<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
OR
[ ] 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: 0-28166
marchFIRST, Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3797833
--------- -----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
311 SOUTH WACKER DRIVE, SUITE 3500, CHICAGO, ILLINOIS 60606-6618
- ---------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(312) 922-9200
--------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 2000, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant (based upon the per share closing price
of $49.1875 on March 1, 2000, and for the purpose of this calculation only, the
assumption that all of the registrant's directors and executive officers are
affiliates) was approximately $6,411,157,211.
As of March 1, 2000, there were 144,823,410 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the registrant's
2000 Annual Meeting of Stockholders are incorporated by reference into PART
III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS.
THE DISCUSSION BELOW CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH
TERM IS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934) THAT
ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT, AS WELL AS
ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO, THE COMPANY'S
MANAGEMENT. THE COMPANY'S RESULTS, PERFORMANCE AND ACHIEVEMENTS IN 2000 AND
BEYOND COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY
SUCH FORWARD-LOOKING STATEMENTS. SEE "CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
SUMMARY
marchFIRST, Inc. ("marchFIRST" or the "Company") is an Internet
professional services firm that provides a comprehensive suite of
professional services to help companies build business models, brands,
systems and processes to capitalize on the opportunities created by the
Internet and related computer and communications technologies. marchFIRST
also provides integrated application hosting services and, through an
affiliate company, plans to provide access to venture capital and external
funding sources. marchFIRST provides services to clients ranging from
early-stage Internet start up companies to Global 2000 companies, reflecting
management's belief that the Internet has narrowed the range of needs among
small, middle-market and global companies.
marchFIRST is the new name for the company formerly known as
Whittman-Hart, reflecting the merger of Whittman-Hart and USWeb/CKS,
completed on March 1, 2000. As a leading information technology services
company prior to the merger, Whittman-Hart provided technology-based
e-Business solutions, including back office business systems integration,
supply-chain management and business-to-business processes and technologies.
USWeb/CKS was a leading provider of Internet professional services, with an
emphasis on emerging e-commerce companies and the Fortune 500
business-to-consumer marketplace, and offered strong strategy and creative
capabilities.
As a result of the merger, marchFIRST provides comprehensive professional
services from more than 70 offices in 14 countries and employs approximately
8,900 employees. The professional services provided by marchFIRST include
business strategy and management consulting, creative branding and marketing,
Web application design and development, packaged software implementation and
integration, and Web and network infrastructure design and implementation.
marchFIRST believes that its breadth of services and capabilities distinguishes
it from potential competitors, fosters long-term client relationships, affords
cross-selling opportunities and protects it from dependence on any single
service line or technology. Unless otherwise noted, the following discussion
reflects the combined business of Whittman-Hart and USWeb/CKS after the merger.
With respect to historical matters, the Company is sometimes referred to as
Whittman-Hart.
2
<PAGE>
marchFIRST's business is organized into the following five geographic
operating units.
- - Central Group (U.S.)
- - East Group (U.S., Latin America and Asia)
- - Northwest Group (U.S.)
- - Southwest Group (U.S.)
- - Europe, Middle East and Africa (EMEA) Group
Each geographic group is divided into smaller regions, and each region
contains multiple offices. Offices serve clients within their own communities,
fostering close, ongoing client relationships and enhancing marchFIRST's ability
to attract skilled, locally-based consultants. marchFIRST believes that local
offices establish greater name recognition for marchFIRST and increase referrals
for its services within the potential client base in their locales. As a result,
marchFIRST believes it has an advantage when competing against firms that do not
maintain a local presence.
INDUSTRY BACKGROUND
The rapid acceptance of the Internet and electronic commerce by
business and consumers has reduced or eliminated such traditional market
barriers as distance, time and cost of entry, creating the opportunity for
many companies to reach new customers and new markets. As these barriers have
diminished, however, competition between established companies and new
entrants has become increasingly intense in many industries. As a result,
businesses are increasingly viewing the Internet as a vital strategic tool to
help them achieve goals ranging from defensive positions such as protecting
their existing customer bases, to aggressive tactics, such as achieving
dominance in new markets.
In the new digital economy, a company's business model, brand and
systems and processes must be fundamentally interdependent. This alignment
presents several core challenges. First, business models must be developed
with an understanding of how markets, market share and technology
infrastructure are all interrelated. Further, the speed of innovation is
leading clients to demand that the generation of ideas be intimately linked
with the ability to create results.
Second, technology is becoming increasingly complex. To compete
successfully, companies must integrate packaged and custom-developed systems
that serve end consumers, employees throughout their organizations, and
representatives of those supply chain member companies which supply raw
materials, components and services.
A third challenge emanates from the competitive need for successful
companies to reinforce their brand experience at every point with their
customers, suppliers and employees. Further, technology must be implemented
with careful consideration of its user interface whether it's intended for
use on a consumer-facing Web site or as part of a procurement system used in
a company's back office.
The final core challenge is that within most companies,
professionals in business, creative branding and marketing, and technology
groups (or areas) often lack the experience and understanding of the other
areas required to work cooperatively to rapidly create seamless business
solutions. Currently, companies seeking rapid and successful business
solutions must often engage different firms as advisors in two or more of
these areas and provide internal guidance to coordinate and integrate each
firms' efforts.
3
<PAGE>
Due to the foregoing factors, demand for a new type of e-Business
professional services firm -- one with depth and breadth of capabilities in
the areas of technology, strategy, marketing and creative -- is growing
rapidly. marchFIRST is a new type of e-Business professional services firm
with substantial capabilities in the areas of technology, strategy, marketing
and creative, addressing the challenges of the new digital economy.
Approximately 60% of marchFIRST's professionals are dedicated to the area of
technology, 20% are dedicated to business strategy counseling, and 20% are
dedicated to the area dedicated to creative branding and marketing.
THE marchFIRST SOLUTION
marchFIRST provides the complete span of business services that
clients need to compete in today's digital economy. Due to the breadth of its
capabilities, marchFIRST has no vested interest in any one solution or any
one business function. Rather, it is prepared to serve clients with the
capabilities that meet their immediate business needs to create immediate
impact.
Professional and consulting services include business strategy and
marketing consulting, creative branding and marketing, Web application design
and development, packaged software implementation and integration, and Web
and network infrastructure design and implementation. In addition, through
Bluevector LLC, an entity that is 50% owned by marchFIRST, the Company
intends to provide its clients with access to venture capital funding
sources. The Company provides outsourcing technology management services
through its Integrated Application Services product offering, which is
discussed below.
marchFIRST's business model focuses on developing close and
long-lasting relationships with its clients. marchFIRST has worked with many
of its clients for several years, spanning a variety of projects and
services. marchFIRST believes that its ability to provide innovative
solutions is enhanced by its strategic relationships with leading vendors
such as Broadvision, Exodus, IBM, Microsoft, Novell, 3Com and Oracle.
NEW INITIATIVES
marchFIRST has recently announced two new initiatives to help its
large corporate clients. The Corporate Partnerships Practice will assist
Global 2000 companies in creating Internet spin-off companies. Through this
practice, marchFIRST plans to invent, invest in and bring to market new
spin-offs for clients. Its comprehensive services will include developing new
business models to leverage the power of the Internet, securing or sourcing
financing for the spin-offs through Bluevector, and integrating the spin-offs
with existing lines of business.
In order to secure financing for these new spin-offs, marchFIRST has
established a venture capital fund, Bluevector LLC. marchFIRST believes that
Bluevector and its new Corporate Partnerships Practice enhances its depth of
expertise and better positions it to provide one-stop advisory services for
its clients.
STRATEGIC BUSINESS PLAN
marchFIRST's objectives are to become a trusted business advisor to
clients; provide clients with integrated e-Business services in the areas of
technology, strategy, creative branding and marketing; be the employer of
choice in the Internet professional services industry; deliver its services
through a global network of offices; and achieve revenue, earnings per share
and operating margin goals. marchFIRST has also established an Executive
Committee to provide leadership and accountability for execution of its
strategic plan.
4
<PAGE>
The Company's strategic plan emphasizes organic growth. Key
components of the Company's plan include:
CROSS-SELLING OF ITS SERVICE OFFERINGS. Regardless of the service
initially provided to a client -- such as business strategy, brand
development or technology services -- a typical engagement enhances the
Company's ability to cross-sell additional services.
PROVIDING NEW SERVICE OFFERINGS. marchFIRST intends to continue
developing and introducing marketing-leading service offerings. These
offerings provide access to new clientele and access to previously untapped
opportunities within existing clients, and may combine existing capabilities
into higher-value offerings. An example of one such offering is the Company's
Corporate Partnerships Practice to help Global 2000 companies create Internet
spin-off companies. Services that will be provided by this practice include
developing new business models, assistance in securing financing and
integrating the spin-offs with existing lines of business.
LEVERAGING THE INCREASING SCALE OF ITS ENGAGEMENTS. The Company has
seen substantial increases in the size of individual engagements over the
past several years, and expects this trend to continue. This is driven in
part by the complexity of engagements as clients seek to integrate front-end
with back-end technology systems. In addition, the trend toward globalization
in business enables the Company to provide multiple services to clients at
many locations simultaneously.
EXPANDING CAPABILITIES THROUGHOUT THE WORLD. marchFIRST is pursuing
growth strategies to increase its size and market penetration in North
America -- its largest market, Europe, the Asia/Pacific Region and Latin
America. Growth strategies are tailored for each market based on local buying
patterns, current market penetration and cultural issues. Global growth
through acquisitions is not a strategic priority for the Company. Rather,
tactical, targeted acquisitions will be used to balance the Company's skills
and capabilities within regions to ensure it can provide the same broad scope
and high caliber of services worldwide.
PURSUE ALLIANCES WITH BUSINESS PARTNERS. marchFIRST forms strategic
relationships with business partners to achieve three goals: develop new
markets, open opportunities and access to new clients, and provide
professional development for its employees. Benefits of these alliances
include the opportunity to share technical and industry knowledge, pursue
joint marketing opportunities, provide training for marchFIRST's consultants
and jointly develop new service offerings incorporating marchFIRST's
methodologies. For example, marchFIRST has established business partner
relationships with such companies as Hewlett-Packard Company, IBM
Corporation, Intel Corporation, Informix Software, Inc., Interworld
Corporation, JD Edwards, Inc., Lotus Development Corporation, Lucent
Technologies, Microsoft Corporation, Novell, Inc., Onyx Software Corporation,
Open Market, Inc., Oracle Corporation, Pandesic LLC, Reuters, SAP America,
Inc. Silverstream Software, Inc., Sun Microsystems, Inc., 3Com and TRADEX
Technologies, Inc. The training programs often enable marchFIRST employees to
become certified in a given technology. Establishing these relationships
typically allows marchFIRST to use the business partner's name and the
"business partner" designation in marketing marchFIRST's services. These
relationships also facilitate marchFIRST's pursuit of marketing opportunities
with the business partners. These strategic relationships generally do not,
however, require marchFIRST to use technology developed by the business
partners in implementing solutions for clients or to re-sell the partners'
products. Nonetheless, marchFIRST may be retained by a client based in part
upon one or more of marchFIRST's business partner relationships.
PROVIDE A GROWING SUITE OF VALUE-ADDED SERVICES. marchFIRST is
pursuing a strategy of creating new services that enable clients to gain
competitive advantage and serve as a catalyst to
5
<PAGE>
the Company's growth. Integrated Application Services is an example of one such
service, providing outsourcing services for hosting, maintenance and operations
of certain key technology systems, such as e-commerce capabilities. In addition,
the Company has created a Global Investment Management Group to link clients
with venture capital funding. This group will coordinate investments in Internet
startup and Global 2000 carve-out companies with Bluevector LLC.
ATTRACT, DEVELOP AND RETAIN PROFESSIONALS WITH THE SKILLS AND
COMPETENCIES THAT MAXIMIZE CLIENT VALUE. In order to address the strong
demand for qualified consultants in the Internet professional services
industry and to minimize recruiting agency fees, marchFIRST has an enterprise
recruiting organization supported by a sophisticated infrastructure
leveraging the Internet and other tools and resources. A decentralized
recruiting staff recruits from and for the local offices. The recruiting
staff at marchFIRST's headquarters provides supplemental support during
periods of high demand, supports strategic expansion, and sources executive
level and special skill-set candidates.
LEVERAGE INTELLECTUAL CAPITAL AND FOSTER ORGANIZATIONAL LEARNING.
marchFIRST believes the collective knowledge, or intellectual capital, of its
employees represents a significant competitive advantage. Given the Company's
broad geographic scope and the increasing complexity of the services it
provides, it is becoming more difficult to build, share and apply knowledge
throughout the organization. To that end, marchFIRST is building a
technology-based knowledge management infrastructure to enable it to leverage
and share the intellectual assets of marchFIRST on a firm-wide basis.
ENHANCE BUSINESS SYSTEMS AND TECHNICAL INFRASTRUCTURE TO ENABLE
IMPROVED COMPANY PERFORMANCE. marchFIRST believes that information technology
can be a powerful strategic business tool. In 1999, the Company completed a
project to upgrade its entire systems portfolio, selectively enhancing or
replacing all systems with scalable applications and the technical
infrastructure required to support projected growth. The integrated
environment supports marchFIRST's core business processes (opportunity
management, resource staffing, project management and billing), the employee
lifecycle or "supply chain" (recruiting, training, developing, and staffing),
and back office operations (finance, accounting, and human resources).
FOCUS ON OPERATIONAL EXCELLENCE. marchFIRST's geographic operating
units are led by five group executive partners. The mission of these units is
to achieve superior office performance, measured by market growth, return on
investment, and profitability. Superior performance is based on the rigorous
execution of annual business and financial plans. These units provide support
for recruiting, business development, service quality and delivery, and
financial management.
CLIENTS
marchFIRST's clients belong to three categories of companies. First
are Global 2000 companies, second are traditional mid-size companies and
third are Internet pure play companies. These emerging e-commerce companies
can be both Internet startup firms or carve-out units of Global 2000
companies.
6
<PAGE>
The Company has served, and intends to continue to serve, clients in
a broad range of industries, including communications, consumer products,
distribution, diversified services, financial services, insurance,
manufacturing, pharmaceuticals, professional services, retail and technology.
The Company employs consultants with business experience in these areas to
enhance its ability to understand industry-specific business issues and
develop solutions to address these issues. marchFIRST has maintained ongoing
relationships with many of its clients over many years, spanning multiple
projects and services. marchFIRST believes that it has established
significant ongoing relationships with many of its clients.
Whittman-Hart's ten most significant clients accounted for a total
of approximately 10% and 13% of its revenues during 1999 and 1998,
respectively. During each of 1999, 1998 and 1997, no client accounted for
more than 10% of Whittman-Hart's total revenues. Annual revenues from each of
Whittman-Hart's ten largest clients in 1999 ranged from approximately $3
million to $7 million. Assuming, for illustrative purposes, that
Whittman-Hart and USWeb/CKS had been added together during these periods,
marchFIRST's ten most significant clients would have accounted for a total of
approximately 8% and 9% of marchFIRST's total revenues for 1999 and 1998,
with annual revenues from such clients in 1999 ranging from approximately $5
million to $18 million. These figures are included for illustrative purposes
only, and are not indicative of future operating results of the Company.
BUSINESS DEVELOPMENT
marchFIRST employs a team-based selling approach, focusing on
introducing enterprise-wide solutions to "C" level executives (CEO, CIO, CFO,
CMO, etc). This approach incorporates representatives from the Company's
business development function and the Company's three principal disciplines:
strategy, creative branding and marketing, and technology. marchFIRST
employees, whether from the business development organization or the
substantive delivery organizations, establish contact with targeted prospects
to create awareness, understanding and preference for the Company. Following
the initial contact with the prospective client, the appropriate business
development representative, together with appropriate subject matter experts
from the strategy, technology and/or creative branding and marketing
disciplines introduce the appropriate team of professionals to help develop
the initial proposal. Once an initial assignment is won, the appropriate
delivery team is assembled to develop the business strategy and design and
execute the technology and creative branding and marketing plans. On select,
high profile accounts, a senior level professional is assigned to the account
to establish and manage the long-term relationship between marchFIRST and the
client. This senior level relationship manager serves as the client's primary
relationship contact with the Company and provides overall coordination of
marchFIRST's multiple service offerings to the client.
HUMAN RESOURCES
marchFIRST's success depends in large part upon its ability to
attract, develop, motivate and retain highly skilled employees. Qualified
employees in all of the Company's core discipline areas are in great demand
and are likely to remain a limited resource for the foreseeable future.
marchFIRST dedicates significant resources to recruiting consultants with
specific experience in strategy, technology, or creative branding, as well as
industry experience. Many consultants are selected from among the largest and
most successful information technology, business strategy, advertising and
marketing and other professional services organizations. As of March 15,
2000, the Company employed approximately 8,900 employees, of whom
approximately 85% were consultants.
marchFIRST has implemented a number of distinctive human resources
programs. For example, nearly all of marchFIRST's employees hold options in
the Company's stock and are directly aligned to the creation of value in the
Company. Additionally, marchFIRST's performance-based incentive compensation
program provides guidelines for career development, encourages development of
skills, provides a tool to manage the
7
<PAGE>
employee development process and establishes compensation guidelines.
marchFIRST employs a Web-enabled campus to create a "virtual learning
environment" that enables consultants to identify and close skill gaps
through a progression of skill development experiences. This process begins
with marchFIRST's centralized employee orientation program where new
employees participate in structured workshops designed to introduce them to
the Company's culture and to teach them to leverage the Web-based employee
development tools offered through its strategic education initiative. This
initiative employs instructor-led, computer-based training and other distance
learning technologies to efficiently and effectively develop employees with
both business and technical expertise.
None of marchFIRST's employees is subject to a collective bargaining
arrangement. marchFIRST has entered into employment agreements, which are
terminable upon two weeks notice (without substantial penalty), with virtually
all of its sales, recruiting and technical personnel. The agreements contain
noncompetition, nondisclosure and nonsolicitation covenants. Although most
consultants are marchFIRST employees, marchFIRST does engage independent
contractors as consultants from time to time.
COMPETITION
The market for Internet professional services is relatively new,
intensely competitive, rapidly evolving and subject to rapid technological
change. marchFIRST expects competition to intensify and increase in the future.
marchFIRST's competitors in the Internet professional services
market have typically grow out of specific service areas and can be divided
into several groups:
- - Large information technology consulting service providers, such as
Andersen Consulting, Cambridge Technology Partners and Electronic Data
Systems Corporation;
- - The consulting divisions of computer hardware vendors, such as IBM
Corporation, Compaq Computer Corp. and Hewlett-Packard Company;
- - Internet integrators and Web presence providers such as Agency.com, iXL
Enterprises, Inc., Organic Online, Inc., Proxicom Inc., Sapient
Corporation, Scient Corporation, and Viant Corporation; and
- - Advertising and media agencies such as Ogilvy & Mather, Young &
Rubicam, and Foote, Cone & Belding.
marchFIRST believes its principal competitive advantages include:
breadth of services offered; ability to combine strategy, creative branding and
marketing, and technology services into integrated solutions; scale; geographic
reach; technical expertise; industry knowledge; perceived value; quality of
service; responsiveness to client needs and speed in solutions; reputation and
client relationships.
8
<PAGE>
INTELLECTUAL PROPERTY RIGHTS
marchFIRST's success has resulted, in part, from its methodologies and
other proprietary intellectual property rights. marchFIRST relies upon a
combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws to protect its proprietary rights and the
proprietary rights of third parties from which marchFIRST licenses intellectual
property. marchFIRST enters into confidentiality agreements with its employees
and limits distribution of proprietary information. The steps taken by
marchFIRST in this regard may be adequate to deter misappropriation of
proprietary information and marchFIRST may not be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Software developed by marchFIRST in connection with a client engagement
is typically assigned to the client. In limited situations, marchFIRST may
retain ownership, or obtain a license from its client that permits marchFIRST or
a third party to market the software for the joint benefit of the client and
marchFIRST or for the sole benefit of marchFIRST.
The following trademarks and service marks are the property of
marchFIRST: "marchFIRST," "Whittman-Hart," "USWeb," "USWeb/CKS," "We are IT,"
"Select Smart," "Compliance 2000," "E-Success," "iFrame," "iAMsystem,"
"iAMportal," and "iAMcommerce." The Company holds no patents or registered
copyrights and has no present intention of making any copyright or patent
applications.
ITEM 2. PROPERTIES.
marchFIRST's principal executive offices are located at 311 South Wacker
Drive, Chicago, Illinois. The Company's lease on these premises covers
approximately 50,000 square feet and expires on October 31, 2004. The Company
also leases facilities in Oakbrook, Illinois, Indianapolis, Milwaukee, Madison,
Minneapolis, Atlanta, Denver, Grand Rapids, Cincinnati, Peoria, Dallas, Boston,
Salem, New Hampshire, Cleveland, Columbus, San Francisco, New Jersey,
Pittsburgh, Phoenix, St. Louis, Charlotte, London, England and Edinburgh,
Scotland.
In addition, the Company purchased a 37,000 square foot facility in
Chicago in April 1997. In 1998, the Company purchased five of its adjacent
buildings for approximately $5.0 million, of which a portion was raised during
1999, and the space will be used for future expansion. In early 1999, the
Company purchased a 120,000 square foot building adjacent to these other
acquired Chicago facilities, for approximately $3.1 million. These buildings
were purchased to provide space for a new Chicago facility, which will house the
Company's education center, Chicago branch office and corporate headquarters.
As a result of the merger with USWeb/CKS on March 1, 2000, the Company's
properties include the former headquarters facility of USWeb/CKS, which occupies
approximately 75,000 square feet under lease in San Francisco, California and
which will serve as additional corporate offices for marchFIRST. All other
office facilities are leased and located in the United States and 27 various
international locations.
The Company anticipates that additional space will be required as its
business expands and believes that it will be able to obtain suitable space as
needed.
ITEM 3. LEGAL PROCEEDINGS.
marchFIRST has the following pending legal proceedings resulting
from lawsuits assumed in the Company's merger with USWeb/CKS on March 1, 2000:
9
<PAGE>
On November 5, 1998, a putative class action lawsuit captioned Wilson vs.
CKS Group, Inc., et al., was filed in the United States District Court for the
Northern District of California against CKS Group and three of its former
officers and directors. The complaint alleges that during the period March 20,
1997 to November 7, 1997 (the "Class Period"), the defendants violated the
Securities Exchange Act and the Securities and Exchange Commission rules and
regulations thereunder by issuing false and misleading statements about CKS
Group's operations, revenues and earnings which allegedly inflated CKS Group's
reported revenues, earnings and stock price. The complaint further alleges that
those who purchased CKS Group' s stock did so at artificially inflated prices.
The plaintiff seeks to recover damages in an unspecified amount (together with
interest and attorneys' fees) on behalf of all purchasers of CKS Group Common
Stock during the Class Period. Discovery in the case has not yet begun.
marchFIRST has filed a motion to dismiss the complaint on February 25, 2000 and
is currently waiting for the final ruling from the District Court. marchFIRST
believes that this lawsuit is without merit and intends to defend this action
vigorously.
On September 15, 1998, US WEST, Inc. filed a complaint against USWeb
and one of their licensees in the United States District Court for the
District of Nebraska, alleging claims under Federal and state law for
trademark infringement, trademark dilution, and unfair competition (the
"Nebraska Action"). US WEST filed an Amended Complaint on October 5, 1998. US
WEST seeks to enjoin all use by the Company of the name USWeb. The case is
expected to go to trial in the summer of 2000. marchFIRST believes that US
WEST's claims are without merit and intends to defend this action vigorously.
As is typical for companies in our business and of our size, we are
from time to time the subject of lawsuits. In addition to the lawsuits
described above, a number of legal proceedings are presently pending. Certain
of such proceedings may be covered under insurance policies or
indemnification agreements. Based upon information presently available, we
believe that the final outcome of pending proceedings should not materially
harm our business, financial condition or results of operations. However, due
to the inherent uncertainties of litigation, there is a risk that the outcome
of pending or any future litigation could materially harm our business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the registrant's shareholders
during the fourth quarter of the registrant's 1999 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock began trading on May 3, 1996 at a price of
$4.00 per share, adjusted to reflect the stock split referred to below. The
Company's common stock is quoted on the Nasdaq National Market, under the symbol
"MRCH". The following table sets forth the high and low sales prices for the
common stock for each quarterly period indicated, retroactively adjusted to
reflect the two-for-one common stock splits which was effective July 12, 1998.
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
PERIOD HIGH LOW
-------------------------------------------------------------
<S> <C> <C>
First Quarter $23.375 $13.875
Second Quarter $24.500 $18.250
Third Quarter $25.312 $15.000
FOURTH QUARTER $28.250 $13.000
-------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------
PERIOD HIGH LOW
-------------------------------------------------------------
<S> <C> <C>
First Quarter $35.125 $19.500
Second Quarter $31.875 $17.000
Third Quarter $39.437 $21.750
Fourth Quarter $81.125 $35.460
-------------------------------------------------------------
</TABLE>
The Company has not paid any dividends to date and plans to reinvest
its earnings in future growth opportunities. The Company does not anticipate
paying cash dividends in the foreseeable future.
As of March 1, 2000, there were approximately 1,102 stockholders of
record of the Company's common stock.
In December 1999, the Company announced the merger with USWeb/CKS. The
merger was completed on March 1, 2000.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data is derived from the Whittman
Hart's consolidated financial statements and notes thereto included elsewhere
in this Form 10-K. This information should be read in conjunction with the
financial statements and notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations." (The Company
merged with USWeb/CKS on March 1, 2000. The Company filed Registration
Statement on Form S-4 on January 13, 2000, Registration No. 333-94565 which
contained unaudited pro forma financial information for the combined company.)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of earnings data:
Revenues $480,911 $333,502 $199,389 $121,536 $73,015
Cost of services 269,240 190,982 117,503 73,706 45,935
- -------------------------------------------------------------------------------------------------------------------
Gross profit 211,671 142,520 81,886 47,830 27,080
Costs and expenses:
Selling 22,773 14,028 8,706 5,448 3,815
Recruiting 10,825 11,328 6,706 3,784 2,753
General and administrative 124,555 86,303 50,434 30,197 18,568
Business combination costs 7,281 775 1,771 - -
- -------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 165,434 112,434 67,617 39,429 25,136
- -------------------------------------------------------------------------------------------------------------------
Operating income 46,237 30,086 14,269 8,401 1,944
Other income (expense) 8,148 5,700 3,474 1,403 33
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 54,385 35,786 17,743 9,804 1,977
Initial deferred income taxes 467 676 - - -
Income tax expense 23,628 14,285 7,806 3,673 90
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $30,290 $20,825 $9,937 $6,131 $1,887
- -------------------------------------------------------------------------------------------------------------------
Pro forma income data:
Net income as reported $30,290 $20,825 $9,937 $6,131 $1,887
Pro forma adjustment to provision
For income taxes (1) - - - - 667
- -------------------------------------------------------------------------------------------------------------------
Pro forma net income
(Actual in 1999, 1998, 1997 and 1996) $30,290 $20,825 $9,937 $6,131 $1,220
- -------------------------------------------------------------------------------------------------------------------
Pro forma basic earnings per share
(actual in 1999, 1998, 1997 and 1996) $.53 $.40 $.21 $.16 $.04
Pro forma diluted earnings per share
(actual in 1999, 1998, 1997 and 1996) $.47 $.36 $.20 $.15 $.04
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of
Common shares outstanding 56,641 52,244 47,580 38,073 27,756
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of
common and common equivalent
Shares outstanding 64,429 57,258 50,939 42,155 33,862
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
Cash and cash equivalents and
short-term and long-term investments $284,336 $151,385 $69,347 $67,461 $4,595
Working capital 284,817 147,902 146,112 83,701 74,878
Total assets 504,207 254,342 129,143 98,562 22,570
Long-term debt, less current portion - 529 537 23 1,135
Redeemable convertible preferred stock - - - - 5,584
Total stockholders' equity 454,655 211,621 99,477 80,818 1,721
</TABLE>
(1) Reflects federal and certain additional state income tax expense for
1995 that would have been required had the Company and its predecessors
operated as a C Corporation for all periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE DISCUSSION BELOW CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH
TERM IS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934) THAT ARE
BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT, AS WELL AS ASSUMPTIONS MADE
BY, AND INFORMATION CURRENTLY AVAILABLE TO, THE COMPANY'S MANAGEMENT. THE
COMPANY'S RESULTS, PERFORMANCE AND ACHIEVEMENTS IN 1999 AND BEYOND COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY SUCH FORWARD-LOOKING
STATEMENTS. SEE "CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE
24.
OVERVIEW
On March 1, 2000, the Company merged with USWeb/CKS. (See section
entitled, "Subsequent Event" for further discussion.) As a result of the
merger, the Company's revenue and operating expenses will increase
substantially in future periods. The discussion that follows reports on the
historical results of the Company (which is sometimes referred to as
Whittman-Hart). Prior to the consummation of the merger on March 1, 2000, the
Company filed a registration statement Form S-4 on January 27, 2000,
Registration No. 333-94565. The filing contained unaudited pro forma
information for the combined company.
The Company's revenues are generated primarily from professional fees,
which are generally billed at a contracted hourly rate and are recognized as
services are provided. For each of the last three fiscal years, at least 90%
of Whittman-Hart's revenues were generated on a time and materials basis. The
Company's services may also be provided on a fixed-bid or fee-capped basis,
in which case revenues are recognized by the percentage of completion method.
These arrangements subject the Company to the risk of cost overruns; however,
historically, such overruns have not been significant. The Company typically
bills on a weekly basis to monitor client satisfaction and manage its
outstanding accounts receivable balances. The Company's most significant cost
is project cost of services, which consists of consultant salaries and
benefits. Thus, the Company's financial performance is primarily based upon
billing margin (billable hourly rate less the consultant's hourly cost) and
personnel utilization rates (billable hours divided by paid hours).
To date, the Company has been able to maintain its billing margins by
offsetting increases in consultant salaries with increases in its hourly rates.
Because most of the Company's engagements are on a time and materials basis,
increases in its cost of services are generally passed along to the Company's
clients and, accordingly, do not have a significant impact on the Company's
financial results. In addition,
13
<PAGE>
the Company attempts to control expenses that are not passed through to its
clients. Furthermore, profitability is improved by tying significant incentive
compensation to achieving performance goals.
The Company establishes standard billing guidelines based on the type of
service offered. Actual billing rates are established on a project-by-project
basis and may vary from the standard guidelines. Over the last three years,
Whittman-Hart's average revenue per assignment hour has steadily increased. The
growth in average revenue per assignment hour reflects a higher percentage of
value-added services, such as package software implementations and
solutions-oriented, strategic consulting projects.
The Company manages its personnel utilization rates by monitoring project
requirements and timetables. The number of consultants assigned to a project
will vary according to the size, complexity, duration and demands of the
project. Project terminations, completions and scheduling delays may result in
periods in which consultants are not fully utilized. An unanticipated
termination of a project could result in a higher than expected number of
unassigned consultants or, if the Company were to terminate such consultants,
increased severance expenses. Although the number of the Company's consultants
can be adjusted to correspond to the number of active projects, Whittman-Hart
must maintain a sufficient number of senior consultants to oversee existing
client projects and assist the Company's sales force in securing new client
assignments. marchFIRST consultants are subject to employment contracts
that may be terminated upon two weeks' notice without substantial penalty or
further expense to the Company.
Historically, Whittman-Hart's revenue growth was attributable to the
addition of new clients and the growth of current client relationships at
existing and new branch locations. During 1999, the Company continued to
supplement its internal revenue growth with the acquisitions. In 2000, the
Company intends to grow its existing branch locations and expand its network
through the traditional greenfield approach supplemented by acquisitions. In
addition to Whittman-Hart's merger with USWeb/CKS, each of the branches,
originally developed by the Company, has generated annual revenue and gross
profit growth since inception.
On March 1, 2000, the Company and USWeb/CKS completed a merger. Under
the terms of the merger agreement, approximately 82,431,300 shares of
Whittman-Hart common stock were exchanged in the merger for all the
outstanding common stock of USWeb/CKS. In addition, employee options to
purchase approximately 34,010,426 shares of USWeb/CKS common stock and
warrants to purchase approximately 2,058,700 shares of USWeb/CKS common stock
were assumed by Whittman-Hart and became options or warrants to purchase
Whittman Hart common stock. These amounts reflect an exchange ratio of 0.865
of a share of Whitman Hart common stock for each share of USWeb/CKS common
stock. This transaction was accounted for as a purchase business combination
in accordance with Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations." The total consideration for the transaction was
valued at approximately $6.5 billion, which includes the value of common
stock issued in the merger, options and warrants, and other direct
acquisition costs.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, selected
statements of earnings data as a percentage of revenues and the percentage
change in each line item between comparative years:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES PERCENTAGE CHANGE
--------------------------- -------------------
1999 1998
Year Ended December 31, Compared to Compared to
1999 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA:
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 44% 67%
Cost of services 56 57 59 41 63
-- -- --
Gross profit 44 43 41 49 74
Costs and expenses:
Selling 5 4 4 62 61
Recruiting 2 3 3 (4) 69
General and administrative 26 26 26 44 71
Business combination costs 2 1 1 839 (56)
- - -
Total costs and expenses 35 34 34 47 66
-- -- --
Operating income 9 9 7 54 111
Other income (expense) 2 2 2 42 63
- - -
Income before income taxes 11 11 9 52 101
Income taxes 5 5 4 61 92
- - -
Net income 6 6 5 46 110
= = =
</TABLE>
All prior period amounts have been restated to reflect the 1999
acquisitions of the Waterfield Technology Group ("Waterfield"), BALR
Corporation ("BALR") and Four Points Digital, L.L.C. ("Four Points") using
the pooling-of-interests method of accounting (see "Business Combinations"
and Note 4 of notes to consolidated financial statements).
1999 COMPARED TO 1998
REVENUES. Revenues increased 44% to $480.9 million in 1999 from $333.5
million in 1998. The increase was attributable primarily to the addition of new
clients and the growth of current client relationships at existing and new
branch locations. Revenues from the Company's ten most significant clients grew
in 1999 by 17 %, but as a percentage of total revenues declined to 10% in 1999
as compared to 13% in 1998.
GROSS PROFIT. Gross profit consists of revenues less cost of services,
which includes consultant salaries and benefits. Gross profit in 1999 grew 49%
to $211.7 million from $142.5 million in 1998. Gross profit as a percentage of
revenues was 44% in 1999 as compared to 43% in 1998. These increases were
attributable to a change in the sales mix toward higher-end service offerings
and the Company's established branches reaching critical mass, partially offset
by lower margins in recently opened branches.
SELLING EXPENSES. Selling expenses include the salaries, benefits,
commissions, travel, entertainment and all other direct costs associated with
the Company's direct sales force. Selling expenses in 1999 increased
approximately 62% to $22.8 million from $14.0 million in 1998. The increases
were attributable to higher commissions, an increased fixed cost structure
related to newly acquired offices and
15
<PAGE>
business development initiatives. As a percentage of revenues, selling expenses
increased in 1999 to 5%, from 4% in 1998.
RECRUITING EXPENSES. Recruiting expenses consist of costs related to
hiring new personnel. These costs include the salaries, benefits, bonuses and
other direct costs of in-house recruiters, outside recruiting agency fees,
sign-on bonuses, relocation fees and advertising costs. Recruiting expenses in
1999 decreased 4% to $10.8 million from $11.3 million in 1998. The number of
employees increased 31% to approximately 4,100 at December 31, 1999, from
approximately 3,100 at December 31, 1998. Total recruiting costs per hire were
in line with the Company's historical average of $6,000 to $7,000 in both 1999
and 1998. As a percentage of revenues, recruiting expenses fell to 2% in 1999
and from 3% in 1998 due to leveraging of fixed recruiting overhead on a higher
revenue base. As of December 31, 1999, approximately 80% of the Company's total
employees were consultants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include salaries and benefits of management and support personnel, facilities
costs, training, travel, outside professional fees and all other branch and
corporate costs. General and administrative expenses in 1999 increased 44% to
$124.6 million from $86.3 million in 1998. As a percentage of revenues, however,
general and administrative expenses remained consistent at 26% in both 1999 and
1998. The increase was attributable to new and newly acquired offices,
integration costs associated with the Company's acquisitions, corporate
initiatives associated with the Company's Focus 2002 strategic plan, costs
related to new branch locations and the addition of management to support the
Company's growth strategies.
BUSINESS COMBINATION COSTS. Business combination costs were $7.3
million in 1999 and $0.8 million in 1998. As a percentage of revenue,
business combination costs accounted for 2% of revenues in 1999 and 1% in
1998. The business combination costs included legal, accounting and other
transaction-related fees and expenses. During 1999, these costs related to
the Company's acquisition of Waterfield in March 1999, POV Partners, Inc.
("POV") in May 1999, BALR in August 1999 and Four Points and Fulcrum
Solutions Ltd. ("Fulcrum") in November 1999. In 1998, the Company incurred
similar types of costs in connection with the acquisition of QCC, Inc.
("QCC") during March of 1998 and North Central Consulting ("NCC") in July of
1998.
OPERATING INCOME. Operating income increased 54% to $46.2 million in 1999
from $30.1 million in 1998. As a percentage of revenues, operating income
remained consistent at 9% in both 1999 and 1998. Increased gross margin and
lower recruiting costs were offset by higher business combination costs and
increased selling expenses, as discussed above.
OTHER INCOME (EXPENSE). Other income (expense) increased 42% to $8.1
million in 1999 from $5.7 million in 1998. This increase was primarily
attributable to the Company earning interest on investments of the net proceeds
from the Company's public offering in May 1998 and the net proceeds from the
purchase of 3,294,893 shares of the Company's common stock by Novell in November
1999 (see "Liquidity and Capital Resources").
INCOME TAXES. The Company's effective tax rate including non-deductible
business combination costs and initial deferred income taxes were 44.3% and
41.8% in 1999 and 1998. The increase in the effective tax rate relates
primarily to higher state tax rates of newly opened branch offices. The
Company's effective tax rate before non-deductible business combination costs
and initial deferred income tax expense for 1999 was 41.7%, compared to 39.2%
for 1998.
The effective tax rate for 1999 reflected non-deductible business
combination costs related to the Company's acquisitions of Waterfield, POV,
BALR, and Four Points and initial deferred income taxes related to the
acquisitions of POV and Four Points. The effective tax rate for 1998 included
non-
16
<PAGE>
deductible business combination costs related to the Company's acquisitions of
QCC and NCC, and the recording of initial deferred income tax expense related to
those acquisitions.
1998 COMPARED TO 1997
REVENUES. Revenues increased 67% to $ 333.5 million in 1998 from $199.4
million in 1997. The increase was attributable to the addition of new clients
and the growth of current client relationships at existing and new branch
locations. Revenues from the Company's ten most significant clients grew in 1998
by 34%, but as a percentage of total revenues declined to 13% in 1998 as
compared to 17% in 1997.
GROSS PROFIT. Gross profit consists of revenues less cost of services,
which includes consultant salaries and benefits. Gross profit in 1998 grew 74%
to $142.5 million from $81.9 million in 1997. Gross profit as a percentage of
revenues was 43% in 1998 as compared to 41% in 1997. These increases were
attributable to a change in the sales mix toward higher-end service offerings
and the Company's established branches reaching critical mass, partially offset
by lower margins in recently opened branches.
SELLING EXPENSES. Selling expenses include the salaries, benefits,
commissions, travel, entertainment and all other direct costs associated with
the Company's direct sales force. Selling expenses in 1998 increased
approximately 61% to $14.0 million from $8.7 million in 1997. This increase
was attributable to higher commissions, an increased fixed cost structure
related to newly acquired offices and business development initiatives, and
other costs associated with the increase in revenues. As a percentage of
revenues, however, selling expenses in 1998 were 4%, consistent with the
prior year.
RECRUITING EXPENSES. Recruiting expenses consist of costs related to
hiring new personnel. These costs include the salaries, benefits, bonuses and
other direct costs of in-house recruiters, outside recruiting agency fees,
sign-on bonuses, relocation fees and advertising costs. Recruiting expenses
in 1998 increased 69% to $11.3 million from $6.7 million in 1997. The number
of employees increased 55% to approximately 3,100 at December 31, 1998, from
2,000 at December 31, 1997. Total recruiting costs per hire were in line with
the historical averages of approximately $6,000 to $7,000 in 1998 and 1997.
As a percentage of revenues, recruiting expenses remained consistent at 3% in
1998 and 1997. As of December 31, 1998, approximately 78% of the Company's
total employees were consultants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include salaries and benefits of management and support personnel, facilities
costs, training, travel, outside professional fees and all other branch and
corporate costs. General and administrative expenses in 1998 increased 71% to
$86.3 million from $50.4 million in 1997. As a percentage of revenues, however
general and administrative expenses remained consistent at 26% in 1998 in 1997.
This increase was attributable to new and newly acquired offices, integration
costs associated with the Company's acquisitions, corporate initiatives
associated with the Company's Focus 2002 strategic plan, costs related to new
branch locations and the addition of management to support the Company's growth
strategies.
BUSINESS COMBINATION COSTS. Business combination costs were $0.8 million
in 1998 and $1.8 million in 1997. As a percentage of revenue, business
combination costs accounted for 1% of revenues in 1998 and 1997. The business
combination costs included legal, accounting and other transaction-related fees
and expenses. During 1998, these costs related to the Company's acquisitions of
QCC in March 1998 and NCC in July 1998. In 1997, the Company incurred similar
costs in connection with acquisitions of Axis Consulting International, Inc.,
Expert Buying Systems, Inc. and World Consulting Limited.
17
<PAGE>
OPERATING INCOME. Operating income increased 111% to $30.1 million in 1998
from $14.3 million in 1997. As a percentage of revenues, operating income
increased to 9% in 1998 from 7% in 1997 due to the increase in gross profit
margin and lower business combination costs, as discussed above.
OTHER INCOME (EXPENSE). Other income (expense) increased 63% to $5.7
million in 1998 from $3.5 million in 1997. This increase was primarily
attributable to the Company earning interest on investments of the net proceeds
from the Company's public offering in May 1998.
INCOME TAXES. The Company's effective tax rate was 41.8% and 44.0% in 1998
and 1997, respectively. The effective tax rate in 1998 and 1997 includes
non-deductible business combination costs and in 1998 also includes the
recording of initial deferred income tax expense related to the Company's
acquisitions of QCC and NCC. The Company's effective tax rate before
non-deductible business combination costs and initial deferred income tax
expense for 1998 was 39.2%, compared to 41.1% for 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had approximately $284.3 million of
cash, cash equivalents, and short-term and long-term investments compared to
$151.4 million at December 31, 1998. Long-term investments at December 31,
1999 included $15.5 million in non-marketable equity securities. The
Company's primary source of liquidity has been cash provided through equity
offerings and cash from operations.
Subsequent to the merger, as of March 1, 2000, the combined company had
approximately $417 million of cash and cash equivalents, and investments,
excluding equity securities.
marchFIRST has a loan agreement for up to $10.0 million of unsecured
credit with interest, at the Company's option, at LIBOR plus 1.5% or the
lender's prime rate. There were no borrowings under this loan agreement as of
December 31, 1999. The Company's loan agreement expires on April 30, 2000. In
connection with the Company's merger with USWeb/CKS, the Company assumed a
revolving credit line with the maximum borrowing capacity of $30 million of
which approximately $11 million was outstanding at December 31, 1999. The credit
agreement is scheduled to expire March 31, 2000. marchFIRST intends to
further extend this credit agreement.
On May 8, 1998, the Company completed a public offering of its common
stock, resulting in net proceeds to the Company of $69.6 million.
On November 12, 1999, Novell, Inc. purchased 3,294,893 shares of the
Company's common stock for a purchase price of $100 million, and the Company
agreed to issue Novell a warrant to purchase 400,000 shares of the Company's
common stock, with an exercise price of $35.875 per share (the "Warrant"). In
addition, the Company and Novell entered into a global alliance agreement. These
transactions are intended to accelerate the deployment of the Novell Services
Directory Services (NDS) in enterprise and e-Business solutions for mid-sized
businesses. Under the global alliance agreement, the Company has agreed to
establish a solutions deployment center and to train at least 600 consultants in
NDS and related Novell solutions. The Warrant will become exercisable only if
the Company fails to meet certain milestones under the global alliance
agreement.
Operating activities provided net cash flows of $35.7 million, $23.5
million and $7.8 million in 1999, 1998 and 1997, respectively, primarily as the
result of increases in net income, accrued compensation, and income taxes
payable, which were partially offset by increases in accounts receivable and
other current assets.
18
<PAGE>
Capital expenditures of $38.5 million, $22.0 million and $11.9 million in
1999, 1998 and 1997, respectively, consisted primarily of real estate, computer
equipment and software and office furniture and equipment to support the growth
and expansion of the Company. During late 1999, the Company completed the
installation of its information systems. The information systems required
capital expenditures of approximately $16 million and $5.5 million during 1999
and 1998, respectively. In addition, the Company's 1999 capital spending
included $14.3 million of capital spending relating to the ongoing construction
of facilities to house the Company's education center, Chicago branch office,
and corporate headquarters.
marchFIRST expects to make similar types of expenditures in 2000 and
future years relating to the expansion of offices and the improvement of
information systems. Also expected are expenditures of approximately $50.0
million in 2000 related to the expansion of marchFIRST's new Chicago facility,
which will house marchFIRST's education center, the Chicago branch office, and
its corporate headquarters. Total capital expenditures for marchFIRST during
2000 are expected to approximate $100.0 million.
On December 22, 1999, the Company signed an operating lease agreement
with First Chicago Leasing Corporation as lessor. The lessor will construct a
parking facility for the Company's education center, the Chicago branch
office, and its corporate headquarters for an estimated $23.0 million. The
lessor will lease the facility to the Company upon completion of the
structure in 2001 at which time the Company will begin making lease payments.
The lease term is five years, bearing an interest rate of the LIBOR rate plus
an applicable margin. The Company's lease obligation is dependent upon the
ultimate cost of the facility. The lease contains certain restrictive
covenants related to change in control and also various financial covenants.
In addition, the Company has the option to renew the lease at the end of the
term or purchase the lessor's interest in the property.
During 1999, 1998 and 1997, cash was provided by the exercise of stock
options and the purchase of common stock through the Company's employee stock
purchase plan, which totaled $37.2 million, $11.3 million and $3.2 million,
respectively.
BUSINESS COMBINATIONS
During March 1998, the Company acquired all the outstanding capital stock
of QCC, Inc. ("QCC") for 600,000 shares of the Company's common stock.
Headquartered in the Boston metropolitan area, QCC's approximately 75
professionals provided the following services: package software evaluation;
business process reengineering; data warehousing; implementation of software
packages developed by SSA Section, Oracle Section and JDEdwards Section;
application development for AS/400 and client server applications; and Year 2000
compliance services. This business combination has been accounted for as a
pooling-of-interests combination. The stockholders' equity and operations of QCC
were not material in relation to those of the Company. As such, the Company has
recorded the combination without restating prior periods' consolidated financial
statements to reflect the pooling-of-interests combination.
During July 1998, the Company acquired North Central Consulting, Inc.
("NCC"), a Minneapolis-based IT services firm. The Company issued 638,508 common
shares in exchange for all of the outstanding capital stock of NCC. This
business combination was accounted for as a pooling-of-interests combination
and, accordingly, the Company's historical consolidated financial statements
have been restated to include the financial position and results of operation of
NCC for all periods presented. Headquartered in Minnetonka, Minnesota, with a
satellite office in Milwaukee, NCC's approximately 120 professionals specialized
in providing ERP software implementations, custom application development and
internet-enabled solutions to middle-market manufacturing, distribution and
financial services companies, as well as some divisions and departments of
Fortune 500 companies. The combination of
19
<PAGE>
Whittman-Hart's recently opened Minneapolis branch with approximately 40
employees and NCC's four-year-old office accelerates Whittman-Hart's ability to
provide a full suite of IT services to its target customer base.
On March 9, 1999, the Company acquired the Waterfield Technology Group
("Waterfield") a Boston-based IT services firm and strategic business partner of
Kurt Salmon and Associates, a global consulting firm, for 576,074 shares of the
Company's common stock. Headquarted in Lexington, Massachusetts, with a branch
office in Parsippany, New Jersey, Waterfield's approximately 90 employees
specialize in client server and internet-enabled application development. They
have extensive experience with Java and Java-based tools, Powerbuilder and the
Microsoft suite of products. This business combination was accounted for as a
pooling-of-interests combination and, accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts and
results of operations of Waterfield for all periods presented.
On May 20, 1999, the Company issued 474,650 of its common shares in
exchange for all the outstanding capital stock of POV Partners, Inc. ("POV") an
Ohio-based IT services firm. Headquartered in Columbus, Ohio, with offices in
Phoenix, Arizona, and Charlotte, North Carolina, POV's approximately 90
employees provide a broad range of business strategy and IT services including
Internet-enabled application development and electronic commerce solutions. This
business combination has been accounted for as a pooling-of-interests
combination. The stockholders' equity and operations of POV were not material in
relation to those of the Company. As such, the Company has recorded the
combination without restating prior periods' consolidated financial statements.
On August 27, 1999, the Company issued in exchange for all of the
outstanding stock of the BALR Corporation ("BALR"), an Oakbrook, Illinois-based
IT services firm, 1,145,796 shares of the Company's common stock. BALR has
approximately 100 employees, who design systems and provide technical consulting
services. BALR's services include e-Business and Web-enabled systems
development, relational database management and client-server application
development. This business combination was accounted for as a
pooling-of-interests combination and, accordingly, the Company's historical
consolidated financial statements were restated to include the accounts and
results of operations of BALR for all periods presented.
On November 12, 1999, the Company issued 1,098,221 shares of its common
stock in exchange for all of the outstanding stock of Four Points Digital,
L.L.C. ("Four Points"), a Chicago, Illinois-based IT services firm with an
office in San Francisco, California. The approximately 80 Four Points
professionals specialize in digital marketing including interactive advertising
using rich media, online site development and online media buying. This business
combination was accounted for as a pooling-of-interests combination and,
accordingly, the Company's historical consolidated financial statements have
been restated to include the accounts and results of operations of Four Points
for all periods presented.
On November 27, 1999, the Company acquired Fulcrum Solutions, Ltd.
("Fulcrum"), a London, England-based IT services firm, further expanding its
European presence. The Company acquired all of the outstanding common stock and
stock options of Fulcrum in exchange for $2,193,857 in cash and 360,869 shares
of the Company's common stock. In addition to its London headquarters, Fulcrum
operated offices in Manchester, England; Edinburgh, Scotland; and New York City.
Its approximately 180 professionals design systems and provide technical
consulting services. The firm specializes in Oracle-based e-Business solutions
including customer relationship management; enterprise-wide Internet transaction
systems in sales and marketing, manufacturing, financial and human resources;
business intelligence, and data migration and integration. The acquisition has
been accounted for by the purchase method of accounting, and accordingly, the
results of operations of Fulcrum have been included in the Company's
consolidated financial statements from November 27, 1999.
20
<PAGE>
The Company anticipates its current cash resources, together with existing
sources of liquidity and funds generated from operations, will provide adequate
cash to fund the Company's anticipated cash needs at least through the next 12
months as well as its long term liquidity needs.
YEAR 2000
The Company had identified three issues related to Year 2000 compliance;
first was the effect on internal information systems, second were issues related
to vendors performing services for the Company, and finally, were issues related
to consulting activities performed by the Company.
The Company replaced its existing internal information systems in the
fourth quarter of 1999. The system is currently operating without any
significant interruptions and the Company is not aware of any Year 2000 related
problems associated with the system. The cost of this implementation did not
have a material adverse impact on the Company's results of operations or
financial condition.
The Company has relationships with several vendors that provide
administration of compensation and related employee benefits and other vendors
that perform banking and treasury services. The Company completed an evaluation
of the state of readiness of these vendors and it believes that the vendors are
currently Year 2000 compliant. Also, the Company is not aware of any significant
issues relating to the Year 2000 compliance of its vendors. The cost to the
Company in the event of non-compliance with Year 2000 issues by any of these
third parties is not expected to have material impact on the Company's result of
operations or its financial condition.
To date, the Company has not experienced any material adverse effect on
the demand for its services as a result of uncertainty relating to, or
diminished functionality of systems resulting from, the passage of the Year
2000. The Company provides solutions for the IT systems that are critical to
companies' operations. Business interruptions, loss or corruption of data or
other major problems resulting from the failure of a client's IT system to
process Year 2000 data correctly could have significant adverse consequences to
that client. The Company cannot currently predict whether or to what extent
there will be any legal claims brought against the Company or whether there will
be any other material adverse effect on the Company's business, financial
condition or the results of operations, as a result of any such adverse
consequences to its clients.
SUBSEQUENT EVENT
On March 1, 2000, the Company and USWeb/CKS completed a merger. Under
the terms of the merger agreement, approximately 82,431,300 shares of
Whittman-Hart common stock were exchanged in the merger for all the
outstanding common stock of USWeb/CKS. In addition, employee options to
purchase approximately 34,010,426 shares of USWeb/CKS common stock and
warrants to purchase approximately 2,058,700 shares of USWeb/CKS common stock
were assumed by Whittman-Hart and became options or warrants to purchase
Whittman Hart common stock. These amounts reflect an exchange ratio of 0.865
of a share of Whittman-Hart common stock for each share of USWeb/CKS common
stock. This transaction was accounted for as a purchase business combination
in accordance with Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations." The total consideration for the transaction was
valued at approximately $6.5 billion, which includes the value of common
stock issued in the merger, options and warrants, and other direct
acquisition costs.
21
<PAGE>
USWeb/CKS was a leading Internet professional services firm which provided
a comprehensive range of business strategy consulting services, Internet
technology solutions and services, such as advanced marketing communications
programs. USWeb/CKS professionals combined their expertise with
industry-specific knowledge to help clients build their businesses in innovative
ways.
Beginning in the first quarter of 2000, marchFIRST's revenue and
related operating costs will increase substantially as a result of the
merger. The increase will include costs related to the integration of
USWeb/CKS and Whittman-Hart. In addition, due to the merger, marchFIRST
anticipates significant expenditures related to the creation, launch and
promotion of its new brand in 2000. Also, the Company intends to modify the
financial statement presentation of the consolidated statement of earnings as
follows:
COST OF SERVICES. marchFIRST will conform its accounting method to
Whittman-Hart's previous practice. Cost of services will continue to include
salaries, benefits and other incentives for employees engaged in delivering
professional services.
SALES AND MARKETING. Previously reported selling expenses, which included
salaries, benefits, commissions, travel and entertainment will be combined with
advertising, branding, and other costs and will be recorded as sales and
marketing expenses.
RECRUITING EXPENSES. Expenses related to the cost of hiring new personnel
will be recorded as general and administrative expenses.
DEPRECIATION AND AMORTIZATION OF OPERATING ASSETS. Depreciation and
amortization of operating assets such as furniture, computers, and leaseholds
will continue to be recorded as general and administrative expenses.
STOCK COMPENSATION, AMORTIZATION OF INTANGIBLE ASSETS. Stock
compensation and amortization of intangible assets will appear as
separate expense lines below general and administrative expenses.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards "SFAS" No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
is effective for financial statements for fiscal years ending December 31, 2000,
but may be adopted in earlier periods. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. The
Company does not believe that SFAS No. 133 will have a significant impact on its
financial statements.
22
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly operating
information of Whittman-Hart for each of the eight quarters ending with the
quarter ended December 31, 1999. This data has been prepared on the same
basis as the audited financial statements, and in management's opinion,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the information for the periods
presented. Results for any previous fiscal quarter are not necessarily
indicative of results for the full year or for any future quarter.
<TABLE>
<CAPTION>
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
(in thousands) 1998 1998 1998 1998 1999 1999 1999 1999
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $66,507 $77,840 $89,582 $99,574 $108,674 $116,016 $123,211 $133,010
Cost of services 39,161 45,117 50,596 56,109 61,560 65,140 68,563 73,976
------- ------- ------- ------- -------- ------- ------- -------
Gross profit 27,346 32,723 38,986 43,465 47,114 50,876 54,648 59,034
Selling 2,469 3,222 4,017 4,320 4,468 5,616 6,238 6,451
Recruiting 2,280 2,959 3,389 2,701 2,633 2,667 2,688 2,837
General and administrative 17,289 20,274 22,814 25,925 28,300 30,003 31,457 34,795
Business combination costs 383 - 392 - 2,653 1,635 406 2,588
------- ------- ------- ------- -------- ------- ------- -------
Operating income 4,925 6,268 8,374 10,519 9,060 10,955 13,859 12,363
Other income 882 1410 1,644 1,764 1,731 1,645 1,881 2,891
Income before taxes 5,807 7,678 10,018 12,283 10,791 12,600 15,740 15,254
Income tax expense 2,694 3,009 4,227 5,030 4,776 5,657 6,763 6,898
------- ------- ------- ------- -------- ------- ------- ------
Net income $3,113 $4,669 $5,791 $7,253 $6,015 $6,943 $ 8,977 $8,356
====== ====== ====== ====== ====== ====== ======= ======
Total revenues, as
-----------------------------------------------------------------------------------------
Previously reported (1) $61,575 $71,833 $82,105 $92,100 $104,092 $111,186 $121,248 $133,010
Adjustments (2) 4,932 6,007 7,477 7,474 4,582 4,830 1,963 -
------- ------- ------- ------- -------- ------- ------- -------
Total revenues 66,507 77,840 89,582 99,574 108,674 116,016 123,211 133,010
Gross Profit, as
Previously reported (1) 25,187 30,063 35,517 40,016 45,015 48,807 53,592 59,034
Adjustments (2) 2,159 2,660 3,469 3,449 2,099 2,069 1,056 -
------- ------- ------- ------- -------- ------- ------- -------
Total gross profit 27,346 32,723 38,986 43,465 47,114 50,876 54,648 59,034
Operating income, as
Previously reported (1) 4,868 5,877 7,575 9,721 8,612 10,589 13,700 12,363
Adjustments (2) 57 391 799 798 448 366 159 -
------- ------- ------- ------- -------- ------- ------- -------
Total operating income 4,925 6,268 8,374 10,519 9,060 10,955 13,859 12,363
Net income, as
Previously reported (1) 2,987 4,245 5,095 6,487 5,560 6,560 8,804 8,356
Adjustments (2) 126 424 696 766 455 383 173 -
------- ------- ------- ------- -------- ------- ------- -------
Total net income $3,113 $4,669 $5,791 $7,253 $6,015 $6,943 $8,977 $ 8,356
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
(1) The quarter ended December 31, 1999 is reported in conjunction with
this Form 10-K.
(2) Adjustments to the quarters relating to 1998 reflect the effect of
acquisitions accounted for as a pooling-of-interests of the amounts previously
reported in the Company's quarterly results on Form 10-K. Adjustments to the
quarters of 1999 reflect the effect of acquisitions accounted for as a
pooling-of-interests of the amounts previously in the Company's reports on Form
10-Q. See note 4 of notes to consolidated financial statements for a more
detailed discussion of these transactions.
Variations in the Company's revenues and operating results
occur from time to time as a result of a number of factors, such as the
significance of client engagements commenced and completed during a
quarter, the number of business days in a quarter, timing of branch and
service line expansion activities, the timing of corporate
expenditures, and employee hiring and utilization rates.
23
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements that reflect
marchFIRST's current expectations about its future operating results,
performance, and opportunities that involve substantial risks and uncertainties.
When used in this Form 10-K, the words "anticipate," "believe," "estimate,"
"plan," "intend," and "expect," and similar expressions, as they relate to
marchFIRST or its management, are intended to identify such forward-looking
statements. These forward looking statements are based on information currently
available to marchFIRST and are subject to a number of risks, uncertainties, and
other factors that could cause marchFIRST's actual results, performance,
prospects, and opportunities to differ materially from those expressed in, or
implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, integration and
other risks related to the merger with USWeb/CKS, difficulties in attracting and
retaining highly skilled employees, marchFIRST's ability to manage rapid growth
and expansion into new geographic areas and service lines, marchFIRST's ability
to manage the risk associated with client projects, and risks related to
possible acquisitions and the other factors discussed under "Risk Factors."
Except as required by the Federal Securities law, the Company does not undertake
any obligation to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this Form 10-K
or for any other reason.
RISK FACTORS
You should consider the following risks in deciding whether to invest in
our Company. These matters should be considered along with the other information
included in this Annual Report on Form 10-K. We have separated the risks into
two groups: risks relating to our recently completed merger with USWeb/CKS and
risks relating to our Company as it now exists following the completion of the
merger.
In accordance with "plain English" guidelines provided by the Securities
and Exchange Commission, the risk factors have been written in the first person.
RISKS RELATING TO THE MERGER
INTEGRATING WHITTMAN-HART AND USWEB/CKS MAY BE DIFFICULT.
We need to efficiently and promptly integrate operations of Whittman-Hart
and USWeb/CKS to achieve the anticipated benefits of the merger. Failure to
successfully integrate the businesses of the two companies could have a negative
effect on us and prevent us from achieving the anticipated benefits of the
merger.
Certain key elements of the operations of the two companies need to be
integrated, including:
- management and other professional personnel;
- technical and creative service offerings;
- sales and marketing efforts; and
- financial, accounting and other operational controls,
procedures, information systems and policies.
The integration process will be further complicated by the need to
integrate widely dispersed operations, multiple executive offices and different
corporate cultures. This integration may not be
24
<PAGE>
accomplished in an efficient or effective manner, if at all. The integration
process will require the dedication of management and other personnel, which may
distract their attention from the conduct of day-to-day business activities. The
integration of Whittman-Hart and USWeb/CKS will be made more difficult by the
large number of other businesses recently acquired by the two companies and the
continuing challenges of integrating some of these businesses. Finally, we have
not attempted an acquisition with the scope or magnitude of the planned merger.
Expenses associated with ongoing integration of the companies are likely to have
a negative effect on our operating results at least through December 31, 2000.
WE MUST RETAIN KEY PERSONNEL AND THEY MUST WORK TOGETHER EFFECTIVELY.
Our success will depend upon the retention of senior executives and other
key employees who are critical to the continued advancement, development and
support of our services, ongoing sales and marketing efforts. The loss of the
services of any key personnel or of any significant group of employees could
negatively affect our business and prospects. As often occurs with mergers of
technology/services companies, our competitors may intensify their efforts to
recruit key employees as we integrate the two companies. Employee uncertainty
regarding the effects of the merger could also cause increased turnover.
Our success largely depends on the ability of our executive officers and
other members of senior management to operate effectively in their roles in the
newly combined company. If our management does not succeed in their roles or we
are not able to efficiently allocate management responsibilities and cause our
officers and senior managers to operate effectively as a group, our business
could be negatively affected.
WE COULD LOSE CLIENTS AS A RESULT OF UNCERTAINTY REGARDING THE MERGER.
Uncertainty regarding our ability to effectively integrate the operations
of the two companies without significant reduction in quality of service could
lead some customers to select other vendors. The loss of business from
significant clients could have a negative effect on our business.
WE MUST BUILD RECOGNITION AND CUSTOMER ACCEPTANCE OF NEW BRANDS.
Whittman-Hart and USWeb/CKS each invested significant efforts in building
brand recognition and customer acceptance of our brand names. We believe that
transferring market acceptance for the Whittman-Hart and USWeb/CKS brands to our
combined and new brands will be an important aspect of our efforts to retain and
attract clients. Promoting and maintaining these brands will depend largely on
the success of our marketing efforts and our ability to provide high quality,
reliable and cost-effective services. These efforts will require significant
expenses, which will affect our results of operations. In addition, although we
intend to centralize our marketing efforts, a significant part of our client
services will continue to be provided through individual consulting offices.
Client dissatisfaction with the performance of a single office could diminish
the value of the combined company brands.
RISKS RELATING TO OUR COMPANY
OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY LEAD TO REDUCED PRICES FOR
OUR STOCK.
Our operating results have fluctuated in the past and our operating
results are likely to fluctuate in the future as a result of a variety of
factors, many of which will be outside of our control. Some of these factors
include:
25
<PAGE>
- timing of the completion, material reduction or cancellation
of major projects or the loss of a major client;
- the amount and timing of the receipt of new business;
- timing of hiring or loss of personnel;
- the cost and timing of the opening or closing of an office;
- the amount and the relative mix of high-margin creative or
strategy consulting projects as compared to lower margin
projects;
- capital expenditures and other costs relating to the expansion
of operations;
- the level of demand for Intranet, Extranet and Web site
development;
- the productivity of consultants;
- the ability to maintain adequate staffing to service clients
effectively;
- the cost of advertising and related media;
- the amount and timing of expenditures by clients for
professional services;
- the introduction of new products or services by competitors;
- pricing changes in the industry;
- the relative mix of lower cost full-time employees versus
higher cost independent contractors;
- technical difficulties with respect to the use of the
Internet;
- economic conditions specific to Internet technology usage;
- government regulation and legal developments regarding the use
of the Internet; and
- general economic conditions.
We may also experience seasonality in our business, resulting in
diminished revenues as a consequence of decreased demand for professional
services during summer and year-end vacation and holiday periods. Due to all of
these factors, our operating results in any given quarter may fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock would likely be significantly and negatively affected
and litigation may ensue.
The historical financial data of the two companies is of limited value in
planning future operating expenses. Accordingly, our expense levels will be
based in part on our expectations concerning future revenues and will be fixed
to a large extent. We will be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenues. Accordingly, a significant
shortfall in demand for services could have an immediate and significant
negative effect on our business and results of operations.
26
<PAGE>
OUR STOCK PRICE IS VOLATILE AND COULD DECLINE IN VALUE.
The stock market, which has recently been at or near historic highs, has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies and
that often have been unrelated to the operating performance of those companies.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. This litigation could result in substantial costs and a
diversion of management's attention and resources, which would have a negative
effect on our business, financial condition and results of operations.
INTENSE COMPETITION FROM OTHER CAPITAL PROVIDERS TO ACQUIRE INTERESTS IN
BUSINESS-TO-BUSINESS E-COMMERCE COMPANIES COULD RESULT IN LOWER RETURNS OR
LOSSES ON INVESTMENTS.
Bluevector LLC, our venture capital fund, faces intense competition from
traditional venture capital firms, corporate strategic investors and other
capital providers to develop and acquire interests in e-commerce spin-off
businesses. Corporate strategic investors include publicly-held CMGI, Internet
Capital Group and Safeguard Scientifics, as well as Idealab!, and other private
companies. In addition, other professional services firms have recently
announced their intention to provide capital and services to e-commerce
businesses. Many of our competitors have greater financial and management
resources, brand name recognition and industry contacts than we do. This intense
competition, and the impact it has on the valuation of e-commerce spin-off
businesses, could limit our opportunities to invest in such businesses or force
us to pay higher prices for such investments, which would result in lower
returns or losses on investments.
TO SUCCEED, WE MUST RECRUIT AND RETAIN SKILLED PROFESSIONALS, WHO ARE IN
SHORT SUPPLY.
Our business of delivering Internet professional services is labor
intensive. Accordingly, our success depends in large part on our ability to
identify, hire, train and retain consulting professionals who can provide the
Internet strategy, technology, and marketing and creative skills required by
clients. The inability to attract and retain the necessary technical, marketing
and managerial personnel would have a negative effect on our business. There is
currently a shortage of this type of personnel, and this shortage is likely to
continue for the foreseeable future. We will encounter intense competition for
qualified personnel from other companies, and may not be able to identify, hire,
train or retain other highly qualified technical, marketing and managerial
personnel in the future.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MANAGE GROWTH.
We have experienced recent rapid growth and are subject to the risks
inherent in the expansion and growth of a business enterprise. This significant
growth, if sustained, will continue to place a substantial strain on our
operational and administrative resources and to increase the level of
responsibility for our management personnel. To manage our growth effectively,
we will need to further develop our operating, MIS, accounting and financial
systems and to expand, train and manage our employee base. The management skills
and systems we currently have in place may not be adequate if we continue to
grow as planned.
27
<PAGE>
OUR INTERNATIONAL OPERATIONS ARE DIFFICULT TO MANAGE.
We have 27 offices outside the United States. If revenues from
international consulting offices are not adequate to offset the expenses of
establishing and maintaining international operations and of localizing our
marketing programs, our business and results of operations could be negatively
affected. In addition to the uncertainty as to our ability to generate revenues
from foreign operations and expand our international presence, there are certain
risks inherent in doing business on an international level, including any of the
following factors which could negatively affect our international operations:
- unexpected changes in regulatory requirements, export and
import restrictions, tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- potentially adverse differences in business customs, practices
and norms;
- longer payment cycles;
- problems in collecting accounts receivable;
- political instability;
- fluctuations in currency exchange rates;
- software piracy;
- seasonal reductions in business activity; and
- potentially adverse tax consequences.
THE MARKET IN WHICH WE COMPETE IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS
TO ENTRY.
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. We
expect competition to intensify and increase in the future. Our competitors can
be divided into several groups:
- large information technology consulting service providers such
as Andersen Consulting, Cambridge Technology Partners and
Electronic Data Systems Corporation;
- the consulting divisions of computer hardware vendors such as
International Business Machines Corporation, Compaq Computer
Corp. and Hewlett-Packard Company;
- Internet integrators and Web presence providers such as
Agency.com, iXL Enterprises, Inc., Organic Online, Inc.,
Proxicom Inc., Sapient Corporation, Scient Corporation and
Viant Corporation; and
- advertising and media agencies such as Ogilvy & Mather, Young
& Rubicam, and Foote, Cone & Belding.
Many of our current and potential competitors have longer operating
histories, larger installed customer bases, longer relationships with clients
and significantly greater financial, technical, marketing and public relations
resources than we do and could decide at any time to increase their resource
commitments to our target markets. In addition, the market for Intranet,
Extranet and Web site
28
<PAGE>
development is relatively new and subject to continuing definition, and, as a
result, may better position our competitors to compete in this market as it
matures. As a strategic response to changes in the competitive environment, we
may from time to time make pricing, service, technology or marketing decisions
or business or technology acquisitions that could have a negative effect on our
business and results of operations.
In addition, our ability to maintain existing client relationships and
generate new clients will depend to a significant degree on the quality of our
services and our reputation among clients and potential clients, as compared
with our competitors. To the extent we lose clients to our competitors because
of dissatisfaction with our services or our reputation is negatively affected
for any other reason, our business could be negatively affected.
There are relatively low barriers to entry into our business. Because
professional services firms like us rely on the skill of their personnel and the
quality of their client service, they typically have no patented technology that
would preclude or inhibit competitors from entering their markets. We are likely
to face additional competition from new entrants into the market in the future.
Existing or future competitors may develop or offer services that provide
significant performance, price, creative or other advantages over those offered
by us, which could have a negative effect on our business and prospects.
WE RELY ON STRATEGIC RELATIONSHIPS THAT COULD BE TERMINATED EASILY.
We have a number of strategic relationships with leading hardware and
software companies, including 3Com Corporation, J.D. Edwards & Company,
Microsoft Corporation, Novell, Inc., and Siebel Systems, Inc. The loss of any
one of these strategic relationships would deprive us of the opportunity to gain
early access to leading-edge technology, cooperatively market products with the
vendor, cross-sell additional services and gain enhanced access to vendor
training and support. Maintenance of our strategic relationships is based
primarily on an ongoing mutual business opportunity and a good overall working
relationship. The legal contracts associated with these relationships would not
be sufficient to force the strategic relationship to continue effectively if the
strategic partner wanted to terminate the relationship. In the event that any
strategic relationship is terminated, our business may be negatively affected.
THE INTERNET ECONOMY AND THE MARKET FOR E-COMMERCE SOLUTIONS IS STILL
DEVELOPING.
We expect to derive a substantial portion of our revenues from services
that depend upon the adoption of Internet solutions and the continued
development of the World Wide Web, the Internet and e-commerce. The Internet has
experienced, and is expected to continue to experience, significant growth in
the number of users and volume of traffic. The Internet infrastructure may not
continue to be able to support the demands placed on it by this continued
growth. In addition, critical issues concerning the use of Internet and
e-commerce solutions, including security, reliability, cost, ease of deployment
and administration and quality of service, remain unresolved and may affect the
acceptance of these technologies to operate a business, expand product
marketing, improve corporate communications and increase business efficiencies.
The adoption of Internet solutions for these purposes can be capital intensive
and generally requires the acceptance of a new way of conducting business and
exchanging information. If critical issues concerning the ability of Internet
solutions to improve business positioning and processes are not resolved or if
the necessary infrastructure is not developed, our business and prospects will
be negatively affected.
Even if these issues are resolved, businesses may not elect to outsource
the design, development and maintenance of their Web sites to Internet
professional services firms. If independent providers of Internet professional
services prove to be unreliable, ineffective or too expensive, or if software
29
<PAGE>
companies develop tools that are sufficiently user-friendly and cost-effective,
enterprises may choose to design, develop or maintain all or part of their
Intranets, Extranets or Web sites themselves. If the market for such services
does not continue to develop or develops more slowly than expected, or if our
services do not achieve market acceptance, our business will be negatively
affected.
THE INFRINGEMENT OR MISUSE OF INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR
BUSINESS.
We regard our intellectual property rights, such as copyrights,
trademarks, trade secrets, practices and tools, as important to our success. To
protect our intellectual property rights, we rely on a combination of trademark
and copyright law, trade secret protection and confidentiality agreements and
other contractual arrangements with our employees, affiliates, clients,
strategic partners, acquisition targets and others. Effective trademark,
copyright and trade secret protection may not be available in every country in
which we intend to offer our services. The steps we have taken to protect our
intellectual property rights may not be adequate, third parties may infringe or
misappropriate our intellectual property rights and we may not be able to detect
unauthorized use and take appropriate steps to enforce our rights. In addition,
other parties may assert infringement claims against us. These claims,
regardless of merit, could result in the expenditure of significant financial
and managerial resources. Further, an increasing number of patents are being
issued to third parties regarding Internet business processes. Future patents
may limit our ability to use processes covered by such patents or expose us to
claims of patent infringement or otherwise require us to seek to obtain related
licenses. These licenses may not be available on acceptable terms. Our failure
to obtain these licenses on acceptable terms could have a negative effect on our
business.
IF WE DO NOT PERFORM TO OUR CLIENTS' EXPECTATIONS, WE FACE POTENTIAL
LIABILITY.
Many of our consulting engagements involve the development, implementation
and maintenance of applications that are critical to the operations of our
clients' businesses. Our failure or inability to meet a client's expectations in
the performance of its services could injure our business reputation or result
in a claim for substantial damages against us, regardless of our responsibility
for the failure. In addition, we possess technologies and content that may
include confidential or proprietary client information. Although we have
implemented policies to prevent this client information from being disclosed to
unauthorized parties or used inappropriately, any unauthorized disclosure or use
of this information could result in a claim for substantial damages. We have
attempted to contractually limit our damages arising from negligent acts,
errors, mistakes or omissions in rendering professional services. However, these
contractual protections may not be enforceable or may not otherwise protect us
from liability for damages. Although we maintain general liability insurance
coverage, including coverage for errors and omissions, this coverage may not
continue to be available on reasonable terms or may not be available in amounts
sufficient to cover one or more large claims, or the insurer may disclaim
coverage as to any future claim. The successful assertion of one or more large
claims against us that are not covered by insurance or result in changes to any
of our insurance policies, including premium or deductible increases or
coinsurance requirements, could negatively affect our business and financial
condition.
OUR ORGANIZATIONAL DOCUMENTS AND CURRENT DELAWARE LAW MAY DETER
POTENTIALLY BENEFICIAL TAKEOVER ATTEMPTS.
Our certificate of incorporation and by-laws and the Delaware General
Corporation Law include provisions that may be deemed to have anti-takeover
effects and may delay, deter or prevent a takeover attempt that stockholders
might consider in their best interests. These include by-law provisions under
which only the Chairman of the Board or the President may call meetings of
stockholders and certain advance notice procedures for nominating candidates for
election to the board of directors. Our directors are divided into three classes
and are elected to serve staggered three-year terms. Our board of directors
30
<PAGE>
is empowered to issue up to 3,000,000 shares of preferred stock and to determine
the price, rights, preferences and privileges of these shares, without any
further stockholder action. The existence of this "blank-check" preferred stock
could render more difficult or discourage an attempt to obtain control of our
company by means of a tender offer, merger, proxy contest or otherwise. In
addition, this "blank-check" preferred stock, and any issuance of this stock,
may significantly decrease the market price of our common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At December 31, 1999, the Company maintained investments in marketable
securities. The securities are classified as available for sale on the
consolidated balance sheet at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity, net of applicable
deferred income taxes. As of December 31, 1999, the fair value of the Company's
marketable securities portfolio was $121.1 million, all of which was invested in
debt securities.
As of December 31, 1999, the Company operated two offices in London,
England, an office in Manchester, England, and an office in Edinburg, Scotland,
which exposes the Company to market risk associated with foreign currency
exchange rate fluctuations; however, such risk is immaterial at this time to the
Company's consolidated financial statements.
Subsequent to the merger with USWeb/CKS, on March 1, 2000, the Company
assumed certain additional risks, including changes in interest rates affecting
the return on its investments and, to a lesser extent, risks associated with
foreign currency fluctuations. In the normal course of business, the Company
establishes policies and procedures to manage its exposure to fluctuations in
interest rates and foreign currency values. The additional risks as a result of
the merger are discussed as follows:
INTEREST RATE RISK. marchFIRST's exposure to interest rate risks results
primarily from our short-term investments. To minimize exposure to interest rate
risks, we invest predominately in instruments that are highly liquid, are of
investment grade and generally have maturities of less than one year. We intend
to make such funds readily available for operating purposes. At December 31,
1999, we had investments with maturities and weighted average interest rates as
follows (in thousands):
Maturities
2000 2001
---- ----
Balance $43,563 $1,028
Interest Rate 5.5% 5.42%
FOREIGN CURRENCY RISKS. As of December 31, 1999, USWeb/CKS had
operating subsidiaries located in several countries including the United
Kingdom, Germany, France, Canada, Switzerland, Spain, Australia, and South
Africa. These subsidiaries operate primarily in the functional currency of
their individual countries. marchFIRST does not have exposure to significant
foreign currency risk related to the ongoing operations of these
subsidiaries. marchFIRST has a foreign currency risk related to one of our
acquisitions. Our acquisitions are typically completed using our Common Stock
as consideration for the acquisitions. Generally, at least 50% of the shares
to be issued are deposited into a one-year escrow, and the remaining shares
are delivered to the acquired company's shareholders. The acquired company is
valued again, typically at each of six and twelve months after the
acquisition, and additional shares are issued to the acquired company's
shareholders or escrowed shares are returned to marchFIRST, depending on
whether the valuation has increased or decreased. Some acquisitions have been
completed using a cash component, typically denominated in United States
dollars. After December 31, 1998, the Company completed one acquisition under
the methodology described above, and the acquired company will be valued
again in February 2000. The value of the
31
<PAGE>
number of shares of Common Stock that were issued in this transaction was
denominated in Swiss Francs. The value of these shares of Common Stock, assuming
financial performance targets was met, is approximately nine million Swiss
Francs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information in response to this item is included in the financial
statements and notes thereto, and the related Independent Auditors' Report,
appearing on pages F-1 to F-20 of this Form 10-K, and in Item 7 of this Form
10-K under the caption, "Quarterly Results of Operations."
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information in response to this item is incorporated herein by
reference from the sections captioned "Election of Directors" and "Executive
Officers" of the Company's definitive Proxy Statement to be filed in connection
with the Company's 2000 Annual Meeting of Stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information in response to this item is incorporated herein by
reference from the section of the Proxy Statement captioned "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in response to this item is incorporated herein by
reference from the section of the Proxy Statement captioned, "Security Ownership
of Management and Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information in response to this item is incorporated herein by
reference from the section of the Proxy Statement captioned, "Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K.
(a) (1) Consolidated Financial Statements.
The following financial statements and notes thereto, and the
related Independent Auditors' Report, are filed as part of this
Form 10-K on pages F-1 to F-20:
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 1999 and 1998.
32
<PAGE>
Consolidated Statements of Earnings for the years ended December
31, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules.
The following financial statement schedule of the Company and the
related Independent Auditors' Report are filed as part of this Form
10-K on pages F-1 to F-20:
Independent Auditors' Report.
Schedule II - Valuation and Qualifying Accounts.
All other financial statement schedules have been omitted because
such schedules are not required or the information required has
been presented in the aforementioned financial statements.
33
<PAGE>
(3) Exhibits.
The following exhibits are filed with this report or incorporated by
reference as set forth below.
EXHIBIT NO. DESCRIPTION
---------- -----------
2.1(1) Agreement and Plan of Merger by and among
Whittman-Hart, Inc., Uniwhale, Inc., and USWeb/CKS
Corporation dated as of December 12, 1999.
2.2(4) Merger agreement dated November 21, 1997 between
Whittman-Hart, Inc., Whittman-Hart Associates, Inc. and
Axis Consulting International, Inc. and Peter Boboff
and Graham Weston.
2.3(5) Exchange Agreement dated March 30, 1998 between
Whittman-Hart, Inc., QCC, Inc., Edward J. Quinn and
Alphonse M. Lucchese, Jr.
3.1 Amended and Restated Certificate of Incorporation of
the Company, as amended.
3.2(1) Second Amended and Restated By-Laws of the Company.
4.1(1) Specimen stock certificate representing Common Stock.
10.1(1) Executive Employment Agreement between the Company and
Robert F. Bernard effective as of June 15, 1995. *
10.2(1) Executive Employment Agreement between the Company and
Edward V. Szofer effective as of June 15, 1995. *
10.6(1) Form of Employment Agreement (Manager). *
10.7(1) Form of Employment Agreement (Consultant). *
10.8(1) 1995 Incentive Stock Plan dated December 29, 1995. *
10.9(1) Employee Stock Purchase Plan. *
10.10(1) Whittman-Hart Corporation II Employee Stock Ownership
Plan. *
10.11(1) Lease for 311 S. Wacker Drive, Chicago, Illinois.
10.19 Lease agreement dated December 22, 1999 between
marchFIRST as lessee and First Chicago Leasing
Corporation as lessor.
23.1 Consent of KPMG LLP.
34
<PAGE>
27.1 Financial Data Schedule.
Year Ended December 31, 1999.
27.2 Financial Data Schedule.
Years Ended December 31, 1998 and December 31, 1997.
(1) Incorporated herein by reference to Whittman-Hart's
Registration Statement on Form S-4 (No. 333-94565)
which was declared effective on January 27, 2000.
(2) Incorporated herein by reference to Whittman-Hart's
Registration Statement on Form S-1 (No. 333-1778),
which was declared effective by the Commission on May
2, 1996.
(3) Incorporated herein by reference to Whittman-Hart's
Registration Statement on Form S-1 (No. 333-18059),
which was declared effective by the Commission on
January 2, 1997.
(4) Incorporated herein by reference to Whittman-Hart's
Registration Statement on Form S-1 (No. 333-09617),
which was declared effective by the Commission on
August 21, 1996.
(5) Incorporated herein by reference to Whittman-Hart's
current report on Form 8-K dated November 21, 1997,
filed with the Commission on December 8, 1997.
(6) Incorporated herein by reference to Whittman-Hart's
Form 8-K dated March 30, 1998, filed with the
Commission on April 13, 1998.
* Management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated September 30, 1999,
announcing that Novell, Inc. had agreed to invest $100 million in the
Company and that Novell, Inc. and the Company had formed a strategic
alliance.
The Company filed a report on Form 8-K dated December 12, 1999,
announcing that it signed an Agreement and Plan of Merger by and
among the Registrant, UniWhale, Inc., a wholly owned subsidiary of
the Registrant, and USWeb Corporation; pursuant to which UniWhale,
Inc. would merge with and into USWeb Corporation and USWeb
Corporation would become a wholly owned subsidiary of Registrant.
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Whittman-Hart, Inc.:
We have audited the accompanying consolidated balance sheets of Whittman-Hart,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Whittman-Hart, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
/s/ KPMG LLP
Chicago, Illinois
January 24, 2000, except as to
Note 17, which is
as of March 1, 2000
F-1
<PAGE>
WHITTMAN-HART, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 147,816,396 $ 50,710,172
Short-term investments 80,424,087 70,478,919
Trade accounts receivable, net of allowance for doubtful accounts of
$3,519,535 and $1,866,640 in 1999 and 1998, respectively 90,708,920 61,298,799
Prepaid expenses and other current assets 11,365,638 3,860,764
Notes and interest receivable 175,932 168,847
Deferred income taxes 1,956,421 988,457
--------- -------
Total current assets 332,447,394 187,505,958
Property and equipment, at cost:
Land 6,208,229 4,811,253
Buildings 17,703,069 6,999,605
Office furniture and equipment 19,531,245 14,296,328
Computer equipment and software 37,911,642 18,069,176
Automobiles 105,311 105,311
Leasehold improvements 2,890,524 1,238,848
--------- ---------
84,350,020 45,520,521
Less accumulated depreciation and amortization (16,330,966) (10,328,975)
----------- -----------
Net property and equipment 68,019,054 35,191,546
Long-term investments 56,095,191 30,195,927
Deferred income taxes 16,895,545 --
Intangible assets 29,250,035 --
Other assets 1,500,594 1,449,029
--------- ---------
Total assets $ 504,207,813 $ 254,342,460
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,468,489 $ 2,562,874
Accrued compensation and related costs 28,289,411 22,254,652
Accrued expenses and other liabilities 13,872,879 11,614,480
Income taxes payable -- 2,724,015
Current maturities of long-term debt -- 447,502
---------- ----------
Total current liabilities 47,630,779 39,603,523
Deferred income taxes, net -- 879,226
Deferred rent 1,865,447 1,671,978
Deferred revenue 56,563 37,720
Long-term debt, less current maturities -- 529,478
---------- ---------
Total liabilities 49,552,789 42,721,925
Stockholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.001 par value; 75,000,000 authorized, 61,934,486 and
54,326,456 shares issued in 1999 and 1998, respectively 61,934 54,326
Additional paid-in capital 388,517,093 173,792,957
Retained earnings 67,490,048 38,538,902
Deferred compensation (1,208,518) (848,628)
Accumulated other comprehensive income (loss) (205,533) 82,978
-------- ------
Total stockholders' equity 454,655,024 211,620,535
----------- -----------
Total liabilities and stockholders' equity $ 504,207,813 $ 254,342,460
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
WHITTMAN-HART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 480,911,489 $ 333,502,274 $ 199,389,053
Cost of services 269,239,800 190,982,472 117,503,492
------------- ------------- -------------
Gross profit 211,671,689 142,519,802 81,885,561
Costs and expenses:
Selling 22,772,758 14,027,912 8,706,294
Recruiting 10,825,201 11,328,160 6,705,736
General and administrative 124,555,312 86,303,064 50,433,915
Business combination costs 7,280,890 774,609 1,771,257
------------- ------------- -------------
Total costs and expenses 165,434,161 112,433,745 67,617,202
------------- ------------- -------------
Operating income 46,237,528 30,086,057 14,268,359
Other income (expense):
Interest expense (3,415) (114,585) (61,435)
Interest income 8,125,039 5,759,513 3,644,594
Other, net 26,671 55,396 (109,136)
------------- ------------- -------------
Total other income (expense) 8,148,295 5,700,324 3,474,023
------------- ------------- -------------
Income before income taxes 54,385,823 35,786,381 17,742,382
Income taxes:
Initial deferred income taxes 351,290 676,334 --
Income taxes 23,743,656 14,284,567 7,805,769
------------- ------------- -------------
Total income taxes 24,094,946 14,960,901 7,805,769
------------- ------------- -------------
Net income 30,290,877 20,825,480 $ 9,936,613
============= ============= =============
Basic earnings per share $ 0.53 $ 0.40 $ 0.21
============= ============= =============
Diluted earnings per share $ 0.47 $ 0.36 $ 0.20
============= ============= =============
Weighted average number of common shares outstanding 56,641,091 52,243,902 47,580,433
============= ============= =============
Weighted average number of common and common
equivalent shares outstanding 64,429,365 57,258,245 50,938,562
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WHITTMAN-HART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained Deferred
Shares Amount Capital Earnings Compensation
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 45,262,562 $ 45,263 $ 73,669,235 $ 7,214,146 $ (97,831)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 9,936,613
Other comprehensive loss, net of tax
Foreign currency translation adjustment
Other comprehensive income
Comprehensive income
Issuance of common stock
related to acquisitions 699,216 699 386,763 (49,491)
Issuance of common stock related
to software purchase 20,844 21 247,852
Issuance of common stock from
exercise of stock options 783,022 783 2,618,467
Issuance of common stock pooled-company 1,615,553 1,615 1,438,209
Issuance of common stock from
employee stock purchase plan 132,956 133 1,194,688
Tax benefit related to stock plans 2,510,523
Issuance of restricted stock awards and options 151,700 152 1,474,317 (1,474,469)
Amortization of deferred compensation 362,675
---------- ------ ---------- ---------- ----------
Balance at December 31, 1997 48,665,853 48,666 83,540,054 17,101,268 (1,209,925)
Net income 20,825,480
Other comprehensive loss, net of tax
Foreign currency translation adjustment
Unrealized gains on securtities
Other comprehensive income
Comprehensive income
Issuance of common stock
related to acquisitions 600,000 600 1,800 1,306,096
Issuance of common stock 3,400,000 3,400 69,576,102
Stock compensation 142,164
Issuance of common stock from
exercise of stock options 1,527,501 1,527 11,345,314
Tax benefit related to stock plans 7,302,677
Issuance of common stock from
employee stock purchase plan 133,102 133 1,884,846
Amortization of deferred compensation 361,297
Distributions (693,942)
---------- ------ ---------- ---------- ----------
Balance at December 31, 1998 54,326,456 54,326 173,792,957 38,538,902 (848,628)
Net income 30,290,697
Other comprehensive loss, net of tax
Foreign currency translation adjustment
Unrealized losses on securtities
Other comprehensive income
Comprehensive income
Stock compensation 1,089,835
Issuance of common stock
related to acquisitions 835,519 836 20,605,678 456,177
Issuance of common stock 3,294,893 3,295 37,161,521
Issuance of common stock from
exercise of stock options 3,115,109 3,115 98,244,409
Tax benefit related to stock plans 28,996,298
Issuance of restricted stock awards 9,835 10 907,807 (907,817)
Issuance of common stock from
employee stock purchase plan 352,674 353 6,196,628
Goodwill related to taxable pooling 21,521,960
Distributions (1,795,728)
Amortization of deferred compensation 547,927
---------- -------- ------------- ----------- -----------
Balance at December 31, 1999 61,934,486 $ 61,934 $ 388,517,093 $67,490,048 $(1,208,518)
========== ======== ============= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Treasury Stock at Cost Comprehensive Comprehensive
Shares Amount Income (Loss) Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ (13,210) $(12,797) $ -- $ -- $ 80,818,016
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 9,936,613 9,936,613
Other comprehensive loss, net of tax
Foreign currency translation adjustment (2,558)
----------
Other comprehensive income (2,558) (2,558) (2,558)
----------
Comprehensive income $9,934,055
==========
Issuance of common stock
related to acquisitions 337,971
Issuance of common stock related
to software purchase 247,873
Issuance of common stock from
exercise of stock options 13,210 12,797 2,632,047
Issuance of common stock pooled-company 1,439,824
Issuance of common stock from
employee stock purchase plan 1,194,821
Tax benefit related to stock plans 2,510,523
Issuance of restricted stock awards and options
Amortization of deferred compensation 362,375
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- -- (2,558) 99,477,505
Net income 20,825,480 20,825,480
Other comprehensive loss, net of tax
Foreign currency translation adjustment (9,029)
Unrealized gains on securtities 94,565
----------
Other comprehensive income 85,536 85,536 85,536
----------
Comprehensive income 20,911,016
==========
Issuance of common stock
related to acquisitions 1,306,096
Issuance of common stock 69,579,502
Stock compensation 142,164
Issuance of common stock from
--
exercise of stock options 11,346,841
Tax benefit related to stock plans 7,302,677
Issuance of common stock from
employee stock purchase plan 1,884,979
Amortization of deferred compensation 361,297
Distributions (693,942)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- -- -- 82,978 211,620,535
Net income 30,290,697 30,290,697
Other comprehensive loss, net of tax
Foreign currency translation adjustment (100,701)
Unrealized losses on securtities (187,810)
--------
Other comprehensive income (288,511) (288,511) (288,511)
--------
Comprehensive income $30,002,186
===========
Stock compensation 1,089,835
Issuance of common stock
related to acquisitions 21,062,691
Issuance of common stock 37,164,816
Issuance of common stock from
exercise of stock options 98,247,524
Tax benefit related to stock plans 28,996,298
Issuance of restricted stock awards --
Issuance of common stock from
employee stock purchase plan 6,196,981
Goodwill related to taxable pooling 21,521,960
Distributions (1,795,728)
Amortization of deferred compensation 547,927
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $- $- $ - $(205,533) $ 454,655,024
====================================================================================================================================
</TABLE>
F-4
<PAGE>
WHITTMAN-HART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 30,290,877 $ 20,825,480 $ 9,936,613
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,946,558 4,173,995 2,875,749
Deferred income taxes (1,212,378) 134,522 (970,876)
Unrealized gain on investments -- (44,429) (594,119)
Unrealized holding loss on investments 187,810 (94,565) --
(Gain) loss on sales of short-term investments -- 3,265 (4,641)
Non cash stock compensation expense 1,089,835 142,164 --
Changes in assets and liabilities, net of acquisitions:
Trade accounts receivable, net (24,452,310) (21,892,715) (15,502,895)
Income taxes receivable -- -- 140,154
Prepaid expenses and other current assets (4,732,268) (415,169) (1,879,467)
Other assets 47,596 (365,627) (5,009)
Accounts payable 1,813,765 (65,381) 343,142
Accrued compensation and related costs 4,239,034 5,225,657 5,842,805
Income taxes payable 23,451,333 8,314,549 4,207,967
Accrued expenses and other liabilities (2,180,120) 7,109,536 2,684,293
Deferred rent 193,469 342,753 441,060
Other, net (15,498) 141,614 248,207
---------- ------------- -------------
Net cash provided by operating activities 35,667,703 23,535,649 7,762,983
---------- ------------- -------------
Cash flows from investing activities:
Purchases of short-term investments (161,510,671) (182,968,293) (115,921,644)
Sales of short-term investments 140,842,303 141,200,598 88,713,027
Investments in non-marketable equity securities (15,452,861) -- --
Payment for acquisition (1,944,955) -- (605,000)
Purchases of property and equipment (38,498,676) (22,347,731) (11,898,952)
---------- ------------- -------------
Net cash used in investing activities (76,564,860) (64,115,426) (39,712,569)
---------- ------------- -------------
Cash flows from financing activities:
Payments on line of credit, net -- (924,146) --
Proceeds from issuance of bank debt -- 387,827 1,660,104
Payments on bank debt (1,809,675) (949,367) (623,857)
Payments on related party debt -- -- (200,000)
Proceeds from issuance of common stock, net of issuance costs 98,247,704 69,579,502 832,501
Proceeds from exercise of stock options 37,164,637 11,346,842 3,161,412
Proceeds from employee stock purchase plan 6,196,933 1,884,978 1,194,821
Partnership capital distributions (1,795,718) (674,670) --
---------- ------------- -------------
Net cash provided by financing activities 138,003,881 80,650,966 6,024,981
---------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 97,106,724 40,071,189 (25,924,605)
Cash and cash equivalents at beginning of year 50,710,172 10,638,983 36,563,588
---------- ------------- -------------
Cash and cash equivalents at end of year $ 147,816,896 $ 50,710,172 $ 10,638,983
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 12,549 $ 81,046 $ 182,073
Income taxes paid 2,821,156 5,416,041 4,584,401
Supplemental disclosures of noncash financing activities:
Issuance of common stock to employees -- -- 900,000
Tax benefit related to stock plans 28,996,298 7,302,677 2,510,523
Issuance of common stock for the purchase of software -- -- 247,873
Issuance of common stock for business combinations 21,062,691 633,826 337,971
Deferred income taxes related to purchased goodwill 21,521,960 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WHITTMAN-HART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS
Whittman-Hart, Inc. (the "Company") provides strategic information
technology ("IT") business solutions designed to improve its clients'
productivity and competitive position. The Company offers its clients a single
source for a comprehensive range of services required to successfully design,
develop and implement integrated solutions in the client/server, open systems,
midrange and mainframe computing environments. Among the services offered by the
Company are systems integration; strategic IT planning; software development;
package software implementation; business process reengineering; organizational
change management; networking and connectivity; conventional and multimedia
documentation and training; design and implementation of collaborative computing
solutions; and design and implementation of electronic commerce solutions (such
as Internet/intranet and electronic data interchange). The Company serves
clients in a broad range of industries including communications, consumer
products, distribution, diversified services, financial services, insurance,
manufacturing, pharmaceuticals, professional services, retail and technology
throughout the United States, London, England and Scotland.
The Company completed a merger with USWeb/CKS on March 1, 2000. See
Note 17.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
In general, the Company recognizes revenues at the time services are
performed. On time and expense contracts, revenue is recognized as costs are
incurred. On fixed-price contracts, revenues are recorded using the
percentage-of-completion method of accounting by relating contract costs
incurred to date to total estimated contract costs at completion. Contract costs
include both direct and indirect costs. Contract losses are provided for in
their entirety in the period they become known, without regard to the
percentage-of-completion.
PROPERTY AND EQUIPMENT
Depreciation is computed using the straight-line method based on the
estimated useful lives, ranging from three to forty years, of the various
classes of property. Amortization of leasehold improvements is computed over the
shorter of the lease term or estimated useful life of the asset.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
F-6
<PAGE>
TRANSLATION OF FOREIGN CURRENCY
For non-U.S. operations, the functional currency is the applicable local
currency. The translation of the functional currency into U.S. dollars is
performed for balance sheet accounts using the current exchange rates in effect
at the balance sheet date and for revenue and expense accounts using the average
rates of exchange prevailing during the reporting period. Adjustments resulting
from the translation of foreign currency financial statements are recorded in
accumulated other comprehensive income (loss), as a separate component of
stockholders' equity.
CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS
Cash equivalents are comprised of certain highly liquid investments with
original maturities of less than three months. Short-term investments consist of
debt securities with original maturities beyond three months but less than
twelve months. Long-term investments consist of debt securities with original
maturities beyond twelve months and to a lesser extent non-marketable equity
securities in start-up companies. The short-term and long-term investments (with
the exception of non-marketable equity securities) are classified as
available-for-sale under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Short-term and long-term investments are reported at fair value,
with the exception of non-marketable equity securities, which are accounted for
at cost.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under the asset and liability method of SFAS No. 109, 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. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock options in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, Statement 123 also allows entities to continue to apply the
provisions of APB 25 and provide pro forma net income and pro forma net income
per share disclosures for employee stock options grants made in 1996 and future
years as if the fair-value-based method defined in Statement 123 had been
applied. The Company has elected to continue to apply the provisions of APB 25
and provide the pro forma disclosure provisions of Statement 123.
F-7
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments are stated at
their fair values.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS. No. 130 "Reporting
Comprehensive Income." SFAS No. 130 established standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income, net
unrealized gains (losses) on securities and foreign currency translation
adjustments and is presented in the consolidated statements of shareholders'
equity and comprehensive income. The statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
RECLASSIFICATIONS
Certain 1998 and 1997 balances have been reclassified to conform to the
1999 presentation.
F-8
<PAGE>
3. EARNINGS PER SHARE
COMPUTATION OF NET INCOME AND EARNINGS PER SHARE
Earnings per share are computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). The
following table reconciles the numerator and denominator for the calculation of
basic and diluted earnings per share for the years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------ ------------
BASIC EPS
<S> <C> <C> <C>
Net income available to
common stockholders $30,290,877 56,641,091 $0.53
Effect of dilutive securities;
Stock options 7,638,790
Restricted stock awards 149,484
-------
DILUTED EPS
Income available to
common stockholders and
assumed conversions $30,290,877 64,429,365 $0.47
=========== ========== ====
FOR THE YEAR ENDED DECEMBER 31, 1998
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------ ------------
BASIC EPS
Net income available to
common stockholders $20,825,480 52,243,092 $0.40
Effect of dilutive securities;
Stock options 4,779,876
Restricted stock awards 235,277
DILUTED EPS
Income available to common
stockholders and
assumed conversions $20,825,480 57,258,245 $0.36
=========== ========== ====
FOR THE YEAR ENDED DECEMBER 31, 1997
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------ ------------
BASIC EPS
Net income available to
common stockholders $9,936,613 47,580,433 $0.21
Effect of dilutive securities;
Stock options 3,269,633
Restricted stock awards 88,496
DILUTED EPS
Net income available to
common stockholders and
assumed conversions $9,936,613 50,938,562 $0.20
========== ========== ====
</TABLE>
F-9
<PAGE>
4. ACQUISITIONS
On March 20, 1997, the Company acquired the business operations and
certain assets of Organizational Change Dynamics, Inc. ("OCD"), a Chicago-based
firm dedicated to strategic business consulting. The purchase price consisted of
a cash payment of $600,000 and 107,700 shares of restricted common stock
(approximate market value of $900,000) that vest, pro rata, over a four-year
period. This acquisition was accounted for as a purchase and accordingly, the
results of OCD have been included in the Company's consolidated statements of
earnings from the date of acquisition. The excess of the purchase price over the
fair value of the net identifiable assets acquired of $605,264 has been recorded
as goodwill and is being amortized on a straight-line basis over fifteen years.
The pro forma impact of this purchase was not significant to the results of the
Company's consolidated operations for the years ended December 31, 1997 and
1996.
On September 8, 1997, the Company acquired all the outstanding capital
stock of Expert Buying Systems, Inc. ("EBS") for 429,972 shares of its common
stock. EBS, based in Vancouver, Washington, develops and markets software
products and services designed to help companies select application software
systems. The business combination has been accounted for as a
pooling-of-interests combination. The stockholders' equity and operations of EBS
were not material in relation to those of the Company. As such, the Company has
recorded the combination as of September 8, 1997 without restating prior
periods' consolidated statements of earnings to reflect the pooling-of-interests
combination.
On November 21, 1997, the Company acquired all the outstanding capital
stock of Axis Consulting International, Inc. ("Axis") for 3,150,156 shares of
its common stock. Headquartered in San Francisco, with an office in New York,
Axis' approximately 130 professionals provide SAP Section, network, Microsoft
Section enterprise, database and midrange solutions. This business combination
has been accounted for as a pooling-of-interests combination and accordingly,
the consolidated financial statements for periods prior to the combination have
been restated to include the accounts and results of operations of Axis.
On November 21, 1997, the Company acquired all the outstanding capital
stock of World Consulting Limited ("World") for 269,244 shares of its common
stock. Based in London, World specializes in JDEdwards Section implementation
solutions through a network of approximately 30 IT professionals. This
business combination has been accounted for as a pooling-of-interests
combination. The stockholders' equity and operations of World were not
material in relation to those of the Company. As such, the Company has
recorded the combination without restating prior periods' consolidated
statements of earnings to reflect the pooling-of-interests combination.
During March 1998, the Company acquired all the outstanding capital stock
of QCC, Inc. ("QCC") for 600,000 shares of its common stock. Headquartered in
the Boston metropolitan area, QCC's approximately 75 professionals provide the
following services: package software evaluation; business process reengineering;
data warehousing; implementation of software packages developed by SSA Section,
Oracle Section and JDEdwards Section; application development for AS/400 and
client server applications; and Year 2000 compliance services. This business
combination has been accounted for as a pooling-of-interests combination. The
stockholders' equity and operations of QCC were not material in relation to
those of the Company. As such, the Company has recorded the combination without
restating prior periods' consolidated financial statements to reflect the
pooling-of-interests combination.
F-10
<PAGE>
During July 1998, the Company acquired North Central Consulting, Inc.
("NCC"), a Minneapolis-based IT services firm. The Company issued 638,508 shares
of its common stock in the transaction, which was accounted for as a
pooling-of-interests combination and, accordingly, the Company's historical
consolidated financial statements have been restated to include the financial
position and results of operations of NCC for all periods presented.
Headquartered in Minnetonka, Minnesota, with a satellite office in Milwaukee,
NCC's approximately 120 professionals specialize in providing ERP software
implementations, custom application development and internet-enabled solutions
to middle-market manufacturing, distribution and financial services companies,
as well as some divisions and departments of Fortune 500 companies. The
combination of Whittman-Hart's recently opened Minneapolis branch with
approximately 40 employees and NCC's four-year-old office accelerates
Whittman-Hart's ability to provide a full suite of IT services to its target
customer base.
On March 9, 1999, the Company acquired the Waterfield Technology Group
("Waterfield") a Boston-based IT services firm and strategic business partner of
Kurt Salmon and Associates, a global consulting firm, for 576,074 shares of the
Company's common stock. Headquarted in Lexington, Massachusetts, with a branch
office in Parsippany, New Jersey, Waterfield's approximately 90 employees
specialize in client server and internet-enabled application development. They
have extensive experience with Java and Java-based tools, Powerbuilder and the
Microsoft suite of products. This business combination was accounted for as a
pooling-of-interests combination and, accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts and
results of operations of Waterfield for all periods presented.
On May 20, 1999, the Company issued 474,650 of its common shares in
exchange for all the outstanding capital stock of POV Partners, Inc. ("POV") an
Ohio-based IT services firm. Headquartered in Columbus, Ohio, with offices in
Phoenix, Arizona, and Charlotte, North Carolina, POV's approximately 90
employees provide a broad range of business strategy and IT services including
Internet-enabled application development and electronic commerce solutions. This
business combination has been accounted for as a pooling-of-interests
combination. The stockholders' equity and operations of POV were not material in
relation to those of the Company. As such, the Company has recorded the
combination without restating prior periods' consolidated financial statements.
On August 27, 1999, the Company issued 1,145,796 shares of the Company's
common stock in exchange for all of the outstanding stock of the BALR
Corporation ("BALR"), an Oakbrook, Illinois-based IT services firm. BALR's
approximately 100 employees design systems and provide technical consulting
services. BALR's services include e-Business and Web-enabled systems
development, relational database management and client-server application
development. This business combination was accounted for as a
pooling-of-interests combination and, accordingly, the Company's historical
consolidated financial statements have been restated to include the accounts and
results of operations of BALR for all periods presented.
On November 12, 1999, the Company issued in exchange for all of the
outstanding stock of the Four Points Digital, L.L.C. ("Four Points"), a Chicago,
Illinois-based independent interactive marketing firm, for 1,098,221 shares of
the Company's common stock. Four Point's approximately 80 employees specialize
in digital marketing including interactive advertising using rich media, online
site development and online media buying. This business combination was
accounted for as a pooling-of-interests combination and accordingly, the
Company's historical consolidated financial statements have been restated to
include the accounts and results of operations of Four Points for all periods
presented.
F-11
<PAGE>
The following table presents certain statement of earnings data of the Company
and Waterfield, BALR, and Four Points. The information presented for these 1999
acquisitions is related to quarterly operations of acquisitions from the
acquisition period through the end of the year.
<TABLE>
<CAPTION>
(in thousands)
WHITTMAN-
HART, INC. WATERFIELD BALR FOUR POINTS COMBINED
---------- ----------- ----- ----------- --------
NET REVENUES FOR THE
<S> <C> <C> <C> <C> <C>
Year ended:
December 31, 1997 $181,655 $10,113 $6,937 $684 $199,389
December 31, 1998 $307,613 $13,762 $9,828 $2,299 $333,502
Six months ended: (unaudited)
June 30, 1999 $215,279 $6,122 $3,290 $224,691
Nine months ended: (unaudited)
September 30, 1999 $342,650 $5,252 $347,902
NET INCOME (LOSS) FOR THe
Year ended:
December 31, 1997 $9,993 $150 $(375) $168 $9,936
December 31, 1998 $18,814 $21 $1,540 $450 $20,825
Six months ended: (unaudited)
June 30, 1999 $12,119 $351 $488 $12,958
Nine months ended: (unaudited)
September 30, 1999 $21,276 $660 $21,936
</TABLE>
On November 27, 1999, the Company acquired all the outstanding common
stock and options of Fulcrum Solutions, Ltd. ("Fulcrum") for $2,193,857 in cash
and 360,869 shares of its common stock. Fulcrum, headquartered in London with
offices in Manchester, England; Edinburgh, Scotland; and New York City, is an
independent provider of e-Business solutions that specializes in Oracle
technology and applications. The acquisition has been accounted for by the
purchase method and, accordingly, the results of operations of Fulcrum have been
included in the Company's financial statements from November 27, 1999. The
purchase price was preliminarily allocated to the following:
Fair value of assets acquired
and liabilities assumed $ 6,214,833
Workforce in place 12,602,342
Customer list 1,260,234
Goodwill (1) 15,639,506
----------
Total $ 35,716,915
==============
(1) Goodwill included $4,297,399 related to the deferred tax effect of the
excess of the book bases over the tax bases of the intangible assets
related to the acquisition.
The above amounts are being amortized over their useful lives of 2-10
years. The purchase agreement also provides for additional payments over the
next three years contingent on the operating income of the Company's United
Kingdom and New York City operations. The additional payments, if any, will be
accounted for as additional goodwill.
F-12
<PAGE>
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Fulcrum as if the acquisition
had occurred as of the beginning of 1999 and 1998, after giving effect to
certain adjustments, including amortization of goodwill, a reduction of interest
income and related income tax effects. The pro forma financial information does
not necessarily reflect the results of operations that would have occurred had
the Company and Fulcrum constituted a single entity during such periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (UNAUDITED)
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue $498,181,149 $344,284,198
Net income $26,070,732 $18,553,379
Diluted earnings per share $0.40 $0.32
</TABLE>
5. DEBT OBLIGATIONS
The Company has a loan agreement for up to $10.0 million of unsecured
credit with interest, at the Company's option, at the London Interbank
Offered Rate (LIBOR) plus 1.5% or the lender's prime rate. No borrowings were
outstanding under this loan agreement at December 31, 1999 or 1998. The loan
agreement expires on April 30, 2000. At December 31, 1998, the Company had
outstanding debt totaling $1.0 million related to debt owed by Waterfield and
Four Points. The debt was fully paid during 1999 subsequent to the mergers.
6. STOCKHOLDERS' EQUITY
On May 8, 1998, the Company completed an offering of its common stock in
which an additional 3,400,000 shares were sold by the Company, resulting in net
proceeds to the Company of $69.6 million.
In July 1998, the Board of Directors approved a 2-for-1 split of the
Company's common shares. Shareholders received one additional common share for
every share held on the record date of July 12, 1998. All of the per share data,
as appropriate, reflect this split. The effect of the split is presented
retroactively within stockholders' equity at December 31, 1997 and December 31,
1996 by transferring the par value for the additional shares issued from the
additional paid-in-capital accounts to common stock account.
On November 12, 1999, Novell, Inc. purchased 3,294,893 shares of the
Company's common stock for a purchase price of $100 million, and the Company
agreed to issue Novell a warrant to purchase 400,000 shares of the Company's
common stock, with an exercise price of $35.875 per share (the "Warrant"). The
Warrant will become exercisable only if the Company fails to meet certain
milestones under the global alliance agreement.
7. INVESTMENT SECURITIES
At December 31, 1999, the Company classified its marketable debt
securities as available-for-sale. Available-for-sale securities represent
those securities that do not meet the classification of held to maturity and
are not actively traded. At December 31, 1999, net unrealized holding losses
from available-for-sale securities of $93,245 (net of income taxes of
$38,129) were included as a separate component of shareholders' equity as
other comprehensive income (loss) until realized. Investment securities also
includes $15,452,861 of non-marketable equity securities which are carried at
cost. The Company's investment in non-marketable equity securities includes
investments in the following entities with the related percentage ownership
interest: e Biosafe.com at 4%, divine interVentures, Inc. at 1%, Imana at 1%,
Netvendor, Inc. at 3%, Commodities Exchange.com at 13%, and EFirst, Inc. at
10%.
F-13
<PAGE>
The amortized cost, gross unrealized holding gains and losses and
aggregate fair value of investment securities at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
Gross Unrealized Gains
AMORTIZED COST AND LOSSES FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
State and municipal bonds $ 15,462 $ (4) $ 15,458
U.S. Government Securities 43,288 (90) 43,198
Corporate bonds 21,777 (9) 21,768
- -------------------------------------------------------------------------------------------------------------------
$ 80,527 $ (103) $80,424
- -------------------------------------------------------------------------------------------------------------------
Non-Current:
State and municipal bonds $ 31,370 $ (10) $ 31,360
U.S. Government Securities 2,748 (16) 2,732
Corporate bonds 6,544 (4) 6,540
- -------------------------------------------------------------------------------------------------------------------
$ 40,662 $ (30) $ 40,632
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost, gross unrealized holding gains and losses and
aggregate fair value of investment securities at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
Gross Unrealized Gains
AMORTIZED COST AND LOSSES FAIR VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
State and municipal bonds $ 17,546 $ - $ 17,546
U.S. Government Securities 38,228 60 38,288
Corporate bonds 14,655 (11) 14,644
- -------------------------------------------------------------------------------------------------------------------
$ 70,429 $ 49 $ 70,478
- -------------------------------------------------------------------------------------------------------------------
Non-Current:
State and municipal bonds $ 15,186 $ 38 $ 15,224
U.S. Government Securities 3,815 8 3,823
Corporate bonds 11,087 62 11,149
- -------------------------------------------------------------------------------------------------------------------
$ 30,088 $ 108 $ 30,196
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The contractual maturities at December 31, 1999 were as follows (in
thousands):
FAIR VALUE
----------
<S> <C>
Due with in one year $ 80,424
Due after one year through five years 16,392
Due after five years 24,250
------
$ 121,066
=========
</TABLE>
F-14
<PAGE>
8. COMMITMENTS
LEASES
The Company leases its office facilities and certain equipment under
operating lease arrangements, which expire at various dates through October
2005.
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$15,742,481; $12,846,815; and $7,377,585, respectively. The future minimum
annual lease payments under noncancelable long-term leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
--------------------------------------------------------------
<S> <C> <C>
2000 $ 13,018,632
2001 8,369,440
2002 6,265,273
2003 5,810,792
2004 3,924,017
THEREAFTER 3,127,340
--------------------------------------------------------------
$ 40,515,494
==============================================================
</TABLE>
On December 22, 1999 the Company signed an operating lease agreement
with First Chicago Leasing Company as lessor. The lessee will construct a
parking facility for $23.0 million and lease the facility to the Company upon
completion of the structure in 2001 at which time the Company will begin
making lease payments. The lease term is five years with an interest rate of
LIBOR plus an applicable margin. The lease contains certain restrictive
covenants related to change in control and also certain financial covenants.
In addition, the Company has the option to renew the lease at the end of the
term or purchase the lessor's interest in the property.
Property
The Company has commitments under contracts for the construction and the
purchase of property related to the expansion of the Company's offices. These
commitments were approximately $1.6 million at December 31, 1999.
F-15
<PAGE>
9. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $20,025,274 $11,680,123 $6,947,721
Foreign 11,646 (93) 3,948
State 5,449,155 2,842,394 1,486,894
- -------------------------------------------------------------------------------------------------
25,486,075 14,522,424 8,438,563
- -------------------------------------------------------------------------------------------------
Deferred:
Federal (704,953) 333,518 (528,377)
State (686,176) 104,959 (104,417)
- -------------------------------------------------------------------------------------------------
(1,391,129) 438,477 (632,794)
- -------------------------------------------------------------------------------------------------
$24,094,946 $14,960,901 $7,805,769
=================================================================================================
</TABLE>
The reconciliation of income taxes was computed using the federal statutory rate
of 35% for 1999, 1998 and 1997. The Company's income tax expense is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at the statutory rate 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit 5.7 5.4 5.0
Tax exempt interest income (1.3) (1.2) (0.4)
Nondeductible expenses, meals and entertainment 1.1 1.1 1.3
Nondeductible business combination costs 2.6 2.6 2.9
Other 1.2 (1.1) 0.2
- ---------------------------------------------------------------------------------------------------
44.3% 41.8% 44.0%
- -------------------------------------------------------- ----------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Goodwill $ 21,521,960 $ -
Allowance for doubtful accounts 876,517 530,700
Accrued expenses 1,001,907 514,915
Stock awards 149,123 76,302
Deferred rent 751,215 673,306
Deferred compensation 47,735 35,623
Net operating losses 305,796 -
Other 108,173 -
- -----------------------------------------------------------------------------------------
Total gross deferred tax assets 24,762,426 1,830,846
Deferred tax liabilities:
Intangible assets (4,297,399) -
Property and equipment - depreciation (1,613,061) (1,038,196)
Other - (683,419)
- -----------------------------------------------------------------------------------------
TOTAL GROSS DEFERRED TAX LIABILITIES (5,910,460) (1,721,615)
- -----------------------------------------------------------------------------------------
Net deferred tax asset $ 18,851,966 $ 109,231
=========================================================================================
</TABLE>
No valuation allowance for deferred tax assets has been recorded, as the
Company believes it is more likely than not the deferred tax assets will be
realized in the future.
F-16
<PAGE>
Deferred tax assets (liabilities) include the deferred tax effect of the
difference between the book bases and the tax bases of certain equity
investments of $64,002 and ($63,044) at December 31, 1999 and 1998,
respectively. The deferred tax asset (liability) results from the
mark-to-market adjustments made to securities with a direct charge to equity,
and accordingly, no tax provision or tax benefit is recognized for changes in
the deferred tax balance.
Deferred tax assets as of December 31, 1999 include state net operating
losses of $5.8 million, which begin to expire in 2004, and goodwill of
$21,521,960 relating to the deferred tax effect of the excess of the tax over
book bases in the net assets resulting from the Company's merger with Four
Points. This acquisition was accounted for as a taxable pooling-of-interests
business combination and accordingly the tax bases in the net assets reflects
fair value.
Deferred tax liabilities as of December 31, 1999 include the deferred tax
effect of the excess of the book bases over the tax bases of intangible assets
acquired in the Fulcrum acquisition of $4,297,399.
As a result of income tax benefits related to certain employee stock
plans, $28,996,298, $7,302,677, and $2,510,523 were credited to additional
paid-in capital during 1999, 1998 and 1997, respectively.
10. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan ("ESOP") which
covers substantially all employees over the age of 21 who have completed one
year of service. Annual ESOP contributions are determined at the discretion of
the Company's Board of Directors. Plan participants become fully vested after
completing four years of service. There were no contributions in 1999, 1998 and
1997. The ESOP held 540,675, 743,364, and 759,158 shares of the Company's common
stock at December 31, 1999, 1998 and 1997, respectively. The Company merged the
ESOP with its Saving and Investment Plan on July 1, 1997. All benefit and
allocation provisions remain the same under the merged plan. The Company does
not intend to make future contributions to the ESOP.
11. 401(K) RETIREMENT PLAN
The Company's 401(k) plan covers all employees who have reached 21 years
of age. Participants may contribute up to 12% of their eligible compensation.
The Company matches participant contributions as defined within the plan.
Company contributions amounted to $3,991,492, $1,873,539, and $1,072,520 in
1999, 1998 and 1997, respectively.
12. EMPLOYEE STOCK PURCHASE PLAN
In 1996, the Company established a stock purchase plan, under the Internal
Revenue Code Section 423, which permits eligible employees to purchase, through
payroll deductions, shares of the Company's common stock at 85% of the fair
market value on the first or last day of each six-month offering period,
whichever is lower. Payroll deductions may not exceed 20% of the employee's
total gross pay in any calendar year. The Company has reserved an aggregate of
1,600,000 shares of common stock for issuance under the plan. During the years
ended December 31, 1999, 1998, and 1997, 352,674, 133,102, and 132,956 shares of
common stock were purchased under the plan, respectively.
F-17
<PAGE>
13. STOCK COMPENSATION PLANS
In 1995, the Company adopted a stock option plan under which certain
employees may be granted the right to purchase shares of common stock at the
fair market value on the date of grant. The Company has reserved an aggregate of
24,000,000 shares of common stock for issuance under the plan. Stock options may
be exercised only to the extent they have vested in accordance with provisions
determined by the Board of Directors.
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $14.31, $9.07 and $3.84, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1999- expected dividend yield of 0%, expected
volatility of 60%, risk-free interest rate of 5.5% and an expected life of 4
years; 1998- expected dividend yield of 0%, expected volatility of 45%,
risk-free interest rate of 5.5% and an expected life of 5.6 years; 1997-
expected dividend yield of 0%, expected volatility of 45%, risk-free interest
rate of 6.0% and an expected life of 3.0 years.
Under SFAS No. 123, compensation cost is recognized for the fair value of
the employees' purchase rights under the Employee Stock Purchase Plan. The
weighted average fair value of those purchase rights granted in 1999, 1998 and
1997 was $3.15, $4.72, and $2.25 using the Black-Scholes model with the
following assumptions: 1999- expected dividend yield of 0%, expected volatility
of 60%, risk-free interest rate of 5.5% and an expected life of six months; 1998
- - expected dividend yield of 0%, expected volatility of 45%, risk-free interest
rate of 5.5% and an expected life of six months; 1997- expected dividend yield
of 0%, expected volatility of 45%, risk-free interest rate of 5.5% and an
expected life of six months.
The Company applies APB 25 in accounting for its plans and accordingly, no
compensation cost has been recognized in the consolidated financial statements
for stock options granted where the strike price equals the market price on date
of grant and its stock purchase plan. Had the Company determined compensation
cost based on the fair value at the grant date for its stock-based compensation
plans under SFAS No. 123, the Company's consolidated net income and net income
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -----
<S> <C> <C> <C>
NET INCOME (LOSS)
As reported $30,290,877 $20,825,480 $9,936,613
Pro forma $(1,934,167) $11,160,780 $7,136,341
DILUTED EARNINGS (LOSS) PER SHARE
As reported $0.47 $0.36 $0.20
Pro forma $(0.03) $0.19 $0.14
</TABLE>
F-18
<PAGE>
Stock option transactions for the years ended December 31, 1999, 1998 and 1997
are summarized as follows (in thousands, except for per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------ -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 14,216 $14.54 6,466 $7.08 3,410 $1.77
Granted 8,095 $26.66 10,272 $18.30 4,260 $10.43
Exercised (3,116) $11.93 (1,518) $7.48 (796) $3.25
Forfeited (2,532) $20.76 (1,004) $15.93 (408) $5.14
------- ------ ------- ------ ----- -----
Outstanding at end of year 16,663 $20.05 14,216 $14.54 6,466 $7.08
Options exercisable at year end 5,967 4,649 1,860
Weighted-average fair value of
options granted during the year $14.32 $9.07 $3.84
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE EXERCISE
EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$.71 to $4.00 1,076,023 6.0 years $1.60 1,071,523 $1.60
$7.00 to $9.9062 1,115,941 7.2 8.79 522,118 8.91
$10.56 to $14.94 2,905,895 7.9 14.24 939,665 14.03
$15.00 to $19.94 855,607 8.3 16.95 235,535 17.52
$20.00 to $24.81 4,422,997 8.5 20.65 2,087,134 20.57
$25.13 to $29.72 5,764,902 9.0 26.42 984,654 26.43
$30.31 to $39.38 209,991 9.6 35.27 46,858 34.93
$43.19 TO $70.91 311,560 9.9 50.39 79,291 50.31
- -------------------------------------------------------------------------------------------------------------------
$0.71 to $70.91 16,662,916 8.4 $20.05 5,966,778 $16.46
===================================================================================================================
</TABLE>
F-19
<PAGE>
14. GEOGRAPHIC AND SEGMENT INFORMATION
The Company has one reportable segment, which is the aggregation of all of
the Company's operating segments. The Company's branch locations were identified
as operating segments. The branch locations provide services including
e-Solutions, Package Software Solutions, Web Development, NetStructure, and
Knowledge Management. The operating segments have similar economic
characteristics including nature of services, type of customer, service
methodologies and processes and long-term average gross margins. The Company
operates two offices in London, England and also operates offices in Manchester,
England and Edinburgh, Scotland. These are the Company's only non-U.S. offices,
and accounted for less than 10% of the consolidated revenues and identifiable
assets in each of the last three years.
15. RELATED-PARTY TRANSACTIONS
The Company has several notes receivable from executives outstanding at
December 31, 1999 and 1998 totaling $250,257 and $168,846, respectively. The
notes bear interest at the prime rate and are due on various dates through
October 1999. In addition, the Company has accounts receivable in the amount
of $8,000 and $338,263 at December 31, 1999 and 1998, respectively, with a
related company. Officers of the Company own a percentage interest in the
related company. The Company has an investment in divine interVentures, Inc. An
officer of the Company is a member of the divine interVentures, Inc. board of
directors.
16. REVENUES FROM SIGNIFICANT CLIENTS
During 1999, 1998 and 1997 no client accounted for 10% or more of the
Company's total consolidated revenues.
17. SUBSEQUENT EVENT
On March 1, 2000, the Company and USWeb/CKS completed a merger. Under
the terms of the merger agreement, approximately 82,431,300 shares of
Whittman-Hart common stock were exchanged in the merger for all the
outstanding common stock of USWeb/CKS. In addition, employee options to
purchase approximately 34,010,426 shares of USWeb/CKS common stock and
warrants to purchase approximately 2,058,700 shares of USWeb/CKS common stock
were assumed by Whittman-Hart and became options or warrants to purchase
Whittman-Hart common stock. These amounts reflect an exchange ratio of 0.865
of a share of Whittman-Hart common stock for each share of USWeb/CKS common
stock. This transaction was accounted for as a purchase business combination
in accordance with Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations." The total consideration for the transaction was
valued at approximately $6.5 billion, which includes the value of common
stock issued in the merger, options and warrants, and other direct
acquisition costs.
USWeb/CKS was a leading Internet professional services firm which provided
a comprehensive range of business strategy consulting services, Internet
technology solutions and services, such as advanced marketing communications
programs. USWeb/CKS professionals combined their expertise with the
industry-specific knowledge to help clients build their businesses in innovative
ways.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Whittman-Hart, Inc.:
Under date of January 24, 2000, except as to Note 17, which is as of
March 1, 2000, we reported on the consolidated balance sheets of
Whittman-Hart, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999, as contained in the annual report on Form
10-K for the year 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule of valuation and qualifying accounts. The
consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statement schedule based on our audits.
In our opinion, the consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Chicago, Illinois
March 1, 2000
S-1
<PAGE>
SCHEDULE II
WHITTMAN-HART, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF YEAR ADDITIONS (1) DEDUCTIONS (2) YEAR
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
For the year ended December 31, 1999:
Allowance for doubtful accounts $1,866,640 $5,840,812 ($4,187,917) $3,519,535
For the year ended December 31, 1998:
Allowance for doubtful accounts $679,623 $2,735,135 ($1,548,118) $1,866,640
For the year ended December 31, 1997:
Allowance for doubtful accounts $369,553 $534,396 ($224,326) $679,623
</TABLE>
(1) Additions include charges to expense and $1,017,096 of additional
allowances for doubtful accounts related to the Fulcrum acquisition in
November of 1999.
(2) Bad debts written off.
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
marchFIRST
Date: March 30, 2000 By: /s/ Robert F. Bernard
---------------------------------
Robert F. Bernard
Chairman of the Board
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ BERT B. YOUNG Chief Financial Officer and Treasurer March 30, 2000
- --------------------
Bert B. Young (principal financial and accounting officer)
/s/ EDWARD V. SZOFER Director, Chief Development Officer March 30, 2000
- ------------------------ and Secretary
Edward V. Szofer
/s/ PAUL D. CARBERY Director March 30, 2000
- ------------------------
Paul D. Carbery
/s/ MARK D. KVAMME Director March 30, 2000
- ------------------------
Mark D. Kvamme
/s/ JOSEPH MARENGI Director March 30, 2000
- ------------------------
Joseph Marengi
/s/ W. BARRY MOORE Director March 30, 2000
- ------------------------
W. Barry Moore
/s/ DAVID P. STORCH Director March 30, 2000
- ------------------------
David P. Storch
/s/ JOHN R. TORELL III Director March 30, 2000
- ------------------------
John R. Torell III
</TABLE>
S-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.19 Lease agreement dated December 22, 1999 between
marchFIRST as lessee and First Chicago Leasing Corporation
as Lessor.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule Year Ended December 31, 1999.
27.2 Financial Data Schedule Years Ended December 31, 1998
and 1997 Restated.
</TABLE>
S-4
<PAGE>
Exhibit No. 10.19
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MASTER AGREEMENT
Dated as of December 22, 1999
among
WHITTMAN-HART, INC. as Lessee
and
FIRST CHICAGO LEASING CORPORATION, as Lessor
----------------------------------------------
Parking Facility
Chicago, Illinois
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1
DEFINITIONS; INTERPRETATION ....................................... 5
SECTION 2
ACQUISITION AND LEASE; FUNDINGS;
NATURE OF TRANSACTION.......................................... 5
SECTION 2.1 Agreement to Acquire, Fund and Lease............................................ 5
SECTION 2.2 Fundings of Purchase Price, Development Costs and Construction Costs............ 6
SECTION 2.3 Lessor's Invested Amount and Yield Thereon; Commitment Fee...................... 7
SECTION 2.4 Lessee Owner for Tax Purposes................................................... 8
SECTION 2.5 Amounts Due Under Lease......................................................... 8
SECTION 3
CONDITIONS PRECEDENT; DOCUMENTS..................................... 8
SECTION 3.1 Conditions to the Obligations of the Lessor on the Closing Date................. 8
SECTION 3.2 Conditions to the Obligations of the Lessor on each Funding Date................ 11
SECTION 3.3 Completion Date Conditions...................................................... 12
SECTION 4
REPRESENTATIONS............................................. 13
SECTION 4.1 Representations of the Lessee................................................... 13
SECTION 4.2 Representations of the Lessor................................................... 18
SECTION 5
COVENANTS OF THE LESSEE......................................... 19
SECTION 5.1 Qualification to do Business in Illinois........................................ 19
SECTION 5.2 Further Assurances.............................................................. 19
SECTION 5.3 Reporting....................................................................... 19
SECTION 5.4 Financial Covenants............................................................. 19
SECTION 5.5 Additional Required Appraisals.................................................. 20
SECTION 6
TRANSFERS BY LESSOR........................................... 22
SECTION 6.1 Lessor Transfers................................................................ 22
</TABLE>
Master Agreement 2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 7
INDEMNIFICATION............................................. 23
SECTION 7.1 General Indemnification......................................................... 23
SECTION 7.2 Environmental Indemnity......................................................... 25
SECTION 7.3 Proceedings in Respect of Claims................................................ 26
SECTION 7.4 Increased Costs................................................................. 27
SECTION 7.5 Change in Law; Unavailability of Deposits....................................... 28
SECTION 7.6 Capital Adequacy................................................................ 29
SECTION 7.7 End of Term Indemnity........................................................... 30
SECTION 8
MISCELLANEOUS.............................................. 31
SECTION 8.1 Survival of Agreements.......................................................... 31
SECTION 8.2 Notices......................................................................... 31
SECTION 8.3 Counterparts.................................................................... 31
SECTION 8.4 Amendments...................................................................... 31
SECTION 8.5 Headings, etc................................................................... 31
SECTION 8.6 Parties in Interest............................................................. 32
SECTION 8.7 GOVERNING LAW................................................................... 32
SECTION 8.8 Expenses........................................................................ 32
SECTION 8.9 Severability.................................................................... 32
SECTION 8.10 Liabilities of the Lessor...................................................... 32
SECTION 8.11 Submission to Jurisdiction; Waivers............................................ 32
APPENDIX A Definitions and Interpretation
SCHEDULES
SCHEDULE 2.2 Commitments
SCHEDULE 4.1(n) Subsidiaries
SCHEDULE 3.1(l) Construction Milestones
SCHEDULE 8.2 Notice Information
EXHIBITS
EXHIBIT A Form of Funding Request
EXHIBIT B Form of Completion Date Certificate
EXHIBIT C Form of Environmental Audit Reliance Letter
EXHIBIT D Form of Lessee's Counsel Opinion
</TABLE>
Master Agreement 3
<PAGE>
Master Agreement 4
<PAGE>
MASTER AGREEMENT
THIS MASTER AGREEMENT, dated as of December 22, 1999 (as it may be
amended or modified from time to time in accordance with the provisions hereof,
this "MASTER AGREEMENT"), is between WHITTMAN-HART, INC., a Delaware
corporation, as Lessee, and FIRST CHICAGO LEASING CORPORATION, a Delaware
corporation, as Lessor.
PRELIMINARY STATEMENT
In accordance with the terms and provisions of this Master Agreement,
the Lease, the Lease Participation Agreement and the other Operative Documents,
(i) the Lessee contemplates creating a Leasehold Estate in the Land in favor of
the Lessor pursuant to the Ground Lease and the Lessor contemplates acquiring
the Leasehold Estate in the Land from Lessee pursuant to the Ground Lease and
subleasing the Land to the Lessee, (ii) the Lessee contemplates constructing a
Building on the Land for the Lessor and, when completed, leasing the Building
from the Lessor as part of the Property under the Lease, (iii) Lessee wishes to
obtain, and the Lessor is willing to provide, funding for the construction of
the Building, and (iv) the Lessor wishes to sell, and the Lease Participant
wishes to purchase, a participation interest in the Lessor's rights under the
Lease and the other Operative Documents.
In consideration of the mutual agreements contained in this Master
Agreement and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1
DEFINITIONS; INTERPRETATION
Unless the context shall otherwise require, capitalized terms used and
not defined herein shall have the meanings assigned thereto in APPENDIX A hereto
for all purposes hereof; and the rules of interpretation set forth in APPENDIX A
hereto shall apply to this Master Agreement.
SECTION 2
ACQUISITION AND LEASE; FUNDINGS;
NATURE OF TRANSACTION
SECTION 2.1 AGREEMENT TO ACQUIRE, FUND AND LEASE.
(a) LEASEHOLD ESTATE. Subject to the terms and conditions of
this Master Agreement, on the Closing Date (i) the Lessee agrees to create a
Leasehold Estate in the Land in
Master Agreement 5
<PAGE>
favor of the Lessor pursuant to the Ground Lease and the Lessor agrees to
acquire the Leasehold Estate in the Land from the Lessee pursuant to the Ground
Lease, (ii) the Lessor hereby agrees to sublease the Land as part of the
Property to the Lessee pursuant to the Lease, and (iii) the Lessee hereby agrees
to sublease the Land as part of the Property from the Lessor pursuant to the
Lease.
(b) BUILDING. Subject to the terms and conditions of this
Master Agreement, from and after the Closing Date (i) the Lessee agrees,
pursuant to the terms of the Construction Agency Agreement, to construct and
install the Building on the Land for the Lessor prior to the Scheduled
Construction Termination Date, (ii) the Lessor agrees to fund the costs of such
construction and installment (and yield thereon), such fundings not to exceed in
the aggregate the remaining amount of the Commitment during the period from the
Closing Date to the Construction Termination Date, (iii) the Lessor hereby
agrees to lease the Building as part of the Property to the Lessee pursuant to
the Lease, and (iv) the Lessee hereby agrees to lease the Building from the
Lessor pursuant to the Lease.
SECTION 2.2 FUNDINGS OF PURCHASE PRICE, DEVELOPMENT COSTS AND
CONSTRUCTION COSTS.
(a) INITIAL FUNDING AND PAYMENT OF PURCHASE PRICE AND
TRANSACTION EXPENSES FOR THE PROPERTY ON CLOSING DATE. Subject to the terms and
conditions of this Master Agreement, on the Closing Date, Lessor shall make its
initial funding of the Lessor's Invested Amount in the amounts and for the
purposes set forth in the Funding Request to be delivered to the Lessor on the
Closing Date.
(b) SUBSEQUENT FUNDINGS AND PAYMENTS OF CONSTRUCTION COSTS
DURING CONSTRUCTION TERM. Subject to the terms and conditions of this Master
Agreement, on each Funding Date following the Closing Date until the
Construction Term Expiration Date, the Lessor shall pay over to the Lessee funds
(which shall constitute a part of and an increase in the Lessor's Invested
Amount) in an amount equal to the amount of Funding requested by the Lessee for
such Funding Date.
(c) AGGREGATE LIMITS ON LESSOR'S INVESTED AMOUNTS. The
aggregate amount that the Lessor shall be committed to provide as Lessor's
Invested Amounts under this Master Agreement shall not exceed the lesser of (i)
$23,000,000 and (ii) the estimated value in use shown on the Appraisal.
(d) NOTICE, TIME AND PLACE OF FUNDINGS. With respect to each
Funding, the Lessee shall give the Lessor an irrevocable prior written notice
not later than 12:00 noon, Chicago, Illinois time, three Business Days prior to
the proposed Funding Date pursuant, in each case, to a Funding Request in the
form of EXHIBIT A (a "FUNDING REQUEST"), specifying the Business Day to be the
Closing Date or subsequent Funding Date, as the case may be, and the amount of
Funding requested. All documents and instruments required to be delivered on the
Closing Date pursuant to this Master Agreement shall be delivered at the offices
of Mayer, Brown & Platt, 190 South LaSalle Street, Chicago, Illinois 60603, or
at such other location as may be determined by the Lessor and the Lessee. Each
Funding shall be in an amount equal to
Master Agreement 6
<PAGE>
$200,000 or an integral multiple of $100,000 in excess thereof. All remittances
made by the Lessor for the Funding shall be made in immediately available funds
by wire transfer to, or as directed by, the Lessee with receipt by the Lessee
not later than 1:00 p.m., Chicago, Illinois time, on the applicable Funding
Date, upon satisfaction or waiver of the conditions precedent to the Funding set
forth in SECTION 3.
(e) LESSEE'S DEEMED REPRESENTATION FOR EACH FUNDING. Each
Funding Request by the Lessee shall be deemed a representation by the Lessee to
the Lessor that on the proposed Closing Date or Funding Date, as the case may
be, (i) the amount of Funding requested represents Transaction Expenses, costs
of Construction (soft costs and hard costs), Commitment Fees or Yield or a
combination thereof (as set forth in the applicable Funding Request), in each
case not to exceed the amounts allocated therefor in the Construction Budget,
(ii) no Event of Default or, to Lessee's knowledge, Potential Event of Default
exists, and (iii) the representations of the Lessee set forth in SECTION 4.1 are
true and correct in all material respects as though made on and as of such
Funding Date except to the extent such representations or warranties relate
solely to an earlier date, in which case such representations and warranties
shall have been true and correct in all material respects on and as of such
earlier date.
SECTION 2.3 LESSOR'S INVESTED AMOUNT AND YIELD THEREON; COMMITMENT FEE.
(a) During the period from and including the Closing Date to
but excluding the date on which Lessor's Invested Amount is repaid in full,
Lessor's Invested Amount shall accrue yield ("YIELD") at a rate PER ANNUM equal
to (i) the sum of (A) the Adjusted LIBOR Rate plus (B) the Applicable Margin PER
ANNUM, computed using the actual number of days elapsed and a 360-day year. If
all or a portion of the principal amount of or yield on the Lessor's Invested
Amount shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), such overdue amount shall, without limiting the
rights of the Lessor under the Lease, accrue yield at the Overdue Rate, in each
case from the date of nonpayment until paid in full (as well after as before
judgment).
(b) During the Construction Term, in lieu of paying Basic Rent
on each Payment Date, Lessee may submit a Funding Request which includes the
amount of the Basic Rent due on each Payment Date during the Construction Term,
and on the Payment Date, provided all conditions under this Master Agreement to
such Funding have been satisfied, the Lessor's Invested Amount shall be
increased by the amount of the Basic Rent then due. Such increases in the
Lessor's Invested Amount shall occur without any disbursement of funds by the
Lessor.
(c) During the Construction Term on each Payment Date, Lessee
shall pay Lessor a commitment fee (the "COMMITMENT FEE") for each day equal to
(A) the Commitment Fee Rate then in effect TIMES (B) the difference between
$23,000,000 and the Lessor's Invested Amount on such day TIMES (C) 1/360. During
the Construction Term, in lieu of paying such Commitment Fee, Lessee may submit
a Funding Request which includes the amount of the Commitment Fee due on each
Payment Date during the Construction Term, and on the Payment
Master Agreement 7
<PAGE>
Date, provided all conditions under this Master Agreement to such Funding have
been satisfied, the Lessor's Invested Amount shall be increased by the amount of
the Commitment Fee then due. Such increases in the Lessor's Invested Amount
shall occur without any disbursement of funds by the Lessor.
SECTION 2.4 LESSEE OWNER FOR TAX PURPOSES. It is the intent of the
Lessee and the Lessor that for federal, state and local tax purposes (A) the
Lessee owns the Property and will be entitled to all tax benefits ordinarily
available to an owner of property similar to the Property, (B) the Lease will be
treated as a financing arrangement, and (C) the Lessor will be treated as a
lender making loans to the Lessee. Consistent with such characterization (i) the
Basic Rent shall be treated as interest, (ii) the Lessor's Invested Amounts
shall be treated as principal of a loan, and (iii) the other Supplemental Rent
shall be treated as additional charges under a loan, for federal income tax
purposes. The Lessor shall not take any actions inconsistent with, or otherwise
interfere with, the tax position described in the foregoing sentence, except as
required by Applicable Law or by any Governmental Authority. Nevertheless, the
Lessee acknowledges and agrees that no Person (including the Lessor) has made
any representation or warranty to it concerning the tax, financial, accounting
or legal characteristics or treatment of the Operative Documents and that the
Lessee has obtained and relied solely upon the advice of its own tax, accounting
and legal advisors concerning the Operative Documents and the accounting, tax,
financial and legal consequences of the transactions contemplated therein.
SECTION 2.5 AMOUNTS DUE UNDER LEASE. Anything else herein or elsewhere
to the contrary notwithstanding, it is the intention of the Lessee and the
Lessor that: (i) the amount and timing of installments of Basic Rent due and
payable from time to time from the Lessee under the Lease shall be equal to the
aggregate payments due and payable with respect to Yield on the Lessor's
Invested Amount on each Payment Date; (ii) if the Lessee elects the Purchase
Option or becomes obligated to purchase the Property under the Lease, the
Lessor's Invested Amounts, all Yield thereon and all other obligations of the
Lessee owing to the Lessor shall be paid in full by the Lessee, (iii) if the
Lessee properly elects the Remarketing Option, the Lessee shall pay the amounts
due pursuant to Section 14.6 of the Lease; and (iv) upon an Event of Default
resulting in an acceleration of the Lessee's obligation to purchase the Property
under the Lease, the amounts then due and payable by the Lessee under the Lease
shall include all amounts necessary to pay in full the Lessor's Invested Amount
and accrued Yield thereon and all other obligations of the Lessee owing to the
Lessor.
SECTION 3
CONDITIONS PRECEDENT; DOCUMENTS
SECTION 3.1 CONDITIONS TO THE OBLIGATIONS OF THE LESSOR ON THE CLOSING
DATE. The obligations of Lessor to carry out its obligations under SECTIONS 2.1
and 2.2 of this Master Agreement to be performed on the Closing Date shall be
subject to the fulfillment to the satisfaction of, or waiver by, Lessor on or
prior to the Closing Date of the following conditions precedent.
Master Agreement 8
<PAGE>
(a) FUNDING REQUEST. The Lessor shall have received from the Lessee the
Funding Request therefor pursuant to SECTION 2.2.
(b) OPERATIVE DOCUMENTS. Each of the Operative Documents shall have
been duly executed and delivered by each of the parties thereto.
(c) SURVEY. The Lessee shall have delivered, or shall have caused to be
delivered, to the Lessor, at the Lessee's expense, an accurate ALTA survey of
the Land, certified as requested by Lessor and showing no state of facts
unsatisfactory to the Lessor in its reasonable judgment and prepared within
ninety (90) days of the Closing Date by a Person reasonably satisfactory to the
Lessor. Such survey shall be sufficient to allow the Title Insurance Company to
issue the Title Policy described below.
(d) TITLE AND TITLE INSURANCE. On the Closing Date, the Lessor shall
receive from the Title Insurance Company an ALTA Owner's Policy of Title
Insurance issued by the Title Insurance Company in an amount equal to
$23,000,000, reasonably acceptable in form and substance to the Lessor and
showing no state of facts unsatisfactory to the Lessor in its reasonable
judgment (collectively, the "TITLE POLICY"). The Title Policy shall be dated as
of the Closing Date, shall include a pending disbursements clause reasonably
satisfactory to the Lessor, shall be without an exception for creditors' rights
and shall include coverage over the general exceptions to such policy and shall
contain such affirmative endorsements as to mechanic's liens, easements and
rights-of-way, encroachments, the non-violation of covenants and restrictions,
survey matters, zoning, recharacterization and other commercially available
endorsements as the Lessor shall reasonably request.
(e) APPRAISAl. The Lessor shall have received a report of Cushman &
Wakefield (the "APPRAISAL"), paid for by the Lessee. Such Appraisal must show
that the estimated value in use (determined as if the Building had already been
completed in accordance with the related Plans and Specifications and by
excluding from such value the amount of assessments on the Property) at the
commencement of the Lease Term is equal to at least the expected final Lessor's
Invested Amount.
(f) ENVIRONMENTAL AUDIT; RELIANCE LETTER REGARDING ENVIRONMENTAL AUDIT.
Lessor is satisfied in all respects with the Environmental Audit and KO
Environmental Services shall have delivered to the Lessor a letter
(substantially in the form of EXHIBIT C) stating that the Lessor and the Lease
Participant may rely upon such firm's Environmental Audit of the Property, a
copy of which has previously been delivered to the Lessor.
(g) EVIDENCE OF INSURANCE. The Lessor shall have received from the
Lessee certificates of insurance evidencing compliance with the provisions of
Article VIII of the Lease (including the naming of the Lessor and the Lease
Participant as additional insureds and the Lessor as loss payee as its interest
may appear with respect to such insurance), in form and substance reasonably
satisfactory to the Lessor.
Master Agreement 9
<PAGE>
(h) LESSEE'S OFFICER'S CERTIFICATE. The Lessor shall have received an
Officer's Certificate of the Lessee stating that, to the best of such officer's
knowledge, (A) each and every representation and warranty of the Lessee
contained in the Operative Documents is true and correct in all material
respects on and as of the Closing Date as though made on and as of the Closing
Date, except to the extent such representations or warranties relate solely to
an earlier date, in which case such representations and warranties shall have
been true and correct in all material respects on and as of such earlier date;
(B) no Event of Default or Potential Event of Default has occurred and is
continuing; (C) each Operative Document to which the Lessee is a party is in
full force and effect with respect to it; and (D) no event that would reasonably
be expected to have a Material Adverse Effect has occurred since September 30,
1999.
(i) LESSEE'S RESOLUTIONS AND INCUMBENCY CERTIFICATE, ETC. The Lessor
shall have received (x) a certificate of the Secretary or an Assistant Secretary
of the Lessee, attaching and certifying as to (i) the Board of Directors'
resolution duly authorizing the execution, delivery and performance by it of
each Operative Document to which it is or will be a party, (ii) the incumbency
and specimen signatures of persons authorized to execute and deliver such
documents on its behalf, (iii) its certificate of incorporation, certified as of
a recent date by the Secretary of State of the state of its incorporation, (iv)
its by-laws, and (y) good standing certificates from the appropriate office of
the States of Delaware and Illinois for the Lessee.
(j) UCC STATEMENT; RECORDING FEES; TRANSFER TAXES. The Lessor shall
have received satisfactory evidence of (i) the filing (or arrangements
satisfactory to them for filing) of such Uniform Commercial Code financing
statements as it deems reasonably necessary or reasonably appropriate in order
to protect its interests, including the UCC Statements, (ii) the payment of all
recording and filing fees and taxes with respect to any recordings or filings
made of the Memorandum of Ground Lease, the Memorandum of Lease and such UCC
financing statements, and (iii) payment of the reasonable legal fees and
expenses of Mayer, Brown & Platt, counsel to Lessor and Lease Participant.
(k) OPINION OF COUNSEL. The opinion of Altheimer & Gray, counsel to the
Lessee, dated the Closing Date, substantially in the form set forth in EXHIBIT
D-1 and the opinion of the General Counsel of Lessee, substantially in the form
set forth in EXHIBIT D-2.
(l) CONSTRUCTION DOCUMENTS. The Lessee shall have delivered to Lessor
an Officer's Certificate of the Lessee, to which all of the following are
attached: (i) the Plans and Specifications, (ii) Construction Contract, (iii)
Construction Milestones, (iv) Construction Budget and (v) the Architect's
Agreement, which Officer's Certificate and attachments shall be subject to the
approval of the Lessor and Lease Participant.
(m) LITIGATION. No action or proceeding shall have been instituted or
threatened nor shall any governmental action, suit, proceeding or investigation
be instituted or threatened before any Governmental Authority, nor shall any
order, judgment or decree have been issued or proposed to be issued by any
Governmental Authority, to set aside, restrain, enjoin or prevent the
Master Agreement 10
<PAGE>
performance of this Master Agreement or any transaction contemplated hereby or
by any other Operative Document or which is reasonably likely to materially
adversely affect the Property or any transaction contemplated by the Operative
Documents or which could reasonably be expected to result in a Material Adverse
Effect.
(n) LEGALITY. In the opinion of the Lessee, the Lessor and the Lease
Participant or their respective counsel, the transactions contemplated by the
Operative Documents shall not violate any Applicable Law, and no change shall
have occurred or been proposed in Applicable Law that would make it illegal for
such party to participate in any of the transactions contemplated by the
Operative Documents.
(o) NO EVENTS. (i) No Event of Default, Potential Event of Default,
Event of Loss or Event of Taking shall have occurred and be continuing, (ii) no
action shall be pending or threatened by a Governmental Authority to initiate a
Condemnation or an Event of Taking, and (iii) there shall not have occurred any
event that would reasonably be expected to have a Material Adverse Effect since
September 30, 1999.
(p) REPRESENTATIONS. Each representation and warranty of the Lessee
contained herein or in any other Operative Document shall be true and correct in
all material respects as though made on and as of the Closing Date.
(q) TRANSACTION EXPENSES. The Lessee shall pay the Lessor the
Transaction Expenses then accrued.
(r) PERFECTION. Lessor is satisfied that it has a first prior perfected
security interest in the Property and all other collateral securing Lessee's
obligations under the Operative Documents.
SECTION 3.2 CONDITIONS TO THE OBLIGATIONS OF THE LESSOR ON EACH
SUBSEQUENT FUNDING DATE. The obligations of the Lessor to carry out its
obligations under SECTION 2 of this Master Agreement to be performed on each
Funding Date after the Closing Date shall be subject to the fulfillment to the
satisfaction of, or waiver by, the Lessor on or prior to each such Funding Date
of the following conditions precedent:
(a) FUNDING REQUEST. The Lessor shall have received from the Lessee the
Funding Request therefor pursuant to SECTION 2.2.
(b) LESSEE'S OFFICER'S CERTIFICATE. The Lessor shall have received an
Officer's Certificate of the Lessee stating that: (A) each and every
representation and warranty of the Lessee contained in the Operative Documents
is true and correct in all material respects on and as of the Funding Date as
though made on and as of the Funding Date, except to the extent such
representations or warranties relate solely to an earlier date, in which case
such representations and warranties shall have been true and correct in all
material respects on and as of such earlier date; (B) no Event of Default or, to
Lessee's knowledge, Potential Event of Default has occurred
Master Agreement 11
<PAGE>
and is continuing; (C) each Operative Document to which the Lessee is a party is
in full force and effect with respect to it; (D) no event that would reasonably
be expected to have a Material Adverse Effect has occurred since September 30,
1999; and (E) the Construction is proceeding in a manner satisfying the
Construction Milestones set forth on SCHEDULE 3.2(b).
(c) LITIGATION. No action or proceeding shall have been instituted or
threatened nor shall any governmental action, suit, proceeding or investigation
be instituted or threatened before any Governmental Authority, nor shall any
order, judgment or decree have been issued or proposed to be issued by any
Governmental Authority, to set aside, restrain, enjoin or prevent the
performance of this Master Agreement or any transaction contemplated hereby or
by any other Operative Document or which is reasonably likely to materially
adversely affect the Property or any transaction contemplated by the Operative
Documents or which could reasonably be expected to result in a Material Adverse
Effect.
(d) LEGALITY. In the opinion of the Lessee, the Lessor and the Lease
Participant or their respective counsel, the transactions contemplated by the
Operative Documents shall not violate any Applicable Law, and no change shall
have occurred or been proposed in Applicable Law that would make it illegal for
such party to participate in any of the transactions contemplated by the
Operative Documents.
(e) NO EVENTS. (i) No Event of Default, Potential Event of Default,
Event of Loss or Event of Taking shall have occurred and be continuing, (ii) no
action shall be pending or threatened by a Governmental Authority to initiate a
Condemnation or an Event of Taking, and (iii) there shall not have occurred any
event that would reasonably be expected to have a Material Adverse Effect since
September 30, 1999.
(f) REPRESENTATIONS. Each representation and warranty of the Lessee
contained herein or in any other Operative Document shall be true and correct in
all material respects as though made on and as of the Funding Date, except to
the extent such representations or warranties relate solely to an earlier date,
in which case such representations and warranties shall have been true and
correct in all material respects on and as of such earlier date.
(g) TRANSACTION EXPENSES. The Lessee shall pay the Lessor the
Transaction Expenses then accrued.
SECTION 3.3 COMPLETION DATE CONDITIONS. The occurrence of the
Completion Date shall be subject to the fulfillment to the satisfaction of, or
waiver by, Lessor of the following conditions precedent:
(a) TITLE POLICY ENDORSEMENTS; ARCHITECT'S CERTIFICATE. The
Lessee shall have furnished to the Lessor
(1) the a date-down endorsement (redating and confirming the
coverage provided under the Title Policy and each endorsement thereto)
and a ALTA 3.1 Zoning
Master Agreement 12
<PAGE>
Endorsement, in each case effective as of a date not earlier than the
date of completion of the Construction subject to no further
exceptions not approved by Lessor (other than the Development
Agreements approved by Lessor in accordance with SECTION 5.9 of this
Master Agreement or ARTICLE V of the Lease);
(2) a certificate of the Architect dated at or about the
Completion Date and stating that (i) the Building has been completed
substantially in accordance with the Plans and Specifications, and the
Property is ready for occupancy, (ii) the Plans and Specifications
comply in all material respects with all Applicable Laws in effect at
such time, and (iii) to the best of the Architect's knowledge, the
Property, as so completed, complies in all material respects with all
Applicable Laws in effect at such time;
(3) an "as built" or "record" set of the Plans and
Specifications;
(4) a plat of survey of the Property "as built" showing all
easements, paving, driveways, fences and exterior improvements. Such
survey shall be certified as requested by Lessor and (i) be sufficient
to allow the Title Company to issue the endorsements referred to in
SECTION 3.3(a)(1) above and (ii) show no state of facts unsatisfactory
to the Lessor in its reasonable judgment; and
(5) copies of a certificate or certificates of occupancy for
the Property or other legally equivalent permission to occupy the
Property.
(b) CONSTRUCTION COMPLETION. The Construction shall have been completed
substantially in accordance with the Plans and Specifications and all Applicable
Laws, and the Property shall be ready for occupancy and operation. All fixtures
and other property contemplated under the Plans and Specifications or included
in the Appraisal delivered pursuant to Section 3.1 to be incorporated into or
installed in the Property shall have been incorporated or installed, free and
clear of all Liens except for Permitted Liens.
(c) LESSEE CERTIFICATION. The Lessee shall have furnished the Lessor
with a certification of the Lessee in the form of Exhibit B attached hereto.
SECTION 4
REPRESENTATIONS
SECTION 4.1 REPRESENTATIONS OF THE LESSEE. The Lessee represents and
warrants to Lessor as follows:
(a) ORGANIZATION; CORPORATE POWERS. The Lessee (i) is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (ii) is duly qualified as a foreign
corporation and in good standing (A) in Illinois and (B) under the laws of each
jurisdiction where such qualification is required and where the
Master Agreement 13
<PAGE>
failure to be duly qualified and in good standing would have a Material Adverse
Effect and (iii) has all requisite corporate power and authority to own, operate
and encumber its property and assets and to conduct its business as presently
conducted and as proposed to be conducted in connection with and following the
consummation of the transactions contemplated by the Operative Documents.
Lessee's principal place of business is located at 311 South Wacker Drive,
Chicago, Illinois 60606.
(b) AUTHORITY. The Lessee has the requisite corporate power and
authority to execute, deliver and perform the Operative Documents executed by
it, or to be executed by it, and the execution, delivery and performance (or
recording or filing, as the case may be) of the Operative Documents, and the
consummation of the transactions contemplated thereby, have been duly approved
by the Board of Directors of the Lessee and no other corporate proceedings on
the part of the Lessee are necessary to consummate the transactions so
contemplated.
(c) ENFORCEABLE. The Operative Documents executed by the Lessee have
been duly executed and delivered (and recorded or filed, as the case may be) by
the Lessee, and constitute its legal, valid and binding obligation, enforceable
against it in accordance with their respective terms, except as enforcement may
be limited by bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or limiting creditors' rights generally or by equitable principles
generally.
(d) NO CONFLICT. The execution, delivery and performance by the Lessee
of each Operative Document to which it is a party and each of the transactions
contemplated thereby do not and will not (i) violate any Applicable Law or
Contractual Obligation of the Lessee the consequences of which violation, singly
or in the aggregate, would have a Material Adverse Effect, (ii) result in or
require the creation or imposition of any Lien whatsoever on the Property or
upon any of the properties or assets of the Lessee or any of its Subsidiaries
(other than Permitted Liens), or (iii) require any approval of stockholders or
others which has not been obtained and is in full force and effect.
(e) GOVERNMENTAL CONSENTS. Except as have been made, obtained or given,
and are in full force and effect, no filing or registration with, consent or
approval of, notice to, with or by any Governmental Authority, is required to
authorize, or is required in connection with, the execution, delivery and
performance by the Lessee of the Operative Documents, the use of the proceeds of
the Funding made to effect the purchase of the Property, or the legality,
validity, binding effect or enforceability of any Operative Document.
(f) APPLICABLE LAW. The Lessee and each Subsidiary of the Lessee, each
of their businesses and each Person acting on behalf of any of them is in
compliance with all Applicable Laws, in each case where the failure to so comply
would have a Material Adverse Effect, either individually or together with other
such cases.
Master Agreement 14
<PAGE>
(g) RIGHTS IN RESPECT OF THE PROPERTY. The Lessee is not a party to any
contract or agreement to sell any interest in the Property or any part thereof,
other than pursuant to this Master Agreement and the Lease.
(h) HAZARDOUS MATERIALS.
(i) To the best knowledge of the Lessee, on the Closing Date,
there are no Hazardous Materials present at, upon, under or within the Property
or released or transported to or from the Property, except, in each case, in
full compliance with all Applicable Laws.
(ii) On or before the Closing Date, no written notices of any
Governmental Action have been received by the Lessee or any
Affiliate which could reasonably be expected to either (A) subject the Lessor or
Lease Participant to any Claims or Liens under any Environmental Law, or (B)
subject the Lessee or the Property to any Claims or Liens under any
Environmental Law which would have a Material Adverse Effect.
(iii) The Lessee has, or will have when required by Applicable
Law, all Environmental Permits necessary to operate the Property in accordance
with Environmental Laws and is complying with and has at all times complied with
all such Environmental Permits, except to the extent the failure to so comply
would not have a Material Adverse Effect.
(iv) No written notice, notification, demand, request for
information, citations, summons, complaint or order has been received by the
Lessee, no penalty has been assessed on the Lessee and no investigation or
review is pending or, to its best knowledge, threatened by any Governmental
Authority or other Person in each case relating to the Property with respect to
any alleged violation or liability of the Lessee under any Environmental Law. No
material notice, notification, demand, request for information, citations,
summons, complaint or order has been received by the Lessee with respect to any
other Person, no material penalty has been assessed on any other Person and no
investigation or review is pending or, to its best knowledge, threatened by any
Governmental Authority or other Person relating to the Property with respect to
any alleged material violation or liability under any Environmental Law by any
other Person.
(v) The Property and each portion thereof are presently in
compliance in all material respects with all Environmental Laws, and there are
no present or past facts, circumstances, activities, events, conditions or
occurrences regarding the Property (including without limitation the release or
presence of Hazardous Materials) that could reasonably be anticipated to (A)
form the basis of a material Claim against the Property, the Lessor, the Lease
Participant or the Lessee, (B) cause the Property to be subject to any
restrictions on ownership, occupancy, use or transferability under any
Environmental Law, (C) require the filing or recording of any notice or
restriction relating to the presence of Hazardous Materials in the real estate
records in the county or other appropriate municipality in which the Property is
located, or (D) prevent or interfere with the continued operation and
maintenance of the Property as contemplated by the Operative Documents.
Master Agreement 15
<PAGE>
(i) PROPERTY. The present condition and use of the Property conforms in
all material respects with all conditions or requirements of all existing
permits and approvals issued with respect to the Property, and the present use
of the Property and the Lessee's future intended use of the Property under the
Lease does not, in any material respect, violate any Applicable Law. No material
written notices, complaints of orders or violation or non-compliance have been
received or, to the Lessee's best knowledge, issued, threatened or contemplated
by any Governmental Authority with respect to the Property or any present or
intended future use thereof. All agreements, easements and other rights, public
or private, which are necessary to permit the lawful use and operation of the
Property as the Lessee intends to use the Property under the Lease and which are
necessary to permit the lawful intended use and operation of all presently
intended utilities, driveways, roads and other means of egress and ingress to
and from the same have been, or to the Lessee's best knowledge will be, obtained
and are, or will be, in full force and effect, and the Lessee has no knowledge
of any pending modification or cancellation of any of the same (other than any
modification pursuant to the Development Agreements).
(j) FINANCIAL STATEMENTS. The September 30, 1999 consolidated financial
statements of the Lessee and its Subsidiaries heretofore delivered to the
Lenders were prepared in accordance with generally accepted accounting
principles in effect on the date such statements were prepared and fairly
present the consolidated financial condition and operations of the Lessee and
its Subsidiaries at such date and the consolidated results of their operations
for the period then ended.
(k) MATERIAL ADVERSE CHANGE. Since the period ending September 30,
1999, there has been no change in the business, property, condition (financial
or otherwise) or results of operations of the Lessee and its Subsidiaries which
could reasonably be expected to have a Material Adverse Effect.
(l) TAXES. The Lessee and its Subsidiaries have filed all United States
federal tax returns and all other tax returns which are required to be filed and
have paid all taxes due pursuant to said returns or pursuant to any assessment
received by the Lessee or any of its Subsidiaries, except such taxes, if any, as
are being contested in good faith and as to which adequate reserves have been
provided in accordance with Agreement Accounting Principles and as to which no
Lien exists. The United States income tax returns of the Lessee and its
Subsidiaries have been audited by the Internal Revenue Service through the
fiscal year ended December 31, 1996. No tax liens have been filed and no claims
are being asserted with respect to any such taxes as of the Closing Date except
as set forth in SCHEDULE 4.1(l). The charges, accruals and reserves on the books
of the Lessee and its Subsidiaries in respect of any taxes or other governmental
charges are adequate.
(m) LITIGATION AND CONTINGENT OBLIGATIONS. There is no litigation,
arbitration, governmental investigation, proceeding or inquiry pending or, to
the knowledge of any of their officers, threatened against or affecting the
Lessee or any of its Subsidiaries which could reasonably be expected to have a
Material Adverse Effect or which seeks to prevent, enjoin or
Master Agreement 16
<PAGE>
delay the making of any Funding hereunder. Other than any liability incident to
any litigation, arbitration or proceeding which could not reasonably be expected
to have a Material Adverse Effect, the Lessee has no material contingent
obligations not provided for or disclosed in the financial statements referred
to in SECTION 4.1(j).
(n) SUBSIDIARIES. SCHEDULE 4.1(n) contains an accurate list of all
Subsidiaries of the Lessee as of the date of this Agreement, setting forth their
respective jurisdictions of organization and the percentage of their respective
capital stock or other ownership interests owned by the Lessee or other
Subsidiaries. All of the issued and outstanding shares of capital stock or other
ownership interests of such Subsidiaries have been (to the extent such concepts
are relevant with respect to such ownership interests) duly authorized and
issued and are fully paid and nonassessable.
(o) ERISA. The Unfunded Liabilities of all Single Employer Plans do not
in the aggregate exceed $5,000,000. Each Plan complies in all material respects
with all Applicable Law, no Reportable Event has occurred with respect to any
Plan, neither the Lessee nor any other member of the Controlled Group has
withdrawn from any Plan or initiated steps to do so, and no steps have been
taken to reorganize or terminate any Plan.
(p) PLAN ASSETS; PROHIBITED TRANSACTIONS. The Lessee is not an entity
deemed to hold "plan assets" within the meaning of 29 C.F.R. Section 2510.3-101
of an employee benefit plan (as defined in Section 3(3) of ERISA) which is
subject to Title I of ERISA or any plan (within the meaning of Section 4975 of
the Code), and neither the execution of this Agreement nor the making of Loans
hereunder gives rise to a prohibited transaction within the meaning of Section
406 of ERISA or Section 4975 of the Code.
(q) ACCURACY OF INFORMATION. No information, exhibit or report
furnished by the Lessee or any of its Subsidiaries to the Agent or Lease
Participant in connection with the negotiation of, or compliance with, the
Operative Documents contained any material misstatement of fact or omitted to
state a material fact or any fact necessary to make the statements contained
therein not misleading.
(r) REGULATION U. Margin stock (as defined in Regulation U) constitutes
less than 25% of the value of those assets of the Lessee and its Subsidiaries
which are subject to any limitation on sale, pledge, or other restriction
hereunder.
(s) INVESTMENT COMPANY ACT. Neither the Lessee nor any Subsidiary is an
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
(t) PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Lessee nor any
Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
Master Agreement 17
<PAGE>
(u) YEAR 2000. The Lessee has made a full and complete assessment of
the Year 2000 Issues and has a realistic and achievable program for remediating
the Year 2000 Issues on a timely basis (the "Year 2000 Program"). Based on such
assessment and on the Year 2000 Program the Lessee does not reasonably
anticipate that Year 2000 Issues will have a Material Adverse Effect.
SECTION 4.2 REPRESENTATIONS OF THE LESSOR. The Lessor represents and
warrants to the Lessee as follows:
(a) ORGANIZATION; CORPORATE POWERS. The Lessor (i) is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, and (ii) has all requisite corporate power and
authority to own, operate and encumber its property and assets and to conduct
its business as presently conducted and as proposed to be conducted in
connection with and following the consummation of the transactions contemplated
by the Operative Documents.
(b) AUTHORITY. (i) The Lessor has the requisite corporate power and
authority to execute, deliver and perform the Operative Documents executed by
it, or to be executed by it, and (ii) the execution, delivery and performance
(and recording or filing, as the case may be) of the Operative Documents, and
the consummation of the transactions contemplated thereby, have been duly
approved by all necessary corporate action of the Lessor and no other corporate
proceedings on the part of the Lessor are necessary to consummate the
transactions so contemplated.
(c) ENFORCEABLE. The Operative Documents executed by the Lessor have
been duly executed and delivered by the Lessor, and constitute its legal, valid
and binding obligation, enforceable against it in accordance with their
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws relating to or limiting
creditors' rights generally or by equitable principles generally.
(d) SECURITIES ACT. Except as set forth in the Lease Participation
Agreement, the interest being acquired or to be acquired by the Lessor in the
Property is being acquired for its own account, without any view to the
distribution thereof or any interest therein.
(e) EMPLOYEE BENEFIT PLANS. The Lessor is not and will not be making
its investment hereunder or performing its obligations under the Operative
Documents, with the assets of an "employee benefit plan" (as defined in Section
3(3) of ERISA) which is subject to Title I of ERISA, or "plan" (as defined in
Section 4975(e)(1)) of the Code.
Master Agreement 18
<PAGE>
SECTION 5
COVENANTS OF THE LESSEE
SECTION 5.1 QUALIFICATION TO DO BUSINESS IN ILLINOIS. The Lessee shall
remain qualified to do business and in good standing in the State of Illinois.
SECTION 5.2 FURTHER ASSURANCES. Upon the written request of the Lessor,
the Lessee, at its own cost and expense, will cause all financing statements
(including precautionary financing statements), fixture filings and other
similar documents, to be recorded or filed at such places and times specified by
the Lessor to the extent reasonably necessary to preserve, protect and perfect
the interest of the Lessor in the Property as contemplated by the Operative
Documents.
SECTION 5.3 REPORTING. The Lessee shall deliver or cause to be
delivered to the Lessor the following (to the extent not previously obtained by
the Lessor):
(a) as soon as they are available but not more than 120 days
after the end of each fiscal year of the Lessee, the Lessee's
consolidated balance sheets and the related statements of income and
cash flows, showing the Lessee's financial condition as of the close of
such fiscal year, on a consolidated basis, certified by KPMG Peat
Marwick or other independent auditors of recognized national standing
and accompanied by an opinion of such auditors to the effect that such
consolidated financial statements fairly present the Lessee's financial
condition and results of operations on a consolidated basis in
accordance with GAAP consistently applied;
(b) as soon as they are available but not later than 45 days
after the end of each fiscal quarter of each year, the Lessee's
consolidated and consolidating balance sheets and related statements of
income and cash flows, showing the Lessee's financial condition, on a
consolidated and consolidating basis, as of the close of such fiscal
quarter and during the then elapsed portion of the related fiscal year,
all certified by one of the Lessee's chief financial officers,
principal accounting officer, Treasurer or Assistant Treasurer (each, a
"FINANCIAL OFFICER") as fairly presenting its financial condition and
results of operations on a consolidated and consolidating basis and,
with respect to the consolidated statements, in accordance with GAAP
consistently applied, subject to normal year-end audit adjustments;
(c) together with the financial statements delivered pursuant
to PARAGRAPHS (a) and (b) above, a certificate from the Lessee's
Financial Officer showing a calculation of the financial covenants set
forth in SECTION 5.4; and
(d) upon request by the Lessor, such other information
relating to the business, affairs and financial condition of the Lessee
and its Subsidiaries or the Property as the Lessor may from time to
time reasonably request.
SECTION 5.4 FINANCIAL COVENANTS.
Master Agreement 19
<PAGE>
5.4.1 FIXED CHARGE COVERAGE RATIO. Lessee will not permit the
ratio, determined as of the end of each of its fiscal quarters, of (i)
Consolidated EBITDA PLUS Consolidated Rentals to (ii) the sum of (x)
Consolidated Interest Expense PLUS (y) Consolidated Rentals, all
calculated for the Lessee and its Subsidiaries on a consolidated basis,
to be less than 3.0 to 1.0.
5.4.2 LEVERAGE RATIO. The Lessee will not permit the ratio,
determined as of the end of each of its fiscal quarters, of (i)
Consolidated Funded Indebtedness to (ii) Consolidated EBITDA PLUS
Consolidated Rentals for the then most-recently ended four fiscal
quarters to be greater than 3.0 to 1.0.
5.4.3 MINIMUM TANGIBLE NET WORTH. The Lessee will at all times
maintain Consolidated Tangible Net Worth of not less than the sum of
(i) $208,500,000 plus (ii) 50% of Consolidated Net Income earned in
each fiscal quarter beginning with the quarter ending December 31, 1999
(without deduction for losses).
SECTION 5.5 ADDITIONAL REQUIRED APPRAISALS. If, as a result of any
change in Applicable Law after the date hereof, an appraisal of the Property is
required during the Lease Term under Applicable Law with respect to the Lessor's
interest therein, the Lessor's Invested Amount with respect thereto or the
Operative Documents, then the Lessee shall pay the cost of such appraisal.
SECTION 5.6 COLLATERAL. Upon the Closing Date and until each of the
obligations of the Lessee under the Operative Agreements have been satisfied in
full, (i) Lessee shall pledge to Lessor Eligible Collateral as security for
Lessee's obligations under the Operative Documents, and (ii) such Eligible
Collateral shall be subject to the Pledge Agreement and held by ANB pursuant to
the Control Agreement. Upon not less than seven (7) Business Day's notice to
Lessor, so long as no Event of Default or Potential Event of Default has
occurred and is continuing, and no Event of Loss, Event of Taking, Casualty or
Condemnation has occurred, Lessee may elect to change the composition of the
Eligible Collateral and cause substitute Eligible Collateral to become subject
to the Pledge Agreement and held by ANB pursuant to the Control Agreement. So
long as the minimum Eligible Collateral remains on deposit in the securities
account established under the Control Agreement, and so long as no Event of
Default or Potential Event of Default has occurred and is continuing, and no
Event of Loss, Event of Taking, Casualty or Condemnation has occurred, Lessor
shall permit Lessee to withdraw from such securities account any accretions
(including interest and dividends) to the property held therein.
SECTION 5.7 REAL PROPERTY TAXES. The Lessee shall, within one hundred
eighty (180) days after the date hereof, take such action as may be necessary to
cause the Cook County Assessor to issue a permanent tax identification number
which affects only the Property, all of the Property and no other real property,
including, without limitation, a petition for division of property. Lessor
shall, upon the request of Lessee, join in any such action subject to each of
the
Master Agreement 20
<PAGE>
requirements set forth in Article V of the Lease. Lessee shall pay, prior to
the date the same becomes due and payable, all Taxes assessed, billed or imposed
with respect to the Property and all additional real property which may be
assessed, billed or taxed together with any portion of the Property. The payment
of such Taxes is hereby acknowledged and agreed to be included within the scope
and intent of the General Indemnity set forth in Section 7.1 of the Master
Agreement.
SECTION 5.8. CHANGE IN CONTROL. Without the prior written consent of
the Lessor (which consent shall not be unreasonably withheld):
5.8.1 Lessee will not permit or suffer to occur any Change
In Control.
5.8.2 The Lessee will not, nor will it permit any
Subsidiary to, merge or consolidate with or into any
other Person, except that a Subsidiary may merge into
the Lessee or a WhollyOwned Subsidiary.
5.8.2 The Lessee will not, nor will it permit any
Subsidiary to, lease, sell or otherwise dispose of
its property to any other Person, including any
right, title or interest in any of the Operative
Documents, except:
(i) Sales of inventory in the ordinary course of
business; or
(ii) Leases, sales or other dispositions of its
property that, together with all other
Property of the Lessee and its Subsidiaries
previously leased, sold or disposed of
(other than inventory in the ordinary course
of business) as permitted by this Section
during the twelve month period ending with
the month in which any such lease, sale or
other disposition occurs, do not constitute
a Substantial Portion of the property of the
Lessee and its Subsidiaries; or
(iii) Lessee may transfer the Land and Lessee's
interests under the Operative Documents to a
WhollyOwned Subsidiary of Lessee so long as
(A) such WhollyOwned Subsidiary is solvent
and (B) Whittman-Hart, Inc. remains liable
for all obligations of the Lessee under the
Operative Documents.
5.8.4 The Lessee will not, nor will it permit any
Subsidiary to, make or suffer to exist any
Investments (including without limitation, loans and
advances to, and other Investments in, Subsidiaries),
or commitments therefor, or to create any Subsidiary
or to become or remain a partner in any partnership
or joint venture, or to make any Acquisition of any
Person, except:
(i) Permitted Investments; or
Master Agreement 21
<PAGE>
(ii) Existing Investments in Subsidiaries and
other Investments in existence on the date
hereof and described in SCHEDULE 5.8.4; or
(iii) New cash Investments in any Person in an
aggregate amount (tested as of the date
such Investment is made) not to exceed
$100,000,000; or
(iv) Acquisitions through the issuance or
delivery of the stock (or other equity or
debt instrument) of Lessee or any Affiliate
of Lessee in the aggregate amount (tested at
the time of an Acquisition) for all such
Acquisitions of not more than $500,000,000.
Subject to limitations of Applicable Law, Lessee agrees to give Lessor
reasonable advance notice of (i) any proposed event which would require the
consent of Lessor under this Section 5.8, (ii) the acquisition by any Person, or
two or more Persons acting in concert, of beneficial ownership (within the
meaning of Rule 13d3 of the Securities and Exchange Commission under the
Securities Exchange Act of 1934) of 30% or more of the outstanding shares of
voting stock of the Lessee or (iii) Acquisitions through the issuance or
delivery of the stock (or other equity or debt instrument) of Lessee or any
Affiliate of Lessee in the amount (tested at the time of an Acquisition) of
$300,000,000 or more.
SECTION 5.9. DEVELOPMENT COVENANTS.
(a) Lessee covenants and agrees that it shall not (unless Lessee's
needs for parking cannot be fully satisfied by the Property and
the Property is otherwise fully occupied by Lessee) directly or
indirectly purchase, use, provide, lease, rent, construct,
subsidize or in any other manner make use of, any parking
facilities or services for or in connection with or in any way
related to the Whittman-Hart Campus and the parking needs of its
employees, guests, visitors and invitees, other than the
Property. This covenant shall be placed of recorded in a document
duly recorded with the Cook County Recorder of Deeds as a
covenant running with the land, burdening the Whittman-Hart
Campus and benefiting the Property.
(b) The TIF Documents shall be subject to the prior approval of
Lessor, such approval not to be unreasonably withheld.
SECTION 6
TRANSFERS BY LESSOR/LEASE PARTICIPANT
SECTION 6.1 LESSOR TRANSFERS. Except as set forth in this Section 6.1
or Section 6.2 of this Master Agreement or Article V of the Lease, the Lessor
shall not assign, convey, pledge,
Master Agreement 22
<PAGE>
mortgage, hypothecate or otherwise transfer all or any portion of its right,
title or interest in, to or under the Property or any of the Operative
Documents. Notwithstanding the foregoing:
(a) prior to the Completion Date, the Lessor may transfer all or any
part of its interest in the Property and/or the Operative
Documents to (i) Bank One Corporation or (ii) any Affiliate of
Bank One Corporation which either (x) has a net worth of
$50,000,000 or (y) has its obligations under the Operative
Documents guaranteed by Bank One Corporation or an Affiliate of
Bank One Corporation which has a net worth of $50,000,000,
provided that prior to the Completion Date Lessor shall not be
released from its obligations under the Operative Documents as a
result of such transfer;
(b) on or after the Completion Date, Lessor may transfer all or any
part of its interest in the Property and/or the Operative
Documents to any Person which (x) has a net worth of $50,000,000
or (y) has its obligations under the Operative Documents
guaranteed by any Person which has a net worth of $50,000,000;
provided that from and after any transfer in accordance with this
clause (b) of Section 6.1 and the written assumption by the
transferee of Lessor's obligations under the Operative Documents
(or the portion thereof so transferred), Lessor shall be released
from its obligations under the Operative Documents to the extent
of, and with respect to, the obligations so assumed;
(c) Lessor may enter into the Lease Participation Agreement with
Lease Participant; and
(d) If an Event of Default has occurred and is continuing, the Lessor
may transfer its interests to any Person without the Lessee's
consent.
Within ten (10)Business Days following any transfer referred to in clauses (a)
or (b) above, Lessor shall notify Lessee of such transfer.
SECTION 6.2 LEASE PARTICIPANT. Lease Participant may transfer its
interests under the Lease Participation Agreement to any Person at any time.
SECTION 7
INDEMNIFICATION
SECTION 7.1 GENERAL INDEMNIFICATION. The Lessee agrees to assume
liability for, and to indemnify, protect, defend, save and keep harmless each
Indemnitee, on an After-Tax Basis, from and against, any and all Claims that may
be imposed on, incurred by or asserted against such Indemnitee (whether because
of action or omission by such Indemnitee or otherwise), whether or not such
Indemnitee shall also be indemnified as to any such Claim by any other Person
and whether or not such Claim arises or accrues prior to the Closing Date or
after the Lease Termination Date, in any way relating to or arising out of:
Master Agreement 23
<PAGE>
(a) any of the Operative Documents or any of the transactions
contemplated thereby, and any amendment, modification or waiver in respect
thereof; or
(b) the Property or any part thereof or interest therein;
(c) Development Agreements;
(d) the purchase, design, construction, preparation, installation,
inspection, delivery, non-delivery, acceptance, rejection, ownership,
management, possession, operation, rental, lease, sublease, repossession,
maintenance, repair, alteration, modification, addition, substitution, storage,
transfer of title, redelivery, use, financing, refinancing, disposition,
operation, condition, sale (including, without limitation, any sale pursuant to
the Lease), return or other disposition of all or any part of any interest in
the Property or the imposition of any Lien (or incurring of any liability to
refund or pay over any amount as a result of any Lien) thereon, including,
without limitation: (1) Claims or penalties arising from any violation of law or
in tort (strict liability or otherwise), (2) latent or other defects, whether or
not discoverable, (3) any Claim based upon a violation or alleged violation of
the terms of any restriction, easement, condition or covenant or other matter
affecting title to the Property or any part thereof, including any Development
Agreements, (4) the making of any Alterations in violation of any standards
imposed by any insurance policies required to be maintained by Lessee pursuant
to the Lease which are in effect at any time with respect to the Property or any
part thereof, and (5) Claims arising from any public improvements with respect
to the Property resulting in any change or special assessments being levied
against the Property or any Claim for utility "tap-in" fees;
(e) the breach or alleged breach by the Lessee of any representation or
warranty made by it or deemed made by it in any Operative Document or any
certificate required to be delivered by any Operative Document;
(f) the retaining or employment of any broker, finder or financial
advisor by the Lessee to act on its behalf in connection with this Master
Agreement;
(g) the existence of any Lien on or with respect to the Property, any
Basic Rent or Supplemental Rent, title thereto, or any interest therein,
including any Liens which arise out of the possession, use, occupancy,
construction, repair or rebuilding of the Property or by reason of labor or
materials furnished or claimed to have been furnished to the Lessee, or any of
its contractors or agents or by reason of the financing of any personalty or
equipment purchased or leased by the Lessee or Alterations constructed by the
Lessee; or
Master Agreement 24
<PAGE>
(h) the transactions contemplated by the Lessee hereby or by any other
Operative Document, in respect of the application of Parts 4 and 5 of Subtitle B
of Title I of ERISA and any prohibited transaction described in Section 4975(c)
of the Code;
PROVIDED, HOWEVER, the Lessee shall not be required to indemnify any Indemnitee
under this SECTION 7.1 for any of the following Claims (other than a Claim
arising from or in connection with the Development Agreements): (1) any Claim to
the extent a court of competent jurisdiction shall have determined that such
claim results from the willful misconduct or gross negligence of such
Indemnitee, (2) any Claim resulting from Lessor Liens which the Lessor is
responsible for discharging under the Operative Documents, and (3) any Claim
related to the Property that arises after the Lease Termination Date when
neither the Lessee nor any Affiliate thereof nor any sublessee thereof has
possession of the Property. It is expressly understood and agreed that the
indemnity provided for herein shall survive the expiration or termination of and
shall be separate and independent from any remedy under the Lease or any other
Operative Document.
SECTION 7.2 ENVIRONMENTAL INDEMNITY. Without limitation of SECTION 7.1,
the Lessee agrees to indemnify, hold harmless and defend each Indemnitee from
and against any and all claims (including without limitation third party claims
for personal injury or real or personal property damage), losses (including but
not limited to any loss of value of the Property), damages, liabilities, fines,
penalties, charges, administrative and judicial proceedings (including informal
proceedings) and orders, judgments, remedial action, requirements, enforcement
actions of any kind, and all reasonable costs and expenses incurred in
connection therewith (including, but not limited to, reasonable attorneys'
and/or paralegals' fees and expenses), including, but not limited to, all costs
incurred in connection with any investigation or monitoring of site conditions
or any clean-up, remedial, removal or restoration work by any federal, state or
local government agency, arising directly or indirectly, in whole or in part,
out of
(a) the presence on or under the Property of any Hazardous Materials,
or any releases or discharges of any Hazardous Materials on,
under, from or onto the Property,
(b) any activity, including, without limitation, construction,
carried on or undertaken on or off the Land, and whether by the
Lessee, or any predecessor in title or any employees, agents,
contractors or subcontractors of the Lessee, or any predecessor
in title, or any other Persons (including such Indemnitee), in
connection with the handling, treatment, removal, storage,
decontamination, clean-up, transport or disposal of any Hazardous
Materials that at any time are located or present on or under or
that at any time migrate, flow, percolate, diffuse or in any way
move onto or under the Property,
(c) loss of or damage to any property or the environment (including,
without limitation, clean-up costs, response costs, remediation
and removal costs, cost of corrective action, costs of financial
assurance, fines and penalties and natural resource damages), or
death or injury to any Person, and all expenses associated
Master Agreement 25
<PAGE>
with the protection of wildlife, aquatic species, vegetation,
flora and fauna, and any mitigative action required by or under
Environmental Laws,
(d) any claim concerning lack of compliance with Environmental Laws,
or any act or omission causing an environmental condition that
requires remediation or would allow any governmental agency to
record a lien or encumbrance on the land records, or
(e) any residual contamination on or under the Property, or affecting
any natural resources, and to any contamination of any property
or natural resources arising in connection with the generation,
use, handling, storage, transport or disposal of any such
Hazardous Materials, and irrespective of whether any of such
activities were or will be undertaken in accordance with
applicable laws, regulations, codes and ordinances;
in any case arising or occurring or resulting from events
(f) prior to or during the Lease Term, or
(g) at any time during which the Lessee or any Affiliate owns,
occupies or possesses the Property or any portion thereof, or
(h) during any period after and during the continuance of any Event
of Default;
PROVIDED, HOWEVER, the Lessee shall not be required to indemnify any Indemnitee
under this SECTION 7.2 for any of the following: (i) any Claim to the extent a
court of competent jurisdiction shall have determined that such Claim results
from the willful misconduct or gross negligence of such Indemnitee or (ii) any
Claim to the extent a court of competent jurisdiction shall have determined that
such Claim results from the negligence of any Indemnitee who, after an Event of
Default shall have occurred, is operating the business conducted at the
Building, . It is expressly understood and agreed that the indemnity provided
for herein shall survive the expiration or termination of and shall be separate
and independent from any remedy under the Lease or any other Operative Document.
SECTION 7.3 PROCEEDINGS IN RESPECT OF CLAIMS. Any Indemnitee requesting
the Lessee to pay any amount under SECTION 7.1 or 7.2 in respect of any Claim
shall immediately notify the Lessee upon such Indemnitee receiving written
notice of such Claim. With respect to any amount that the Lessee is requested by
an Indemnitee to pay by reason of SECTION 7.1 or 7.2, such Indemnitee shall, if
so requested by the Lessee and prior to any payment, submit such additional
information to the Lessee as the Lessee may reasonably request and which is in
the possession of or reasonably available to such Indemnitee to substantiate
properly the requested payment. In case any action, suit or proceeding shall be
brought against any Indemnitee, such Indemnitee shall promptly notify the Lessee
of the commencement thereof or any notice thereof received by such Indemnitee,
and the Lessee shall be entitled, at its expense, to participate in, and, to the
Master Agreement 26
<PAGE>
extent that the Lessee desires to, assume and control the defense thereof;
PROVIDED, HOWEVER, that the Lessee shall have acknowledged in writing its
obligation to fully indemnify such Indemnitee in respect of such action, suit or
proceeding, and, the Lessee shall provide such Indemnitee with all information
with respect to such action, suit or proceeding as such Indemnitee shall
reasonably request, and, PROVIDED FURTHER, that the Lessee shall not be entitled
to assume and control the defense of any such action, suit or proceeding if and
to the extent that, (A) in the reasonable opinion of such Indemnitee, such
action, suit or proceeding involves any possibility of imposition of criminal
liability on such Indemnitee, (B) such proceeding involves Claims not fully
indemnified by the Lessee which the Lessee and the Indemnitee have been unable
to sever from the indemnified claim(s) or (C) an Event of Default shall have
occurred and be continuing. The Indemnitee may participate in a reasonable
manner at its own expense and with its own counsel in any proceeding conducted
by the Lessee in accordance with the foregoing. Such Indemnitee shall cooperate
in any such proceeding as reasonably requested by the Lessee and shall provide
all information and assistance reasonably requested by the Lessee and in the
possession of or reasonably available to such Indemnitee.
Unless an Event of Default shall have occurred and be continuing, no
Indemnitee shall enter into any settlement or other compromise with respect to
any Claim which is entitled to be indemnified under SECTION 7.1 or 7.2 without
the prior written consent of the Lessee, which consent shall not be unreasonably
withheld, unless such Indemnitee waives its right to be indemnified under
SECTION 7.1 or 7.2 with respect to such Claim.
Upon payment in full of any Claim by the Lessee pursuant to SECTION 7.1
or 7.2 to or on behalf of an Indemnitee, the Lessee, without any further action,
shall be subrogated to any and all claims that such Indemnitee may have relating
thereto, and such Indemnitee shall execute such instruments of assignment and
conveyance, evidence of claims and payment and such other documents, instruments
and agreements as may be reasonably necessary to preserve any such claims and
otherwise cooperate with the Lessee and give such further assurances as are
reasonably necessary or advisable to enable the Lessee vigorously to pursue such
claims.
Any amount payable to an Indemnitee pursuant to SECTION 7.1 or 7.2
shall be paid to such Indemnitee promptly upon receipt of a written demand
therefor from such Indemnitee, accompanied by a written statement describing in
reasonable detail the basis for such indemnity and the computation of the amount
so payable.
SECTION 7.4 INCREASED COSTS. If the Lessor or the Lease Participant
shall determine in good faith that any change in any applicable law, treaty,
regulation or guideline (including, without limitation, Regulation D of the
Board of Governors of the Federal Reserve System) or any new law, treaty,
regulation or guideline, or any interpretation of any of the foregoing by any
governmental authority charged with the administration thereof or any central
bank or other fiscal, monetary or other authority having jurisdiction over the
Lessor or the Lease Participant or its lending branch or the Fundings
contemplated by this Agreement (whether or not having the force of law) shall:
Master Agreement 27
<PAGE>
(i) impose, increase, or deem applicable any reserve, special
deposit or similar requirement against assets held by, or deposits in
or for the account of, or loans by, or any other acquisition of funds
or disbursements by, the Lessor or the Lease Participant which is not
in any instance already accounted for in computing the Adjusted LIBOR
Rate;
(ii) impose on the Lessor or the Lease Participant any penalty
with respect to the foregoing or any other condition regarding this
Agreement, any other Operative Document, its disbursements or the
Lessor's Invested Amount;
and the Lessor or the Lease Participant, as the case may be, shall determine
that the result of any of the foregoing is to increase the cost (whether by
incurring a cost or adding to a cost) to the Lessor or the Lease Participant, as
the case may be, of creating or maintaining any LIBOR portion of the Lessor's
Invested Amount or to reduce the amount of Basic Rent received or receivable by
the Lessor or the Lease Participant, as the case may be, then the Lessee shall
pay on demand to the Lessor or the Lease Participant, as the case may be, for
the account of the Lessor or the Lease Participant, as the case may be, from
time to time as specified by the Lessor or the Lease Participant, as the case
may be, such additional amounts as the Lessor or the Lease Participant, as the
case may be, shall reasonably determine are sufficient to compensate and
indemnify it for such increased cost or reduced amount. If the Lessor or the
Lease Participant makes such a claim for compensation, (i) it shall provide to
the Lessee a certificate setting forth in reasonable detail the computation of
the increased cost or reduced amount as a result of any event mentioned herein
and such certificate shall be deemed prima facie correct and (ii) from and after
the last day of the then current Yield Period (upon at least two (2) Business
Days notice to Lessor and Lease Participant from Lessee), the Yield shall
thereafter accrue at the Alternative Rate.
SECTION 7.5 CHANGE IN LAW; UNAVAILABILITY OF DEPOSITS.
(a) Notwithstanding any other provision herein, if at any time the
Lessor or the Lease Participant shall determine in good faith that any change in
applicable laws or regulations or in the interpretation thereof shall make it
unlawful for the Lessor or the Lease Participant to make or maintain any portion
of the Lessor's Invested Amount based on the Adjusted LIBOR Rate or to give
effect to its obligations as contemplated by the Operative Documents with
respect to any portion of the Lessor's Invested Amount based on the Adjusted
LIBOR Rate, it shall promptly notify the Lessee, and the obligation of the
Lessor to maintain any portion of the Lessor's Invested Amount at the Adjusted
LIBOR Rate shall terminate until it is no longer unlawful for the Lessor or the
Lease Participant, as the case may be, to maintain the Lessor's Invested Amount
at the Adjusted LIBOR Rate. If the continued maintenance of any portion of the
Lessor's Invested Amount at the Adjusted LIBOR Rate is unlawful, the Lessor's
Invested Amount shall be converted to accrue Yield based on the Alternative Rate
on the last day of the then current Yield Period, or on such earlier date as may
be required by applicable law.
(b) Notwithstanding any other provision of this Agreement, if prior to
the commencement of any Yield Period, the Lessor or Lease Participant shall
either (A) inform the
Master Agreement 28
<PAGE>
Lessee that it has determined that United States dollar deposits in the amount
of the Lessor's Invested Amount scheduled to be outstanding during such Yield
Period are not readily available to the Lessor or the Lease Participant, as the
case may be, in the offshore interbank market or (B) advise the Lessee that the
Adjusted LIBOR Rate will not adequately and fairly reflect the cost to the
Lessor or the Lease Participant, as the case may be, of funding the Lessor's
Invested Amount for such Yield Period, the Lessor shall promptly give notice
thereof to the Lessee, and the Lessor's Invested Amount shall be converted to
accrue Yield based on the Alternative Rate until United States dollar deposits
in such amount and for the applicable Yield Period shall again be readily
available in the offshore interbank market or the Adjusted LIBOR Rate shall
adequately and fairly reflect the cost to the Lessor and the Lease Participant,
as the case may be.
(c) In the event the Lessor or the Lease Participant shall incur any
loss, cost or expense (including, without limitation, any loss, cost or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired or contracted to be acquired by the Lessor or the Lease Participant to
fund or maintain the Lessor's Invested Amount or the re-lending or reinvestment
of such deposits or other funds or amounts paid or prepaid to the Lessor or the
Lease Participant, but not including a loss of profit), as a result of:
(i) any payment of the Lessor's Invested Amount on a date
other than a Payment Date for any reason, whether before or after
default, and whether or not such payment is required by any provision
of any Operative Document; or
(ii) any failure by the Lessee to complete any Funding after
the Funding Notice therefor has been given, unless such failure results
from the Lessor's or the Lease Participant's inability pursuant to this
SECTION 7.5 to continue to maintain the Lessor's Invested Amount at the
Adjusted LIBOR Rate;
then, upon the demand of the Lessor or the Lease Participant, as the case may
be, the Lessee shall pay on demand to the Lessor or the Lease Participant such
amount as will reimburse the Lessor or the Lease Participant, as the case may
be, for such loss, cost or expense. If the Lessor or the Lease Participant
requests such a reimbursement, it shall provide the Lessee with a certificate
setting forth in reasonable detail the computation of the loss, cost or expense
giving rise to the request for reimbursement, and such certificate such be
deemed prima facie correct.
SECTION 7.6 CAPITAL ADEQUACY. If the Lessor or the Lease Participant
shall determine that any applicable law, rule or regulation regarding capital
adequacy instituted after the date hereof, or any change in the interpretation
or administration of any applicable, law, rule or regulation regarding capital
adequacy by any Governmental Authority, central bank or comparable agency
charged with the interpretation or administration thereof or compliance by the
Lessor or the Lease Participant (or its lending office) with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on the Lessor's or the Lease Participant's
capital as a consequence of its obligations hereunder or under the other
Operative Documents, or credit extended by it hereunder or the Operative
Documents to a level
Master Agreement 29
<PAGE>
below that which the Lessor or the Lease Participant, as the case may be, could
have achieved but for such law, rule, regulation, change or compliance, taking
into consideration the Lessor's or the Lease Participant's, as the case may be,
policies with respect to capital adequacy, by an amount deemed by the Lessor or
the Lease Participant to be material, then from time to time as specified by the
Lessor or the Lease Participant, as the case may be, the Lessee shall pay on
demand such additional amount or amounts as will compensate the Lessor or the
Lease Participant for such reduction. A certificate of the Lessor or the Lease
Participant claiming compensation under this SECTION 7.6 and setting forth the
additional amount or amounts to be paid to it hereunder in reasonable detail
shall be prima facie evidence thereof. In determining such amount, the Lessor or
the Lease Participant, as the case may be, may use any reasonable averaging and
attribution methods.
SECTION 7.7 END OF TERM INDEMNITY.
(a) SALE. In the event that at the end of the Lease Term the Lessee
elects the Remarketing Option and the amount of sales proceeds applied to the
Lease Balance, together with the Lessee's payment of the Recourse Deficiency
Amount, does not result in Lessor receiving the entire Lease Balance, then the
Lessor may obtain, at the Lessee's sole cost and expense, a report from the
Appraiser (or, if the Appraiser is not available, another appraiser reasonably
satisfactory to the Lessor) in form and substance satisfactory to Lessor
("REPORT") to establish the reason for any decline in value of the Property from
that anticipated for such date in the Appraisal delivered on the Closing Date.
The Lessee shall promptly reimburse the Lessor for the amount equal to such
decline in value (but not in excess of the remaining Lease Balance after
application of such sales proceeds and the Recourse Deficiency Amount) to the
extent that the Report indicates that such decline was due to (collectively, the
"DECLINE CAUSES"):
(i) extraordinary use, failure to maintain, to repair, to
restore, to rebuild or to replace, failure to comply with all
Applicable Laws, failure to use, workmanship, method of installation
or removal or maintenance, repair, rebuilding or replacement, or any
other cause or condition within the power of the Lessee to control or
effect resulting in the Building failing to be a parking garage
(excepting in each case ordinary wear and tear), or
(ii) any Alteration made to, or any rebuilding of, the Property
or any part thereof by the Lessee, or
(iii) any restoration or rebuilding carried out by the Lessee or
any condemnation of any portion of the Property pursuant to
Article XI of the Lease,
(iv) any use of the Property or any part thereof by the Lessee
other than as permitted by the Lease and the Ground Lease;
or
(v) any Development Agreements.
Master Agreement 30
<PAGE>
(b) REJECTION. In the event that at the end of the Lease Term the
Lessee elects the Remarketing Option and Lessor rejects the sale pursuant to
Section 14.6 of the Lease, then the Lessor may obtain, at the Lessee's sole cost
and expense, a Report to establish the reason for any decline in value of the
Property from that anticipated for such date in the Appraisal delivered on the
Closing Date. The Lessee shall promptly reimburse the Lessor for the amount
equal to such decline in value (but not in excess of the remaining Lease Balance
after application of the Recourse Deficiency Amount) to the extent that the
Report indicates that such decline was due to one or more of the Decline Causes.
SECTION 8
MISCELLANEOUS
SECTION 8.1 SURVIVAL OF AGREEMENTS. The representations, warranties and
indemnities of the parties provided for in the Operative Documents, and the
parties' obligations under any and all thereof, shall survive the execution and
delivery and the termination or expiration of this Master Agreement and any of
the Operative Documents, the transfer of the Property to the Lessor as provided
herein, any disposition of any interest of the Lessor in the Property, and shall
be and continue in effect notwithstanding any investigation made by any party
hereto or to any of the other Operative Documents and the fact that any such
party may waive compliance with any of the other terms, provisions or conditions
of any of the Operative Documents.
SECTION 8.2 NOTICES. Unless otherwise specified herein, all notices,
requests, demands or other communications to or upon the respective parties
hereto shall be addressed to such parties at the addresses therefor as set forth
in SCHEDULE 8.2, as such other address as any such party shall specify to the
other parties hereto, and shall be deemed to have been given when received.
SECTION 8.3 COUNTERPARTS. This Master Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
SECTION 8.4 AMENDMENTS. No Operative Document nor any of the terms
thereof may be terminated, amended, supplemented, waived or modified with
respect to the Lessee or the Lessor, except (a) in the case of a termination,
amendment, supplement, waiver or modification to be binding on the Lessee, with
the written agreement or consent of the Lessee, and (b) in the case of a
termination, amendment, supplement, waiver or modification to be binding on the
Lessor or the Lease Participant, with the written agreement or consent of the
Lessor.
SECTION 8.5 HEADINGS, ETC. The Table of Contents and headings of the
various Articles and Sections of this Master Agreement are for convenience of
reference only and shall not modify, define, expand or limit any of the terms or
provisions hereof.
Master Agreement 31
<PAGE>
SECTION 8.6 PARTIES IN INTEREST. Except as expressly provided herein,
none of the provisions of this Master Agreement is intended for the benefit of
any Person except the parties hereto, the Lease Participant and their permitted
successors and assigns.
SECTION 8.7 GOVERNING LAW. THIS MASTER AGREEMENT HAS BEEN DELIVERED IN,
AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF ILLINOIS APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE.
SECTION 8.8 EXPENSES. The Lessee agrees to pay, as Supplemental Rent,
all reasonable and documented out-of-pocket costs and expenses (i) of the Lessor
and the Lease Participant in connection with the preparation, execution,
delivery and perfection of the Operative Documents and the documents and
instruments referred to therein (including, without limitation, the reasonable
fees and disbursements of Mayer, Brown & Platt) and any amendment, waiver or
consent relating thereto and (ii) of the Lessor and the Lease Participant in
connection with the enforcement of the Operative Documents and the documents and
instruments referred to therein (including, without limitation, the reasonable
fees and disbursements of counsel for the Lessor and the Lease Participant) and
(iii) of the Lessor and the Lease Participant in connection with any request by
Lessee for Lessor's consent to or review of any matter, including, without
limitation, the Development Agreements (including, without limitation, the
reasonable fees and disbursements of Mayer, Brown & Platt).
SECTION 8.9 SEVERABILITY. Any provision of this Master Agreement that
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
SECTION 8.10 LIABILITIES OF THE LESSOR. The Lessor shall have no
obligation to the Lessee with respect to the transactions contemplated by the
Operative Documents except those obligations expressly set forth in the
Operative Documents or except as set forth in the instruments delivered in
connection therewith.
SECTION 8.11 SUBMISSION TO JURISDICTION; WAIVERS. Each party hereto
hereby irrevocably and unconditionally:
(i) submits for itself and its property in any legal action or
proceeding relating to this Master Agreement or any other Operative
Document, or for recognition and enforcement of any judgment in respect
thereof, to the non-exclusive general jurisdiction of the Courts of the
State of Illinois, the courts of the United States of America for the
Northern District of Illinois and appellate courts from any thereof;
Master Agreement 32
<PAGE>
(ii) consents that any such action or proceedings may be
brought to such courts, and waives any objection that it may now or
hereafter have to the venue of any such action or proceeding in any
court or that such action or proceeding was brought in an inconvenient
court and agrees not to plead or claim the same;
(iii) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by a national
overnight courier service, with a written receipt therefor, to such
party at its address set forth in SCHEDULE 8.2 or at such other address
of which the other parties hereto shall have been notified pursuant to
SECTION 8.2; and
(iv) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law.
[END OF TEXT. SIGNATURE PAGES TO FOLLOW]
Master Agreement 33
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Master
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.
WHITTMAN-HART, INC.
By:
-----------------------------------------
Name Printed:
-------------------------------
Title:
--------------------------------------
FIRST CHICAGO LEASING CORPORATION, as Lessor
By:
-----------------------------------------
Name Printed:
-------------------------------
Title:
--------------------------------------
Master Agreement 34
<PAGE>
SCHEDULE 2.2
PAYMENT INSTRUCTIONS AND
AMOUNT OF COMMITMENT
Lessee: Wire Transfer to:
As directed by Lessee from time to time.
Lessor: Wire Transfer to:
[TO BE PROVIDED BY LESSOR]
Master Agreement 35
<PAGE>
SCHEDULE 3.2(b)
CONSTRUCTION MILESTONES
Master Agreement 36
<PAGE>
SCHEDULE 4.1(l)
TAXES
Taxes for 1999 not yet delinquent
Master Agreement 37
<PAGE>
SCHEDULE 5.8.4
EXISTING INVESTMENTS
Master Agreement 38
<PAGE>
SCHEDULE 8.2
ADDRESSES FOR NOTICES
<TABLE>
<S> <C>
If to Lessor: First Chicago Leasing Corporation
Mail Suite 0502
Bank One Plaza
Chicago, Illinois 60670-0502
Attention: President
If to Lessee: Whittman-Hart, Inc.
311 South Wacker Drive
Chicago, Illinois 60606-6618
Attention: President
With a copy to: Whittman-Hart, Inc.
311 South Wacker Drive
Chicago, Illinois 60606-6618
Attention: General Counsel
</TABLE>
Master Agreement 39
<PAGE>
EXHIBIT A
TO MASTER AGREEMENT
FORM OF FUNDING REQUEST
TO: First Chicago Leasing Corporation,
as Lessor under the Master Agreement referred to below
American National Bank and Trust Company of Chicago,
as Lease Participant
Reference is hereby made to the Master Agreement dated as of
December 22, 1999 (as heretofore amended, the "MASTER AGREEMENT") between
Whittman-Hart, Inc., as Lessee, and First Chicago Leasing Corporation, as
Lessor. Capitalized terms not otherwise defined herein are used herein as
defined in the Master Agreement.
Whittman-Hart, Inc., as Lessee (the "LESSEE") hereby notifies you that
Lessee requests a Funding in the amount of $____________ on [INSERT REQUESTED
FUNDING DATE] in respect of [DESCRIBE CONSTRUCTION COSTS (INCLUDING SOFT COSTS),
TRANSACTION EXPENSES, YIELD].
In connection with such requested Funding, the Lessee hereby represents
and warrants to you as follows:
(A) on the requested Funding Date the representations and
warranties of the Lessee contained in each of the Operative Documents
shall be true and correct in all material respects as though made on
and as of such Funding Date, except to the extent such representations
or warranties relate solely to an earlier date, in which case such
representations and warranties shall have been true and correct in all
material respects on and as of such earlier date;
(B) there shall not have occurred and be continuing any Event
of Default or , to our knowledge, Potential Event of Default;
(C) The amount of the requested funding falls within the
Construction Budget, and in the case of hard costs or soft costs of the
Construction represents funds needed to reimburse Lessee or pay third
parties for amounts paid or due and owing
(D) all of the conditions precedent to such Funding set forth
in Section 3 of the Master Agreement have been satisfied.
Please wire transfer the proceeds of the Funding to __________________.
Master Agreement 40
<PAGE>
The Lessee has caused this Funding Request to be executed and delivered
by its duly authorized officer this _______________ [TO BE DELIVERED NOT LATER
THAN 12:00 NOON, THREE BUSINESS DAYS PRIOR TO THE REQUESTED FUNDING DATE].
WHITTMAN-HART, INC.
By:
--------------------------------
Name Printed:
----------------------
Title:
-----------------------------
Master Agreement 41
<PAGE>
Schedule 1 to Funding Request
<TABLE>
<S> <C>
Transaction Expenses $_____________________
Commitment Fee $_____________________
Yield $_____________________
Soft Costs $______________________
Hard Costs $______________________
TOTAL $______________________
</TABLE>
Master Agreement 42
<PAGE>
EXHIBIT B
TO MASTER AGREEMENT
FORM OF COMPLETION DATE CERTIFICATE
TO: First Chicago Leasing Corporation, as Lessor under the Master Agreement
referred to below
Reference is hereby made to the Master Agreement dated as of December
22, 1999 (as heretofore amended, the "MASTER AGREEMENT") between Whittman-Hart,
Inc., as Lessee, and First Chicago Leasing Corporation, as Lessor. Capitalized
terms not otherwise defined herein are used herein as defined in the Master
Agreement. This Certificate is being delivered pursuant to Section 3.3(c) of the
Master Agreement.
The undersigned Lessee hereby certifies to you that as of ____________,
2000 (the "COMPLETION DATE") with respect to the Property:
(i) all amounts owing to third parties for the Construction
have been paid in full (other than contingent obligations for which the
Lessee has made adequate reserves), and no litigation or proceedings
are pending, or to the best of Lessee's knowledge, are threatened,
against the Property or the Lessee which could reasonably be expected
to have a Material Adverse Effect;
(ii) all consents, licenses and permits and other governmental
authorizations or approvals required for the Construction and operation
of the Property (except for those the absence of which would not have a
Material Adverse Effect) have been obtained and are in full force and
effect, or will be obtained when required by Applicable Law;
(iii) the Property has available all services of public
facilities and other utilities necessary for use and operation of the
Property for its intended purposes, including, without limitation,
adequate water, gas and electrical supply, storm and sanitary sewerage
facilities, telephone, other required public utilities and means of
access between the Building and public highways for pedestrians and
motor vehicles;
(iv) all material agreements, easements and other rights,
public or private, which are necessary to permit the lawful use and
operation of the Property as the Lessee intends to use the Property
under the Lease and which are necessary to permit the lawful intended
Master Agreement 43
<PAGE>
use and operation of all then intended utilities, driveways, roads and
other means of egress and ingress to and from the same have been
obtained and are in full force and effect and the Lessee has no
knowledge of any pending modification or cancellation of any of the
same; and the use of the Property does not depend on any variance,
special exception or other municipal approval, permit or consent that
has not been obtained and is in full force and effect for its
continuing legal use;
(v) all of the requirements and conditions set forth in
SECTION 3.3(B) of the Master Agreement have been completed and
fulfilled;
(vi) the Property is in compliance in all material respects
with all applicable zoning laws and regulations; and
(vii) the representations set forth in SECTION 4.1 of the
Master Agreement are true and correct in all material respects on the
Completion Date.
The Lessee has caused this Completion Date Certificate to be executed
and delivered by its duly authorized officer this _______________, 2000.
WHITTMAN-HART, INC.
By:
--------------------------------
Name Printed:
----------------------
Title:
-----------------------------
Master Agreement 44
<PAGE>
EXHIBIT C
TO MASTER AGREEMENT
[letterhead of firm that performed environmental audit]
____________, 1996
First Chicago Leasing Corporation
1 Bank One Plaza
Chicago, Illinois 60670
American National Bank and Trust Company of Chicago
- --------------------
Chicago, Illinois ______
Ladies/Gentlemen:
We refer to the Phase One environmental assessment dated _________,
prepared by us for ______________, with respect to [DESCRIBE PROPERTY]. Please
be advised that you may rely upon such report as if it were addressed directly
to you.
Very truly yours,
[ ]
-----------------------------------
By:
------------------------------------------
Title:
---------------------------------------
Master Agreement 45
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG LLP
The Stockholders and Board of Directors
Whittman-Hart, Inc.:
We consent to incorporation by reference in the registration statements
on Forms S-3 (No. 333-60113), S-3 (No. 333-50029), S-3 (No. 333-74491), S-3
(No. 333-82491), S-3 (No. 333-87509), S-3 (No. 333-95675), S-3
(No. 333-95679), S-4 (No. 333-18059), S-8 (No. 333-03523), S-8 (No. 333-81809),
and S-8 (No. 333-31452) of Whittman-Hart, Inc. of our reports dated January
24, 2000, except as to Note 17, which is as of March 1, 2000, relating to the
consolidated balance sheets of Whittman-Hart, Inc. and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
earnings, stockholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 31, 1999, and the
related consolidated financial statement schedule of valuation and qualifying
accounts, which reports appear in the December 31, 1998 Annual Report on Form
10-K of Whittman-Hart, Inc. These consolidated financial statements and
consolidated financial statement schedule and our reports thereon are
included herein.
KPMG LLP
/s/ KPMG LLP
Chicago, Illinois
MARCH 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets as of December 31, 1999 and the consolidated
statements of earnings for the year ended December 31, 1999 and is qualifed in
its entirety by reference to such consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 147,816
<SECURITIES> 80,424
<RECEIVABLES> 94,228
<ALLOWANCES> 3,519
<INVENTORY> 0
<CURRENT-ASSETS> 332,447
<PP&E> 84,350
<DEPRECIATION> 16,331
<TOTAL-ASSETS> 504,208
<CURRENT-LIABILITIES> 47,631
<BONDS> 0
0
0
<COMMON> 62
<OTHER-SE> 454,593
<TOTAL-LIABILITY-AND-EQUITY> 504,208
<SALES> 0
<TOTAL-REVENUES> 480,911
<CGS> 0
<TOTAL-COSTS> 269,672
<OTHER-EXPENSES> 165,434
<LOSS-PROVISION> 3,807
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 54,386
<INCOME-TAX> 24,904
<INCOME-CONTINUING> 30,291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,291
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.47
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial info. extracted from the conso. bal.
sheets and statements of earnings as of and for YE 12/31/98 & 97 and is quali-
fied in its entirety by reference to such consolidated financial statements.
Amounts are restated to reflect the Co.'s acquisitions of Waterfield, Balr,
and Four Points during 1999, which were accounted for as a pooling-of-interests.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 50,710 10,638
<SECURITIES> 70,479 58,708
<RECEIVABLES> 66,899 38,129
<ALLOWANCES> 1,866 680
<INVENTORY> 0 0
<CURRENT-ASSETS> 187,506 111,795
<PP&E> 45,521 22,154
<DEPRECIATION> 10,329 5,965
<TOTAL-ASSETS> 254,342 129,143
<CURRENT-LIABILITIES> 39,604 27,365
<BONDS> 0 783
0 0
0 0
<COMMON> 54 49
<OTHER-SE> 211,567 99,438
<TOTAL-LIABILITY-AND-EQUITY> 211,621 99,477
<SALES> 0 0
<TOTAL-REVENUES> 333,502 199,389
<CGS> 0 0
<TOTAL-COSTS> 190,982 117,503
<OTHER-EXPENSES> 112,434 67,617
<LOSS-PROVISION> 2,735 534
<INTEREST-EXPENSE> 115 0
<INCOME-PRETAX> 35,786 17,742
<INCOME-TAX> 14,961 7,806
<INCOME-CONTINUING> 20,825 9,936
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 20,825 9,936
<EPS-BASIC> 0.40 0.21
<EPS-DILUTED> 0.36 0.20
</TABLE>
