.4 Amendment. To the extent permitted by the Delaware Statute, this
Agreement may be amended by the parties hereto, by action taken or authorized by
their respective Boards of Directors and the Special Committee, at any time
before the Effective Time, regardless of approval of the matters presented in
connection with the Merger by the stockholders of the Target or of Purchaser.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the Parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Boards of Directors
and the Special Committee, may, to the extent legally allowed, (i) extend the
time for the performance of any of the obligations or other acts of the other
parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party.
ARTICLE VIII
DEFINITIONS
8.1 Certain Definitions. For purposes of this Agreement:
(a) "Action" shall mean any action, claim, suit, demand, litigation,
governmental or other proceeding, labor dispute, arbitral action, governmental
audit, inquiry, investigation, criminal prosecution, investigation or unfair
labor practice charge or complaint.
(b) an "Affiliate" of any person or entity means another person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such first person or entity.
(c) "Beneficially Own" or "Beneficial Ownership" with respect to any
securities, means having "beneficial ownership" of such securities in accordance
with the provisions of Rule 13d-3 under the Exchange Act. Without duplicative
counting of the same securities by the same holder, securities beneficially
owned by a person include securities beneficially owned by all other persons
with whom such person would constitute a group.
(d) "Benefit Plan" shall mean any "employee benefit plans" (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended,
including, but not limited to, employment Contracts, bonus, pension, profit
sharing, deferred compensation, incentive compensation, excess benefit, stock,
stock option (including the Target Stock Plans), severance, termination pay,
change in control or other employee benefit plans, programs or arrangements,
including those providing medical, dental, vision, disability, life insurance
and vacation benefits (other than those required to be maintained by law),
whether written or unwritten, qualified or unqualified, funded or unfunded,
foreign or domestic, currently maintained, or contributed to, or required to be
maintained or contributed to, by the Target or any ERISA Affiliate for the
benefit of any current or former employees, officers or directors of the Target
or any Subsidiary or with respect to which the Target or its Subsidiaries have
any liability.
(e) "Contract" shall mean any agreement, contract, note, lease, evidence of
indebtedness, purchase order, letter of credit, indenture, security or pledge
agreement, franchise agreement, undertaking, covenant not to compete, employment
agreement, license, instrument, obligation, commitment, course of dealing or
practice, understanding or arrangement, whether written or oral, to which a
particular Person is a party or is otherwise bound.
(f) "Competing Transaction" shall mean any of the following (other than the
transactions contemplated by this Agreement) involving the Target: (i) any
merger, consolidation, share exchange, exchange offer, business combination,
recapitalization, liquidation, dissolution or other similar transaction
involving the Target resulting in the Target's current stockholders owning less
than a majority of the capital stock of the surviving corporation in such
transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets representing 20% or more of the total assets of the Target
and its Subsidiaries, in a single transaction or series of transactions; (iii)
any tender offer or exchange offer for 20% or more of the outstanding Target
Common Stock or the filing of a registration statement under the Securities Act
in connection therewith; (iv) any person or group acquiring Beneficial Ownership
of 15% or more, or such person or group having increased its Beneficial
Ownership beyond 15%, of the outstanding Target Common Stock; or (v) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing.
(g) "Default" shall mean any breach, default and/or other violation, and/or
the occurrence of any event that with or without the passage of time or the
giving of notice or both would constitute a breach, default or other violation,
under, or give any Person the right to accelerate, terminate or renegotiate, any
Contract.
(h) "Derivative Securities" shall mean warrants, options, rights, shares of
capital stock, evidences of indebtedness, or other securities, which are
convertible, exercisable or exchangeable into shares of common stock.
(i) "ERISA Affiliate" shall mean the Target or any other person or entity
that, together with the Target, is treated as a single employer under Section
414 of the Internal Revenue Code of 1986, as amended.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(k) "Governmental Entity" shall mean a federal, state, local, or foreign
governmental body or a political subdivision of such governmental body, or other
regulatory body, court, administrative agency or commission or other
governmental authority or instrumentality.
(l) "Lien" shall mean any claim, lien, pledge, option, charge, restriction,
easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
(m) "Material" with respect to any entity means an event, change or effect
which is material in relation to the condition (financial or otherwise),
properties, assets, liabilities, businesses or operations of such entity and its
Subsidiaries taken as a whole.
(n) "Material Adverse Effect" means, with respect to the Target or
Purchaser, any change, event or effect shall have occurred that, when taken
together with all other adverse changes, events or effects that have occurred
would or would reasonably be expected to (i) be Materially adverse to the
business, assets, properties, results of operations or condition (financial or
otherwise) of such party and its Subsidiaries taken as a whole, or (ii) prevent
or Materially delay the consummation, or increase the cost to Purchaser, of the
Merger.
(o) "Person" means an individual, corporation, limited liability company,
general or limited partnership , joint venture, association, trust,
unincorporated organization or other legal entity.
(p) "Securities Act" shall mean the Exchange Act of 1933, as amended.
(q) "SEC" means the United States Securities and Exchange Commission.
(r) a "Subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
person.
(s) "Superior Proposal" means any bona fide written proposal to acquire,
directly or indirectly, for consideration consisting of cash and/or securities,
all of the shares of Target Common Stock then outstanding or all or
substantially all of the assets of the Target and the assumption of the
liabilities and obligations of the Target to be followed by a pro rata
distribution of the sale proceeds to stockholders of the Target, that (i) is not
subject to any financing conditions or contingencies, (ii) provides holders of
Target Common Stock with per share consideration that the Special Committee
determines in good faith, after receipt of advice of its Independent Advisor, is
more favorable from a financial point of view than the consideration to be
received by holders of Target Common Stock in the Merger, (iii) is determined by
the Special Committee in its good faith judgment, after receipt of advice of its
Independent Advisor and outside legal counsel, to be likely of being completed
(taking into account all legal, financial, regulatory and other aspects of the
proposal, the Person making the proposal and the expected timing to complete the
proposal), and (iv) does not, in the definitive agreement, contain any "due
diligence" conditions.
ARTICLE IX
GENERAL PROVISIONS
9.1 Survival of Representations, Warranties and Agreements. The
representations and warranties made by the Parties contained in this Agreement
and any other agreement delivered pursuant hereto or made in writing by or on
behalf of the Parties shall not survive beyond the Effective Time.
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to the Key Stockholders and Purchaser, to:
Sandata Acquisition Corp.
26 Harbor Park Drive
Port Washington, New York 11050
Attention: Bert E. Brodsky
Facsimile: (516) 484-3290
With a copy to:
Panza, Maurer & Maynard, P.A.
Third Floor, Bank of America Building
3600 North Federal Highway
Fort Lauderdale, Florida 33308
Attention: Linda C. Frazier, Esq.
Facsimile: (954) 390-7991
(b) if to the Target, to:
Sandata Technologies, Inc.
26 Harbor Park Drive
Port Washington, New York 11050
Attention: Jonathan Friedman, Esq.
Facsimile: (516) 605-6989
With copies to:
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue, 9th Floor
East Meadow, New York 11554
Attention: Steven J. Kuperschmid, Esq.
Facsimile: (516) 296-7111
9.3 Interpretation. When a reference is made in this Agreement to Sections,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The recitals hereto constitute an integral part of this Agreement.
The table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement", "the date hereof" and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to October 28, 2002.
9.4 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, it being understood that all
parties need not sign the same counterpart.
9.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership.
This Agreement (including the documents and the instruments referred to herein)
(i) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; and (ii) except as provided in Sections 2.4, 2.5, 5.3 and
5.5, is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder. The parties hereby acknowledge that, except as
hereinafter agreed to in writing, no party shall have the right to acquire or
shall be deemed to have acquired shares of common stock of the other party
pursuant to the Merger until consummation thereof.
9.6 Governing Law; Consent to Jurisdiction.
(a) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to the
principles of conflicts of laws thereof.
(b) Jurisdiction and Venue. Each of the parties hereto (A) consents to
submit itself to the exclusive personal jurisdiction and venue of any Delaware
state court or any federal court located in the State of Delaware in the event
any dispute arises out of this Agreement or any of the transactions contemplated
by this Agreement and (B) agrees that it shall not attempt to deny or defeat
such personal jurisdiction or venue by motion or other request for leave from
any such court.
9.7 Severability; No Remedy in Certain Circumstances. Any term or provision
of this Agreement that is invalid 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 declares that any term or
provision hereof is invalid or unenforceable, the parties agree that the court
making the determination of invalidity or unenforceability shall have the power
to reduce the scope, duration, or area of the term or provision, to delete
specific words or phrases, or to replace any invalid 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, and this Agreement shall be enforceable as so modified after the
expiration of the time within which the judgment may be appealed. Except as
otherwise contemplated by this Agreement, to the extent that a party hereto took
an action inconsistent herewith or failed to take action consistent herewith or
required hereby pursuant to an order or judgment of a court or other competent
authority, such party shall incur no liability or obligation unless such party
did not in good faith seek to resist or object to the imposition or entering of
such order or judgment.
9.8 Publicity. Except as otherwise required by any applicable law or rules
or regulations promulgated thereunder, including, without limitation, any public
disclosure obligations of Target, so long as this Agreement is in effect,
neither the Target, the Key Stockholders nor Purchaser shall issue or cause the
publication of any press release or other public announcement with respect to
the transactions contemplated by this Agreement without the consent of the other
party, which consent shall not be unreasonably withheld.
9.9 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
9.10 Adjustment. All dollar amounts and share numbers set forth herein,
including without limitation the Merger Consideration, shall be subject to
equitable adjustment in the event of any stock split, stock dividend, reverse
stock split or similar event affecting the Target Common Stock, between the date
of this Agreement and the Effective Time, to the extent appropriate.
The Remainder of this Page is Intentionally Left Blank. Signature page
follows.
IN WITNESS WHEREOF, Purchaser, the Key Stockholders and the Target have
caused this Agreement, to be signed by their respective officers thereunto duly
authorized or individually, as the case may be, all as of the date hereof.
SANDATA ACQUISITION CORP.
By:/s/Jessica Brodsky Miller
Name: Jessica Brodsky Miller
Title:President
SANDATA TECHNOLOGIES, INC.
By:/s/Bert E. Brodsky
Name: Bert E. Brodsky
Title: Chairman and Chief Executive
Officer
/s/Bert E. Brodsky
--------------------------------
Bert E. Brodsky
/s/Hugh Freund
--------------------------------
Hugh Freund
/s/ Gary Stoller
--------------------------------
Gary Stoller
APPENDIX B
BREAN MURRAY & CO., INC.
570 Lexington Avenue
New York, NY 10022-6822
212/702-6500
www.bmur.com
October 28, 2002
Board of Directors
Sandata Technologies, Inc.
26 Harbor Park Drive
Port Washington, NY 11050
Dear Sirs:
We understand that Sandata Technologies, Inc., a Delaware corporation
("Sandata"), intends to enter into an Agreement and Plan of Merger,
substantially in the form of the draft dated October 25, 2002 (the "Agreement"),
among Sandata Acquisition Corp. ("SAC"), Bert E. Brodsky, Hugh Freund, Gary
Stoller, and Sandata, a copy of which has been provided to us. The Agreement
provides, among other things, for the merger (the "Proposed Transaction") of SAC
with and into Sandata, with Sandata continuing as the surviving corporation.
The Agreement provides, among other things, that at the "Effective Time"
(as such term is defined in the Agreement), each outstanding share of Common
Stock of Sandata, par value $.001 per share (the "Sandata Common Stock"), other
than the shares of Sandata Common Stock held in the treasury of Sandata, by any
of its subsidiaries, or by stockholders validly exercising their dissenter's
rights, will be converted into the right to receive $1.91 in cash (the "Merger
Consideration"). The terms of the Proposed Transaction are set forth in more
detail in the Agreement.
You have requested our opinion, as investment bankers, as to the fairness
from a financial point of view, to the stockholders of Sandata of the Merger
Consideration to be paid by SAC for the Sandata Common Stock in the Proposed
Transaction. Our opinion addresses only the fairness, from a financial point of
view, of the Merger Consideration to be paid by SAC for the Sandata Common Stock
in the Proposed Transaction, and we do not express any views on any other terms
of the Proposed Transaction. Specifically, we have not been requested to opine
as to, and our opinion does not in any manner address, the relative merits of
the Proposed Transaction as compared to any alternative business strategy that
might exist for Sandata. We have been advised, and have taken into account, that
a majority of the outstanding common stock of Sandata is beneficially owned by
the principals of SAC, who are three of Sandata's directors and the adult
children of one of its directors.
In arriving at our opinion, we have:
- reviewed publicly available historical financial and operating data
concerning Sandata, including, without limitation, the Annual Reports on Form
10-KSB for the fiscal years ended May 31, 2000, May 31, 2001, and May 31, 2002;
- reviewed projected financial information prepared by Sandata management;
- reviewed publicly available information concerning Sandata; o conducted
discussions with Sandata senior management concerning Sandata's historical
financial results, business prospects and projected financial information;
- reviewed the draft dated October 25, 2002, of the Agreement and related
documents; for the purposes of this opinion, we have assumed that the final form
thereof will not differ in any material respect from such draft; and
- performed various financial analyses of Sandata, as we have deemed
appropriate, including a discounted cash flow analysis; a comparable company
analysis, and an internal rate of return to equity analysis.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for the independent verification of such
information, and we have further relied upon the assurances of Sandata that it
is not aware of any facts or circumstances that would make such information
inaccurate or misleading. We have also assumed that obtaining all regulatory
approvals and third party consents required for the consummation of the Proposed
Transaction will not have an adverse impact on Sandata or on the anticipated
benefits of the Proposed Transaction. We have further assumed that the
transactions described in the Agreement will be consummated in a timely manner
without waiver or modification of any of the material terms or conditions
contained therein. In arriving at our opinion, we have not conducted any
physical inspection of Sandata's properties or facilities, and we have not made
or obtained any evaluation or appraisal of the assets or liabilities of Sandata.
Our opinion set forth herein is necessarily based upon financial, market,
economic and other conditions and circumstances as they exist and have been
disclosed on, and can be evaluated as of, the date hereof. We are not expressing
any opinion herein as to the price at which the Sandata Common Stock will
actually trade at any time.
B-1
We have acted as financial advisor to the Special Independent Committee of
the Board of Directors of Sandata in connection with the Proposed Transaction
and will receive a fee for such services and for rendering this opinion. In
addition, Sandata has agreed to indemnify us for certain liabilities that may
arise out of the rendering of this opinion. In the ordinary course of our
business, we may actively trade the debt or equity securities of Sandata for our
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
Our opinion is provided for the use and benefit of the Board of Directors
of Sandata and is rendered to the Board of Directors in connection with the
Proposed Transaction. This opinion is not intended and does not constitute a
recommendation to any stockholder of Sandata as to how a stockholder should vote
with respect to the Proposed Transaction. This opinion is not to be reprinted,
reproduced or disseminated without our prior written consent, and is not to be
quoted or referred to, in whole or in part, in connection with the Proposed
Transaction or any other matter; provided that we understand and agree that if
this opinion is required pursuant to any applicable statute or regulation to be
included in any materials to be filed with the Securities and Exchange
Commission or mailed to the shareholders of Sandata in connection with the
Proposed Transaction, the opinion may be reproduced in such materials only in
its entirety, and any description of or reference to us or any summary of this
opinion in such materials must be in a form acceptable to and consented to in
advance by us, such consent not to be unreasonably withheld.
Based upon and subject to the foregoing, including the various assumptions,
limitations, and qualifications set forth hErein, we are of the opinion that, as
of the date hereof, the Merger Consideration to be paid by SAC in connection
with the Proposed Transaction is fair, from a financial point of view, to the
stockholders of Sandata.
Respectfully submitted,
/s/Brean Murray & Co., Inc.
Brean Murray & Co., Inc.
APPENDIX C
ss. 262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to ss. 251 (other than a merger effected pursuant to ss. 251(g) of this
title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title. (2)
Notwithstanding paragraph (1) of this subsection, appraisal rights under this
section shall be available for the shares of any class or series of stock of a
constituent corporation if the holders thereof are required by the terms of an
agreement of merger or consolidation pursuant to ss.ss. 251, 252, 254, 257, 258,
263 and 264 of this title to accept for such stock anything except: a. Shares of
stock of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof; b. Shares of stock of
any other corporation, or depository receipts in respect thereof, which shares
of stock (or depository receipts in respect thereof) or depository receipts at
the effective date of the merger or consolidation will be either listed on
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of
fractional shares or fractional depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or d. Any combination of the shares
of stock, depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing subparagraphs a., b.
and c. of this paragraph. (3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under ss. 253 of this title is
not owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable. (d) Appraisal
rights shall be perfected as follows: (1) If a proposed merger or consolidation
for which appraisal rights are provided under this section is to be submitted
for approval at a meeting of stockholders, the corporation, not less than 20
days prior to the meeting, shall notify each of its stockholders who was such on
the record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section. Each
stockholder electing to demand the appraisal of such stockholder's shares shall
deliver to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such stockholder's shares. A proxy or vote against the merger
or consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein provided.
Within 10 days after the effective date of such merger or consolidation, the
surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has not voted
in favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
C-1
(2) If the merger or consolidation was approved pursuant to ss. 228 or ss.
253 of this title, then either a constituent corporation before the effective
date of the merger or consolidation or the surviving or resulting corporation
within 10 days thereafter shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constitutent [sic] corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constitutent [sic] corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constitutent [sic] corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given. (e) Within 120 days after the effective date of the
merger or consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw such stockholder's demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger or
resulting from the consolidation a statement setting forth the aggregate number
of shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder's written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later. (f) Upon the filing of any such
petition by a stockholder, service of a copy thereof shall be made upon the
surviving or resulting corporation, which shall within 20 days after such
service file in the office of the Register in Chancery in which the petition was
filed a duly verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with whom agreements
as to the value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such a duly verified
list. The Register in Chancery, if so ordered by the Court, shall give notice of
the time and place fixed for the hearing of such petition by registered
orcertified [sic] mail to the surviving or resulting corporation and to the
stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation. (g)
At the hearing on such petition, the Court shall determine the stockholders who
have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder. (h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted such stockholder's certificates of stock to the
Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section. (i) The Court shall direct the payment
of the fair value of the shares, together with interest, if any, by the
surviving or resulting corporation to the stockholders entitled thereto.
Interest may be simple or compound, as the Court may direct. Payment shall be so
made to each such stockholder, in the case of holders of uncertificated stock
forthwith, and the case of holders of shares represented by certificates upon
the surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of Chancery may
be enforced, whether such surviving or resulting corporation be a corporation of
this State or of any state. (j) The costs of the proceeding may be determined by
the Court and taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order all or a
portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorney's fees
and the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal. (k) From and after the effective
date of the merger or consolidation, no stockholder who has demanded appraisal
rights as provided in subsection (d) of this section shall be entitled to vote
such stock for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions payable to
stockholders of record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just. (l) The shares of the
surviving or resulting corporation to which the shares of such objecting
stockholders would have been converted had they assented to the merger or
consolidation shall have the status of authorized and unissued shares of the
surviving or resulting corporation. (8 Del. C. 1953, ss. 262; 56 Del. Laws, c.
50; 56 Del. Laws, c. 186, ss. 24; 57 Del. Laws, c. 148, ss.ss. 27-29; 59 Del.
Laws, c. 106, ss. 12; 60 Del. Laws, c. 371, ss.ss. 3-12; 63 Del. Laws, c. 25,
ss. 14; 63 Del. Laws, c. 152, ss.ss. 1, 2; 64 Del. Laws, c. 112, ss.ss. 46-54;
66 Del. Laws, c. 136, ss.ss. 30-32; 66 Del. Laws, c. 352, ss. 9; 67 Del. Laws,
c. 376, ss.ss. 19, 20; 68 Del. Laws, c. 337, ss.ss. 3, 4; 69 Del. Laws, c. 61,
ss. 10; 69 Del. Laws, c. 262, ss.ss. 1-9; 70 Del. Laws, c. 79, ss. 16; 70 Del.
Laws, c. 186, ss. 1; 70 Del. Laws, c. 299, ss.ss. 2, 3; 70 Del. Laws, c. 349,
ss. 22; 71 Del. Laws, c. 120, ss. 15; 71 Del. Laws, c. 339, ss.ss. 49-52; 73
Del. Laws, c. 82, ss. 21.)
APPENDIX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2002
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from ________ to __________
Commission file number 0-14401
SANDATA TECHNOLOGIES, INC.
(Exact name of small business issuer in its charter)
DELAWARE 11-2841799
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
26 Harbor Park Drive, Port Washington, NY 11050
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (516) 484-4400
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
D-1
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for year ended May 31, 2002 were $17,852,710.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of August
16, 2002 was $1,536,918.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
---------------- -------------
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of each of the issuer's classes of common
equity, as of August 16, 2002 was 2,481,808.
Transitional Small Business Disclosure Format (check one):
Yes No X
------------ ------------
DOCUMENTS INCORPORATED BY REFERENCE
None.
INDEX
Page No.
Forward Looking Statements
PART I
Item 1. Description of Business 1
Item 2. Description of Property 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 11
Item 7. Financial Statements 18
18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 18
18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 19
Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 23
Item 12. Certain Relationships and Related Transactions 25
PART IV
Item 13. Exhibits, List and Reports on Form 8-K 27
Signatures 30
Certain information contained in this Annual Report on Form 10-KSB (the
"Form 10-KSB") includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and is subject to the safe
harbor created by that act. Sandata Technologies, Inc. (the "Company") cautions
readers that certain important factors may affect the Company's actual results
and could cause such results to differ materially from any forward-looking
statements which may be deemed to have been made in this Form 10-KSB or which
are otherwise made by or on behalf of the Company. For this purpose, any
statements contained in this Form 10-KSB that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may", "will", "expect", "believe",
or "anticipate", or the negative variations thereof, or comparable terminology,
are intended to identify forward-looking statements. Factors which may affect
the Company's results include, but are not limited to, the risks and
uncertainties associated with developments in and regulation of the health-case
industry, new technology developments, competitive bidding, risks and
uncertainties associated with the Internet and Internet-related products, and
other factors.
The Company is also subject to other risks detailed herein or detailed from
time to time in its Securities and Exchange Commission ("SEC") filings. Readers
are also urged to carefully review and consider the various disclosures made by
the Company which attempt to advise interested parties of the factors which
affect the Company's business, including, without limitation, the disclosures
made under the captions "Description of Business" in Item 1, "Management's
Discussion and Analysis or Plan of Operation" in Item 6, and "Certain
Relationships and Related Transactions" in Item 12, of this Form 10-KSB. All
references to a fiscal year are to the Company's fiscal year which ends May 31.
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Business Development
General
The Company, by itself and through its wholly owned subsidiaries, is
engaged in providing technology services to its customers. These services either
a) utilize software products developed, acquired or licensed by the Company or
b) leverage the technology-based core competencies that the Company has
developed in formulating and delivering its software services.
Applications of the Company's software include: an automated payroll
processing and Medicaid billing service delivered via leased lines or over the
Internet, computerized preparation of management reports, telephone based data
collection services, and automated database driven outbound telephone
notification.
Services that leverage the Company's core competencies are driven by the
Company's Information Technology ("IT") support services. The services currently
offered include: facilities outsourcing for database and operating system
support, technology consulting, custom software development and support, resale
and implementation of software written and distributed by others, web site
development and hosting, help desk services, and hardware maintenance and
related administrative services.
The Company's software is written in a variety of software languages
including JAVA, C++, Oracle PL/SQL, CGI, Perl, VB, Foxpro, Access and COBOL.
The Company was incorporated in the State of New York in June, 1978 and
reincorporated in the State of Delaware in December 1986. On November 21, 2001,
the Company changed its name from Sandata Inc. to its present name.
Business of Issuer
Principal Products and Services
Computerized Information Processing Services. The Company, through its
wholly owned subsidiary, Sandsport Data Services, Inc. ("Sandsport"), provides
computer services to the home health care industry, principally through its
SHARP (Sandsport Home Attendant Reporting Program) product.
The primary customers are vendor agencies that provide home attendant
services to the elderly and infirm in New York City. The Federal Government
offers this program (the "Home Attendant Program") to participating states and
municipalities as an optional part of its Medicaid program. The Federal
Government funds a substantial portion of the program and the New York State
Department of Social Services and New York City fund the balance of the program.
In New York City, the Home Attendant Program is administered by the Human
Resources Administration ("HRA"), which sub-contracts with proprietary and
not-for-profit agencies ("Vendor Agencies") to provide home attendant services
to those in need. HRA refers patients to Vendor Agencies that, in turn, send
home attendants to patients' homes to assist in personal care chores. Vendor
Agencies also provide periodic nurse's visits to patients.
Sandsport processes payroll, preparing paychecks indicating year-to-date
earnings and deductions, payroll journals and payroll earnings and deduction
summaries. Sandsport provides computerized information which permits Vendor
Agencies to prepare their Employer's Quarterly Federal Tax Return, New York
State unemployment insurance returns, deposits for Federal unemployment
insurance and all required New York City tax returns and deposits.
Annually, Sandsport prepares for each Vendor Agency employee Transmittal of
Income and Tax Statements, reconciliation of state tax withheld and Federal
Unemployment Insurance Returns. Sandsport also furnishes to Vendor Agencies
employee-earning ledgers that enable them to review a full year's earnings
history for each of their employees.
Generally, in providing software-related services, the Company receives
data from its customers, processes the data on the Company's equipment at its
premises, and generates reports based on such data.
These services are primarily provided through SHARP. Vendor Agencies enlist
Sandsport's computer services to provide weekly time sheets, billing, payroll
processing and management reports. For the fiscal years ended May 31, 2002 and
2001, approximately $5,433,000 or 32% and $5,445,000 or 31%, respectively, of
the Company's total operating revenues were derived from services rendered to
Vendor Agencies.
The Company's strategy is to diversify and expand its health care customer
base. Its wholly-owned subsidiary, Pro-Health Systems, Inc., ("Pro-Health")
intends to utilize newly acquired and enhanced software to provide additional
payroll and billing functionality for SHARP users and, by expanding its billing
capabilities, make the product relevant to home healthcare agencies that cannot
use SHARP in its current form.
Pro-Health offers a system which is designed to be delivered as an
Application Service Provider ("ASP") solution, which allows its customers to
access certain Pro-Health software over the Internet without the customer
needing sophisticated hardware at its site to house the software or store the
data. This allows the Company's customers to have access to software programs
via low-cost hardware and on a fee per transaction basis, and enables them to
utilize the Company's software services without a substantial upfront investment
in either hardware or software. The software consists of a comprehensive suite
of on-line interactive modules that are integrated with other Company
applications such as Santrax(R) (see below). The Pro-Health systems' modular and
flexible design makes it adaptable to the changeable needs of a wide spectrum of
health care entities.
For the fiscal years ended May 31, 2002 and 2001, approximately $530,000 or
3%, and $516,000 or 3% respectively, of the Company's total operating revenues
were derived from services rendered to customers using the Pro-Health system.
Telephone-Based Data Collection Services. The Company has developed an
automated telephony system (combining telephones and computers) known as
Sandata(R) SANTRAX(R) that allows the use of Automated Number Identification
("ANI") technology and voice recognition technology to assist in capturing data
via telephone. The system incorporates telephone technologies into the data
reporting process and is currently designed to monitor the arrival and departure
times of off-site workers who simply call a unique toll-free number to record
their arrival and departure. The system automatically and immediately confirms
that the assigned person is at the expected place at the expected time for the
approved and scheduled duration, and produces real-time exception reports to
enable its clients to manage their off-site staff.
In addition to collecting the arrival and departure times of off-site
workers from the visit site, SANTRAX is also able to collect a wide range of
additional information. By collecting additional data, SANTRAX can increase
operational efficiencies and enable its customers to generate administrative
savings. The information that can be collected and analyzed by SANTRAX includes
expense-related data such as mileage and supplies, as well as tasks performed by
the off-site worker. This data is used to produce weekly payroll and to
automatically prepare reimbursement submissions. Reports are generated to the
customer based upon its specific requirements.
For the fiscal years ended May 31, 2002 and 2001, approximately $7,691,000
or 45% and $7,562,000 or 43%, respectively, of the Company's total operating
revenues were derived from services rendered relating to SANTRAX.
The software operates on the ASP model, and the Company receives an
aggregate of approximately 620,000 calls per week or 32 million calls per year.
The service is currently utilized principally by the Company's home health care
clients, and approximately seventy-two per cent (72%) of current SANTRAX calls
are Vendor Agencies using the SHARP program.
Effective June 1, 1998, the Company and MCI Telecommunications Corporation
("MCI") entered into a License Agreement (the "License Agreement") pursuant to
which the Company was granted a license, under certain of MCI's patents (each
individually a "Patent" and collectively the "Patents"), which enables it to use
and sell its SANTRAX time and attendance verification product non-exclusively
nationwide and exclusively in the home health care industries for the five New
York boroughs. The License Agreement remains in effect until the last to expire
of various patents held by MCI or until October 19, 2010, whichever is later.
Pursuant to the License Agreement, the Company pays MCI certain royalties on a
per call basis.
Although no assurances can be given, it is anticipated that the SANTRAX
product can be utilized by other industry applications. The Company is
developing the product so that it can be sold into the general commercial
market, and the service is currently being modified to meet the needs of a wide
range of businesses wishing to monitor or collect data from off-site employees.
Technology Infrastructure and Outsourcing Services. The Company supports
specialized system applications for businesses based upon its analysis of a
client's particular need and specialized system applications.
In addition, the Company develops web sites, runs e-commerce applications
and resells telephone services, leveraging the favorable rates it receives by
virtue of the substantial call volume driven by SANTRAX. The Company has also
offered managed services in the security arena such as security audits,
enterprise firewalls and network monitoring, although it currently is not
providing such services. The Company plans to diversify the web site
development, e-commerce, and telephone services and resell them to businesses
throughout the New York metropolitan area.
For the fiscal years ended May 31, 2002 and 2001, approximately $737,000 or
4% and $2,071,000 or 12%, respectively, of the Company's total operating
revenues were derived from services rendered for outsourcing services.
Information Technology Services. The Company, through its SandataNet(R)
division, provides IT consulting services for businesses and the public sector.
It delivers computer, communications and networking sales and services,
including training, maintenance and repair services, to companies and government
and professional services organizations.
SandataNet(R) manages a help desk for the Company's internal operations.
This help desk is responsible for desk side support services, including software
support, hardware support/break-fix, LAN administration and configuration
services.
The Company has installed critical software applications at a local
municipal government office. It also provides custom programming, software
development and installation services to this sector.
For the fiscal years ended May 31, 2002 and 2001 approximately $2,766,000
or 15% and $2,170,000 or 12%, respectively of the Company's total operating
revenues were derived from services rendered relating to SandataNet(R).
On April 27, 2001, the Company acquired certain assets of North American
Internet Services, Inc. ("NAIS"), a provider of broadband services, Internet
access, and co-location services. NAIS had entered bankruptcy proceedings and,
under the auspices of the Bankruptcy Court, the Company was permitted to "credit
bid" approximately $124,000 of expenses (including salaries) it had incurred on
behalf of NAIS as the purchase price for the assets, and was given 180 days to
exploit the assets it had acquired. The Company incurred $77,000 in additional
costs related to the acquisition of these assets. The tangible assets were
determined to have no significant fair value. Therefore, all the expenditures
related to the acquisition were allocated to goodwill. The Company has the
option to abandon the exploitation of these assets within the 180 day period. If
the Company continues to use the NAIS assets, 10% of the profits (defined as
earnings before interest expense and taxes) generated by such use must be paid
to the bankruptcy estate for the first three years.
At May 31, 2001, the Company performed an evaluation of the recoverability
of the assets acquired from NAIS and concluded that a significant impairment of
these assets had occurred based on actual results during the year ended May 31,
2001 and on estimated future cash flows not being sufficient to recover the
carrying value of the goodwill. Therefore, the carrying value of the impaired
goodwill was written down to its estimated fair value, which was determined
based on discounted estimated cash flows. The Company recognized an impairment
loss and write down of the goodwill of approximately $201,000. Considerable
management judgment is necessary to estimate fair value; accordingly, actual
results could vary significantly from such estimates.
Seasonality
The Company's revenues are not subject to seasonal fluctuations.
Competition
In the sale of its software products, the Company competes for customers on
the basis of the range, price, functionality and quality of its software and on
its ability to develop programs tailored to its customers' requirements. Many of
its competitors are companies with directly competitive software products, and a
number have substantially greater financial resources and substantially larger
marketing, technical and field organizations.
With respect to the Company's SHARP business, there is added competitive
pressure and uncertainty because the City of New York requires all contracts
with City agencies to undergo competitive bidding. Furthermore, the success of
the SHARP business rests with a key officer of the Company, who has established
strong relationships with the Company's SHARP customers over the years. Although
the Company has been awarded contracts based on its bids, there can be no
assurance that its bids will be accepted in the future.
The computer services industry is characterized by competition in the areas
of service, quality, price and technical expertise. Competitors in this segment
vary from small, local companies to multinational consulting and accounting
firms.
Customers
The Company's customer base is primarily drawn from the health care
industry. During the fiscal years 2002 and 2001, the Company derived revenues
from the Vendor Agencies who are all funded by one governmental agency,
amounting to approximately $10,549,000 or 61% and $10,608,000 or 60% of total
operating revenues, respectively. The Company was owed approximately $1,259,000
and $1,160,000 from these customers at May 31, 2002 and 2001, respectively. The
Company also derived approximately $693,000 or 4% and $2,458,000 or 14% of
revenue in the years 2002 and 2001 from National Medical Health Card Systems,
Inc. ("Health Card") for database and operating system support, hardware
leasing, maintenance and related administrative services. Health Card is a
public company engaged in the pharmacy benefits management business; Bert E.
Brodsky, Chairman of the Board and Chief Executive Officer of the Company, is
also the Chairman of the Board and a principal shareholder of Health Card. (See
Item 6 - "Management's Discussion and Analysis or Plan of Operation - Liquidity
and Capital Resources").
The Company markets its products and services through telemarketing and
sales representatives.
Proprietary Rights
The Company filed a United States Trademark application which renames its
voice recognition timekeeping system to SANTRAX. The trademark was registered on
September 16, 1997.
On March 3, 1997 the Company filed an application with the United States
Patent and Trademark Office to register its SandataNet(R) trademark. The
trademark was registered on February 24, 1998.
The Company has not applied for Federal copyright registration for its
computer software systems now in existence or being developed. However, the
Company believes that its systems are trade secrets and that they, together with
the documentation, manuals, training aids, instructions and other materials
supplied to users, are subject to the proprietary rights of the Company and
protected by applicable trade secret laws. The Company generally seeks to obtain
trade secret protection pursuant to non-disclosure and confidentiality
agreements with its employees. Although the Company's customers are advised that
the Company retains title to all of its products, and they agree to safeguard
against unauthorized use of such systems, there can be no assurance that the
Company will be able to protect against misappropriation of its proprietary
rights and trade secrets.
Research and Development
The Company incurred approximately $62,000 and $10,000 during the fiscal
years 2002 and 2001, respectively, on research and development. The Company
incorporates its research and development into its on-going business activities.
The Company's employees may develop new software programs and expand or modify
existing ones. After determining that a program has reached technological
feasibility, the subsequent development costs are capitalized. All other costs
are expensed.
Employees
As of May 31, 2002, the Company and its subsidiaries employed 102
employees, including 98 full-time and 4 part-time employees. The Company
believes that its success will depend in part on its ability in a highly
competitive environment to attract and retain highly skilled technical,
marketing and management personnel.
On August 8, 2001, the Company eliminated certain positions and terminated
approximately thirty (30) employees. Projected revenue reductions and recent
operating losses combined to cause management to re-evaluate staffing needs. The
eliminations and terminations from within the Company and its subsidiaries are
expected to generate approximately $1,600,000 in reduced expenses on an annual
basis. The Company also incurred approximately $47,000 in severance payments.
The Company considers its employee relations to be satisfactory. The
Company is not a party to any collective bargaining agreement.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company and its subsidiaries currently occupy approximately 25,188
square feet of office space located at 26 Harbor Park Drive, Port Washington,
New York 11050 (the "Facility"). The Company subleases the Facility from BFS
Realty, LLC, successor to BFS Sibling Realty, Inc. and an affiliate of the
Company's Chairman (the "Affiliate"). The Affiliate leases the Facility from the
Nassau County Industrial Development Agency (the "NCIDA"), pursuant to a lease
(the "Lease"), which was entered into by that Agency and the Affiliate in July
1994. (Subsequent assignments and re-assignments of that Lease have, in effect,
returned the parties to their original positions.). The Lease expires in March
2005. The Affiliate has the right to become the owner of the Facility upon
expiration of the Lease. The Affiliate subleases a portion of the Facility to
the Company. The Company currently pays rent to the Affiliate in the amount of
$22,679 per month. The Affiliate also receives rent from other companies that
occupy space in the Facility, some of which are affiliated with the Company's
Chairman. The Company believes that its facilities are adequate for current
purposes. See Item 6 - "Management's Discussion and Analysis or Plan of
Operation - IDA/SBA Financing", and Note 6a to the Financial Statements
contained in Item 7 of this Form 10-KSB, for a discussion of the NCIDA and U.S.
Small Business Administration financing transactions. See also Note 5
(Commitments and Contingencies) to the Financial Statements comprising Item 7
hereof, for a description of the lease entered into as of June 1, 2001 and
revised in November, 2001.
ITEM 3 - LEGAL PROCEEDINGS
In August of 1999, the Company's wholly-owned subsidiary, Sandsport Data
Services, Inc. ("Sandsport") was named as a defendant in Greater Bright Light
Home Care Services, Inc. et al. v. Joseph Jeffries-El, El Equity Corporation,
Sandsport Data Services, Inc. et al. (Supreme Court of the State of New York,
Kings County). Sandsport's contractual obligation to Greater Bright Light
involved the depositing of certain government-issued checks into a specific bank
account. Upon receiving written notification from the agency issuing the checks
to stop depositing them in that account, Sandsport ceased depositing them. The
plaintiff brought the action against Joseph Jeffries-El and El Equity, and El
Equity counterclaimed against the plaintiff, each basing its claims on the
financing agreement between them. El Equity also cross-claimed against
Sandsport, asserting that Sandsport converted the government-issued checks to
its own use. Although Sandsport is named as a defendant, the Complaint seeks no
affirmative relief against Sandsport. Co-defendant Citibank has asserted
indemnification claims against Sandsport and all of the other defendants.
Sandsport disputes all liability. The aggregate amount of the funds at issue is
approximately $262,000.
On October 19, 1999, the Company and Pro-Health brought an action against
Provider Solutions Corporation ("Provider") and others, in Supreme Court, New
York County, based on breach of contract, fraudulent misrepresentation and other
causes of action, demanding damages of approximately $10,000,000 (the "State
Action"). On October 22, 1999, Provider brought a federal action in the United
States District Court for the Eastern District of New York (the "Federal
Action"). The complaint demanded relief in the form of a permanent injunction
and damages against the Company and Pro-Health for total amounts ranging from
$10,000,000 to $15,000,000. The State Action was consolidated with the Federal
Action.
On March 8, 2001 the Company, Pro-Health, Provider and all involved parties
and individuals settled the consolidated Federal Action, globally resolving all
issues, claims and disputes. The settlement entailed the exchange of general
releases between the Company, Pro-Health, Provider and all parties, and the
payment of $600,000 to Provider, of which $50,000 was paid by the Company. The
balance of the payment under the settlement was funded by the Company's
insurers. The settlement did not have a material effect on the Company's
financial performance. The Company has retained its proprietary interest in the
subject software.
On March 1, 2000, Dataline, Inc. ("Dataline") began a lawsuit against MCI
WorldCom Network Services, Inc. ("MCI") and the Company for alleged trade libel
and related counts, in the United States District Court for the Southern
District of New York. The court dismissed that lawsuit, with prejudice, on May
23, 2002. On May 4, 2001, MCI had brought a patent infringement lawsuit against
Dataline, alleging that it was infringing three MCI patents, under which the
Company has an exclusive license in New York City. Shortly thereafter, the
Company joined MCI in the suit against Dataline. Pursuant to a Settlement
Agreement dated January 1, 2002 among MCI, its parent (MCI Communications
Corporation), the Company, and Dataline, Dataline acknowledged the validity and
enforceability of the 3 MCI-owned patents that were the subject of the lawsuits.
There were no payments from either MCI or the Company to Dataline. In addition,
Sandata and Dataline entered into an Exclusive Service Agreement by which
Dataline agreed to use the Company's "call capture infrastructure" for all of
Dataline's time and attendance systems, and to pay royalties to the Company for
such use. The terms of the settlement also included mutual releases. See Note 5c
to the Financial Statements comprising Item 7 hereof.
An action was commenced against the Company and Health Card by a former
executive of Health Card, Mary Casale, who alleged that employees of both Health
Card and the Company engaged in sex discrimination as to Ms. Casale, and thus,
violated Title VII of the Civil Rights Act of 1964. In February 2002 the matter
was withdrawn from the Equal Employment Opportunity Commission, and was settled
without any effect on the business or financial condition of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is traded on the Nasdaq SmallCap Market under
the symbol "SAND".
On July 9, 2002 the Company issued a press release announcing that Nasdaq
had informed the Company that its shares would be subject to de-listing from the
SmallCap Market for failure to comply with Nasdaq's Marketplace Rules regarding
minimum value of publicly held shares and minimum bid price per share. The
Company requested a hearing on these matters, and the de-listing was stayed
until the hearing. The Company was informed by Nasdaq on August 21, 2002 that
the Company had regained compliance with both Marketplace Rules and that,
therefore, the hearing was cancelled and the matter is moot.
The table below sets forth high and low sale prices of the Common Stock, as
furnished by Nasdaq.
Sale Prices
High Low
---------------- -----------------
---------------- -----------------
Fiscal Year Ended
May 31, 2002
First Quarter $1.35 $1.07
Second Quarter $1.18 $ .84
Third Quarter $1.67 $ .75
Fourth Quarter $1.02 $ .44
Fiscal Year Ended
May 31, 2001
First Quarter $1.88 $1.25
Second Quarter $1.50 $ .53
Third Quarter $1.41 $ .84
Fourth Quarter $1.38 $ .86
Holders
The Company has been advised by its transfer agent (North American Transfer
Co.) that the number of holders of record of the Company's Common Stock, as of
August 16, 2002 was 991.
Dividends
No cash dividends have been paid by the Company on its Common Stock and no
such payment is anticipated in the foreseeable future.
The Company's ability to declare and pay dividends is restricted pursuant
to the terms of a Revolving Credit Agreement dated April 18, 1997 between the
Company and HSBC Bank USA, formerly Marine Midland Bank (the "Bank"), and also
under the terms of the Guaranty Agreement dated June 1, 1994 by and among the
Company (as a guarantor), the Affiliate, and the Bank (among others). The
Guarantee Agreement was entered into in connection with the IDA/SBA Financing
discussed in Item 6 hereof, "Management's Discussion and Analysis or Plan of
Operation".
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company provides its computerized information processing services to a
variety of users, although principally to the health care industry. Many of the
Company's software programs are adaptable to customers in related fields of
enterprise. Thus, the components of the SHARP system for the Home Attendant
Program - Medicaid reimbursable billing, management reports, payroll processing,
tax reports - are being developed for utilization in other settings, such as
nursing homes, skilled nursing facilities, and rehabilitation facilities.
The Company's telephone-based data collection services are currently
principally used to monitor off-site workers in the home healthcare industry.
The SANTRAX proprietary software could be used to monitor off-site workers in
other industries, and the Company is currently exploring opportunities in the
temporary staffing, security guard and building maintenance industries.
Technology infrastructure and outsourcing services are currently utilized
in-house and within affiliate companies. The Company intends to take the core
competencies that it has developed in supporting its service offerings and
resell them into the business community in the New York metropolitan area. The
Company cannot assure its ability to resell such services.
The Company believes it can leverage its in-house capabilities to develop a
new IT services business, and intends that such IT services will be marketed
primarily to businesses in the New York metropolitan area, where it believes it
can support professional services with on-site technical help. In the future,
the Company believes it will have the capability of rolling out such IT services
to a wider geographical audience. The Company cannot assure its ability to
develop a new IT service business and cannot predict that such services will be
successful.
Analysis of Operations
Fiscal Years ended May 31, 2002 compared with May 31, 2001
Service fee revenues for fiscal 2002 were $17,173,922 as compared to
$17,769,069 for the previous fiscal year, a decrease of $595,147 or 3%. The
decrease is primarily attributable to decreases in revenues from outsourcing of
approximately $1,300,000 partially offset by increases in revenue from
SandataNet of approximately $775,000.
Other income for the year ended May 31, 2002 was $514,999 as compared to
$368,502 for the year ended May 31, 2001, an increase of $146,497 or 40%. The
increase is attributable to $115,000 in payments received in connection with a
litigation settlement, and the sale of a customer list for $79,000. This
increase is partially offset by a decrease in income recognized on
sales/leaseback transactions.
Expenses Related to Services
Operating expenses were $9,877,651 for the year ended May 31, 2002, as
compared to $10,372,524 for the year ended May 31, 2001, a decrease of $494,873
or 5%. Decreased payroll expenses (approximately $875,000) due to a reduction in
workforce, and decreased equipment rental expenses (approximately $373,000),
partially offset by increases in purchases for resale (approximately $945,000)
were the primary factors for the decrease in operating expenses.
Selling, general and administrative expenses for the year ended May 31,
2002 were $5,502,264 compared to $5,004,255 for the year ended May 31, 2001, an
increase of $498,099 or 9%. The increases were primarily due to increases in
consulting and legal expenses, and additional insurance premiums.
Depreciation and amortization expenses were $1,839,959 for the year ended
May 31, 2002, as compared to $2,748,411 for the year ended May 31, 2001, a
decrease of $908,452 or 33%. The decrease was primarily attributable to the
write off of impaired software in 2001, as described below under the heading
"Impairment of Developed Software."
Interest expense for the year ended May 31, 2002 was $241,729 as compared
to $189,240 for the year ended May 31, 2001, an increase of $52,489 or 28%. The
increase was a result of higher overall average daily balances under the
Company's revolving credit agreement.
Impairment of Developed Software
During the fourth quarter of the year ended May 31, 2001, the Company shut
down certain operating systems and hardware configurations, which had been
capitalized in previous years. The Company had determined that the older
system's architecture had become obsolete and too costly to maintain, so the
Company coordinated placing several new systems in production after running
parallel with pre-existing systems resulting in the retirement of the older
systems during the fourth quarter. The Company further determined that there is
no net realizable value remaining since no future revenue would be recognized in
the retired systems because the architecture was completely replaced by the new
systems. As such the Company recognized an impairment loss of approximately
$3,300,000 for the year ended May 31, 2001.
Impairment of Goodwill
On April 27, 2001, the Company acquired certain assets of North American
Internet Services, Inc. ("NAIS"), a provider of broadband services, Internet
access, and co-location services for approximately $201,000. NAIS had entered
bankruptcy proceedings and, under the auspices of the Bankruptcy Court, the
Company was permitted to "credit bid" approximately $124,000 of expenses
(including salaries) it had incurred on behalf of NAIS as the purchase price for
the assets, and was given 180 days to exploit the assets it had acquired. The
Company incurred approximately $77,000 in additional costs related to the
acquisition of these assets. The tangible assets were determined to have no
significant fair value. Therefore, all the expenditures related to the
acquisition were allocated to goodwill. The Company has the option to abandon
the exploitation of these assets within the 180 day period. If the Company
continues to use the NAIS assets, 10% of the profits (defined as earnings before
interest expense and taxes) generated by such use must be paid to the bankruptcy
estate for the first three years.
At May 31, 2001, the Company performed an evaluation of the recoverability
of the assets acquired from NAIS and concluded that a significant impairment of
these assets had occurred based on actual results during the year ended May 31,
2001 and on estimated future cash flows not being sufficient to recover the
carrying value of the goodwill. As such, the carrying value of goodwill was
written down to its estimated fair value, which was determined based on
discounted estimated cash flows. The Company recognized an impairment loss and
write down of the goodwill of approximately $201,000. Considerable management
judgment is necessary to estimate fair value; accordingly, actual results could
vary significantly from such estimates.
Income Tax Expenses
Income tax expense (benefit) was $249,067 and $(1,293,401) for fiscal 2002
and 2001, respectively. The increase in income tax expense is due to higher
pretax income. The effective tax rates for fiscal 2002 and 2001 were 63.7% and
(37.0%), respectively.
IDA/SBA Financing
In November, 1996 the Company entered into an agreement with the Affiliate,
the Nassau County Industrial Development Agency ("NCIDA"), and Marine Midland
Bank (the "Bondholder") (the "Agreement"). Pursuant to the Agreement, the
Affiliate (i) assumed all of the Company's rights and obligations under a Lease
Agreement that was previously between the Company and the NCIDA (the "Lease"),
and (ii) entered into a Sublease Agreement with the Company for the premises the
Company occupies. Pursuant to the Agreement, the Affiliate also obtained the
right to become the owner of the premises upon expiration of the Lease. Under
the terms of the Agreement, the Company is jointly and separately liable to the
NCIDA for all obligations owed by the Affiliate to the NCIDA under the Lease;
however, the Affiliate has indemnified the Company with respect to certain
obligations relative to the Lease and the Agreement. In addition, the Agreement
provides that the Company is bound by all the terms and conditions of the Lease,
and that a security interest is granted to the Affiliate in all of the Company's
fixtures constituting part of the premises.
The foregoing transactions and agreements were the last in a series of
transactions involving the Company, the Affiliate, NCIDA, the Bondholder and the
U.S. Small Business Administration. Chief among these was the borrowing by the
Affiliate in June of 1994 of $3,350,000 in the form of Industrial Development
Revenue Bonds (the "Bonds") to finance the acquisition of the Facility.
Simultaneously with the issuance of the Bonds: (1) NCIDA obtained title to the
Facility and leased it to the Affiliate, (2) the Affiliate subleased the
Facility to the Company, (3) the Bondholder bought the Bonds, (4) the Bondholder
received a mortgage and security interest in the Facility to secure the payment
of the Bonds. The Affiliate's obligations under the Lease were guaranteed by Mr.
Brodsky, the Company, Sandsport and others. The Affiliate's obligations
respecting repayment of the Bonds were also guaranteed by Mr. Brodsky, the
Company, Sandsport and others.
The Bonds currently bear interest at the rate of 9%, and the outstanding
balance due on the Bonds as of May 31, 2002 was $1,444,445. During the years
ended May 31, 2002 and 2001, the Company paid rent to the Affiliate of
approximately $408,000 and $615,000, respectively.
On August 11, 1995, the Company entered into a $750,000 loan agreement with
the Long Island Development Corporation ("LIDC"), under a guarantee by the U.S.
Small Business Administration ("SBA") (the "SBA Loan"). The SBA Loan was
assigned to the Affiliate in November 1996; however, repayment of the SBA Loan
is guaranteed by the Company and various subsidiaries of the Company. The entire
proceeds were used to repay a portion of the Bonds. The SBA Loan is payable in
240 monthly installments of $6,255, which includes principal and interest at a
rate of 7.015%. The balance of the SBA Loan as of May 31, 2002 was $599,024.
Liquidity and Capital Resources
The Company's working capital decreased as of May 31, 2002 to $1,890,988
from $1,956,661 as of May 31, 2001. The primary factors that contributed to the
decrease were increases in accounts payable, accrued expenses, and notes
receivable-officer, and decreases in receivables from affiliates and deferred
income, offset by an increase in cash and cash equivalents.
The Company has spent approximately $2,620,049 for fixed asset additions,
including software capitalization costs in connection with revenue growth and
new product development. The Company expects a reduction in the levels of
capital expenditures in the future.
On July 14, 1998 the Chairman, certain officers and directors, and a former
director (who is also the spouse of an officer and an employee of Sandsport Data
Services, Inc. ("Sandsport"), the Company's wholly owned subsidiary), exercised
their respective options and warrants to purchase an aggregate of 921,334 shares
of Common Stock. The exercise prices ranged from $1.38 to $2.61 per share for an
aggregate cost of $1,608,861. Payment for such shares was made to the Company in
the amount of $921 representing the par value of the shares, and a portion in
the form of non-recourse promissory notes due in July 2001, with interest at
eight and one-half percent (8-1/2%) per annum, payable annually, and secured by
the number of shares exercised. The Company has received interest payments on
such notes in the amount of $131,994 and $162,110 during the fiscal years ended
May 31, 2002 and 2001. As of May 31, 2002 and 2001, the outstanding balance on
such notes, including principal and accrued but unpaid interest, was $1,669,640
and $1,722,547, respectively. (see item 7 "Finacial Statements" note 12d). On
July 14, 2001, the Company agreed to extend the due dates of the Promissory
Notes for one hundred twenty days. On November 9, 2001, the due date of the
Notes was extended to November 9, 2004, and the Company agreed to substitute
full recourse unsecured Notes for the Notes it had previously accepted.
Effective December 1, 2001, the interest rate was changed from 8-1/2% to 6%.
On April 18, 1997 Sandsport, entered into a revolving credit agreement (the
"Credit Agreement") with the Bank which allowed Sandsport to borrow amounts up
to $3,000,000. Interest accrues on amounts outstanding under the Credit
Agreement at a rate equal to the London Interbank Offered Rate plus 2% and will
be paid quarterly in arrears or, at Sandsport's option, interest may accrue at
the Bank's prime rate. The Credit Agreement requires Sandsport to pay a fee
equal to 1/4% per annum on the unused average daily balance of amounts under the
Credit Agreement. In addition, there are other fees and charges imposed based
upon Sandsport's failure to maintain certain minimum balances. The Credit
Agreement has been amended by the Bank to permit Sandsport to borrow amounts up
to $4,500,000 until June 14, 2003. Interest accrues at the same rate as the
original Credit Agreement. The indebtedness under the Credit Agreement is
guaranteed by the Company and Sandsport's sister subsidiaries (the "Group"). All
of the Group's assets are pledged to the Bank as collateral for amounts due
under the Credit Agreement, which pledge is secured by a first lien on all
equipment owned by members of the Group, as well as a collateral assignment of
$2,000,000 of life insurance payable on the life of the Company's Chairman. The
Group's guaranty to the Bank was subsequently modified to include all
indebtedness incurred by the Company under the amended Credit Agreement dated
August 24, 2001 (see below).
In addition, pursuant to the Credit Agreement, the Group is required to
maintain certain levels of net worth and meet certain financial ratios in
addition to various other affirmative and negative covenants. At May 31, 2001
the Group failed to meet these net worth and financial ratios, and the Bank
granted the Group a waiver. As of August 24, 2001, Sandsport, the Company and
the other members of the Group, and the Bank, entered into the Third Amendment
and Waiver (the "Third Amendment") to the Credit Agreement. Pursuant to the
Third Amendment, Sandsport's covenants to the Bank to maintain a certain net
worth and to maintain certain financial ratios were revised, on a going-forward
basis, and the noncompliance with the existing covenants was waived by the Bank.
In addition, in connection with the Third Amendment, Sandsport and each member
of the Group executed and delivered to the Bank a Collective Amended and
Restated Security Agreement, pursuant to which the Bank's security interest was
extended to include a security interest in all of the personal and fixture
property of Sandsport, the Company and the members of the Group. On April 11,
2002 the Bank approved the extension of the termination date of the Credit
Agreement to June 14, 2003. There can be no assurance that the Bank will
continue to grant waivers if the Group fails to meet the net worth and financial
ratios in the future. If such waivers are not granted, any loans outstanding
under the Credit Agreement become immediately due and payable, which may have an
adverse effect on the Company's business, operations or financial condition. As
of May 31, 2002, the outstanding balance on the Credit Agreement with the Bank
was $4,500,000 and the Company was in compliance with the covenants.
The Company is a party to various sale/leaseback transactions involving
certain fixed assets, principally computer hardware, software and equipment.
Gains on these transactions have been deferred and are being recognized over the
lives of the related leases, each of which is 36 months. Approximately $297,000
and $344,000 of the deferred gains were recognized in other income for the years
ended May 31, 2002 and 2001, respectively. Included in these amounts are the
effects of the following sale/leaseback transactions:
(a) In January 1998, the Company consummated a sale/leaseback of certain
fixed assets which had a net book value of approximately $515,000, were sold for
$700,000. The resulting gain of approximately $185,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $36,000
of the deferred gain was recognized for the year ended May 31, 2001, which was
the last year of the lease. An unaffiliated third party purchased the residual
rights in such lease.
(b) In January 1999, the Company consummated a sale/leaseback of certain
fixed assets which had a net book value of approximately $830,000, were sold for
$1,100,000. The resulting gain of approximately $270,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $60,000 and $90,000 of deferred gain was recognized for the years
ended May 31, 2002 and 2001, respectively. An unaffiliated third party purchased
the residual rights in such lease.
(c) In May 1999, the Company entered into a sale/leaseback of certain fixed
assets which had a net book value of approximately $896,000 were sold for
$1,100,000. The resulting gain of approximately $204,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $68,000 of deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
(d) In October 1999, the Company consummated a sale/leaseback of certain
fixed assets which had a net book value of approximately $895,000, were sold for
$1,115,000. The resulting gain of approximately $220,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $73,000 of the deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
(e) In January 2000, the Company consummated a sale/leaseback of certain
fixed assets which had a net book value of approximately $442,000, were sold for
$561,000. The resulting gain of approximately $119,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $40,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
(f) In February 2000, the Company entered into a sale/leaseback of certain
fixed assets which had a net book value of approximately $237,000, were sold for
$277,000. The resulting gain of approximately $40,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $14,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
(g) In November 2000, the Company entered into a sale/leaseback of certain
fixed assets which had a net book value of approximately $421,500, were sold for
$548,300. The resulting gain of approximately $126,800 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $42,000
and $21,000 of the deferred gain was recognized for the years ended May 31, 2002
and 2001, respectively. An unaffiliated third party purchased the residual
rights in such lease.
Until January of 2002, the Company was leasing equipment and providing
services to Health Card pursuant to a verbal agreement, and was receiving its
allocable share of administrative and support services that were shared by
Health Card and the Company, at a cost to Health Card of approximately
$81,000/month. As of January, 2002, the Company ceased rendering services to
Health Card. Health Card continues to pay its allocable share of expenses for
shared services, which amounts to approximately $45,000 per month.
The Company believes the results of its present operations, together with
the available Credit Line, should be adequate to fund present and foreseeable
working capital requirements.
Prospects for the Future, Trends and Other Events
There is added competitive pressure and uncertainty in the Company's SHARP
business because the City of New York requires all contracts with City agencies
to undergo competitive bidding. Furthermore, the success of its SHARP business
rests with a key officer of the Company, who has established strong
relationships with the Company's SHARP customers over the years. Although the
Company has been awarded contracts based on its bids, there can be no assurance
that its bids will be accepted in the future.
Going Private Transaction
The Company has received a proposal to engage in a going private
transaction. The proposed transaction is anticipated to be in the form of a
merger with an entity owned by an investor group to be led by Bert E. Brodsky,
the Company's Chief Executive Officer, and to include Hugh Freund and Gary
Stoller, as well as other investors (the "Acquiring Group") Pursuant to the
proposal, the Company's shareholders (other than Mr. Brodsky and the other
shareholders that shall comprise part of the Acquiring Group) would receive
$1.50 per share of Common Stock of the Company (the "Shares"), in cash. The
proposal may be amended, modified or supplemented at any time.
The Board of Directors has appointed a Special Committee (the "Committee"),
comprised of Ronald Fish and Martin Bernard, to review the proposed transaction.
The Committee has retained Brean Murray & Co., Inc. as its financial advisor,
and has retained its own legal counsel.
The proposed transaction would result in the acquisition of all of the
outstanding Shares of the Company other than the shares owned by Mr. Brodsky and
the other shareholders that shall comprise part of the Acquiring Group. The
final terms of any acquisition will be based on negotiations between the
Acquiring Group and the Committee. The proposed acquisition will be subject to,
among other things, (1) the negotiation, execution, and delivery of a definitive
agreement, (2) approval of the proposed transaction by the Committee, the full
Board of Directors and the Company's shareholders, (3) receipt of a fairness
opinion by the Committee, (4) applicable regulatory approval, and (5) obtaining
any necessary third-party consents or waivers. There can be no assurance that a
definitive merger agreement will be executed and delivered, or that the proposed
transaction will be consummated.
Except as discussed above, the Company has no knowledge of any specific
prospects, industry or other trends, events or uncertainties that might have a
material impact on the Company's net sales or revenues or income from continuing
operations, or that would increase the value of the shares in the long-term or
the short-term.
ITEM 7 - FINANCIAL STATEMENTS
(BEGINS ON PAGE F-1 BELOW)
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following persons are the Directors and executive officers of
the Company.
=========================== ========= ========================================================================
Positions and Offices
Presently Held with
Name Age the Company
--------------------------- --------- ------------------------------------------------------------------------
--------------------------- --------- ------------------------------------------------------------------------
Bert E. Brodsky 59 Chairman and Treasurer, President Pro Tem
--------------------------- --------- ------------------------------------------------------------------------
--------------------------- --------- ------------------------------------------------------------------------
Hugh Freund 64 Executive Vice President, Secretary and Director
--------------------------- --------- ------------------------------------------------------------------------
--------------------------- --------- ------------------------------------------------------------------------
Gary Stoller 49 Chief Technology Officer, Executive Vice President
--------------------------- --------- ------------------------------------------------------------------------
--------------------------- --------- ------------------------------------------------------------------------
Ronald L. Fish 61 Director
--------------------------- --------- ------------------------------------------------------------------------
--------------------------- --------- ------------------------------------------------------------------------
Martin Bernard 53 Director
=========================== ========= ========================================================================
Bert E. Brodsky has been Chairman and Treasurer of the Company since June
1, 1983 and President from December 1989 through January 2000. From August 1983
through November 1984, from December 1988 through January 1991, from February
1998 to June 1998 and from December 1998 to present, Mr. Brodsky served as
Chairman of Health Card and from June 1998 through December 1998 served as
President of Health Card. From October 1983 through December 1993, Mr. Brodsky
served as Chairman of Compuflight, a provider of computerized flight planning
services. Since August 1980, Mr. Brodsky has served as Chairman of P.W. Medical
Management, Inc., which provides financial and consulting services to
physicians. Since 1979, Mr. Brodsky has also served as President of Bert Brodsky
Associates, Inc., which provides consulting services.
Hugh Freund, a founder of the Company, was the Company's President from
1978 to November 1986, and a Director of the Company since its formation in
1978. Since November 1986, Mr. Freund has served as an Executive Vice President
of the Company and Secretary since 1995. Mr. Freund is also President of
Sandsport, the Company's wholly-owned health care data processing subsidiary.
Additionally, Mr. Freund has been serving as the President of Pro-Health
Systems, Inc. since March 9, 1999. In addition to managing the Company's
operations, Mr. Freund has been responsible for the marketing efforts of the
Company.
Gary Stoller joined the Company at the time of its formation in 1978 as its
Senior Programmer and Analyst, and has been its Chief Information Officer and an
Executive Vice President and a Director of the Company since January 1983. Mr.
Stoller has been responsible for computer design, programming and operations of
the Company as its Chief Technology Officer since 1995, and is the architect of
the SHARP and SanTrax systems.
Ronald L. Fish has served as a Director of the Company since January, 1998.
Since 1975, Mr. Fish served as Administrator, Treasurer and Director of
Unlimited Care Inc., a nursing services firm, and is a certified public
accountant. Mr. Fish serves on the Company's Audit Committee and on the Special
Committee.
Martin Bernard has served as a Director of the Company since October 22,
2001. Since 1970, Mr. Bernard has worked in the insurance industry, most of
those years working for The Rampart Group, located in Lake Success, NY. Mr.
Bernard is a graduate of the New York Institute of Technology, earning a degree
in Business Administration and since 1997 has been a Trustee of the North Shore
LIJ Health Systems. Mr. Bernard serves on the Company's Audit Committee and on
the Special Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
To the Company's knowledge, based solely on a review of copies of Forms 3,
4 and 5 furnished to it and written representations that no other reports were
required, during the fiscal year ended May 31, 2002, the Company's officers,
Directors and 10% shareholders complied with all Section 16(a) filing
requirements applicable to them except: Mr. Fish failed to timely file 4 reports
relative to 4 transactions and Mr. Bernard failed to timely file 1 report
relative to 1 transaction.
ITEM 10 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information for the fiscal years
ending May 31, 2002, 2001 and 2000 concerning the compensation of Bert E.
Brodsky, the Chairman and Chief Executive Officer of the Company; Stephen
Davies, President of the Company from February 2000 until August 6, 2001; Hugh
Freund, Executive Vice President and Secretary; and Gary Stoller, Executive Vice
President and Chief Technology Officer. No other executive officer had a total
salary and bonus in excess of $100,000 for the fiscal year ended May 31, 2002.
=========================== ======= ======================================== ================================= ==============
Annual Compensation Long-Term Compensation
--------------------------- ------- ---------------------------------------- --------------------------------- --------------
--------------------------- ------- ------------ ---------- ---------------- ------------------------ -------- -------------
Awards Payouts
--------------------------- ------- ------------ ---------- ---------------- ------------------------ -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
Other Annual Restricted Securities
Compensa- Stock Underlying LTIP All Other
Name and Principal Salary Bonus tion Awards Options/ Payouts Compensation
Position Year ($) ($) ($) ($) SARs (#) ($) ($)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
Bert E. Brodsky, Chairman 2002 297,693 (2) -- 27,334(4) -- -- -- 53,785 (5)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
2001 310,000 (2) -- 27,918(4) -- -- -- 41,246 (5)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
2000 200,000 (2) 113,650 14,013 (4) -- 350,000 -- 28,564 (5)
(3)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
Gary Stoller, Executive 2002 155,769 5,000 14,366 (4) -- -- -- 16,040 (6)
Vice President, Chief
Technology Officer
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
2001 150,000 5,800 22,391(4) -- -- -- 16,040 (6)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
2000 150,000 5,000 22,391 (4) -- -- -- 16,040 (6)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
Hugh Freund, Executive 2002 171,346 30,500 15,585 (4) -- -- -- 22,670 (7)
Vice President, Secretary 17,064 (8)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
2001 165,000 37,500 15,585 (4) -- -- -- 22,670 (7)
17,064 (8)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
22,670 (7)
2000 82,789 28,000 15,585 (4) -- -- -- 17,064 (8)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
Stephen Davies, President 2002 139,528 -- -- -- -- -- --
(la)
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
2001 200,159 -- -- -- 150,000 -- --
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
--------------------------- ------- ------------ ---------- ---------------- ------------ ----------- -------- -------------
2000 62,307 -- -- -- 100,000 -- --
(1b)
=========================== ======= ============ ========== ================ ============ =========== ======== =============
(1a) Mr. Davies' employment as President of the Company was terminated on
August 6, 2001. See Note 5 to the Financial Statements comprising Item 7 of this
Annual Report on Form 10-KSB.
(1b) Represents compensation paid to Mr. Davies from February 1, 2000
through May 31, 2000, of which $12,000 were consultation fees.
(2) As of May 31, in each of 2000, 2001 and 2002 Mr. Brodsky signed a
waiver wherein he agreed to waive his rights to an additional $300,000, $190,000
and $202,307, respectively, of compensation due to be paid to him for the fiscal
years then ended, pursuant to the terms of the Brodsky Employment Agreement
discussed below under "Employment Agreements, Termination of Employment and
Change-in-Control Agreements."
(3) Represents 25,000 shares of Common Stock granted to Mr. Brodsky on
February 4, 2000, and $82,000 in bonus paid in the fiscal year ended May 31,
2000.
(4) Represents compensation relating to the use of Company-leased
automobiles provided for business purposes by an affiliate of the Company's
Chairman.
(5) Includes insurance premiums paid by the Company on behalf of Mr.
Brodsky, for life insurance policies on his life, the benefits of which are
payable to his spouse.
(6) Includes insurance premiums paid by the Company on behalf of Mr.
Stoller, for life insurance policies on his life, the benefits of which are
payable to his spouse.
(7) Includes insurance premiums paid by the Company on behalf of Mr.
Freund, for life insurance policies on his life, the benefits of which are
payable to his spouse.
(8) Represents insurance premiums paid by the Company on behalf of Mr.
Freund for life insurance policies on his life, the benefits of which are
payable to an insurance trust, of which Mr. Freund is a co-Trustee.
Option/SAR Grants in Last Fiscal Year
Not Applicable.
Aggregated Option/SAR Exercise in Last Fiscal Year and Fiscal Year-End
Option Value Table
The following table sets forth certain information concerning the value of
unexercised options and warrants held by the named executive officers for the
fiscal year ended May 31, 2002:
===================== ======================= ================= ========================== ==========================
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options and
Options and Warrants at Warrants at May 31,
Shares Acquired on Value Realized May 31, 2002(#) 2001($)
Name Exercise(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
Bert E. Brodsky -- -- 536,500/123,500 0/0
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
Gary Stoller -- -- 143,500/0 0/0
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
Hugh Freund -- -- 137,000/0 0/0
===================== ======================= ================= ========================== ==========================
Compensation of Directors
During the fiscal year ended May 31, 2002 non-qualified options to purchase
up to 10,000 shares of Common Stock, at an exercise price of $1.00 per share,
were issued to each of Messrs. Bernard and Fish. In addition, for the fiscal
year ended May 31, 2002, the Company paid an aggregate of $4,000 in Director's
fees.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
On February 1, 1997 the Company and its Chairman ("Mr. Brodsky") entered
into an employment agreement for a five year term (the "Brodsky Employment
Agreement"). Among other things, the Brodsky Employment Agreement provides
compensation at the annual rate of $500,000 or a lesser amount if mutually
agreed. The Brodsky Employment Agreement also provides for payment of an annual
bonus at the sole discretion of the Board of Directors. Mr. Brodsky agreed to
accept a reduction in compensation for the fiscal years ended May 31, 2001 and
2000, and has signed waivers evidencing his agreement to such reductions. The
Brodsky Employment Agreement was renewed, on identical terms, on March 1, 2002,
and Mr. Brodsky again agreed to accept a reduction in compensation for the
fiscal year ended May 31, 2002.
In May 1992, Mr. Brodsky and the Company entered into a deferred
compensation agreement pursuant to which the Company would (i) pay to Mr.
Brodsky a lump sum ranging from $75,000 to $255,000 if he voluntarily terminated
his employment with the Company after attaining 55 years of age, or (ii) pay to
Mr. Brodsky's beneficiary a lump sum ranging from $200,000 to $450,000 in the
event of Mr. Brodsky's death during the term of his employment with the Company.
This agreement was terminated in October, 2001.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
AND RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial share ownership, as of May
31, 2002 of (i) each person who is known by the Company to be the beneficial
owner of more than five (5%) percent of the Company's Common Stock; (ii) each of
the Company's current Directors (iii) each person listed in the Summary
Compensation Table (except Stephen Davies, the former President); and (iv) all
of the Company's executive officers and Directors as a group. The ownership
percentages indicated are calculated, on a fully-diluted basis, in accordance
with Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934, as
amended, which attributes beneficial ownership of securities to a person or
entity who holds options or warrants to purchase such securities.
============================================== ============================== ======================================
Name of Management Person and Name and Approximate Percentage
Address of Beneficial Owner Number of Shares of Outstanding Shares
---------------------------------------------- ------------------------------ --------------------------------------
Bert E. Brodsky
26 Harbor Park Drive
Port Washington, NY 1,302,957 (1) 42.5%
---------------------------------------------- ------------------------------ --------------------------------------
Hugh Freund
26 Harbor Park Drive
Port Washington, NY 487,721 (2) 18.6%
---------------------------------------------- ------------------------------ --------------------------------------
Gary Stoller
26 Harbor Park Drive
Port Washington, NY 297,278 (3) 11.3%
---------------------------------------------- ------------------------------ --------------------------------------
Ronald L. Fish
Unlimited Care Inc.
245 Main Street
White Plains, NY 10601 26,500 (4) 1.7%
---------------------------------------------- ------------------------------ --------------------------------------
Martin Bernard
c/o Rampart Group
1983 Marcus Aveue
Lake Success, NY 11042 0 (5) *
---------------------------------------------- ------------------------------ --------------------------------------
Jessica Heather Brodsky
26 Harbor Park Drive
Port Washington, NY 294,470 11.8%
---------------------------------------------- ------------------------------ --------------------------------------
Jeffrey Holden Brodsky
26 Harbor Park Drive
Port Washington, NY 184,925 7.4%
---------------------------------------------- ------------------------------ --------------------------------------
All executive officers and Directors as a
group (4 persons) 2,114,456 (1) (2) (3) (4) 63.7%
============================================== ============================== ======================================
(1) Includes 18,684 shares of the Company's Common Stock owned by the trust
established for the benefit of Mr. Brodsky's minor son; includes 20,500 shares
of the Company's Common Stock owned by Mr. Brodsky's wife; includes 200,000
shares of Common Stock owned by the Bert E. Brodsky Revocable Trust. Includes
presently exercisable options to purchase 310,000 shares of Common Stock at
$1.41 per share under the 1995 Stock Option Plan; includes presently exercisable
options to purchase 226,500 shares of common stock at $1.31 per share under the
1998 Stock Option Plan.
(2) Includes presently exercisable options to purchase 137,000 shares of
Common Stock at $1.41 per share under the 1995 Plan. Excludes 41,464 shares of
Common Stock owned by Mr. Freund's adult children. Mr. Freund disclaims any
beneficial interest in, or voting or dispositive control over, such shares.
(3) Includes presently exercisable options to purchase 20,000 shares of
Common Stock at $2.34 per share under the 1995 Plan, which options have been
extended to expire on March 14, 2006; includes presently exercisable options to
purchase 50,000 shares of Common Stock at $2.61 per share under the 1995 Plan,
which options have been extended to expire on June 10, 2006; includes presently
exercisable options to purchase 73,500 shares of Common Stock at $1.41 per share
under the 1995 Plan. Includes 21,000 shares of Common Stock owned by trusts
established for the benefit of Mr. Stoller's children of which Mr. Stoller is a
trustee.
(4) Includes presently exercisable options to purchase 18,000 shares of
Common Stock at $3.00 per share under the 1998 Plan. Does not include an option
to purchase 10,000 shares of common stock at $1.00 per share under the 2000
stock option plan, none of which are currently exercisable.
(5) Does not include an option to purchase 10,000 shares of common stock at
$1.00 per share under the 2000 stock option plan, none of which are currently
exercisable.
* Less than one percent (1%)
EQUITY COMPENSATION PLAN INFORMATION
---------------------------- ------------------------ ----------------------- ---------------------------------------
Number of Weighted-average Number of Securities remaining
Securities to be price of outstanding available for future issuance under
issued upon exercise options warrants and equity compensation plans (excluding
of outstanding Rights securities reflected in column (a))
options, warrants and
rights
---------------------------- ------------------------ ----------------------- ---------------------------------------
---------------------------- ------------------------ ----------------------- ---------------------------------------
(a) (b) (c)
---------------------------- ------------------------ ----------------------- ---------------------------------------
---------------------------- ------------------------ ----------------------- ---------------------------------------
1995 Stock Option Plan
(approved by security
holders)* 590,500 $1.54 409,500
---------------------------- ------------------------ ----------------------- ---------------------------------------
---------------------------- ------------------------ ----------------------- ---------------------------------------
1998 Stock Option Plan
(approved by security
holders)* 775,579 $2.24 224,421
---------------------------- ------------------------ ----------------------- ---------------------------------------
---------------------------- ------------------------ ----------------------- ---------------------------------------
2000 Stock Option Plan
(approved by security
holders)* 28,340 $1.59 1,491,660
---------------------------- ------------------------ ----------------------- ---------------------------------------
* There are no equity compensation plans not approved by security holders.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Going Private Transaction
Reference is made to Item 6 - "Management's Discussion and Analysis or Plan
of Operation - Prospects for the Future, Trends and Other Events" for a
description of a proposal that the Company has received to engage in a going
private transaction with a group of investors that includes three of the
Company's directors.
IDA/SBA Financing
Reference is made to Item 6 - "Management's Discussion and Analysis or Plan
of Operation - IDA/SBA Financing" for a discussion of an industrial development
revenue bond and SBA financing, pursuant to which the Company pays rent for its
facility to an affiliate of the Company's Chairman.
Advances and Loans to Affiliates
During the years ended May 31, 2002 and 2001, the Company paid an aggregate
of $57,285 and $65,894 on behalf of certain officers to companies affiliated
with the Company's Chairman for payment of automobile leases.
National Medical Health Card Systems, Inc.
The Company owed Health Card $500,000 pursuant to a promissory note, dated
May 31, 2000 and due June 1, 2001 plus interest at the rate of 9-1/2%; interest
on such note was payable quarterly. The Note was paid in May, 2001. On June 9,
2001, the Company again issued a promissory note to Health Card in the principal
amount of $500,000, with interest at the rate of 7%, which was due on June 8,
2002. This Note was paid in full on August 15, 2001.
Until January of 2002 the Company derived revenue from Health Card, for
database and operating system support, hardware leasing, and maintenance and
related administrative services. The revenues generated from Health Card
amounted to approximately $693,000 and $2,458,000 for the years ended May 31,
2002 and 2001, respectively. For the years ended May 31, 2002 and 2001,
respectively, the Company billed Health Card approximately $126,000 and $821,000
for quality assurance testing and network support; $47,000 and $561,000 for help
desk services; $175,000 and $448,000 for data processing center; $305,000 and
$534,000 for certain computer equipment leases; and $40,000 and $95,000 for
other services. In addition, the Company resells its telephone services to
Health Card. The billings for such telephone services amounted to approximately
$124,000 and $134,000 for the years ended May 31, 2002 and May 31, 2001 and are
recorded as a reduction of operating expense. The Company was owed approximately
$19,000 from Health Card at May 31, 2002. Subsequent to May 31, 2002, the
Company received approximately $14,000 from Health Card, representing
substantially complete payment of amounts due as of that date. As of January
2002, the Company ceased rendering services to Health Card. Health Card
continues to pay its allocable share of expenses for shared services, which
amounts to approximately $45,000 per month.
Leases
The Company makes equipment lease payments to P.W. Capital Corp. and P.W.
Medical Management, Inc., both of which are affiliates of the Company's
Chairman. The payments were $268,011and $395,989 in fiscal 2002 and 2001,
respectively. The payments for the Facility were made to BFS Realty, LLC, and
were $408,000 and $615,000 for the years ended May 31, 2002 and 2001,
respectively. In June 2001, the Company entered into a new lease for the
Facility which was revised in November 2001. (See Item 7, Note 5 to the
Financial Statements for details.)
Medical Arts Office Services, Inc.
Medical Arts Office Services, Inc. ("MAOS"), of which the Company's
Chairman is the sole shareholder, provided the Company with accounting,
bookkeeping and legal services. For the fiscal years ended May 31, 2002 and 2001
the total payments made by the Company to MAOS were $340,869 and $279,894
respectively.
Part IV
ITEM 13 - EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit Number Document
3.1 Certificate of Incorporation and Amendments thereto
including Certificate of Ownership and Merger (DE) and
Agreement and Plan of Merger (1)
3.2 Certificate of Amendment to Certificate of Incorporation
filed July 27, 1993 (1)
3.3 Certificate of Amendment to Certificate of Incorporation
filed May 26, 1995 (1)
3.4 Certificate of Amendment to Certificate of Incorporation
filed November 21, 2001
3.5 By-Laws (1)
4.1 Nassau County Industrial Development Agency Industrial
Development Revenue Bonds(1994 Brodsky Sibling Realty Inc.
Project) dated June 1, 1994 (1)
4.2 Revolving Credit Agreement dated as of April 20, 1995
by and among Sandsport Data Services, Inc. and Marine
Midland Bank (1)
4.3 Nassau County Industrial Development Agency Industrial
Development Revenue Bonds (1994 Brodsky Sibling Realty
Inc. Project) Assumption and Amendment of Certain
Agreements dated July 1, 1995 (1)
4.4 Loan Agreement dated August 11, 1995 between Sandata, Inc.
and Long Island Development Corporation (1)
4.5 "504" Note dated August 11, 1995 from the Long Island
Development Corporation to Sandata, Inc. (1)
4.6 Nassau County Industrial Development Agency Industrial
Development Revenue Bonds (1994 Brodsky Sibling Realty
Inc. Project) Assumption and Amendment of Certain
Agreements dated November 1, 1996 (3)
Exhibit Number Document
4.7 Revolving Credit Agreement dated as of April 18, 1997
by and among Sandsport Data Services, Inc., the
Registrant, certain subsidiaries of the Registrants and
Marine Midland Bank (3)
4.8 Second Amendment dated as of February 14, 2000 to
Revolving Credit Agreement by and among Sandsport Data
Services, Inc., the Registrant, certain subsidiaries of
the Registrants and HSBC Bank USA (6)
10.1 Software License Agreement and Distribution Agreement
between Sandata Home Health Systems, Inc. and Fastrack
Healthcare Systems, Inc. dated as of June 15, 1995 (1)
10.2 Employees' Incentive Stock Option Plan (1)
10.3 First Amendment to Incentive Stock Option Plan dated
April 4, 1989 (1)
10.4 Second Amendment to Incentive Stock Option Plan dated
December 18, 1990
10.5 1986 Non-qualified Stock Option Plan (1)
10.6 Amendment to 1986 Non-qualified Stock Option Plan
dated April 4, 1989 (1)
10.7 1995 Stock Option Plan (1)
10.8 1998 Stock Option Plan (5)
10.10 Termination letter dated October 8, 2001,
regarding Deferred Compensation Plan dated
May 1, 1992 between the Registrant and Bert E. Brodsky
10.11 Form of agreement between Sandsport Data Services,
Inc. and vendor agency (2)
10.12 Form of agreement between Sandsport Data Services,
Inc. and vendor agency (2)
Exhibit Number Document
10.13 Form of Subscription Agreement dated December 23, 1996
(2)
10.14 Form of Subscription Agreement dated September 12, 1996(2)
10.18 Employment Agreement dated February 1, 1997 between the
Registrant and Bert E. Brodsky (3)
10.19 Form of Pledge Agreement (4)
10.20 Form of Non-Negotiable Promissory Note (4)
10.21 Stock Option Agreement dated December 10, 1998 between
the Registrant and Bert E. Brodsky (6)
10.22 Stock Option Agreement dated February 3, 2000 between
the Registrant and Bert E. Brodsky (6)
10.29 Extension Agreement dated July 14, 2001, between the
Registrant and certain shareholders (7)
10.30 Third Amendment and Waiver dated as of August 24, 2001
to Loan Agreement dated as of April 18, 1997 by and
among Sandsport Data Services, Inc., the Registrant,
certain subsidiaries of the Registrant, and HSBC Bank,
USA (7)
10.31 Collective Amended and Restated Security Agreement dated
as of August 24, 2001, by and among Sandsport Data
Services, Inc., the Registrant, certain subsidiaries
of the Registrant, and HSBC Bank, USA (7)
10.32 Lease Agreement dated November 1, 2001 between the
Registrant and BFS Realty, LLC for premises in Port
Washington, NY (8)
10.33 Recourse Note between Bert E. Brodsky and Registrant dated
December 1, 2001, in the amount of $1,091,128.24
10.34 Recourse Note between Hugh Freund and Registrant dated
December 1, 2001, in the amount of $420,419.16
10.35 Recourse Note between Gary Stoller and Registrant dated
December 1, 2001, in the amount of $57,742.20
21 Subsidiaries of Registrant (6)
---------------------------
(1) Denotes a document filed as an Exhibit to the Company's Report on Form
10-KSB for the fiscal year ended May 31, 1995, and incorporated herein by
reference.
(2) Denotes a document filed as an Exhibit to Amendment No. 1 to Form S-3
Registration Statement as filed with the Securities and Exchange Commission on
May 27, 1997 and incorporated herein by reference.
(3) Denotes a document filed as an Exhibit to the Company's Report on Form
10-KSB for the fiscal year ended May 31, 1997, and incorporated herein by
reference.
(4) Denotes a document filed as an Exhibit to the Company's Report on Form
10-KSB for the fiscal year ended May 31, 1998, and incorporated herein by
reference.
(5) Denotes a document filed as an Exhibit to the Company's Report on Form
10-KSB for the fiscal year ended May 31, 1999, and incorporated herein by
reference.
(6) Denotes a document filed as an Exhibit to the Company's Report on Form
10-KSB for the fiscal year ended May 31, 2000 and incorporated herein by
reference.
(7) Denotes a document filed as an Exhibit to the Company's Report on Form
10-KSB for the fiscal year ended May 31, 2001 and incorporated herein by
reference.
(8) Denotes a document filed as an Exhibit to the Company's Report on Form
10-QSB for the fiscal quarter ended November 30, 2001 and incorporated herein by
reference.
(b) Reports on Form 8-K
(i) On July 9, 2002 the Company filed an 8-K containing a press release
announcing that Nasdaq had informed the Company that its shares would be subject
to de-listing from the SmallCap Market for failure to comply with certain Nasdaq
Marketplace Rules.The Company was informed by Nasdaq on August 21, 2002 that the
Company had regained compliance with both Marketplace Rules. See Item 5 hereof.
(ii) On August 6, 2002 the Company filed an 8-K containing a press release
announcing that the Company had received a proposal to engage in a going private
transaction with an investor group led by Bert E. Brodsky, Chief Executive
Officer of the Company. See Item 6 hereof.
SANDATA TECHNOLOGIES, INC.
FINANCIAL STATEMENTS COMPRISING ITEM 7 OF REPORT ON FORM 10-KSB TO
SECURITIES AND EXCHANGE COMMISSION YEAR ENDED MAY 31, 2002
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
Financial Statements
Consolidated Balance Sheets as of May 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the years ended
May 31, 2002 and 2001 F-4
Consolidated Statement of Shareholders' Equity for the years
ended May 31, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7 - F-29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Sandata Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sandata
Technologies, Inc. and Subsidiaries (formerly Sandata, Inc.) as of May 31, 2002
and 2001, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sandata Technologies, Inc. and Subsidiaries as of May 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
As more fully described in the Notes to the consolidated financial
statements, the Company had certain transactions with companies affiliated with
the Company's Officers and Chairman.
/s/ Marcum & Kliegman LLP
Woodbury, New York
July 26, 2002, except for Note 12c and 12d,
which are dated August 21, 2002
and August 22, 2002, respectively
See notes to consolidated financial statements
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
2002 2001
---- ----
CURRENT ASSETS
Cash and cash equivalents $1,630,617 $ 475,578
Accounts receivable, net of allowance for doubtful accounts of $202,746
and $346,903 at 2002 and 2001, respectively 2,182,963 2,160,675
Receivables from affiliates 280,297 802,787
Inventories 45,342 35,993
Prepaid expenses and other current assets 345,349 416,056
Deferred income taxes 207,595 274,470
---------- ----------
Total Current Assets 4,692,163 4,165,559
FIXED ASSETS, NET 6,820,596 6,036,203
-----------------
DEFERRED INCOME TAXES 171,579 335,773
---------------------
OTHER ASSETS
Notes receivable 25,190 29,669
Cash surrender value of officer's life insurance, security
deposits and other assets 1,105,502 866,774
----------- ----------
Total Assets $12,815,030 $11,433,978
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,781,550 $ 1,881,269
Deferred/unearned revenue 16,367 31,069
Deferred income 103,258 296,560
----------- ------------
Total Current Liabilities 2,901,175 2,208,898
LONG-TERM DEBT 4,500,000 3,850,000
--------------
DEFERRED INCOME 21,142 124,401
--------------- ----------- ------------
Total Liabilities 7,422,317 6,183,299
----------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.001 par value, 6,000,000 shares
authorized; 2,481,808 and 2,506,475 shares issued and
outstanding in 2002 and 2001, respectively 2,482 2,506
Additional paid in capital 5,765,766 5,803,704
Retained earnings 1,193,755 1,051,721
Notes receivable - officers (1,469,290) (1,607,252)
----------- -----------
Total Shareholders' Equity 5,492,713 5,250,679
----------- -----------
Total Liabilities and Shareholders'
Equity $12,915,030 $11,433,978
=========== ===========
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31,
2002 2001
---- ----
REVENUES
Service fees $17,173,922 $17,769,069
Other income 514,999 368,502
Interest income 163,789 185,311
------------- -------------
TOTAL REVENUES 17,852,710 18,322,882
----------- -----------
COSTS AND EXPENSES
Operating 9,877,651 10,372,524
Selling, general and administrative 5,502,264 5,004,255
Depreciation and amortization 1,839,965 2,748,411
Interest expense 241,729 189,240
Impairment of developed software -- 3,298,872
Impairment of goodwill 201,128
------------ ------------
TOTAL COSTS AND EXPENSES 17,461,609 21,814,430
----------- -----------
Earnings (loss) before income taxes 391,101 (3,491,548)
Income tax expense (benefit) 249,067 (1,293,401)
---------------------------- ------------ -----------
NET EARNINGS (LOSS) $ 142,034 $ (2,198,147)
============ ============
PER SHARE INFORMATION
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE $ .06 $ (.88)
============ =============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 2,494,175 2,506,475
============ =============
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended May 31, 2002 and 2001
Additional Notes Total
Common Stock Paid-In Retained Receivable Shareholders'
Shares Amount Capital Earnings Officers Equity
------- ------ -------- --------- ---------- ------------
Balance at
June 1, 2000 2,506,475 $2,506 $5,803,704 $ 3,249,868 $(1,607,252) $ 7,448,826
Net Loss -- -- -- (2,198,147) -- (2,198,147)
------------ ----------- ------------ ----------- ----------- -----------
Balance at
May 31, 2001 2,506,475 2,506 5,803,704 1,051,721 (1,607,252) 5,250,679
Effect of Stock
Surrender (24,667) (24) (37,938) -- 37,962 --
Net Earnings -- -- 142,034 -- 142,034
----------- -------- ----------- ---------- ------------ -----------
Balance at
May 31, 2002 2,481,808 $2,482 $5,765,766 $ 1,193,755 $(1,469,290) $ 5,492,713
========= ====== ========== =========== =========== ===========
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31,
2002 2001
---- ----
Cash flows from operating activities
Net earnings (loss) $ 142,034 $(2,198,147)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,839,965 2,748,411
(Gain) loss on disposal of fixed assets (4,309) 75,111
Change in allowance for doubtful accounts (144,157) (100,879)
Recognition of deferred income (296,561) (343,820)
Recognition of deferred revenue (36,121) (116,702)
Impairment of developed software -- 3,298,872
Impairment of goodwill -- 201,128
Deferred tax provision 231,069 (1,312,401)
(Increase) decrease in operating assets
Accounts receivable 121,869 249,105
Receivables from affiliates 522,490 (397,055)
Inventories (9,352) (18,828)
Prepaid expenses and other current assets 70,708 (2,937)
Other assets (234,247) (24,827)
(Decrease) Increase in operating liabilities
Accounts payable and accrued expenses 900,282 (698,874)
Deferred/unearned revenue 21,418 108,923
Deferred income -- 126,850
----------- ----------
Net cash provided by operating activities 3,125,088 1,593,930
----------- ----------
Cash flows from investing activities:
Purchases of fixed assets (2,620,049) (3,795,285)
Proceeds from sale/leaseback transactions -- 548,343
Acquisition of intangible asset -- (201,128)
----------- -----------
Net cash used in investing activities (2,620,049) (3,448,070)
----------- -----------
Cash flows from financing activities
Principal payments on note payable (500,000) (500,000)
Proceeds from note payable 500,000 --
Proceeds from line of credit 3,800,000 2,200,000
Principal payments on line of credit (3,150,000) (600,000)
----------- -----------
Net cash provided by financing
activities 650,000 1,100,000
----------- -----------
INCREASE (Decrease) in cash and cash 1,155,039 (754,140)
equivalents
Cash and cash equivalents - beginning 475,578 1,229,718
------------------------- ------------ ----------
Cash and cash equivalents - ending $ 1,630,617 $ 475,578
------------------------- ============ ==========
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business and Economic Dependency
Sandata Technologies, Inc. and Subsidiaries (the "Company", formerly known
as Sandata, Inc. ) are primarily engaged in the business of providing
computerized data processing services and custom software and programming
services using Company-developed and licensed software principally to the
healthcare industry. The Company primarily operates in the New York metropolitan
area. During fiscal years ended May 31, 2002 and 2001, the Company received
revenues from a group of customers who are all funded by the Human Resources
Administration of the City of New York ("HRA"), amounting to approximately
$10,549,000 and $10,608,000, respectively. The Company was owed approximately
$1,259,000 and $1,160,000 from these customers at May 31, 2002 and 2001,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of Sandata
Technologies, Inc. and its wholly owned subsidiaries: Sandsport Data Services,
Inc., Sandata Home Health Systems, Inc., Sandata Spectrum, Inc., SANTRAX
Systems, Inc., SANTRAX Productivity, Inc. and Pro-Health Systems, Inc.
("Pro-Health", formerly known as Sandata Inteck, Inc.). SANTRAX Productivity,
Inc. and Sandata Spectrum, Inc. are inactive subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year financial statements. These reclassifications have no effect on
previously reported earnings/loss.
Fixed Assets
Fixed assets are recorded at cost. Depreciation and amortization are
computed principally by the straight-line method over the lesser of the
estimated useful lives or lease terms of the related assets.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets as determined by estimated discounted cash
flows. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
NOTE 1 - Summary of Significant Accounting Policies, continued
Income Taxes
The Company uses the liability method to account for income taxes. The
primary objectives of accounting for income taxes are to (a) recognize the
amount of income tax payable for the current year and (b) recognize the amount
of deferred tax liability or asset based on management's assessment of the tax
consequences of events that have been reflected in the Company's financial
statements or tax returns. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Software Costs
The Company capitalizes software development costs from the point in time
where technological feasibility has been established until the computer software
product is available to be sold. The annual amortization of the capitalized
amounts is the greater of the ratio of current revenue to total projected
revenue for a product, or the straight-line method, and is applied over periods
ranging up to five years. The Company performs periodic reviews to ensure that
unamortized program costs remain recoverable from future revenue.
Research and Development
Research and development costs are charged to expense as incurred. Research
and development expenses amounted to approximately $62,000 and $10,000 in 2002
and 2001, respectively.
Inventories
Inventories, consisting of computer hardware and peripherals held for
resale, are stated at the lower of cost or market; cost is determined using the
specific identification method.
Net Earnings Per Common Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". Basic
earnings per share has been computed using the weighted average number of shares
of common stock outstanding. Diluted earnings per share has been computed using
the basic weighted average shares of common stock issued adjusted for the
dilutive effect of outstanding stock options. NOTE 1 - Summary of Significant
Accounting Policies, continued
Net Earnings Per Common Share, continued
For the year ended May 31, 2002 options and warrants to purchase 1,374,419
shares of common stock were outstanding and were not included in the computation
of diluted earnings per share because the exercise price of the options and
warrants were greater than the average market price of the common stock. For the
year ended May 31, 2001, outstanding stock options, warrants and other potential
stock issuances were not been considered in the computation of diluted earnings
per share amounts since the effect of their inclusion would have been
antidilutive. The Company uses the treasury stock method to calculate the effect
that the conversion of the stock options would have on earnings per share and
the weighted average number of shares of common stock.
Revenue Recognition
Computerized Information Processing Services. The Company generates
revenues for its computerized information processing services from its Sandsport
Home Attendant Reporting Program ("SHARP") and Pro-Health software applications.
The SHARP application provides weekly time sheets, billing, payroll processing
and management reports for not-for-profit agencies that provide home attendant
services to those in need. Revenues are recognized for these services in the
period they are provided. The Pro-Health application is an application service
provider solution that provides home health care customers access to the
Company's software over the Internet without needing sophisticated hardware at
its site to house the software or store the data. Customers using this
application are charged a monthly fee and revenue is recognized on a monthly
basis as the service is provided.
Telephone-Based Data Collection Services. The Company generates revenues
for its telephone-based data collection services from its automated electronic
system knows as Sandata(R) SANTRAX(R) ("SANTRAX") software application. The
SANTRAX application is an automated electronic system that incorporates
telephone technologies into the data reporting process to monitor the arrival
and departure times of off-site workers. Revenues from this application are
recognized based on a per call or visit basis in the period in which the
services are provided.
Technology Infrastructure and Outsourcing Services. Revenues from
technology infrastructure and outsourcing services such as data processing,
technology infrastructure consulting, web site development, running e-commerce
applications and reselling telephone services are recognized based on per hour
or call rates in the period the service is provided.
NOTE 1 - Summary of Significant Accounting Policies, continued
Revenue Recognition, continued
Information Technology Services. The Company generates revenues from
information technology services under the name of SandataNet and includes
services such as software support, hardware support/break-fix, Local Area
Network ("LAN") administration and configuration services and the reselling of
computer hardware and third-party software systems, some of the services are
pursuant to long-term contracts. Support revenue is recognized based on per hour
rates in the period the service is provided. For maintenance contracts greater
than one month, revenue is recognized over the term of the contract on a
straight-line basis. Computer hardware and software resale revenues are
recognized when the units are shipped and accepted by the customer. The Company
does not bundle maintenance with any software sold.
Long-Term Contracting. As discussed above, the Company utilizes long-term
contracts and recognizes revenue for financial statement purposes under the
percentage of completion method and, therefore, takes into account the costs,
estimated earnings and revenue-to-date on contracts not yet completed.
The amount of revenue recognized at the financial statement date is the
portion of the total contract price that the direct labor costs expended to date
bears to the anticipated total direct labor costs, based on current estimates of
costs to complete. Direct labor costs include all direct labor, related
benefits, and subcontract costs. This method is used because management
considers direct labor costs to be the best available measure of progress on
these contracts.
Revisions in estimates of costs and earnings during the life of the
contracts are reflected in the accounting period in which such revisions become
known. At the time a loss on a contract becomes known, the entire amount of the
estimated loss is recognized in the financial statements. Billings in excess of
estimated costs and earnings on uncompleted contracts are included in
deferred/unearned revenue.
Sale/Leaseback
The Company recognizes gains from sale/leaseback transactions ratably over
the term of the underlying lease. All such leases are operating leases. Any
losses from these transactions are recognized in the period incurred.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. Due to the nature of its
operations, the Company deposits, on a monthly basis, amounts in financial
institutions for the payment of payroll liabilities for certain customers. Such
amounts are reduced when the Company pays such liabilities. Such reductions
generally occurs over five to ten business days. At May 31, 2001, the Company
had amounts on deposit for these liabilities of approximately $1,300,000.
NOTE 1 - Summary of Significant Accounting Policies, continued
Concentration of Credit Risk
The Company is subject to a concentration of credit risk with respect to
its trade receivables, as disclosed above. The Company performs on-going credit
evaluations of its customers and generally does not require collateral. The
Company maintains allowances to cover potential or anticipated losses for
uncollectible accounts.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of May 31, 2002.
Statements of Cash Flows
The Company paid income taxes of approximately $19,000 and $23,000 and
interest of approximately $242,000 and $252,000 for the years ended May 31, 2002
and 2001, respectively.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Company's short term financial instruments include cash, accounts
receivable, receivable from affiliates and accounts payable. Due to the
short-term nature of these instruments, the fair value of these instruments
approximates their recorded value. The Company has long-term debt instruments
which it believes are stated at their estimated fair value.
Stock Options and Similar Equity Instruments
The Company accounts for stock options and similar equity instruments
(collectively "Options") issued to employees and directors in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," rather than the fair value based method of accounting prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The exercise price for Options issued to employees and directors
equals or exceeds the fair value of the Company's Common Stock at the date of
grant and, accordingly, no compensation expense is recorded. Equity instruments
issued to acquire goods and services from non-employees are accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more readily determinable. NOTE 1 - Summary of
Significant Accounting Policies, continued
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Business Segments
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which supercedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements regarding
products and services, geographical areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company has determined that its operations are in one segment,
computer services to the health care industry.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS No. 144 addresses the accounting model for long-lived assets to be disposed
of by sale and resulting implementation issues. This statement requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. It also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS No. 144 is effective
for the Company in fiscal 2003. The Company is evaluating the impact that
implementation of SFAS No. 144 may have on the financial statements of the
Company.
NOTE 1 - Summary of Significant Accounting Policies, continued
New Accounting Pronouncements, continued
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect and eliminates an
inconsistency between the accounting for sale-leaseback transactions and certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Generally, SFAS No. 145 is effective for
transactions occurring after May 15, 2002. The adoption of this standard is
expected to have no impact to the Company.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"), provides guidance on the recognition and measurement
of liabilities for cost associated with exit or disposal activities. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently reviewing SFAS
146 to determine the impact upon adoption.
NOTE 2 - Fixed Assets
Fixed assets consist of the following:
May 31,
Useful Life 2002 2001
----------- ---- ----
Computer equipment 5 years $ 3,169,445 $ 2,883,819
Software costs Up to 5 years 12,364,224 10,047,618
Furniture, fixtures and automobiles 4-7 years 419,274 415,330
Leasehold improvements 10 years 2,823,154 2,809,278
------------ -------------
18,776,097 16,156,045
Less: accumulated depreciation and
amortization (11,955,501) (10,119,842)
------------ ------------
Total Fixed Assets, net $ 6,820,596 $ 6,036,203
============ ============
Depreciation and amortization expense relating to fixed assets (other than
software costs) amounted to approximately $443,000 in 2002 and 2001,
respectively.
Unamortized software costs amounted to approximately $5,105,000 and
$4,186,000 at May 31, 2002 and 2001, respectively. Amortization expense for
these costs totaled approximately $1,397,000 and $2,305,000 in 2002 and 2001,
respectively.
NOTE 2 - Fixed Assets, continued
During the fourth quarter of the year ended May 31, 2001, the Company shut
down certain operating systems and hardware configurations, which had been
capitalized in previous years. The Company had determined that the older systems
architecture had become obsolete and too costly to maintain, so the Company
coordinated placing several new systems in production after running parallel
with pre-existing systems resulting in the retirement of the older systems
during the fourth quarter. The Company further determined that there is no net
realizable value remaining since no future revenue would be recognized in the
retired systems because the architecture was completely replaced by the new
systems. As such the Company recognized an impairment loss of approximately
$3,300,000 for the year ended May 31, 2001.
NOTE 3 - Debt
Credit Agreement
The Company's wholly owned subsidiary, Sandsport Data Services, Inc.
("Sandsport"), has a revolving credit agreement (the "Credit Agreement") with a
Bank which allows Sandsport to borrow amounts up to $4,500,000 and is due on
June 14, 2003. Interest accrues on amounts outstanding under the Credit
Agreement at a rate equal to the London Interbank Offered Rate plus 2% and will
be paid quarterly in arrears or, at Sandsport's option, interest may accrue at
the Bank's prime rate. The Credit Agreement requires Sandsport to pay a fee
equal to 1/4% per annum on the unused average daily balance of amounts under the
Credit Agreement. In addition, there are other fees and charges imposed based
upon Sandsport's failure to maintain certain minimum balances. The indebtedness
under the Credit Agreement is guaranteed by the Company and Sandsport's sister
subsidiaries (the "Group"). All of the Group's assets are pledged to the Bank as
collateral for the amounts due under the Credit Agreement, which pledge is
secured by a first lien on all equipment owned by members of the Group, as well
as a collateral assignment of $2,000,000 of life insurance payable on the life
of the Company's Chairman. In addition, the Company is restricted in its ability
to declare and pay dividends pursuant to the Credit Agreement. The Group's
guaranty to the Bank was subsequently modified to include all indebtedness
incurred by the Company under the amended Credit Agreement dated August 24, 2001
(see below).
On August 24, 2001, Sandsport, the Company and the other members of the
Group, and the Bank, entered into the Third Amendment and Waiver (the "Third
Amendment") to the Credit Agreement. Pursuant to the Third Amendment,
Sandsport's covenants to the Bank to maintain a certain net worth, and to
maintain certain financial ratios, were revised on a going-forward basis and the
noncompliance with the existing covenants was waived by the Bank. In addition,
in connection with the Third Amendment, Sandsport and each member of the Group
executed and delivered to the Bank a Collective Amended and Restated Security
Agreement, pursuant to which the Bank's security interest was extended to
include a security interest in all of the personal and fixture property of
Sandsport, the Company and the members of the Group. As of May 31, 2002 and
2001, the outstanding balance on the Credit Agreement with the Bank was
$4,500,000 and $3,850,000, respectively.
NOTE 3 - Debt, continued
Long Term Debt
The Company owed National Medical Health Card Systems, Inc. ("Health
Card"), a company affiliated with the Company's Chairman, $500,000 pursuant to a
promissory note, dated May 31, 2000 and due June 1, 2001 plus interest at the
rate of 9-1/2%; interest on such note was payable quarterly. The Note was paid
in May, 2001.
On June 9, 2001, the Company issued a promissory note to Health Card in the
principal amount of $500,000, with interest at the rate of 7%, which was due on
June 8, 2002. This Note was paid in full on August 15, 2001.
NOTE 4 - Income Taxes
The income tax expense (benefit) is comprised of the following:
Year Ended May 31,
------------------
2002 2001
---- ----
Current
Federal $ -- $ --
State 17,998 19,000
-------- -------------
Total current 17,998 19,000
-------- -------------
Deferred
Federal 192,761 (1,089,293)
State 38,308 (223,108)
--------- ------------
Total deferred 231,069 (1,312,401)
-------- -----------
Income tax expense (benefit) $249,067 $(1,293,401)
======== ===========
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
Year Ended May 31,
2002 2001
---- ----
Statutory U.S. federal tax rate 34.0% (34.0%)
State taxes 4.6 (5.8)
Permanent Differences 12.2 1.2
Other 12.9 1.6
---- ------
63.7% (37.0%)
===== ======
NOTE 4 - Income Taxes, continued
The components of deferred tax assets and liabilities consists of the
following:
May 31,
2002 2001
---- ----
Deferred Tax Assets-Current portion
Allowance for Doubtful Accounts $ 81,686 $142,230
Deferred Income 61,367 43,340
Accrued Expenses 56,117 79,706
Other 8,425 9,194
-------- --------
Deferred Tax Assets, current $207,595 $274,470
======== ========
May 31,
2002 2001
---- ----
Deferred Tax Assets-Long term portion
Net Operating Loss Carryforwards $ 1,642,275 $ 1,255,038
Deferred Income -- 129,255
Goodwill -- 82,872
Other 604 615
----------- -----------
Deferred Tax Assets, Long-term 1,642,879 1,467,780
----------- -----------
Deferred Tax Liabilities-Long-term portion
Depreciation and amortization (1,460,054) (1,132,007)
Deferred income (11,246) --
---------- --------------
Deferred Tax Liabilities, Long-term (1,471,300) (1,132,007)
----------- -----------
Deferred Tax Assets - Long-term, Net 171,579 335,773
----------- -----------
Total Deferred Tax Asset, Net $ 379,174 $ 610,243
============ ===========
Management determined that it was more likely than not that future taxable
income would be sufficient to enable the Company to realize all of its deferred
tax assets. Accordingly, no valuation allowance has been recorded at May 31,
2002 and 2001.
At May 31, 2002, the Company had net operating loss carryforwards for tax
purposes of approximately $4,076,000, expiring at various dates through 2022.
NOTE 5- Commitments and Contingencies
Lease Agreements
The Company leases office space at 26 Harbor Park Drive, Port Washington,
NY 11050 (the "Facility") from BFS Realty LLC, successor to BFS Sibling Realty
and an affiliate of the Company's Chairman (the "Affiliate") (see Note 6). The
Company paid rent in the amount of $407,834 and $615,412 to the Affiliate for
the years ended May 31, 2002 and 2001, respectively.
On June 1, 2001 (revised November, 2001) , the Company entered into a ten
(10) year lease for the Facility with the Affiliate. The lease provides for
annual rental payments of $277,817 for the period June 1, 2002 to May 31, 2003,
with annual 5% increases in each 12-month period thereafter. The lease is being
expensed on a straight-line basis over the lease term. The lease also requires
monthly payments of various types, such as the Company's proportionate share of
real estate taxes and common area maintenance charges, that aggregate
approximately $10,000 per month. In November, 2001, the lease was revised to
provide that the Company would pay its utility expenses directly to the
respective utility company, not to the Affiliate.
The Company has obligations to pay rental expense in connection with six
sale/leaseback transactions. The rental expenses amounted to approximately
$1,195,000 and $1,630,000 for the years ended May 31, 2002 and 2001
respectively. (See Note 8)
Total office space and equipment rental expense under all operating leases
amounted to approximately $2,294,000 and $3,417,000 in fiscal 2002 and 2001,
respectively.
Future minimum lease payments for all non cancelable operating leases at
May 31, 2002 are as follows:
Year Ending May 31, Amount
------------------- ------
2003 $1,759,640
2004 969,461
2005 644,554
2006 336,390
2007 330,988
Thereafter 1,739,257
----------
Total $5,780,290
==========
NOTE 5- Commitments and Contingencies, continued
Litigation
a. On October 19, 1999, the Company and Pro-Health brought an action
against Provider Solutions Corporation ("Provider") and others, in Supreme
Court, New York County, based on breach of contract, fraudulent
misrepresentation and other causes of action, demanding damages of approximately
$10,000,000 (the "State Action"). On October 22, 1999, Provider brought a
federal action in the United States District Court for the Eastern District of
New York (the "Federal Action"). The complaint demanded relief in the form of a
permanent injunction and damages against the Company and Pro-Health for total
amounts ranging from $10,000,000 to $15,000,000. The State Action was
consolidated with the Federal Action.
On March 8, 2001 the Company, Pro-Health, Provider and all involved parties
and individuals settled the consolidated Federal Action, globally resolving all
issues, claims and disputes. The settlement entailed the exchange of general
releases between the Company, Pro-Health, Provider and all parties, and the
payment of $600,000 to Provider, of which $50,000 was paid by the Company. The
balance of the payment under the settlement was funded by the Company's
insurers. The settlement did not have a material effect on the Company's
operations. The Company has retained its proprietary interest in the subject
software.
b. In August of 1999, the Company's wholly-owned subsidiary, Sandsport was
named as a defendant in Greater Bright Light Home Care Services, Inc. et al. v.
Joseph Jeffries-El, El Equity Corporation, Sandsport Data Services, Inc. et al.
(Supreme Court of the State of New York, Kings County). Sandsport's contractual
obligation to Greater Bright Light involved the depositing of certain
government-issued checks into a specific bank account. Upon receiving written
notification from the agency issuing the checks to stop depositing them in that
account, Sandsport ceased depositing them. The plaintiff brought the action
against Joseph Jeffries-El and El Equity, and El Equity counterclaimed against
the plaintiff, each basing its claims on the financing agreement between them.
El Equity also cross-claimed against Sandsport, asserting that Sandsport
converted the government-issued checks to its own use. Although Sandsport is
named as a defendant, the Complaint seeks no affirmative relief against
Sandsport. Co-defendant Citibank has asserted indemnification claims against
Sandsport and all of the other defendants. Sandsport disputes all liability.
However, the Company is unable to predict the outcome of these claims and
accordingly, no adjustments have been made in the consolidated financial
statements in response to these claims.
c. On March 1, 2000, Dataline, Inc. ("Dataline") began a lawsuit against
MCI WorldCom Network Services, Inc. ("MCI") and the Company for alleged trade
libel and related counts, in the United States District Court for the Southern
District of New York. The court dismissed that lawsuit, with prejudice, on May
23, 2002. On May 4, 2001 MCI had brought a patent infringement lawsuit against
NOTE 5- Commitments and Contingencies, continued
Litigation, continued
Dataline, alleging that it was infringing three MCI patents, under which
the Company has an exclusive license in New York City. Shortly thereafter, the
Company joined MCI in the suit against Dataline. Pursuant to a Settlement
Agreement dated January 1, 2002 among MCI, its parent (MCI Communications
Corporation), the Company, and Dataline, Dataline acknowledged the validity and
enforceability of the 3 MCI-owned patents that were the subject of the lawsuits.
There were no payments from either MCI or the Company to Dataline. As part of
the settlement, Dataline agreed to pay the Company $100,000 in cash and issue an
8% promissory note in the amount of $721,000. Due to the uncertainty of
realization of the note receivable, the Company is recognizing the income on the
note using the installment method of accounting. During the year ended May 31,
2002, the Company has recognized approximately $115,000 of income. In addition,
Sandata and Dataline entered into an Exclusive Service Agreement by which
Dataline agreed to use the Company's "call capture infrastructure" for all of
Dataline's time and attendance systems, and to pay royalties to the Company for
such use. The terms of the settlement also included mutual releases.
d. An action was commenced against the Company and Health Card by a former
executive of Health Card, Mary Casale, who alleged that employees of both Health
Card and the Company engaged in sex discrimination as to Ms. Casale, and thus,
violated Title VII of the Civil Rights Act of 1964. In February 2002 the matter
was withdrawn from the Equal Employment Opportunity Commission, and was settled
without any effect on the financial statements of the Company.
Royalty Agreement
The Company has been granted a license under certain of MCI's patents which
permits the Company to continue to market and sell its SANTRAX time and
attendance verification product non-exclusively nationwide, and exclusively in
the home health care industries for the five New York boroughs, and that the
Company will pay MCI certain royalties, on a per call basis. The license remains
in effect until the last to expire of various patents held by MCI or until
October 19, 2010, whichever is later.
Employment and Deferred Compensation Agreements
On February 1, 1997 the Company and its Chairman ("Mr. Brodsky") entered
into an employment agreement for a five year term (the "Brodsky Employment
Agreement"). Among other things, the Brodsky Employment Agreement provides
compensation at the annual rate of $500,000 or a lesser amount if mutually
agreed. The Brodsky Employment Agreement also provides for payment of an annual
bonus at the sole discretion of the Board of Directors. Mr. Brodsky agreed to
accept a reduction in compensation for the fiscal years ended May 31, 2002,
2001, and 2000 and has signed waivers evidencing his agreement to such
reductions. The Brodsky Employment Agreement was renewed, on identical terms, on
March 1, 2002.
In May 1992, Mr. Brodsky and the Company entered into a deferred
compensation agreement pursuant to which the Company would (i) pay to Mr.
Brodsky a lump sum ranging from $75,000 to $255,000 if he voluntarily terminated
his employment with the Company after attaining 55 years of age, or (ii) pay to
Mr. Brodsky's beneficiary a lump sum ranging from $200,000 to $450,000 in the
event of Mr. Brodsky's death during the term of his employment with the Company.
This agreement was terminated in October, 2001.
NOTE 5- Commitments and Contingencies, continued
Employment and Deferred Compensation Agreements, Continued
On August 9, 2001 the Company announced that it had terminated the
employment of Stephen Davies as President of the Company, and would be
terminating approximately 30 other employees. Mr. Davies received a severance
payment equal to six (6) months' base salary, or $100,000, and had 90 days from
the date of termination to exercise the 66,673 options that were vested on that
date. None of such options were exercised. In addition, the Company paid
approximately $47,000 in severance payments for approximately 30 other
terminated employees.
NOTE 6 - Related Party Transactions
a. In November 1996 the Company entered into an agreement with the
Affiliate, the Nassau County Industrial Development Agency ("NCIDA"), and a Bank
(the "Bondholder") (the "Agreement"). Pursuant to the Agreement, the Affiliate
(i) assumed all of the Company's rights and obligations under a Lease Agreement
that was previously between the Company and the NCIDA (the "Lease"), and (ii)
entered into a Sublease Agreement with the Company for the premises the Company
occupies. Pursuant to the Agreement, the Affiliate also obtained the right to
become the owner of the premises upon expiration of the Lease. Under the terms
of the Agreement, the Company is jointly and separately liable to the NCIDA for
all obligations owed by the Affiliate to the NCIDA under the Lease; however, the
Affiliate has indemnified the Company with respect to certain obligations
relative to the Lease and the Agreement. In addition, the Agreement provides
that the Company is bound by all the terms and conditions of the Lease, and that
a security interest is granted to the Affiliate in all of the Company's fixtures
constituting part of the premises.
The foregoing transactions and agreements were the last in a series of
transactions involving the Company, the Affiliate, NCIDA, the Bondholder and the
U.S. Small Business Administration ("SBA"). Chief among these was the borrowing
by the Affiliate in June of 1994 of $3,350,000 in the form of Industrial
Development Revenue Bonds (the "Bonds") to finance the acquisition of the
Facility. Simultaneously with the issuance of the Bonds: (1) NCIDA obtained
title to the Facility and leased it to the Affiliate, (2) the Affiliate
subleased the Facility to the Company, (3) the Bondholder bought the Bonds, (4)
the Bondholder received a mortgage and security interest in the Facility to
secure the payment of the Bonds. The Affiliate's obligations under the Lease
were guaranteed by Mr. Brodsky, the Company, Sandsport and others. The
Affiliate's obligations respecting repayment of the Bonds were also guaranteed
by Mr. Brodsky, the Company, Sandsport and others.
NOTE 6 - Related Party Transactions, CONTINUED
The Bonds currently bear interest at the rate of 9%, and the outstanding
balance due on the Bonds as of May 31, 2002 was $1,444,445. The Company paid
rent to the Affiliate of $407,834 and $615,412 for the years ended May 31, 2002
and 2001.
On August 11, 1995, the Company entered into a $750,000 loan agreement with
the Long Island Development Corporation ("LIDC"), under a guarantee by the SBA
(the "SBA Loan"). The SBA Loan was assigned to the Affiliate in November 1996;
however, repayment of the SBA loan is guaranteed by the Company and various
subsidiaries of the Company. The entire proceeds were used to repay a portion of
the Bonds. The SBA Loan is payable in 240 monthly installments of $6,255, which
includes principal and interest at a rate of 7.015%. The balance of the SBA loan
as of May 31, 2002 was $599,024.
b. Until January 2002, the Company derived revenue from Health Card, a
company affiliated with the Company's Chairman, principally for data base and
operating system support, hardware leasing, maintenance and related
administrative services. The revenues generated from Health Card amounted to
approximately $693,000 and $2,458,000 for the years ended May 31, 2002 and 2001,
respectively. The Company billed Health Card approximately $126,000 and $821,000
for quality assurance testing of software programs developed by Health Card and
network support, and $47,000 and $561,000 for help desk services, $175,000 and
$448,000 for data processing center as well as $305,000 and $534,000 for certain
computer equipment leases and other services for $40,000 and $95,000 for years
ended May 31, 2002 and 2001, respectively. In addition the Company resells its
telephone services to Health Card. The billings for such telephone services
amounted to approximately $124,000 and $134,000 for the years ended May 31, 2002
and May 31, 2001 and are recorded as a reduction of operating expense. The
Company was owed $19,280 from Health Card at May 31, 2002. Subsequent to May 31,
2002, the Company received approximately $14,000 from Health Card, representing
substantially complete payment of amounts due as of that date. As of January,
2002, the Company ceased rendering services to Health Card. Health Card
continues to pay its allocable share of expenses for shared services, which
amounts to approximately $45,000 per month.
c. The Company makes lease and rent payments to affiliates of the Company's
Chairman. The payments for leased equipment were made to P.W. Capital Corp. and
P.W. Medical Management, Inc., and were $268,011 and $395,989 for the years
ended May 31, 2002 and 2001, respectively. The payments for the Facility were
made to BFS Realty, LLC, and were $407,834 and $615,412 for the years ended May
31, 2002 and 2001, respectively. In June 2001, the Company entered into a new
lease for the Facility which was revised in November, 2001. (See Note 5).
NOTE 6 - Related Party Transactions, CONTINUED
d. Medical Arts Office Services, Inc. ("MAOS"), of which the Company's
Chairman is the sole shareholder, provided the Company with accounting,
bookkeeping and legal services. For the years ended May 31, 2002 and 2001 the
total payments made by the Company to MAOS were $340,869 and $279,894,
respectively.
e. During the years ended May 31, 2002 and 2001 the Company paid an
aggregate of $57,285 and $65,894, respectively on behalf of certain officers to
companies affiliated with the Company's Chairman for payment of automobile
leases.
NOTE 7 - SHAREHOLDERS' EQUITY
Stock Options
The Company maintains the following stock option plans:
1984 Stock Option Plan
There had been 2,536 options granted at an exercise price of $1.88 under an
incentive stock option plan adopted in October 1984 (the "1984 Plan") and
subsequently amended. Options granted under this plan were granted at exercise
prices not less than fair market value on the date of grant. All of the options
outstanding under this plan expired in January 2001. No additional options may
be granted under this plan.
1995 Stock Option Plan
At May 31, 2002, there were 590,500 incentive options outstanding under a
stock option plan adopted in January 1995 (the "1995 Plan"), which provides for
both incentive and nonqualified stock options and reserves 1,000,000 shares of
common stock for grant under the plan. Of these options, 520,500 are held by
officers of the Company. The plan requires that incentive options be granted at
exercise prices not less than the fair market value at the date of grant, and
terminates in January 2005. All options outstanding under this plan are
exercisable at May 31, 2002 at prices ranging from $1.41 to $2.61 per share over
a period of five years from date of grant.
On July 14, 1997, the Company filed a Registration Statement on Form S-8
relative to reofferings of shares of Common Stock of the Company which may be
acquired pursuant to the 1984 and 1995 Plan.
1998 Stock Option Plan
At May 31, 2002 there were 775,579 incentive stock options outstanding
under a stock option plan adopted in October 1998, (the "1998 Plan") which
provides for both incentive and nonqualified stock options and reserves
1,000,000 shares of common stock for grant under the plan. The plan requires
that incentive options be granted at exercise prices not less than the fair
market value at the date of grant and terminates in August 2008. Of the options
outstanding at May 31, 2002, 567,060 were exercisable at prices ranging from
$1.31 to $3.00 over three to five years from the date of grant.
NOTE 7 - SHAREHOLDERS' EQUITY, CONTINUED
2000 Stock Option Plan
At May 31, 2002, there were 28,340 incentive options outstanding under a
stock option plan adopted on November 20, 2000 (the "2000 Plan"), which provides
for both incentive and nonqualified stock options and reserves 1,500,000 shares
of common stock for grant under the plan. The 2000 Plan terminates in September
2010. Options outstanding under the plan vest over a seven-year period
commencing December 31, 2000 and ending December 31, 2007 and are exercisable at
prices ranging from $1.00 per share to $3.00 per share over a period of ten
years from the date of grant. At May 31, 2002, there were no options currently
exercisable.
Summary information with respect to the stock option plans follows:
Range of
exercise Outstanding Outstanding
options options
prices ($) granted exercisable
---------- ------- -----------
Balance, June 1, 2000 1.31 - 3.00 1,523,902 849,871
Granted 3.00 279,808 269,653
Cancelled (76,118) (11,146)
---------- ------------
Balance, May 31, 2001 1.31 - 3.00 1,727,592 1,108,378
Granted 1.00 - 3.00 40,085 150,895
Cancelled (373,258) (101,713)
----------- -----------
Balance, May 31, 2002 1.31 - 3.00 1,394,419 1,157,560
========= =========
Stock option grants to certain officers and directors were as follows:
In October 1998, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 20,000 shares of the
Company's common stock under the 1998 Plan at an exercise price of $1.00. These
options vested immediately and are exercisable over a five-year period.
In December 1998, the Company granted 520,500 incentive options to certain
officers of the Company under the 1995 Plan at an exercise price of $1.41 per
share. These options vested immediately and are exercisable over a five-year
period.
In February 2000, the Company granted its Chairman incentive stock options
to purchase an aggregate of 350,000 shares under the 1998 Plan at an exercise
price of $1.31. These options vest and are exercisable over a five-year period.
In April 2000, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 72,000 shares under the
1998 Plan at an exercise price of $3.00. These options vest and are exercisable
over a six-year period.
NOTE 7 - SHAREHOLDERS' EQUITY, CONTINUED
2000 Stock Option Plan, Continued
In April 2000, the Company granted its then President incentive stock
options to purchase an aggregate of 100,000 shares under the 1998 Plan at an
exercise price of $3.00. In October 2000, the Company granted its then President
incentive stock options to purchase 150,000 shares under the 2000 Plan, at an
exercise price of $3.00 per share. The President's employment was terminated on
August 6, 2001, at which date the President became entitled to exercise, for
ninety days, the options that had already vested. Those options consisted of
33,340 shares under the 1998 Plan, and 33,333 under the 2000 Plan, none of which
were exercised before the right to exercise expired.
In November 2000, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 20,000 shares of the
Company's common stock under the 1998 Plan at an exercise price of $3.00. These
options vest over a three-year period and are exercisable over a five-year
period.
During the fiscal year ended May 31, 2002 non-qualified options to purchase
up to 10,000 shares of Common Stock, at an exercise price of $1.00 per share,
were issued to each of two Director's.
On July 14, 1998, the Chairman, certain officers and directors, and a
former director (who is also the spouse of an officer and an employee of
Sandsport Data Services, Inc. ("Sandsport"), the Company's wholly owned
subsidiary), exercised their respective options and warrants to purchase an
aggregate of 921,334 shares of Common Stock. The exercise prices ranged from
$1.38 to $2.61 per share for an aggregate cost of $1,608,861. Payment for such
shares was made to the Company in the amount of $921 representing the par value
of the shares, and a portion in the form of non-recourse promissory notes due in
July 2001, with interest at eight and one-half percent (8-1/2%) per annum,
payable annually, and secured by the number of shares exercised. The Company has
received interest payments on such notes in the amount of $131,994 and $162,110
during the fiscal years ended May 31, 2002 and 2001. As of May 31, 2002 and
2001, the outstanding balance on such notes, including principal and accrued but
unpaid interest, was $1,669,640 and $1,722,547, respectively (see Note 12d). On
July 14, 2001, the Company agreed to extend the due dates of the promissory
notes for one hundred twenty days. On November 9, 2001, the due date of the
notes was extended to November 9, 2004, and the Company agreed to substitute
full recourse unsecured notes for the notes it had previously accepted.
Effective December 1, 2001, the interest rate was changed from 8-1/2% to 6%.
During the year ended May 31, 2002, 24,667 shares of common stock were
surrendered by a former director and an employee in settlement of notes in the
amount of $37,962.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock option plans under the fair value method of
SFAS No. 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions for 2002 and 2001.
NOTE 7 - Shareholders' Equity, continued
ASSUMPTIONS
Year Ended May 31,
------------------
2002 2001
---- ----
Risk free rate 4.95 - 6.05% 5.25 - 6.04%
Dividend yield .00% .00%
Volatility factor of the expected market
price of the Company's common stock 61% 117%
Average life 5 years 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly differently from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma loss is as follows:
Year Ended May 31,
2002 2001
---- ----
Pro forma net income (loss) $78,025 $(2,470,616)
Pro forma net income (loss) per share $ .03 $ (.99)
The weighted average fair value of options granted during the years ended
May 31, 2002 and 2001 were $1.12 and $.86, respectively. The weighted average
remaining contractual life of options exercisable at May 31, 2002 is 5 years.
The exercisable prices range from $1.31 to $3.00 for options outstanding as of
May 31, 2002.
Restricted Stock Grant Plan
On September 1, 2000 the Board of Directors approved the adoption of the
Company's 2000 Restricted Stock Grant Plan (the "Stock Grant Plan"). The Stock
Grant Plan was subsequently adopted by the Shareholders at the Company's Annual
Meeting on November 20, 2000. The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares (e.g., the standard seven year vesting schedule set forth in the
Stock Grant Plan) and/or restrictions that the Board may impose, such as
restrictions relating to length of service, corporate performance, or other
restrictions. As of May 31, 2002, no grants had been made under the Stock Grant
Plan and, therefore, no shares had vested under it. There are 700,000 shares of
Common Stock reserved for issuance in connection with grants made under the
Stock Grant Plan.
NOTE 8 - Sale/Leaseback Transactions
The Company is a party to various sale/leaseback transactions involving
certain fixed assets, principally computer hardware, software and equipment.
Gains on these transactions have been deferred and are being recognized over the
lives of the related leases, each of which is 36 months. Approximately $297,000
and $344,000 of the deferred gains were recognized in other income for the years
ended May 31, 2002 and 2001, respectively. Included in these amounts are the
effects of the following sale/leaseback transactions:
In January 1998, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $515,000, were sold for
$700,000. The resulting gain of approximately $185,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $36,000
of the deferred gain was recognized for fiscal 2001, which was the last year of
the lease. An unaffiliated third party purchased the residual rights to such
lease.
In January 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $830,000, were sold for
$1,100,000. The resulting gain of approximately $270,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $60,000 and $90,000 of deferred gain was recognized for the years
ended May 31, 2002 and 2001, respectively. An unaffiliated third party purchased
the residual rights in such lease.
In May 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $896,000, were sold for
$1,100,000. The resulting gain of approximately $204,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $68,000 of deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
In October 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $895,000, were sold for
$1,115,000. The resulting gain of approximately $220,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $73,000 of the deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
In January 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $442,000, were sold for
$561,000. The resulting gain of approximately $119,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $40,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
NOTE 8 - Sale/Leaseback Transactions, continued
In February 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $237,000, were sold for
$277,000. The resulting gain of approximately $40,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $14,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
In November 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $421,500, were sold for
$548,300. The resulting gain of approximately $126,800 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $42,000
and $21,000 of the deferred gain was recognized for the years ended May 31, 2002
and 2001, respectively. An unaffiliated third party purchased the residual
rights in such lease.
NOTE 9 - Asset Acquisition and Impairment
On April 27, 2001, the Company acquired certain assets of North American
Internet Services, Inc. ("NAIS"), a provider of broadband services, Internet
access, and co-location services for approximately $201,000. NAIS had entered
bankruptcy proceedings and, under the auspices of the Bankruptcy Court, the
Company was permitted to "credit bid" approximately $124,000 of expenses
(including salaries) it had incurred on behalf of NAIS as the purchase price for
the assets, and was given 180 days to exploit the assets it had acquired. The
Company incurred approximately $77,000 in additional costs related to the
acquisition of these assets. The tangible assets were determined to have no
significant fair value. Therefore, all the expenditures related to the
acquisition were allocated to goodwill. The Company has the option to abandon
the exploitation of these assets within the 180 day period. If the Company
continues to use the NAIS assets, 10% of the profits (defined as earnings before
interest expense and taxes) generated by such use must be paid to the bankruptcy
estate for the first three years.
At May 31, 2001, the Company performed an evaluation of the recoverability
of the assets acquired from NAIS and concluded that a significant impairment of
these assets had occurred based on actual results during the year ended May 31,
2001 and on estimated future cash flows not being sufficient to recover the
carrying value of the goodwill. As such, the carrying value of goodwill was
written down to its estimated fair value, which was determined based on
discounted estimated cash flows. The Company recognized an impairment loss and
write down of the goodwill of approximately $201,000. Considerable management
judgment is necessary to estimate fair value; accordingly, actual results could
vary significantly from such estimates.
NOTE 10 - Retirement Plan
The Company has a 401(k) savings plan covering all eligible employees in
which the Company matches a portion of the employees' contribution. The amount
of this match was $40,204 and $38,197 in fiscal years 2002 and 2001,
respectively.
NOTE 11 - Revenue by Product Line
The Company operates in one business segment, but derives its revenue from
several product lines. The following table provides the service fee revenues for
the product lines earned for the fiscal years ended May 31, 2002 and 2001:
Year Ended May 31,
2002 2001
---- ----
Computerized information processing $ 5,962,880 $ 5,960,450
Telephone-based data collection 7,690,852 7,561,852
Technology infrastructure and outsourcing 736,932 2,071,266
Information technology 2,765,761 2,170,240
Other 17,497 5,261
-------------- ---------------
Total $17,173,922 $17,769,069
=========== ===========
NOTE 12 - Subsequent Events
a. By letter dated June 26, 2002, a former employee of the Company asserted
claims for back wages of $410,000. The letter, from the employee's attorney,
also contained allegations of age discrimination and retaliatory discharge. The
letter also contained an offer of settlement. No formal litigation has been
started and the Company intends to pursue settlement negotiations. A provision
of $200,000 is included in accrued expenses relating to the asserted claim,
which represents the Company's best estimate of costs to be incurred. The amount
of the ultimate cost may vary from this estimate.
b. The Company has received a proposal to engage in a going private
transaction. The proposed transaction is anticipated to be in the form of a
merger with an entity owned by an investor group to be led by Bert E. Brodsky,
the Company's Chief Executive Officer, and to include Directors Hugh Freund and
Gary Stoller as well as other investors (the "Acquiring Group"). Pursuant to the
proposal, the Company's shareholders (other than Mr. Brodsky and the other
shareholders that shall comprise part of the Acquiring Group) would receive
$1.50 per share of Common Stock of the Company (the "Shares"), in cash. The
proposal may be amended, modified or supplemented at any time.
NOTE 12 - Subsequent Events, continued
The Board of Directors has appointed a Special Committee (the "Committee"),
comprised of Ronald Fish and Martin Bernard, to review the proposed transaction.
The Committee has retained Brean Murray & Co., Inc. as its financial advisor,
and has retained its own legal counsel.
The proposed transaction would result in the acquisition of all of the
outstanding Shares other than the Shares owned by Mr. Brodsky and the other
shareholders that shall comprise the Acquiring Group. The final terms of any
acquisition will be based on negotiations between the Acquiring Group and the
Committee. The proposed acquisition will be subject to, among other things, (1)
the negotiation, execution, and delivery of a definitive agreement, (2) approval
of the proposed transaction by the Committee, the full Board of Directors and
the Company's shareholders, (3) receipt of a fairness opinion by the Committee,
(4) applicable regulatory approval, and (5) obtaining any necessary third-party
consents or waivers. There can be no assurance that a definitive merger
agreement will be executed and delivered, or that the proposed transaction will
be consummated.
c. On July 9, 2002 the Company issued a press release announcing that
Nasdaq had informed the Company that its shares would be subject to de-listing
from the Small Cap Market for failure to comply with Nasdaq's Marketplace Rules
regarding minimum value of publicly held shares and minimum bid price per share.
The Company requested a hearing on these matters, and the de-listing was stayed
until the hearing. The Company was informed by Nasdaq on August 21, 2002 that
the Company had regained compliance with both Marketplace Rules and that,
therefore, the hearing was cancelled and the matter is moot.
d. On August 22, 2002, the Chairman repaid $100,000 of the note receivable
officer.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SANDATA TECHNOLOGIES, INC.
(Registrant)
By /s/ Bert E. Brodsky
--------------------------------------------------------------------------
Bert E. Brodsky, Chairman
(Principal Executive Officer and
Principal Financial and Accounting Officer)
Date: August 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Bert E. Brodsky
-----------------------------------------------------------------------
Bert E. Brodsky, Chairman, Treasurer, Director
Date: August 27, 2002
By /s/ Hugh Freund
-----------------------------------------------------------------------
Hugh Freund, Executive Vice President, Secretary, Director
Date: August 27, 2002
By /s/ Gary Stoller
-----------------------------------------------------------------------
Gary Stoller, Executive Vice President, Director
Date: August 27, 2002
By /s/ Martin Bernard
----------------------------------------------------------------------
Martin Bernard, Director
Date: August 27, 2002
By /s/ Ronald L. Fish
-----------------------------------------------------------------------
Ronald L. Fish, Director
Date: August 27, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Sandata Technologies, Inc. (the
"Company") on Form 10-KSB for the year ended May 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Bert E.
Brodsky, Chief Executive Officer and Chief Financial Officer of the Company,
certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Bert E. Brodsky
Bert E. Brodsky
Chief Executive Officer and Chief Financial Officer
August 27, 2002
APPENDIX E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended May 31, 2002
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
------- ---------
Commission file number 0-14401
SANDATA TECHNOLOGIES, INC.
(Exact name of small business issuer in its charter)
DELAWARE 11-2841799
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
26 Harbor Park Drive,
Port Washington, NY
(Address of principal executive offices)
11050
(Zip Code)
Issuer's telephone number, including area code: (516) 484-4400
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----------- --------------
E-1
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for year ended May 31, 2002 were $17,852,710.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of August
16, 2002 was $1,536,918.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
---------------- -------------
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of each of the issuer's classes of
common equity, as of August 16, 2002 was 2,481,808.
Transitional Small Business Disclosure Format (check one):
Yes No X
------------ ------------
DOCUMENTS INCORPORATED BY REFERENCE
None.
ITEM 7 - FINANCIAL STATEMENTS
The Annual Report on Form 10-KSB for Sandata Technologies, Inc. (the
"Company") for the year ended May 31, 2002 is hereby amended to the extent, and
only to the extent, of amending Item 7 thereof, to correct typographical errors
in the Consolidated Balance Sheet and the Consolidated Statement of Shareholders
Equity for the year ended May 31, 2002, and in the Notes to the Consolidated
Financial Statements. Item 7 shall read in its entirety as follows:
SANDATA TECHNOLOGIES, INC.
FINANCIAL STATEMENTS COMPRISING ITEM 7
OF REPORT ON FORM 10-KSB
TO SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED MAY 31, 2002
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
Financial Statements
Consolidated Balance Sheets as of May 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the years ended
May 31, 2002 and 2001 F-4
Consolidated Statement of Shareholders' Equity for the years
ended May 31, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 2002 and 2001 F-6
Notes to Consolidated Financial Statements F-7 - F-29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Sandata Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sandata
Technologies, Inc. and Subsidiaries (formerly Sandata, Inc.) as of May 31, 2002
and 2001, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sandata Technologies, Inc. and Subsidiaries as of May 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
As more fully described in the Notes to the consolidated financial
statements, the Company had certain transactions with companies affiliated with
the Company's Officers and Chairman.
/s/ Marcum & Kliegman LLP
Woodbury, New York
July 26, 2002, except for Notes 12c and 12d, which are dated August 21, 2002 and
August 22, 2002, respectively
F-2
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 31,
2002 2001
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,630,617 $ 475,578
Accounts receivable, net of allowance for doubtful accounts
of $202,746 and $346,903 at 2002 and 2001, respectively 2,182,963 2,160,675
Receivables from affiliates 280,297 802,787
Notes receivable - officer 100,000 --
Inventories 45,342 35,993
Prepaid expenses and other current assets 345,349 416,056
Deferred income taxes 207,595 274,470
----------- -----------
Total Current Assets 4,792,163 4,165,559
FIXED ASSETS, NET 6,820,596 6,036,203
DEFERRED INCOME TAXES 171,579 335,773
OTHER ASSETS
Notes receivable 25,190 29,669
Cash surrender value of officer's life insurance, security
deposits and other assets 1,105,502 866,774
----------- -----------
TOTAL ASSETS $12,915,030 $11,433,978
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,781,550 $ 1,881,269
Deferred/unearned revenue 16,367 31,069
Deferred income 103,258 296,560
----------- -----------
Total Current Liabilities 2,901,175 2,208,898
LONG-TERM DEBT 4,500,000 3,850,000
DEFERRED INCOME 21,142 124,401
----------- -----------
TOTAL LIABILITIES 7,422,317 6,183,299
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.001 par value, 6,000,000 shares
authorized; 2,481,808 and 2,506,475 shares issued and
outstanding in 2002 and 2001, respectively 2,482 2,506
Additional paid in capital 5,765,766 5,803,704
Retained earnings 1,193,755 1,051,721
Notes receivable - officers (1,469,290) (1,607,252)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 5,492,713 5,250,679
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $12,915,030 $11,433,978
=========== ===========
See notes to consolidated financial statements
F-3
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31,
2002 2001
---- ----
REVENUES
Service fees $17,173,922 $17,769,069
Other income 514,999 368,502
Interest income 163,789 185,311
----------- -----------
TOTAL REVENUES 17,852,710 18,322,882
----------- -----------
COSTS AND EXPENSES
Operating 9,877,651 10,372,524
Selling, general and administrative 5,502,264 5,004,255
Depreciation and amortization 1,839,965 2,748,411
Interest expense 241,729 189,240
Impairment of developed software -- 3,298,872
Impairment of goodwill -- 201,128
----------- ------------
TOTAL COSTS AND EXPENSES 17,461,609 21,814,430
----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 391,101 (3,491,548)
INCOME TAX EXPENSE (BENEFIT) 249,067 (1,293,401)
----------- -----------
NET EARNINGS (LOSS) $ 142,034 $(2,198,147)
=========== ===========
PER SHARE INFORMATION
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE $ .06 $ (.88)
=========== ===========
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 2,494,175 2,506,475
=========== ===========
See notes to consolidated financial statements
F-4
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended May 31, 2002 and 2001
Additional Notes Total
Common Stock Paid-In Retained Receivable Shareholders'
Shares Amount Capital Earnings Officers Equity
------- ------ ----------- -------- ---------- ------------
Balance at
June 1, 2000 2,506,475 $2,506 $5,803,704 $ 3,249,868 $(1,607,252) $ 7,448,826
Net Loss -- -- -- (2,198,147) -- (2,198,147)
--------- ------ ---------- ----------- ----------- -----------
Balance at
May 31, 2001 2,506,475 2,506 5,803,704 1,051,721 (1,607,252) 5,250,679
Reclassification of notes
receivable officer (re-paid
subsequent to year-end-
Note 12d) -- -- -- -- 100,000 100,000
Effect of Stock
Surrender (24,667) (24) (37,938) -- 37,962 --
Net Earnings -- -- -- 142,034 -- 142,034
--------- ------ ---------- ----------- ----------- -----------
Balance at
May 31, 2002 2,481,808 $2,482 $5,765,766 $ 1,193,755 $(1,469,290) $ 5,492,713
========= ====== ========== =========== =========== ===========
See notes to consolidated financial statements
F-5
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings (loss) $ 142,034 $(2,198,147)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,839,965 2,748,411
(Gain) loss on disposal of fixed assets (4,309) 75,111
Change in allowance for doubtful accounts (144,157) (100,879)
Recognition of deferred income (296,561) (343,820)
Recognition of deferred revenue (36,121) (116,702)
Impairment of developed software -- 3,298,872
Impairment of goodwill -- 201,128
Deferred tax provision 231,069 (1,312,401)
(Increase) decrease in operating assets
Accounts receivable 121,869 249,105
Receivables from affiliates 522,490 (397,055)
Inventories (9,352) (18,828)
Prepaid expenses and other current assets 70,708 (2,937)
Other assets (234,247) (24,827)
(Decrease) Increase in operating liabilities
Accounts payable and accrued expenses 900,282 (698,874)
Deferred/unearned revenue 21,418 108,923
Deferred income -- 126,850
----------- ----------
Net cash provided by operating activities 3,125,088 1,593,930
----------- ----------
Cash flows from investing activities:
Purchases of fixed assets (2,620,049) (3,795,285)
Proceeds from sale/leaseback transactions -- 548,343
Acquisition of intangible asset -- (201,128)
----------- ----------
Net cash used in investing activities (2,620,049) (3,448,070)
----------- ----------
Cash flows from financing activities:
Principal payments on note payable (500,000) (500,000)
Proceeds from note payable 500,000 --
Proceeds from line of credit 3,800,000 2,200,000
Principal payments on line of credit (3,150,000) (600,000)
----------- ----------
Net cash provided by financing
activities 650,000 1,100,000
----------- -----------
INCREASE (Decrease) in cash and cash 1,155,039 (754,140)
equivalents
Cash and cash equivalents - beginning 475,578 1,229,718
----------- ----------
Cash and cash equivalents - ending $ 1,630,617 $ 475,578
=========== ==========
See notes to consolidated financial statements
F-6
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Economic Dependency
Sandata Technologies, Inc. and Subsidiaries (the "Company", formerly known
as Sandata, Inc. ) are primarily engaged in the business of providing
computerized data processing services and custom software and programming
services using Company-developed and licensed software principally to the
healthcare industry. The Company primarily operates in the New York metropolitan
area. During fiscal years ended May 31, 2002 and 2001, the Company received
revenues from a group of customers who are all funded by the Human Resources
Administration of the City of New York ("HRA"), amounting to approximately
$10,549,000 and $10,608,000, respectively. The Company was owed approximately
$1,259,000 and $1,160,000 from these customers at May 31, 2002 and 2001,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of Sandata
Technologies, Inc. and its wholly owned subsidiaries: Sandsport Data Services,
Inc., Sandata Home Health Systems, Inc., Sandata Spectrum, Inc., SANTRAX
Systems, Inc., SANTRAX Productivity, Inc. and Pro-Health Systems, Inc.
("Pro-Health", formerly known as Sandata Inteck, Inc.). SANTRAX Productivity,
Inc. and Sandata Spectrum, Inc. are inactive subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year financial statements. These reclassifications have no effect on
previously reported earnings/loss.
Fixed Assets
Fixed assets are recorded at cost. Depreciation and amortization are
computed principally by the straight-line method over the lesser of the
estimated useful lives or lease terms of the related assets.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets as determined by estimated discounted cash
flows. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
Income Taxes
The Company uses the liability method to account for income taxes. The
primary objectives of accounting for income taxes are to (a) recognize the
amount of income tax payable for the current year and (b) recognize the amount
of deferred tax liability or asset based on management's assessment of the tax
consequences of events that have been reflected in the Company's financial
statements or tax returns. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Software Costs
The Company capitalizes software development costs from the point in time
where technological feasibility has been established until the computer software
product is available to be sold. The annual amortization of the capitalized
amounts is the greater of the ratio of current revenue to total projected
revenue for a product, or the straight-line method, and is applied over periods
ranging up to five years. The Company performs periodic reviews to ensure that
unamortized program costs remain recoverable from future revenue.
Research and Development
Research and development costs are charged to expense as incurred. Research
and development expenses amounted to approximately $62,000 and $10,000 in 2002
and 2001, respectively.
Inventories
Inventories, consisting of computer hardware and peripherals held for
resale, are stated at the lower of cost or market; cost is determined using the
specific identification method.
Net Earnings Per Common Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". Basic
earnings per share has been computed using the weighted average number of shares
of common stock outstanding. Diluted earnings per share has been computed using
the basic weighted average shares of common stock issued adjusted for the
dilutive effect of outstanding stock options.
For the year ended May 31, 2002 options and warrants to purchase 1,394,419
shares of common stock were outstanding and were not included in the computation
of diluted earnings per share because the exercise price of the options and
warrants were greater than the average market price of the common stock. For the
year ended May 31, 2001, outstanding stock options, warrants and other potential
stock issuances have not been considered in the computation of diluted earnings
per share amounts since the effect of their inclusion would have been
antidilutive. The Company uses the treasury stock method to calculate the effect
that the conversion of the stock options would have on earnings per share and
the weighted average number of shares of common stock.
Revenue Recognition
Computerized Information Processing Services. The Company generates
revenues for its computerized information processing services from its Sandsport
Home Attendant Reporting Program ("SHARP") and Pro-Health software applications.
The SHARP application provides weekly time sheets, billing, payroll processing
and management reports for not-for-profit agencies that provide home attendant
services to those in need. Revenues are recognized for these services in the
period they are provided. The Pro-Health application is an application service
provider solution that provides home health care customers access to the
Company's software over the Internet without needing sophisticated hardware at
its site to house the software or store the data. Customers using this
application are charged a monthly fee and revenue is recognized on a monthly
basis as the service is provided.
Telephone-Based Data Collection Services. The Company generates revenues
for its telephone-based data collection services from its automated electronic
system knows as Sandata(R) SANTRAX(R) ("SANTRAX") software application. The
SANTRAX application is an automated electronic system that incorporates
telephone technologies into the data reporting process to monitor the arrival
and departure times of off-site workers. Revenues from this application are
recognized based on a per call or visit basis in the period in which the
services are provided.
Technology Infrastructure and Outsourcing Services. Revenues from
technology infrastructure and outsourcing services such as data processing,
technology infrastructure consulting, web site development, running e-commerce
applications and reselling telephone services are recognized based on per hour
or call rates in the period the service is provided.
Information Technology Services. The Company generates revenues from
information technology services under the name of SandataNet and includes
services such as software support, hardware support/break-fix, Local Area
Network ("LAN") administration and configuration services and the reselling of
computer hardware and third-party software systems; some of the services are
pursuant to long-term contracts. Support revenue is recognized based on per hour
rates in the period the service is provided. For maintenance contracts greater
than one month, revenue is recognized over the term of the contract on a
straight-line basis. Computer hardware and software resale revenues are
recognized when the units are shipped and accepted by the customer. The Company
does not bundle maintenance with any software sold.
Long-Term Contracting. As discussed above, the Company utilizes long-term
contracts and recognizes revenue for financial statement purposes under the
percentage of completion method and, therefore, takes into account the costs,
estimated earnings and revenue-to-date on contracts not yet completed.
The amount of revenue recognized at the financial statement date is the
portion of the total contract price that the direct labor costs expended to date
bears to the anticipated total direct labor costs, based on current estimates of
costs to complete. Direct labor costs include all direct labor, related
benefits, and subcontract costs. This method is used because management
considers direct labor costs to be the best available measure of progress on
these contracts.
Revisions in estimates of costs and earnings during the life of the
contracts are reflected in the accounting period in which such revisions become
known. At the time a loss on a contract becomes known, the entire amount of the
estimated loss is recognized in the financial statements. Billings in excess of
estimated costs and earnings on uncompleted contracts are included in
deferred/unearned revenue.
Sale/Leaseback
The Company recognizes gains from sale/leaseback transactions ratably over
the term of the underlying lease. All such leases are operating leases. Any
losses from these transactions are recognized in the period incurred.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. Due to the nature of its
operations, the Company deposits, on a monthly basis, amounts in financial
institutions for the payment of payroll liabilities for certain customers. Such
amounts are reduced when the Company pays such liabilities. Such reduction
generally occurs over five to ten business days. At May 31, 2002, the Company
had amounts on deposit for these liabilities of approximately $1,300,000.
Concentration of Credit Risk
The Company is subject to a concentration of credit risk with respect to
its trade receivables, as disclosed above. The Company performs on-going credit
evaluations of its customers and generally does not require collateral. The
Company maintains allowances to cover potential or anticipated losses for
uncollectible accounts.
The Company has cash balances in banks in excess of the maximum amount
insured by the FDIC as of May 31, 2002.
Statements of Cash Flows
The Company paid income taxes of approximately $19,000 and $23,000 and
interest of approximately $242,000 and $252,000 for the years ended May 31, 2002
and 2001, respectively.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Company's short term financial instruments include cash, accounts
receivable, receivable from affiliates and accounts payable. Due to the
short-term nature of these instruments, the fair value of these instruments
approximates their recorded value. The Company has long-term debt instruments
which it believes are stated at their estimated fair value.
Stock Options and Similar Equity Instruments
The Company accounts for stock options and similar equity instruments
(collectively "Options") issued to employees and directors in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," rather than the fair value based method of accounting prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The exercise price for Options issued to employees and directors
equals or exceeds the fair value of the Company's Common Stock at the date of
grant and, accordingly, no compensation expense is recorded. Equity instruments
issued to acquire goods and services from non-employees are accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more readily determinable.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Business Segments
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which supercedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements regarding
products and services, geographical areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Company has determined that its operations are in one segment,
computer services to the health care industry.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS No. 144 addresses the accounting model for long-lived assets to be disposed
of by sale and resulting implementation issues. This statement requires that
those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. It also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS No. 144 is effective
for the Company in fiscal 2003. The Company is evaluating the impact that
implementation of SFAS No. 144 may have on the financial statements of the
Company.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect and eliminates an
inconsistency between the accounting for sale-leaseback transactions and certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Generally, SFAS No. 145 is effective for
transactions occurring after May 15, 2002. The adoption of this standard is
expected to have no impact to the Company.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"), provides guidance on the recognition and measurement
of liabilities for cost associated with exit or disposal activities. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently reviewing SFAS
146 to determine the impact upon adoption.
NOTE 2 - Fixed Assets
Fixed assets consist of the following:
May 31,
Useful Life 2002 2001
----------- ---- ----
Computer equipment 5 years $ 3,169,445 $ 2,883,819
Software costs Up to 5 years 12,364,224 10,047,618
Furniture, fixtures and automobiles 4-7 years 419,274 415,330
Leasehold improvements 10 years 2,823,154 2,809,278
------------ -------------
18,776,097 16,156,045
Less: accumulated depreciation and
amortization (11,955,501) (10,119,842)
------------ ------------
Total Fixed Assets, net $ 6,820,596 $ 6,036,203
============ ============
Depreciation and amortization expense relating to fixed assets (other than
software costs) amounted to approximately $443,000 in 2002 and 2001,
respectively.
Unamortized software costs amounted to approximately $5,105,000 and
$4,186,000 at May 31, 2002 and 2001, respectively. Amortization expense for
these costs totaled approximately $1,397,000 and $2,305,000 in 2002 and 2001,
respectively.
During the fourth quarter of the year ended May 31, 2001, the Company shut
down certain operating systems and hardware configurations, which had been
capitalized in previous years. The Company had determined that the older systems
architecture had become obsolete and too costly to maintain, so the Company
coordinated placing several new systems in production after running parallel
with pre-existing systems resulting in the retirement of the older systems
during the fourth quarter. The Company further determined that there is no net
realizable value remaining since no future revenue would be recognized in the
retired systems because the architecture was completely replaced by the new
systems. As such the Company recognized an impairment loss of approximately
$3,300,000 for the year ended May 31, 2001.
NOTE 3 - Debt
Credit Agreement
The Company's wholly owned subsidiary, Sandsport Data Services, Inc.
("Sandsport"), has a revolving credit agreement (the "Credit Agreement") with a
Bank which allows Sandsport to borrow amounts up to $4,500,000 and is due on
June 14, 2003. Interest accrues on amounts outstanding under the Credit
Agreement at a rate equal to the London Interbank Offered Rate plus 2% and will
be paid quarterly in arrears or, at Sandsport's option, interest may accrue at
the Bank's prime rate. The Credit Agreement requires Sandsport to pay a fee
equal to 1/4% per annum on the unused average daily balance of amounts under the
Credit Agreement. In addition, there are other fees and charges imposed based
upon Sandsport's failure to maintain certain minimum balances. The indebtedness
under the Credit Agreement is guaranteed by the Company and Sandsport's sister
subsidiaries (the "Group"). All of the Group's assets are pledged to the Bank as
collateral for the amounts due under the Credit Agreement, which pledge is
secured by a first lien on all equipment owned by members of the Group, as well
as a collateral assignment of $2,000,000 of life insurance payable on the life
of the Company's Chairman. In addition, the Company is restricted in its ability
to declare and pay dividends pursuant to the Credit Agreement. The Group's
guaranty to the Bank was subsequently modified to include all indebtedness
incurred by the Company under the amended Credit Agreement dated August 24, 2001
(see below).
On August 24, 2001, Sandsport, the Company and the other members of the
Group, and the Bank, entered into the Third Amendment and Waiver (the "Third
Amendment") to the Credit Agreement. Pursuant to the Third Amendment,
Sandsport's covenants to the Bank to maintain a certain net worth, and to
maintain certain financial ratios, were revised on a going-forward basis and the
noncompliance with the existing covenants was waived by the Bank. In addition,
in connection with the Third Amendment, Sandsport and each member of the Group
executed and delivered to the Bank a Collective Amended and Restated Security
Agreement, pursuant to which the Bank's security interest was extended to
include a security interest in all of the personal and fixture property of
Sandsport, the Company and the members of the Group. As of May 31, 2002 and
2001, the outstanding balance on the Credit Agreement with the Bank was
$4,500,000 and $3,850,000, respectively.
Long Term Debt
The Company owed National Medical Health Card Systems, Inc. ("Health
Card"), a company affiliated with the Company's Chairman, $500,000 pursuant to a
promissory note, dated May 31, 2000 and due June 1, 2001 plus interest at the
rate of 9-1/2%; interest on such note was payable quarterly. The Note was paid
in May, 2001.
On June 9, 2001, the Company issued a promissory note to Health Card in the
principal amount of $500,000, with interest at the rate of 7%, which was due on
June 8, 2002. This Note was paid in full on August 15, 2001.
NOTE 4 - Income Taxes
The income tax expense (benefit) is comprised of the following:
Year Ended May 31,
------------------
2002 2001
---- ----
Current
Federal $ -- --
State 17,998 19,000
-------- --------
Total current 17,998 19,000
-------- --------
Deferred
Federal 192,761 (1,089,293)
State 38,308 (223,108)
--------- ----------
Total deferred 231,069 (1,312,401)
--------- ----------
Income tax expense (benefit) $249,067 $(1,293,401)
======== ===========
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
Year Ended May 31,
2002 2001
---- ----
Statutory U.S. federal tax rate 34.0% (34.0%)
State taxes 4.6 (5.8)
Permanent Differences 12.2 1.2
Other 12.9 1.6
---- -----
63.7% (37.0%)
===== ======
The components of deferred tax assets and liabilities consists of the
following:
May 31,
2002 2001
---- ----
Deferred Tax Assets-Current portion
Allowance for Doubtful Accounts $ 81,686 $142,230
Deferred Income 61,367 43,340
Accrued Expenses 56,117 79,706
Other 8,425 9,194
-------- --------
Deferred Tax Assets, current $207,595 $274,470
======== ========
May 31,
2002 2001
---- ----
Deferred Tax Assets-Long term portion
Net Operating Loss Carryforwards $1,642,275 $1,255,038
Deferred Income -- 129,255
Goodwill -- 82,872
Other 604 615
---------- ----------
Deferred Tax Assets, Long-term 1,642,879 1,467,780
---------- ----------
Deferred Tax Liabilities-Long-term portion
Depreciation and amortization (1,460,054) (1,132,007)
Deferred income (11,246) --
---------- ----------
Deferred Tax Liabilities, Long-term (1,471,300) (1,132,007)
---------- ----------
Deferred Tax Assets - Long-term, Net 171,579 335,773
---------- ----------
Total Deferred Tax Asset, Net $ 379,174 $ 610,243
========== ==========
Management determined that it was more likely than not that future taxable
income would be sufficient to enable the Company to realize all of its deferred
tax assets. Accordingly, no valuation allowance has been recorded at May 31,
2002 and 2001.
At May 31, 2002, the Company had net operating loss carryforwards for tax
purposes of approximately $4,076,000, expiring at various dates through 2022.
NOTE 5- Commitments and Contingencies
Lease Agreements
The Company leases office space at 26 Harbor Park Drive, Port Washington,
NY 11050 (the "Facility") from BFS Realty LLC, successor to BFS Sibling Realty
and an affiliate of the Company's Chairman (the "Affiliate") (see Note 6). The
Company paid rent in the amount of $407,834 and $615,412 to the Affiliate for
the years ended May 31, 2002 and 2001, respectively.
On June 1, 2001 (revised November, 2001) , the Company entered into a ten
(10) year lease for the Facility with the Affiliate. The lease provides for
annual rental payments of $277,817 for the period June 1, 2002 to May 31, 2003,
with annual 5% increases in each 12-month period thereafter. The lease is being
expensed on a straight-line basis over the lease term. The lease also requires
monthly payments of various types, such as the Company's proportionate share of
real estate taxes and common area maintenance charges, that aggregate
approximately $10,000 per month. In November, 2001, the lease was revised to
provide that the Company would pay its utility expenses directly to the
respective utility company, not to the Affiliate.
The Company has obligations to pay rental expense in connection with six
sale/leaseback transactions. The rental expenses amounted to approximately
$1,195,000 and $1,630,000 for the years ended May 31, 2002 and 2001
respectively. (See Note 8)
Total office space and equipment rental expense under all operating leases
amounted to approximately $2,294,000 and $3,417,000 in fiscal 2002 and 2001,
respectively.
Future minimum lease payments for all non cancelable operating leases at
May 31, 2002 are as follows:
Year Ending May 31, Amount
------------------- ------
2003 $1,759,640
2004 969,461
2005 644,554
2006 336,390
2007 330,988
Thereafter 1,739,257
----------
Total $5,780,290
==========
Litigation
a. On October 19, 1999, the Company and Pro-Health brought an action
against Provider Solutions Corporation ("Provider") and others, in Supreme
Court, New York County, based on breach of contract, fraudulent
misrepresentation and other causes of action, demanding damages of approximately
$10,000,000 (the "State Action"). On October 22, 1999, Provider brought a
federal action in the United States District Court for the Eastern District of
New York (the "Federal Action"). The complaint demanded relief in the form of a
permanent injunction and damages against the Company and Pro-Health for total
amounts ranging from $10,000,000 to $15,000,000. The State Action was
consolidated with the Federal Action.
On March 8, 2001 the Company, Pro-Health, Provider and all involved parties
and individuals settled the consolidated Federal Action, globally resolving all
issues, claims and disputes. The settlement entailed the exchange of general
releases between the Company, Pro-Health, Provider and all parties, and the
payment of $600,000 to Provider, of which $50,000 was paid by the Company. The
balance of the payment under the settlement was funded by the Company's
insurers. The settlement did not have a material effect on the Company's
operations. The Company has retained its proprietary interest in the subject
software.
b. In August of 1999, the Company's wholly-owned subsidiary, Sandsport was
named as a defendant in Greater Bright Light Home Care Services, Inc. et al. v.
Joseph Jeffries-El, El Equity Corporation, Sandsport Data Services, Inc. et al.
(Supreme Court of the State of New York, Kings County). Sandsport's contractual
obligation to Greater Bright Light involved the depositing of certain
government-issued checks into a specific bank account. Upon receiving written
notification from the agency issuing the checks to stop depositing them in that
account, Sandsport ceased depositing them. The plaintiff brought the action
against Joseph Jeffries-El and El Equity, and El Equity counterclaimed against
the plaintiff, each basing its claims on the financing agreement between them.
El Equity also cross-claimed against Sandsport, asserting that Sandsport
converted the government-issued checks to its own use. Although Sandsport is
named as a defendant, the Complaint seeks no affirmative relief against
Sandsport. Co-defendant Citibank has asserted indemnification claims against
Sandsport and all of the other defendants. Sandsport disputes all liability.
However, the Company is unable to predict the outcome of these claims and
accordingly, no adjustments have been made in the consolidated financial
statements in response to these claims.
c. On March 1, 2000, Dataline, Inc. ("Dataline") began a lawsuit against
MCI WorldCom Network Services, Inc. ("MCI") and the Company for alleged trade
libel and related counts, in the United States District Court for the Southern
District of New York. The court dismissed that lawsuit, with prejudice, on May
23, 2002. On May 4, 2001 MCI had brought a patent infringement lawsuit against
Dataline, alleging that it was infringing three MCI patents, under which the
Company has an exclusive license in New York City. Shortly thereafter, the
Company joined MCI in the suit against Dataline. Pursuant to a Settlement
Agreement dated January 1, 2002 among MCI, its parent (MCI Communications
Corporation), the Company, and Dataline, Dataline acknowledged the validity and
enforceability of the 3 MCI-owned patents that were the subject of the lawsuits.
There were no payments from either MCI or the Company to Dataline. As part of
the settlement, Dataline agreed to pay the Company $100,000 in cash and issue an
8% promissory note in the amount of $721,000. Due to the uncertainty of
realization of the note receivable, the Company is recognizing the income on the
note using the installment method of accounting. During the year ended May 31,
2002, the Company has recognized approximately $115,000 of income. In addition,
Sandata and Dataline entered into an Exclusive Service Agreement by which
Dataline agreed to use the Company's "call capture infrastructure" for all of
Dataline's time and attendance systems, and to pay royalties to the Company for
such use. The terms of the settlement also included mutual releases.
d. An action was commenced against the Company and Health Card by a former
executive of Health Card, Mary Casale, who alleged that employees of both Health
Card and the Company engaged in sex discrimination as to Ms. Casale, and thus,
violated Title VII of the Civil Rights Act of 1964. In February 2002 the matter
was withdrawn from the Equal Employment Opportunity Commission, and was settled
without any effect on the financial statements of the Company.
Royalty Agreement
The Company has been granted a license under certain of MCI's patents which
permits the Company to continue to market and sell its SANTRAX time and
attendance verification product non-exclusively nationwide, and exclusively in
the home health care industries for the five New York boroughs, and that the
Company will pay MCI certain royalties, on a per call basis. The license remains
in effect until the last to expire of various patents held by MCI or until
October 19, 2010, whichever is later.
Employment and Deferred Compensation Agreements
On February 1, 1997 the Company and its Chairman ("Mr. Brodsky") entered
into an employment agreement for a five year term (the "Brodsky Employment
Agreement"). Among other things, the Brodsky Employment Agreement provides
compensation at the annual rate of $500,000 or a lesser amount if mutually
agreed. The Brodsky Employment Agreement also provides for payment of an annual
bonus at the sole discretion of the Board of Directors. Mr. Brodsky agreed to
accept a reduction in compensation for the fiscal years ended May 31, 2002,
2001, and 2000 and has signed waivers evidencing his agreement to such
reductions. The Brodsky Employment Agreement was renewed, on identical terms, on
March 1, 2002.
In May 1992, Mr. Brodsky and the Company entered into a deferred
compensation agreement pursuant to which the Company would (i) pay to Mr.
Brodsky a lump sum ranging from $75,000 to $255,000 if he voluntarily terminated
his employment with the Company after attaining 55 years of age, or (ii) pay to
Mr. Brodsky's beneficiary a lump sum ranging from $200,000 to $450,000 in the
event of Mr. Brodsky's death during the term of his employment with the Company.
This agreement was terminated in October, 2001.
On August 9, 2001 the Company announced that it had terminated the
employment of Stephen Davies as President of the Company, and would be
terminating approximately 30 other employees. Mr. Davies received a severance
payment equal to six (6) months' base salary, or $100,000, and had 90 days from
the date of termination to exercise the 66,673 options that were vested on that
date. None of such options were exercised. In addition, the Company paid
approximately $47,000 in severance payments for approximately 30 other
terminated employees.
NOTE 6 - Related Party Transactions
a. In November 1996 the Company entered into an agreement with the
Affiliate, the Nassau County Industrial Development Agency ("NCIDA"), and a Bank
(the "Bondholder") (the "Agreement"). Pursuant to the Agreement, the Affiliate
(i) assumed all of the Company's rights and obligations under a Lease Agreement
that was previously between the Company and the NCIDA (the "Lease"), and (ii)
entered into a Sublease Agreement with the Company for the premises the Company
occupies. Pursuant to the Agreement, the Affiliate also obtained the right to
become the owner of the premises upon expiration of the Lease. Under the terms
of the Agreement, the Company is jointly and separately liable to the NCIDA for
all obligations owed by the Affiliate to the NCIDA under the Lease; however, the
Affiliate has indemnified the Company with respect to certain obligations
relative to the Lease and the Agreement. In addition, the Agreement provides
that the Company is bound by all the terms and conditions of the Lease, and that
a security interest is granted to the Affiliate in all of the Company's fixtures
constituting part of the premises.
The foregoing transactions and agreements were the last in a series of
transactions involving the Company, the Affiliate, NCIDA, the Bondholder and the
U.S. Small Business Administration ("SBA"). Chief among these was the borrowing
by the Affiliate in June of 1994 of $3,350,000 in the form of Industrial
Development Revenue Bonds (the "Bonds") to finance the acquisition of the
Facility. Simultaneously with the issuance of the Bonds: (1) NCIDA obtained
title to the Facility and leased it to the Affiliate, (2) the Affiliate
subleased the Facility to the Company, (3) the Bondholder bought the Bonds, (4)
the Bondholder received a mortgage and security interest in the Facility to
secure the payment of the Bonds. The Affiliate's obligations under the Lease
were guaranteed by Mr. Brodsky, the Company, Sandsport and others. The
Affiliate's obligations respecting repayment of the Bonds were also guaranteed
by Mr. Brodsky, the Company, Sandsport and others.
The Bonds currently bear interest at the rate of 9%, and the outstanding
balance due on the Bonds as of May 31, 2002 was $1,444,445. The Company paid
rent to the Affiliate of $407,834 and $615,412 for the years ended May 31, 2002
and 2001.
On August 11, 1995, the Company entered into a $750,000 loan agreement with
the Long Island Development Corporation ("LIDC"), under a guarantee by the SBA
(the "SBA Loan"). The SBA Loan was assigned to the Affiliate in November 1996;
however, repayment of the SBA loan is guaranteed by the Company and various
subsidiaries of the Company. The entire proceeds were used to repay a portion of
the Bonds. The SBA Loan is payable in 240 monthly installments of $6,255, which
includes principal and interest at a rate of 7.015%. The balance of the SBA loan
as of May 31, 2002 was $599,024.
b. Until January 2002, the Company derived revenue from Health Card, a
company affiliated with the Company's Chairman, principally for data base and
operating system support, hardware leasing, maintenance and related
administrative services. The revenues generated from Health Card amounted to
approximately $693,000 and $2,458,000 for the years ended May 31, 2002 and 2001,
respectively. The Company billed Health Card approximately $126,000 and $821,000
for quality assurance testing of software programs developed by Health Card and
network support, and $47,000 and $561,000 for help desk services, $175,000 and
$448,000 for data processing center as well as $305,000 and $534,000 for certain
computer equipment leases and other services for $40,000 and $95,000 for years
ended May 31, 2002 and 2001, respectively. In addition the Company resells its
telephone services to Health Card. The billings for such telephone services
amounted to approximately $124,000 and $134,000 for the years ended May 31, 2002
and May 31, 2001 and are recorded as a reduction of operating expense. The
Company was owed $19,280 from Health Card at May 31, 2002. Subsequent to May 31,
2002, the Company received approximately $14,000 from Health Card, representing
substantially complete payment of amounts due as of that date. As of January,
2002, the Company ceased rendering services to Health Card. Health Card
continues to pay its allocable share of expenses for shared services, which
amounts to approximately $45,000 per month.
c. The Company makes lease and rent payments to affiliates of the Company's
Chairman. The payments for leased equipment were made to P.W. Capital Corp. and
P.W. Medical Management, Inc., and were $268,011 and $395,989 for the years
ended May 31, 2002 and 2001, respectively. The payments for the Facility were
made to BFS Realty, LLC, and were $407,834 and $615,412 for the years ended May
31, 2002 and 2001, respectively. In June 2001, the Company entered into a new
lease for the Facility which was revised in November, 2001. (See Note 5).
d. Medical Arts Office Services, Inc. ("MAOS"), of which the Company's
Chairman is the sole shareholder, provided the Company with accounting,
bookkeeping and legal services. For the years ended May 31, 2002 and 2001 the
total payments made by the Company to MAOS were $340,869 and $279,894,
respectively.
e. During the years ended May 31, 2002 and 2001 the Company paid an
aggregate of $57,285 and $65,894, respectively on behalf of certain officers to
companies affiliated with the Company's Chairman for payment of automobile
leases.
NOTE 7 - SHAREHOLDERS' EQUITY
Stock Options
The Company maintains the following stock option plans:
1984 Stock Option Plan
There had been 2,536 options granted at an exercise price of $1.88 under an
incentive stock option plan adopted in October 1984 (the "1984 Plan") and
subsequently amended. Options granted under this plan were granted at exercise
prices not less than fair market value on the date of grant. All of the options
outstanding under this plan expired in January 2001. No additional options may
be granted under this plan.
1995 Stock Option Plan
At May 31, 2002, there were 590,500 incentive options outstanding under a
stock option plan adopted in January 1995 (the "1995 Plan"), which provides for
both incentive and nonqualified stock options and reserves 1,000,000 shares of
common stock for grant under the plan. Of these options, 520,500 are held by
officers of the Company. The plan requires that incentive options be granted at
exercise prices not less than the fair market value at the date of grant, and
terminates in January 2005. All options outstanding under this plan are
exercisable at May 31, 2002 at prices ranging from $1.41 to $2.61 per share over
a period of five years from date of grant.
On July 14, 1997, the Company filed a Registration Statement on Form S-8
relative to reofferings of shares of Common Stock of the Company which may be
acquired pursuant to the 1984 and 1995 Plan.
1998 Stock Option Plan
At May 31, 2002 there were 775,579 incentive stock options outstanding
under a stock option plan adopted in October 1998, (the "1998 Plan") which
provides for both incentive and nonqualified stock options and reserves
1,000,000 shares of common stock for grant under the plan. The plan requires
that incentive options be granted at exercise prices not less than the fair
market value at the date of grant and terminates in August 2008. Of the options
outstanding at May 31, 2002, 567,060 were exercisable at prices ranging from
$1.31 to $3.00 over three to five years from the date of grant.
2000 Stock Option Plan
At May 31, 2002, there were 28,340 incentive options outstanding under a
stock option plan adopted on November 20, 2000 (the "2000 Plan"), which provides
for both incentive and nonqualified stock options and reserves 1,500,000 shares
of common stock for grant under the plan. The 2000 Plan terminates in September
2010. Options outstanding under the plan vest over a seven-year period
commencing December 31, 2000 and ending December 31, 2007 and are exercisable at
prices ranging from $1.00 per share to $3.00 per share over a period of ten
years from the date of grant. At May 31, 2002, there were no options currently
exercisable.
Summary information with respect to the stock option plans follows:
Range of Outstanding Outstanding
exercise options options
prices ($) granted exercisable
---------- ------- -----------
Balance, June 1, 2000 1.31 - 3.00 1,523,902 849,871
Granted 3.00 279,808 269,653
Cancelled (76,118) (11,146)
---------- ----------
Balance, May 31, 2001 1.31 - 3.00 1,727,592 1,108,378
Granted 1.00 - 3.00 40,085 150,895
Cancelled (373,258) (101,713)
---------- ----------
Balance, May 31, 2002 1.31 - 3.00 1,394,419 1,157,560
========== ==========
Stock option grants to certain officers and directors were as follows:
In October 1998, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 20,000 shares of the
Company's common stock under the 1998 Plan at an exercise price of $3.00. These
options vested immediately and are exercisable over a five-year period.
In December 1998, the Company granted 520,500 incentive options to certain
officers of the Company under the 1995 Plan at an exercise price of $1.41 per
share. These options vested immediately and are exercisable over a five-year
period.
In February 2000, the Company granted its Chairman incentive stock options
to purchase an aggregate of 350,000 shares under the 1998 Plan at an exercise
price of $1.31. These options vest and are exercisable over a five-year period.
In April 2000, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 72,000 shares under the
1998 Plan at an exercise price of $3.00. These options vest and are exercisable
over a six-year period.
In April 2000, the Company granted its then President incentive stock
options to purchase an aggregate of 100,000 shares under the 1998 Plan at an
exercise price of $3.00. In October 2000, the Company granted its then President
incentive stock options to purchase 150,000 shares under the 2000 Plan, at an
exercise price of $3.00 per share. The President's employment was terminated on
August 6, 2001, at which date the President became entitled to exercise, for
ninety days, the options that had already vested. Those options consisted of
33,340 shares under the 1998 Plan, and 33,333 under the 2000 Plan, none of which
were exercised before the right to exercise expired.
In November 2000, the Company granted certain directors of the Company
non-qualified stock options to purchase an aggregate of 20,000 shares of the
Company's common stock under the 1998 Plan at an exercise price of $3.00. These
options vest over a three-year period and are exercisable over a five-year
period.
During the fiscal year ended May 31, 2002 non-qualified options to purchase
up to 10,000 shares of Common Stock, at an exercise price of $1.00 per share,
were issued to each of two Director's.
On July 14, 1998, the Chairman, certain officers and directors, and a
former director (who is also the spouse of an officer and an employee of
Sandsport Data Services, Inc. ("Sandsport"), the Company's wholly owned
subsidiary), exercised their respective options and warrants to purchase an
aggregate of 921,334 shares of Common Stock. The exercise prices ranged from
$1.38 to $2.61 per share for an aggregate cost of $1,608,861. Payment for such
shares was made to the Company in the amount of $921 representing the par value
of the shares, and a portion in the form of non-recourse promissory notes due in
July 2001, with interest at eight and one-half percent (8-1/2%) per annum,
payable annually, and secured by the number of shares exercised. The Company has
received interest payments on such notes in the amount of $131,994 and $162,110
during the fiscal years ended May 31, 2002 and 2001. As of May 31, 2002 and
2001, the outstanding balance on such notes, including principal and accrued but
unpaid interest, was $1,669,640 and $1,722,547, respectively (see Note 12d). On
July 14, 2001, the Company agreed to extend the due dates of the promissory
notes for one hundred twenty days. On November 9, 2001, the due date of the
notes was extended to November 9, 2004, and the Company agreed to substitute
full recourse unsecured notes for the notes it had previously accepted.
Effective December 1, 2001, the interest rate was changed from 8-1/2% to 6%.
During the year ended May 31, 2002, 24,667 shares of common stock were
surrendered by a former director and an employee in settlement of notes in the
amount of $37,962.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock option plans under the fair value method of
SFAS No. 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions for 2002 and 2001.
ASSUMPTIONS
Year Ended May 31,
------------------
2002 2001
---- ----
Risk free rate 4.95 - 6.05% 5.25 - 6.04%
Dividend yield .00% .00%
Volatility factor of the expected market
price of the Company's common stock 61% 117%
Average life 5 years 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly differently from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma loss is as follows:
Year Ended May 31,
2002 2001
---- ----
Pro forma net income (loss) $78,025 $(2,470,616)
Pro forma net income (loss) per share $ .03 $ (.99)
The weighted average fair value of options granted during the years ended
May 31, 2002 and 2001 were $1.12 and $.86, respectively. The weighted average
remaining contractual life of options exercisable at May 31, 2002 is 5 years.
The exercisable prices range from $1.31 to $3.00 for options outstanding as of
May 31, 2002.
Restricted Stock Grant Plan
On September 1, 2000 the Board of Directors approved the adoption of the
Company's 2000 Restricted Stock Grant Plan (the "Stock Grant Plan"). The Stock
Grant Plan was subsequently adopted by the Shareholders at the Company's Annual
Meeting on November 20, 2000. The Stock Grant Plan provides for the issuance of
shares that are subject to both standard restrictions on the sale or transfer of
such shares (e.g., the standard seven year vesting schedule set forth in the
Stock Grant Plan) and/or restrictions that the Board may impose, such as
restrictions relating to length of service, corporate performance, or other
restrictions. As of May 31, 2002, no grants had been made under the Stock Grant
Plan and, therefore, no shares had vested under it. There are 700,000 shares of
Common Stock reserved for issuance in connection with grants made under the
Stock Grant Plan.
NOTE 8 - Sale/Leaseback Transactions
The Company is a party to various sale/leaseback transactions involving
certain fixed assets, principally computer hardware, software and equipment.
Gains on these transactions have been deferred and are being recognized over the
lives of the related leases, each of which is 36 months. Approximately $297,000
and $344,000 of the deferred gains were recognized in other income for the years
ended May 31, 2002 and 2001, respectively. Included in these amounts are the
effects of the following sale/leaseback transactions:
In January 1998, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $515,000, were sold for
$700,000. The resulting gain of approximately $185,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $36,000
of the deferred gain was recognized for fiscal 2001, which was the last year of
the lease. An unaffiliated third party purchased the residual rights to such
lease.
In January 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $830,000, were sold for
$1,100,000. The resulting gain of approximately $270,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $60,000 and $90,000 of deferred gain was recognized for the years
ended May 31, 2002 and 2001, respectively. An unaffiliated third party purchased
the residual rights in such lease.
In May 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $896,000, were sold for
$1,100,000. The resulting gain of approximately $204,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $68,000 of deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
In October 1999, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $895,000, were sold for
$1,115,000. The resulting gain of approximately $220,000 was recorded as
deferred income and is being recognized over the life of the lease.
Approximately $73,000 of the deferred gain was recognized for each of the years
ended May 31, 2002 and 2001. An unaffiliated third party purchased the residual
rights in such lease.
In January 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $442,000, were sold for
$561,000. The resulting gain of approximately $119,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $40,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
In February 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $237,000, were sold for
$277,000. The resulting gain of approximately $40,000 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $14,000
of deferred gain was recognized for each of the years ended May 31, 2002 and
2001. An unaffiliated third party purchased the residual rights in such lease.
In November 2000, the Company consummated a sale/leaseback of certain fixed
assets which had a net book value of approximately $421,500, were sold for
$548,300. The resulting gain of approximately $126,800 was recorded as deferred
income and is being recognized over the life of the lease. Approximately $42,000
and $21,000 of the deferred gain was recognized for the years ended May 31, 2002
and 2001, respectively. An unaffiliated third party purchased the residual
rights in such lease.
NOTE 9 - Asset Acquisition and Impairment
On April 27, 2001, the Company acquired certain assets of North American
Internet Services, Inc. ("NAIS"), a provider of broadband services, Internet
access, and co-location services for approximately $201,000. NAIS had entered
bankruptcy proceedings and, under the auspices of the Bankruptcy Court, the
Company was permitted to "credit bid" approximately $124,000 of expenses
(including salaries) it had incurred on behalf of NAIS as the purchase price for
the assets, and was given 180 days to exploit the assets it had acquired. The
Company incurred approximately $77,000 in additional costs related to the
acquisition of these assets. The tangible assets were determined to have no
significant fair value. Therefore, all the expenditures related to the
acquisition were allocated to goodwill. The Company has the option to abandon
the exploitation of these assets within the 180 day period. If the Company
continues to use the NAIS assets, 10% of the profits (defined as earnings before
interest expense and taxes) generated by such use must be paid to the bankruptcy
estate for the first three years.
At May 31, 2001, the Company performed an evaluation of the recoverability
of the assets acquired from NAIS and concluded that a significant impairment of
these assets had occurred based on actual results during the year ended May 31,
2001 and on estimated future cash flows not being sufficient to recover the
carrying value of the goodwill. As such, the carrying value of goodwill was
written down to its estimated fair value, which was determined based on
discounted estimated cash flows. The Company recognized an impairment loss and
write down of the goodwill of approximately $201,000. Considerable management
judgment is necessary to estimate fair value; accordingly, actual results could
vary significantly from such estimates.
NOTE 10 - Retirement Plan
The Company has a 401(k) savings plan covering all eligible employees in
which the Company matches a portion of the employees' contribution. The amount
of this match was $40,204 and $38,197 in fiscal years 2002 and 2001,
respectively.
NOTE 11 - Revenue by Product Line
The Company operates in one business segment, but derives its revenue from
several product lines. The following table provides the service fee revenues for
the product lines earned for the fiscal years ended May 31, 2002 and 2001:
Year Ended May 31,
2002 2001
---- ----
Computerized information processing $ 5,962,880 $ 5,960,450
Telephone-based data collection 7,690,852 7,561,852
Technology infrastructure and outsourcing 736,932 2,071,266
Information technology 2,765,761 2,170,240
Other 17,497 5,261
------------ --------------
Total $17,173,922 $17,769,069
=========== ===========
NOTE 12 - Subsequent Events
a. By letter dated June 26, 2002, a former employee of the Company asserted
claims for back wages of $410,000. The letter, from the employee's attorney,
also contained allegations of age discrimination and retaliatory discharge. The
letter also contained an offer of settlement. No formal litigation has been
started and the Company intends to pursue settlement negotiations. A provision
of $200,000 is included in accrued expenses relating to the asserted claim,
which represents the Company's best estimate of costs to be incurred. The amount
of the ultimate cost may vary from this estimate.
b. The Company has received a proposal to engage in a going private
transaction. The proposed transaction is anticipated to be in the form of a
merger with an entity owned by an investor group to be led by Bert E. Brodsky,
the Company's Chief Executive Officer, and to include Directors Hugh Freund and
Gary Stoller as well as other investors (the "Acquiring Group"). Pursuant to the
proposal, the Company's shareholders (other than Mr. Brodsky, and the other
shareholders that shall comprise the "Acquiring Group") would receive $1.50 per
share of Common Stock of the Company (the "Shares"), in cash. The proposal may
be amended, modified or supplemented at any time.
The Board of Directors has appointed a Special Committee (the "Committee"),
comprised of Ronald Fish and Martin Bernard, to review the proposed transaction.
The Committee has retained Brean Murray & Co., Inc. as its financial advisor,
and has retained its own legal counsel.
The proposed transaction would result in the acquisition of all of the
outstanding Shares other than the Shares owned by Mr. Brodsky and the other
shareholders that shall comprise the Acquiring Group. The final terms of any
acquisition will be based on negotiations between the Acquiring Group and the
Committee. The proposed acquisition will be subject to, among other things, (1)
the negotiation, execution, and delivery of a definitive agreement, (2) approval
of the proposed transaction by the Committee, the full Board of Directors and
the Company's shareholders, (3) receipt of a fairness opinion by the Committee,
(4) applicable regulatory approval, and (5) obtaining any necessary third-party
consents or waivers. There can be no assurance that a definitive merger
agreement will be executed and delivered, or that the proposed transaction will
be consummated.
c. On July 9, 2002 the Company issued a press release announcing that
Nasdaq had informed the Company that its shares would be subject to de-listing
from the Small Cap Market for failure to comply with Nasdaq's Marketplace Rules
regarding minimum value of publicly held shares and minimum bid price per share.
The Company requested a hearing on these matters, and the de-listing was stayed
until the hearing. The Company was informed by Nasdaq on August 21, 2002 that
the Company had regained compliance with both Marketplace Rules and that
therefore, the hearing was cancelled and the matter was moot.
d. On August 22, 2002 the Chairman repaid $100,000 of the note receivable
officer.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SANDATA TECHNOLOGIES, INC.
----------------------------------------------------------------------------
(Registrant)
By /s/ Bert E. Brodsky
----------------------------------------------------------------------------
Bert E. Brodsky, Chairman
(Principal Executive Officer and
Principal Financial and Accounting Officer)
Date: October 22, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Bert E. Brodsky
-------------------------------------------------------------------
Bert E. Brodsky, Chairman, Treasurer, Director
Date: October 22, 2002
By /s/ Hugh Freund
-------------------------------------------------------------------
Hugh Freund, Executive Vice President, Secretary, Director
Date: October 22, 2002
By /s/ Gary Stoller
-------------------------------------------------------------------
Gary Stoller, Executive Vice President, Director
Date: October 22, 2002
By /s/ Martin Bernard
-------------------------------------------------------------------
Martin Bernard, Director
Date: October 22, 2002
By /s/ Ronald L. Fish
-------------------------------------------------------------------
Ronald L. Fish, Director
Date: October 22, 2002
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Amended Annual Report of Sandata Technologies, Inc.
("the "Company") on Form 10-KSB-A for the year ended May 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Bert E. Brodsky, Chief Executive Officer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Bert E. Brodsky
Bert E. Brodsky
Chief Executive Officer,
Chief Financial Officer
October 22, 2002
CERTIFICATION
I, Bert E. Brodsky, Chief Executive Officer and Chief Financial Officer,
certify that:
1. I have reviewed this amended annual report on Form 10-KSB/A of Sandata
Technologies, Inc. and its Subsidiaries;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the periods covered by this amended annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this amended annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of Sandata Technologies, Inc. and its Subsidiaries as of, and for, the periods
presented in this amended annual report.
4. As both Chief Executive Officer and Chief Financial Officer, I am
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and I
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to me by others within those entities, particularly during the
periods in which this amended annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this amended
annual report (the "Evaluation Date"); and
c) presented in this report my conclusions about the effectiveness of the
disclosure controls and procedures based on my evaluation as of the Evaluation
Date;
5. As both Chief Executive Officer and Chief Financial Officer I have
disclosed, based on my most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data, and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. As both Chief Executive Officer and Chief Financial Officer, I have
indicated in this report whether or not there were significant changes in
internal controls subsequent to the date of my most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 22, 2002
/s/ Bert E. Brodsky
Bert E. Brodsky, Chief Executive
Officer and Chief Financial Officer
APPENDIX F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the period ended August 31, 2002
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
For the transition period from ________ to __________
Commission file number 0-14401
SANDATA TECHNOLOGIES, INC.
(Exact name of small business issuer in its charter)
DELAWARE 11-2841799
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
26 Harbor Park Drive
Port Washington, NY
(Address of principal executive offices)
11050
(Zip Code)
Issuer's telephone number, including area code: (516) 484-4400
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
---------------- -------------
APPLICABLE ONLY TO
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes____ No____
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of
common equity, as of October 8, 2002 was 2,481,808.
Transitional Small Business Disclosure Format (check one):
Yes____ No X
-------
F-1
SANDATA TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of
August 31, 2002 (Unaudited) and May 31, 2002 (Audited).........................................3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended August 31, 2002 and August 31, 2001.................................4
Unaudited Condensed Consolidated Statements of Cash Flows for
the three months ended August 31, 2002 and August 31, 2001.....................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)................................6
Item 2. Management's Discussion and Analysis
or Plan of Operation ...........................................................................13
Item 3. Procedures and Controls..........................................................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................17
Item 2. Changes in Securities and Use of Proceeds........................................................17
Item 3. Defaults Upon Senior Securities..................................................................17
Item 4. Submission of Matters to a Vote of Security Holders..............................................17
Item 5. Other Information................................................................................17
Item 6. Exhibits and Reports on Form 8-K.................................................................17
Signature...................................................................................
Certifications..............................................................................
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, 2002 May 31, 2002
--------------- ------------
(unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,162,312 $ 1,630,617
Accounts receivable, net of allowance for doubtful accounts
of $260,974 and $202,746 at 2002 and 2001, respectively 2,527,353 2,182,963
Receivables from affiliates 359,771 280,297
Notes receivable - officer -- 100,000
Inventories 48,250 45,342
Prepaid expenses and other current assets 235,140 345,349
Deferred income taxes 226,536 207,595
------------- ------------
Total Current Assets 5,559,362 4,792,163
FIXED ASSETS, NET 6,587,269 6,820,596
DEFERRED INCOME TAXES 141,349 171,579
OTHER ASSETS
Notes receivable 23,821 25,190
Cash surrender value of officer's life insurance, security
deposits and other assets 1,115,398 1,105,502
------------- --------------
Total Assets $ 13,427,199 $ 12,915,030
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,071,298 $ 2,781,550
Deferred/unearned revenue 38,100 16,367
Deferred income 71,650 103,258
Short term debt 3,750,000 --
------------- -------------
Total Current Liabilities 7,931,048 2,901,175
LONG-TERM DEBT -- 4,500,000
DEFERRED INCOME 10,572 21,142
------------- ------------
Total Liabilities 7,941,620 7,422,317
------------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.001 par value, 6,000,000 shares
authorized; 2,481,808 shares issued and
outstanding 2,482 2,482
Additional paid in capital 5,765,766 5,765,766
Retained earnings 1,186,621 1,193,755
Notes receivable - officers (1,469,290) (1,469,290)
------------- ----------
Total Shareholders' Equity 5,485,579 5,492,713
------------- -----------
Total Liabilities and Shareholders'
Equity $ 13,427,199 $ 12,915,030
============= ==============
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31,
2002 2001
---- ----
REVENUES
Service fees $4,398,826 $ 4,392,328
Other income 79,520 98,742
Interest income 43,576 33,596
---------- ----------
4,521,922 4,524,666
COSTS AND EXPENSES
Operating 2,696,630 2,714,083
Selling, general and administrative 1,263,068 1,650,170
Depreciation and amortization 499,502 427,862
Interest expense 45,759 77,679
---------- -----------
TOTAL COSTS AND EXPENSES 4,504,959 4,869,794
---------- -----------
EARNINGS (LOSS) FROM OPERATIONS BEFORE INCOME TAX
EXPENSE (BENEFIT) 16,963 (345,128)
---------- -----------
INCOME TAX EXPENSE (BENEFIT) 24,097 (170,179)
---------- -----------
NET (LOSS) $ (7,134) $ (174,949)
========== ===========
BASIC AND DILUTED LOSS PER SHARE $ 0.00 (0.07)
========== ===========
BASIC WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,481,808 2,506,475
========== ===========
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31,
2002 2001
---- ----
Cash flows from operating activities:
Net (loss) $ (7,134) $ (174,949)
Adjustments to reconcile net (loss) to net cash provided by operating
activities:
Depreciation and amortization 499,502 427,862
Gain on disposal of fixed assets -- (4,309)
Provision for doubtful accounts 58,228 17,101
Recognition of deferred income (42,179) (81,640)
Recognition of deferred revenue (19,489) 23,643
Deferred tax provision 11,289 (170,179)
(Increase) decrease in operating assets
Accounts Receivable (402,618) 63,503
Receivables from affiliates (79,474) 133,522
Inventories (2,908) (14,006)
Prepaid expenses and other current assets 110,209 171,354
Other assets (8,527) (2,307)
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses 1,289,748 1,298,374
Deferred/unearned revenue 41,223 --
----------- ----------
Net cash provided by operating activities 1,447,870 1,687,969
----------- ----------
Cash flows from investing activities:
Purchases of fixed assets (266,175) (759,751)
----------- ----------
Net cash used in investing activities (266,175) (759,751)
----------- ----------
Cash flows from financing activities:
Principal payments on note payable -- (500,000)
Proceeds from note payable -- 500,000
Proceeds from note receivable officer 100,000 --
Proceeds from line of credit 500,000 1,450,000
Principal payments on line of credit (1,250,000) (850,000)
----------- ---------
Net cash (used in) provided by financing activities (650,000) 600,000
----------- ---------
Net increase in cash and cash equivalents 531,695 1,528,218
Cash and cash equivalents at the beginning of the year 1,630,617 475,578
----------- ------------
Cash and cash equivalents at the end of the year $ 2,162,312 $ 2,003,796
----------- ------------
SANDATA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Condensed Consolidated Balance Sheet as of August 31, 2002, the
Condensed Consolidated Statements of Operations for the three month periods
ended August 31, 2002 and 2001, and the Condensed Consolidated Statements of
Cash Flows for the three month periods ended August 31, 2002 and 2001 have been
prepared by Sandata Technologies, Inc. and Subsidiaries (the "Company") without
audit. In the opinion of management, all adjustments (which include only normal,
recurring adjustments) necessary to present fairly the financial position as of
August 31, 2002 and for all periods presented have been made.
For information concerning the Company's significant accounting policies,
reference is made to the Company's Annual Report on Form 10-KSB for the year
ended May 31, 2002. Results of operations for the period ended August 31, 2002
are not necessarily indicative of the operating results expected for the full
year.
New Accounting Pronouncements and Policies
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. Due to the nature of its
operations, the Company deposits, on a monthly basis, amounts in financial
institutions for the payment of payroll liabilities for certain customers. Such
amounts are reduced when the Company pays such liabilities. Such reductions
generally occur over five to ten business days. At August 31, 2002, the Company
had amounts on deposit for these liabilities of approximately $1,800,000. The
Company has cash balances in banks in excess of the maximum amount insured by
the FDIC as of August 31, 2002.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 144 ("SFAS No. 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
accounting model for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. It
also broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the entity in
a disposal transaction. SFAS No. 144 is effective for the Company in fiscal
2003. The provisions of the interpretations that are applicable to the Company
were implemented on a prospective basis as of June 1, 2002, which had no
material effect on the Company's financial statements.
On April 30, 2002 the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 eliminates the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect and eliminates an inconsistency between the accounting for sale-
leaseback transactions and certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Generally, SFAS No. 145
is effective for transactions occurring after May 15, 2002. The adoption of this
standard is expected to have no impact to the Company.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), provides guidance on
the recognition and measurement of liabilities for costs associated with exit or
disposal activities. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company is
currently reviewing SFAS 146 to determine the impact upon adoption.
2. RELATED PARTY TRANSACTIONS
a. Pursuant to an agreement (the "Agreement") involving the Company, Nassau
County Industrial Development Agency ("NCIDA"), BFS Realty, LLC (the
"Affiliate") HSBC Bank USA (successor to Marine Midland Bank) ("the "Bank") and
the U.S. Small Business Administration ("SBA"), the Affiliate borrowed
$3,350,000 in Industrial Development Revenue Bonds (the "Bonds") to finance the
acquisition of the Company's facility (the "Facility").
Under the terms of the Agreement, the Company is jointly and separately
liable to the NCIDA for all obligations owed by the Affiliate to the NCIDA under
the lease agreement between NCIDA, as landlord, and the Affiliate, as Tenant
(the "Lease"); however, the Affiliate has indemnified the Company with respect
to certain obligations relative to the Lease and the Agreement. The Company
subleases space from the Affiliate (see below). The Affiliate's obligations
under the Lease were guaranteed by Mr. Brodsky, the Company, Sandsport and
others. The Affiliate's obligations respecting repayment of the Bonds were also
guaranteed by Mr. Brodsky, the Company, Sandsport and others. The Bonds
currently bear interest at the rate of 9%, and the outstanding balance due on
the Bonds as of August 31, 2002 was $1,401,111.
The Company has also entered into a $750,000 loan agreement with the Long
Island Development Corporation ("LIDC"), under a guarantee by the SBA (the "SBA
Loan"). The SBA Loan was assigned to the Affiliate in November 1996; however,
repayment of the SBA Loan is guaranteed by the Company and various subsidiaries
of the Company. The SBA Loan is payable in 240 monthly installments of $6,255,
which includes principal and interest at a rate of 7.015%. The balance of the
SBA Loan as of August 31, 2002 was $592,036.
b. The Company derived revenue from National Medical Health Card Systems,
Inc. ("Health Card") a company affiliated with the Company's Chairman,
principally for data base and operating system support, hardware leasing,
maintenance and related administrative services. No revenues were generated from
Health Card for the three months ended August 31, 2002. The revenues generated
from Health Card amounted to approximately $367,000 for the three months ended
August 31, 2001 for various services. In addition the Company resells its
telephone services to Health Card. The billings for such telephone services
amounted to approximately $6,000 and $61,000 for the three months ended August
31, 2002 and 2001, respectively and are recorded as a reduction of operating
expense. The Company was owed approximately $43,000 from Health Card at August
31, 2002. Subsequent to August 31, 2002, the Company received approximately
$28,000 from Health Card.
c. The Company makes lease and rent payments to affiliates of the Company's
Chairman. The payments for leased equipment were made to P.W. Capital Corp. and
P.W. Medical Management, Inc., and were approximately $54,000 and $95,000 for
the three months ended August 31, 2002 and 2001 respectively. The payments for
the Facility were made to the Affiliate, and were approximately $68,000 and
$143,000 for the three months ended August 31, 2002 and 2001 respectively.
d. Medical Arts Office Services, Inc. ("MAOS"), of which the Company's
Chairman is the sole shareholder, provided the Company with accounting,
bookkeeping and legal services. For the three months ended August 31, 2002 and
2001 the total payments made by the Company to MAOS were approximately $115,000
and $89,000, respectively.
3. NET EARNINGS (LOSS) PER COMMON SHARE
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share". Basic earnings per
share has been computed using the weighted average number of shares of common
stock outstanding.
Options and warrants to purchase 1,388,599 shares of common stock were
outstanding at August 31, 2002, which were not included in the computation of
diluted earnings per share because the exercise effect would have been
anti-dilutive.
4. SHAREHOLDERS' EQUITY
Stock Options
On July 14, 1998, the Chairman, certain officers, directors, and a former
director and the spouse of an officer (who is an employee of Sandsport Data
Services, Inc. ("Sandsport") the Company's wholly owned subsidiary), exercised
their respective options and warrants to purchase an aggregate of 921,334 shares
of Common Stock. The exercise prices ranged from $1.38 to $2.61 per share for an
aggregate cost of $1,608,861. Payment for such shares was made to the Company in
the amount of $921 representing the par value of the shares, and a portion in
the form of non-recourse promissory notes due in July 2001, with interest at
eight and one-half percent (8 1/2%) per annum, payable annually, and secured by
the number of shares acquired ("Non-recourse Notes"). On July 14, 2001, the
Company agreed to extend the due dates of the Non-recourse Notes for one hundred
twenty days. On November 9, 2001, the due date of the notes was extended to
November 9, 2004 and the Company agreed to substitute full recourse unsecured
notes ("Recourse Notes") for the Non-recourse Notes it had previously accepted.
The Recourse Notes will bear interest at the rate of eight and one-half percent
(8 1/2%) per annum, payable annually, with the principal amount of each Recourse
Note, plus any accrued and unpaid interest, due and payable on November 9, 2004.
Effective December 1, 2001, the interest rate on the Recourse Notes was
changed to six percent (6%) per annum, and the shares and Recourse Note of the
spouse of the officer were both transferred to the officer.
During the year ended May 31, 2002, 24,667 shares of common stock were
surrendered by a former director and an employee in settlement of Non-recourse
Notes in the amount of $37,962. As of August 31, 2002, the outstanding balance
on Recourse Notes, including principal and accrued but unpaid interest, was
$1,512,679. During the period ended August 31, 2002, the Chairman repaid
$100,000 of his Recourse Note.
5. COMMITMENTS AND CONTINGENCIES
Litigation
a. In August of 1999, the Company's wholly-owned subsidiary, Sandsport was
named as a defendant in Greater Bright Light Home Care Services, Inc. et al. v.
Joseph Jeffries-El, El Equity Corporation, Sandsport Data Services, Inc. et al.
(Supreme Court of the State of New York, Kings County). Sandsport's contractual
obligation to Greater Bright Light involved the depositing of certain
government-issued checks into a specific bank account. Upon receiving written
notification from the agency issuing the checks to stop depositing them in that
account, Sandsport ceased depositing them. The plaintiff brought the action
against Joseph Jeffries-El and El Equity, and El Equity counterclaimed against
the plaintiff, each basing its claims on the financing agreement between them.
El Equity also cross-claimed against Sandsport, asserting that Sandsport
converted the government-issued checks to its own use. Although Sandsport is
named as a defendant, the Complaint seeks no affirmative relief against
Sandsport. Co-defendant Citibank has asserted indemnification claims against
Sandsport and all of the other defendants. Sandsport disputes all liability.
However, the Company is unable to predict the outcome of these claims and
accordingly, no adjustments have been made in the consolidated financial
statements in response to these claims.
b. On March 1, 2000, Dataline, Inc. ("Dataline") began a lawsuit against
MCI WorldCom Network Services, Inc. ("MCI") and the Company for alleged trade
libel and related counts, in the United States District Court for the Southern
District of New York. The court dismissed that lawsuit, with prejudice, on May
23, 2002. On May 4, 2001 MCI had brought a patent infringement lawsuit against
Dataline, alleging that it was infringing three MCI patents, under which the
Company has an exclusive license in New York City. Shortly thereafter, the
Company joined MCI in the suit against Dataline. Pursuant to a Settlement
Agreement dated January 1, 2002 among MCI, its parent (MCI Communications
Corporation), the Company, and Dataline, Dataline acknowledged the validity and
enforceability of the 3 MCI-owned patents that were the subject of the lawsuits.
There were no payments from either MCI or the Company to Dataline. As part of
the settlement, Dataline agreed to pay the Company $100,000 in cash and issue an
8% promissory note in the amount of $721,000. Due to the uncertainty of
realization of the note receivable, the Company is recognizing the income on the
note using the installment method of accounting. For the three months ended
August 31, 2002, the Company has recognized approximately $45,000 of income. In
addition, Sandata and Dataline entered into an Exclusive Service Agreement by
which Dataline agreed to use the Company's "call capture infrastructure" for all
of Dataline's time and attendance systems, and to pay royalties to the Company
for such use. The terms of the settlement also included mutual releases.
c. By letter dated June 26, 2002, a former employee of the Company asserted
claims for back wages of $410,000. The letter, from the employee's attorney,
also contained allegations of age discrimination and retaliatory discharge. The
letter also contained an offer of settlement. No formal litigation has been
started and the Company intends to pursue settlement negotiations. A provision
of $200,000 is included in accrued expenses relating to the asserted claim,
which represents the Company's best estimate of costs to be incurred. The amount
of the ultimate cost may vary from this estimate.
d. For description of the going private transaction, and of the
class-action lawsuits initiated in connection with such transaction, see Note 8.
Royalty Agreement
The Company has been granted a license under certain of MCI's patents which
permits the Company to continue to market and sell its SANTRAX time and
attendance verification product non-exclusively nationwide, and exclusively in
the home health care industries for the five New York boroughs, and that the
Company will pay MCI certain royalties, on a per call basis. The license remains
in effect until the last to expire of various patents held by MCI or until
October 19, 2010, whichever is later.
6. REVENUE BY PRODUCT LINE
The Company derives its revenue from several product lines that are similar in
nature. The following table provides the service fee revenues for the product
lines earned for the three month periods ended August 31, 2002 and 2001:
For the three months
ended August 31,
2002 2001
---- ----
Computerized information processing $1,564,344 $1,522,247
Telephone-based data collection 2,085,888 1,892,151
Technology infrastructure and outsourcing 11,150 402,292
Information technology 736,930 564,075
Other 514 11,563
---------- ----------
$4,398,826 $4,392,328
7. ECONOMIC DEPENDENCE
A significant number of the Company's customers (both for-profit and
not-for-profit companies) receive some or all of their funding from Federal and
State agencies. These customers' contracts with the Company are subject to
review and approval by a New York City governmental agency. For the three months
ended August 31, 2002, the Company received revenues from these customers
amounting to approximately $2,836,279, as compared to $2,667,000 for the three
months ended August 31, 2001. The Company was owed approximately $1,481,000 from
these customers at August 31, 2002.
8. GOING PRIVATE TRANSACTION
The Company has received a proposal to engage in a going private
transaction. The proposed transaction is anticipated to be in the form of a
merger with an entity owned by an investor group to be led by Bert E. Brodsky,
the Company's Chief Executive Officer, and to include Directors Hugh Freund and
Gary Stoller as well as other investors (the "Acquiring Group"). Pursuant to the
proposal, the Company's shareholders (other than Mr. Brodsky, and the other
shareholders that shall comprise the "Acquiring Group") would receive $1.50
(subsequently revised to $1.91) per share of Common Stock of the Company (the
"Shares"), in cash. The proposal may be amended, modified or supplemented at any
time.
The Board of Directors has appointed a Special Committee (the "Committee"),
comprised of Ronald Fish and Martin Bernard, to review the proposed transaction.
The Committee has retained Brean Murray & Co., Inc. as its financial advisor,
and has retained its own legal counsel.
The proposed transaction would result in the acquisition of all of the
outstanding Shares other than the Shares owned by Mr. Brodsky and the other
shareholders that shall comprise the Acquiring Group. The final terms of any
acquisition will be based on negotiations between the Acquiring Group and the
Committee. The proposed acquisition will be subject to, among other things, (1)
the negotiation, execution, and delivery of a definitive agreement, (2) approval
of the proposed transaction by the Committee, the full Board of Directors and
the Company's shareholders, (3) receipt of a fairness opinion by the Committee,
(4) applicable regulatory approval, and (5) obtaining any necessary third-party
consents or waivers. There can be no assurance that a definitive merger
agreement will be executed and delivered, or that the proposed transaction will
be consummated.
On September 11, 2002, a stockholder of the Company filed a lawsuit in the
Delaware Chancery Court against the Company and the members of its Board of
Directors. (Eva Seitler v. Sandata Technologies, Inc., Bert E. Brodsky, Ronald
L. Fish, Martin Bernard, Hugh Freund, and Gary Stoller, Civil Action No.
19886-NC). The plaintiff alleges that the defendants breached their fiduciary
duties to the Company and the Company's public stockholders in connection with
Sandata Acquisition Corp.'s proposal to acquire all of the outstanding public
shares of the Company. The plaintiffs also allege, among other things, that the
directors serving on the special committee are not independent, and that the
merger consideration is inadequate. The complaint seeks certification of the
action as a class action, both preliminary and permanent injunction against the
proposed transaction, and rescission if it is not enjoined. On September 13,
another stockholder of the Company filed a separate lawsuit in the same court,
making substantially identical allegations and seeking substantially identical
remedies. The Company and the individual directors intend to vigorously defend
themselves. However, the Company is unable to predict the outcome of this matter
and, accordingly, no adjustments have been made in the condensed consolidated
financial statements in response to this matter.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Revenues were $4,521,922 for the three months ended August 31, 2002 as
compared to $4,524,666 for the three months ended August 31, 2001, a decrease of
$2,744 or .06%.
Service fee revenue for the three months ended August 31, 2002 was
$4,398,826 as compared to $4,392,328 for the three months ended August 31, 2001
an increase of $6,498. or .15%.
Other income for the three months ended August 31, 2002 was $79,520 as
compared to $98,742 for the three months ended August 31, 2001. The decrease is
attributable to a decrease in income recognized on sales/leaseback transactions,
offset by payments received on notes receivable.
Expenses Related to Services
Operating expenses were $2,696,630 for the three months ended August 31,
2002 as compared to $2,714,083 for the three months ended August 31, 2001, a
decrease of $17,453 or .6%. Costs associated with payroll decreased this
quarter, offset by an increase in purchases for resale.
Selling, general and administrative expenses were $1,263,068 for the three
months ended August 31, 2002, as compared to $1,650,170 for the three months
ended August 31, 2001, a decrease of $387,102 or 23%. The decrease is primarily
due to a decrease in payroll.
On August 9, 2001 the Company announced that it had terminated the
employment of Stephen Davies as President of the Company, and would be
terminating approximately 30 other employees. Under the terms of Mr. Davies'
Employment Agreement, he is entitled to a severance payment equal to six (6)
months' base salary, or $100,000, and has 90 days from the date of termination
to exercise the 66,673 options that were vested on that date. The elimination of
approximately 30 positions from within the Company and its subsidiaries is
expected to generate between $1.7 million and $2 million in reduced expenses. In
addition, the Company paid approximately $47,000 in severance payments for
approximately 30 terminated employees.
Depreciation and amortization expense increased $71,640 to $499,502 for the
three months ended August 31, 2002 as compared to $427,862 for the three months
ended August 31, 2001. The increase was primarily attributable to the write-off
of developed software that occurred in the year ended May 31, 2001, which
resulted in decreased amortization expense in last year's quarter.
Interest expense was $45,759 for the three months ended August 31, 2002 as
compared to $77,679 for the three months ended August 31, 2001. The decrease was
a result of decreased borrowings on the Company's Credit Agreement.
Income Tax Expenses (Benefit)
Income tax expense for the three months ended August 31, 2002 was $24,097
as compared to income tax benefit of $170,179 for the three months ended August
31, 2001. The increase in income tax expense is due to higher pretax income.
Liquidity and Capital Resources
The Company has a working capital deficit as of August 31, 2002 of
$2,371,686, as compared to working capital of $1,890,988 at May 31, 2002. The
primary factor is a result of the revolver becoming short-term liability of
which $3,750,000 is due in June 2003.
For the three months ended August 31, 2002, the Company spent approximately
$266,000 in fixed asset additions, of which $229,000 was for software
capitalization costs in connection with revenue growth and new product
development. The Company expects the current levels of capital expenditures to
continue.
On July 14, 1998, the Chairman, certain officers, directors and a former
director and the spouse of an officer and an employee of Sandsport Data
Services, Inc. ("Sandsport"), the Company's wholly owned subsidiary, exercised
their respective options and warrants to purchase an aggregate of 921,334 shares
of Common Stock at exercise prices ranging from $1.38 to $2.61 per share for an
aggregate cost of $1,608,861. Payment for such shares was made to the Company in
the amount of $921 representing the par value of the shares, and a portion in
the form of non-recourse promissory notes due in July 2001, with interest at
eight and one-half percent (8-1/2%) per annum, payable annually, and secured by
the number of shares exercised. On July 14, 2001, the Company agreed to extend
the due dates of such notes for one hundred twenty days until November 11, 2001.
On November 9, 2001, the Company agreed to substitute full recourse unsecured
Notes for the Notes it had previously accepted in connection with these option
and warrant exercises. Such notes will bear interest at the rate of eight and
one-half percent (8 1/2%) per annum, payable annually, with the principal amount
of each such Note, plus any accrued and unpaid interest, due and payable on
November 9, 2004.
As of December 1, 2001, the interest rate on the notes was changed to six
percent (6%) per annum, and the shares and note of the spouse of the officer
were both transferred to the officer. During the year ended May 31, 2002, 24,667
shares of common stock were surrendered by a former director and an employee in
settlement of notes in the amount of $37,962. As of August 31, 2002, the
outstanding balance on such notes, including principal and accrued but unpaid
interest, was $1,512,679.
On April 18, 1997, the Company's wholly owned subsidiary, Sandsport,
entered into a revolving credit agreement (the "Credit Agreement") with HSBC
Bank USA, which allows Sandsport to borrow amounts up to $3,000,000. Interest
accrues on amounts outstanding under the Credit Agreement at a rate equal to the
London Interbank Offered Rate plus 2% and will be paid quarterly in arrears or,
at Sandsport's option, interest may accrue at the Bank's prime rate. The Credit
Agreement requires Sandsport to pay a fee equal to 1/4% per annum payable on the
unused average daily balance of amounts under the Credit Agreement. In addition,
there are other fees and charges imposed based upon Sandsport's failure to
maintain certain minimum balances. The Credit Agreement has been amended by the
Bank to permit Sandsport to borrow amounts up to $4,500,000 until February 14,
2003. Interest accrues at the same rate as the original Credit Agreement. The
indebtedness under the Credit Agreement is guaranteed by the Company and
Sandsport's sister subsidiaries (the "Group"). All of the Group's assets are
pledged to the Bank as collateral for amounts due under the Credit Agreement,
which pledge is secured by a first lien on all equipment owned by members of the
Group, as well as a collateral assignment of $2,000,000 of life insurance
payable on the life of the Company's Chairman. The Group's guaranty to the Bank
was modified to include all indebtedness incurred by the Company under the
Credit Agreement. On April 11, 2002, the Bank approved the extension of the
termination date of the Credit Agreement to June 14, 2003 (from February 14,
2003).
In addition, pursuant to the Credit Agreement, the Group is required to
maintain certain levels of net worth and meet certain financial ratios in
addition to various other affirmative and negative covenants. As of August 24,
2001, Sandsport, the Company and the other members of the Group, and the Bank,
entered into the Third Amendment and Waiver (the "Third Amendment") to the
Credit Agreement. Pursuant to the Third Amendment, Sandsport's covenants to the
Bank to maintain a certain net worth and to maintain certain financial ratios
were revised, on a going-forward basis, and the noncompliance with the existing
covenants was waived by the Bank. In addition, in connection with the Third
Amendment, Sandsport and each member of the Group executed and delivered to the
Bank a Collective Amended and Restated Security Agreement, pursuant to which the
Bank's security interest was extended to include a security interest in all of
the personal and fixture property of Sandsport, the Company and the members of
the Group. On October 23, 2001 the Credit Agreement was amended with respect to
one of the financial ratios, at the Company's request. At August 31, 2002 the
Group met the net worth and financial ratios requirements of the Credit
Agreement. In the past, the Group has failed to meet certain of the financial
ratios, and the Bank has granted the Group a waiver. There can be no assurance
that the Bank will continue to grant waivers if the Group fails to meet the net
worth and financial ratios in the future. If such waivers are not granted, any
loans outstanding under the Credit Agreement become immediately due and payable,
which may have an adverse effect on the Company's business, operations or
financial condition. As of August 31, 2002, the outstanding balance on the
Credit Agreement with the Bank was $3,750,000.
The Company believes the results of its continued operations, together with
the available credit line, should be adequate to fund presently foreseeable
working capital requirements.
ITEM 3 - PROCEDURES AND CONTROLS
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, primarily the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Notes 5 and 8 to the Condensed Consolidated Financial
Statements comprising Part I, Item 1 of this Form 10-QSB.
ITEM 2 - CHANGES IN SECURITIES
The Company's ability to declare and pay dividends is restricted pursuant
to the terms of a Revolving Credit Agreement dated April 18, 1997 between the
company and HSBC Bank USA, formerly Marine Midland Bank (the "Bank"), and also
under the terms of the Guaranty Agreement dated June 1, 1994 by and among the
Company (as a guarantor), BFS Realty, LLC (an affiliate of the Company's
Chairman), and the Bank (among others). The Guarantee Agreement was entered into
in connection with the IDA/SBA Financing discussed in Item 6 of the Annual
Report on Form 10-KSB for the year ended May 31, 2002, filed with the SEC on
August 27, 2002.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant to Sarbanes Oxley Act, Section 302
99.2 Certification Pursuant to Sarbanes Oxley Act, Section 906
(b) Reports on Form 8-K
1. Current Report on Form 8-K filed August 23, 2002 reporting
under Item 5 the Company's regaining compliance with certain
Nasdaq Marketplace Rules, as detailed in the press release
comprising an Exhibit to the Report.
2. Current Report on Form 8-K filed September 18, 2002
reporting under Item 5 the Company's acceptance of a proposal
to engage in a going private transaction, subject to the
conditions specified in the press release comprising an
Exhibit to the Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SANDATA TECHNOLOGIES, INC.
--------------------------
(Registrant)
Date: October 15, 2002 By: /s/ Bert E. Brodsky
-------------------------
Bert E. Brodsky
Chairman of the Board,
Chief Executive Officer,
Chief Financial Officer