<PAGE>
As filed with the Securities and Exchange Commission on October 6, 1997
Registration No. 333-33961
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT No. 1
To
REGISTRATION STATEMENT
on Form S-1
Under
THE SECURITIES ACT OF 1933
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OAO TECHNOLOGY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 7373 52-1973990
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code No.) Identification No.)
7500 Greenway Center Drive
Greenbelt, Maryland 20770
(301) 486-0400
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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William R. Hill
Chief Executive Officer
OAO TECHNOLOGY SOLUTIONS, INC.
7500 Greenway Center Drive
Greenbelt, Maryland 20770
(301) 486-0400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies of all communications to:
<TABLE>
<CAPTION>
<S> <C> <C>
James A. Ounsworth, Esq. N. Jeffrey Klauder, Esq. Robert H. Strouse, Esq.
Safeguard Scientifics, Inc Morgan, Lewis & Bockius LLP Drinker Biddle & Reath LLP
800 The Safeguard Building 2000 One Logan Square 1000 Westlakes Drive
435 Devon Park Drive Philadelphia, Pennsylvania 19103-6993 Suite 300
Wayne, Pennsylvania 19087 (215) 963-5694 Berwyn, Pennsylvania 19312-2409
(610) 293-0600 (610) 993-2213
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ X ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ X ]
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation or an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
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SUBJECT TO COMPLETION, DATED OCTOBER 6, 1997
PROSPECTUS
6,720,000 Shares
OAO TECHNOLOGY SOLUTIONS, INC.
Common Stock
(and Rights to acquire
up to 6,400,000 of such shares)
OAO Technology Solutions, Inc. is granting at no cost to the holders of
common shares of Safeguard Scientifics, Inc. transferable rights to purchase
shares of our Common Stock. Safeguard shareholders will receive one right for
every five Safeguard common shares that they own as of ___________, 1997.
Each right will entitle the holder to purchase one share of our Common Stock at
an exercise price of $5.00 per share. Up to 6,400,000 shares of our Common
Stock will be offered in the rights offering. Of these shares, we will be
selling 5,915,000 shares and three of our existing stockholders will be selling
485,000 shares. If any shares remain unsubscribed after the rights offering,
the underwriters will purchase all such shares pursuant to a standby
underwriting agreement.
We will also be selling an additional 320,000 shares of our Common Stock to
certain persons selected by us. These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership companies.
The exercise period for the rights will expire at 5:00 p.m., New York City
time, on ___________, 1997. You may only exercise your rights if you
purchase at least 20 shares of our Common Stock through such exercise.
(Continued)
You should carefully consider the information regarding the risks
associated with an investment in our Common Stock that are discussed under the
caption "Risk Factors" beginning on page 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Assumed Exercise Underwriting Discount Paid by Selling Proceeds to the Selling
and Offer Price Paid by the Company Stockholders the Company Stockholders
----------------- --------------------- -------------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Min. $0.15 Min. $0.15 Max. $4.85 Max. $4.85
Per Share................ $5.00 Max. $0.35 Max. $0.35 Min. $4.65 Min. $4.65
Min. $935,250 Min. $72,750 Max. $30,239,750 Max. $2,352,250
Total.................... $33,600,000 Max. $2,118,250 Max. $169,750 Min. $29,056,750 Min. $2,255,250
Total with Min. $935,250 Min. $296,750 Max. $30,239,750 Max. $5,328,250
Over-Allotment........... $36,800,000 Max. $2,118,250 Max. $393,750 Min. $29,056,750 Min. $5,231,250
- -----------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
The minimum underwriting discount assumes that all rights granted in the
rights offering are exercised and reflects the payment of a financial advisory
fee to the underwriters equal to 3% of the exercise price on the 6,720,000
shares sold in this offering. In such a case, the minimum underwriting discount
would yield the maximum proceeds to us and to the selling stockholders. The
maximum underwriting discount assumes that none of the rights granted in the
rights offering are exercised and reflects the payment of an underwriting
discount of 4% of the exercise price on the 6,400,000 shares which would then be
purchased by the underwriters plus an additional 3% financial advisory fee on
all of the 6,720,000 shares offered hereby. In such a case, the maximum
underwriting discount would yield the minimum proceeds to us and to the selling
stockholders.
The last row of the table assumes that the underwriters have exercised
their option granted by the selling stockholders to purchase an additional
640,000 shares of our Common Stock. The exercise of the over-allotment option
would yield additional proceeds to the selling stockholders and would require
the payment by the selling stockholders of both a 4% underwriting discount and a
3% financial advisory fee on such shares.
Wheat First Butcher Singer Janney Montgomery Scott Inc.
The date of this Prospectus is , 1997.
<PAGE>
Once you exercise a right and we accept the exercise, you may not withdraw
the exercise. The shares of our Common Stock that are sold in the rights
offering will come first from the shares being issued by us, and then from the
shares being sold by the selling stockholders. If shares remain unsubscribed
after the end of the rights exercise period, the first 300,000 of such shares
will be offered by us to certain other persons. These persons may have a
relationship with us, Safeguard or one of Safeguard's other partnership
companies. All shares not purchased by such persons after this offer and all
unsubscribed shares in excess of 300,000 will be purchased by the underwriters
pursuant to a standby underwriting agreement.
There is no minimum number of shares that must be subscribed for in the
rights offering for it to be completed. The number of rights that will be
granted to the holders of Safeguard common shares is based upon the number of
Safeguard common shares that are outstanding on __________, 1997. If there are
fewer than 32,000,000 Safeguard common shares outstanding on ___________, 1997,
we will grant fewer than 6,400,000 rights in the rights offering. If fewer than
6,400,000 rights are granted, we will offer the shares subject to the rights
which were not granted to Safeguard shareholders to certain persons selected by
us at a purchase price of $5.00 per share. In any event, all of the 6,400,000
shares of our Common Stock offered in the rights offering will be sold.
However, this offering may be canceled by the underwriters if certain conditions
are not satisfied. In that event, if you have made any payments to the rights
agent, ChaseMellon Shareholder Services, L.L.C., the full amount of your
payments, without interest, will be promptly returned to you.
We will not receive any proceeds from the sale of shares by the selling
stockholders. After the completion of this offering, the selling stockholders
together will own approximately 21.6% of our Common Stock.
We have filed a Registration Statement with the SEC covering the rights and
the shares of Common Stock. Before this offering, our Common Stock has not been
listed on any stock exchange or The Nasdaq Stock Market. We have filed an
application to have the rights and our Common Stock approved for quotation on
the Nasdaq National Market.
The underwriters may engage in transactions involving the Common Stock
during and after the rights exercise period. As a result, the underwriters may
realize profit in addition to the underwriting compensation received for their
participation in this offering. We expect that we will deliver any remaining
shares on or about ___________, 1997 at the offices of Wheat, First
Securities, Inc. in Richmond, Virginia.
After this offering, we intend to send to all of our stockholders annual
reports containing financial statements that have been examined and reported
upon, with an opinion expressed by, the Company's independent auditors.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE
NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR RETARDING A DECLINE IN
THE MARKET PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
[PHOTO]
Three photographs of employees surrounding the following
text: "OAO Technology Solutions, Inc. Providing Worldwide,
[PHOTO] Full-Service Information Technology Solutions through
Industry-Specific Global Partnerships".
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes no exercise of the
underwriters' over-allotment option and assumes an exercise price of $5.00
per share. Unless the context otherwise indicates, OAO Technology Solutions,
Inc. and its subsidiaries are referred to collectively herein as the
"Company."
The Company
OAO Technology Solutions, Inc. (the "Company") provides a wide range of
outsourced information technology ("IT") solutions and professional services,
including the operation of large-scale data center complexes and networks
("Megacenter Operations"), distributed systems management, staffing services
and other IT services. The Company provides these solutions and services,
generally on a long-term, fixed-price contractual basis, to strategic clients
("Strategic Clients") which are global providers of IT outsourcing services.
The Company works with these Strategic Clients as part of the IT outsourcing
team in providing services to a wide range of corporate clients ("Engagement
Clients"), accepting delivery responsibility for specific functional roles
within the outsourcing engagements. The Company's primary Strategic Clients
have been IBM's Global Services ("IBM", formerly IBM's Integrated Systems
Solutions Corp.) and Digital Equipment Corporation ("Digital"). The Company
is also working towards establishing a Strategic Client relationship, with
Perot Systems Corp. ("Perot Systems"). Representative Engagement Clients
currently include Ameritech, Campbell Soup, McDonnell Douglas, PECO Energy
and Ryder Systems Corp. The Company's revenues have expanded at a compound
annual growth rate of 60.5% to $57.9 million in 1996 from $22.5 million in
1994. Revenues in the first six months of 1997 increased by 61.7% to $39.3
million compared to $24.3 million in the first six months of 1996. For the
years ended December 31, 1995 and 1996 and for the six months ended June 30,
1997, approximately 92%, 74% and 62% of the Company's revenues, respectively,
were derived from fixed-price contracts. As of June 30, 1997, the Company
had over 1,300 employees in 14 Company offices and 82 engagement locations in
the United States, Canada, Mexico, Brazil and the United Kingdom.
The use of outsourcing has grown rapidly as corporations have
increasingly determined that it is advantageous to focus on their core
competencies and outsource those functions that are not central to their
primary mission. According to the Yankee Group, an industry research firm,
the IT outsourcing market in 1995 was approximately $59 billion in the United
States and approximately $107 billion worldwide. One of the key trends
occurring in the IT outsourcing industry is an increasing use of business
partnerships and alliances among outsourcing vendors to deliver more
cost-effectively to the engagement client a broader range of technical
skills. Factors driving this trend include the complexity and convergence of
technology required in outsourcing engagements, competition for technical
resources, shortened delivery times, and investment costs of internally
building technical capabilities. As a result, outsourcing providers
recognize that it is not practical to internally develop and manage all of
the technical skills and critical resources necessary to perform increasingly
complex outsourcing engagements.
The Company believes that it is differentiated from other IT service
providers through its focus on relationships with Strategic Clients, its
ability to perform successfully and profitably under multi-year, fixed-price
contracts and its ability to provide services on a national and international
basis. The Company's strategy is to build long-term relationships with
selected Strategic Clients by understanding their business needs and by
providing specific services within large-scale outsourcing engagements more
cost-effectively than its Strategic Clients. The Company's services range
from basic data center management operations to help desk services, business
process reengineering and software engineering support. The Company delivers
its services through customer teams, each of which has full responsibility
for the delivery of services to a specific Strategic Client. The Company's
close relationships with its Strategic Clients, its ability to rapidly
transition and integrate its management personnel into new engagements, and
its ability to effectively manage personnel in the client environment, allow
the Company to profitably price its services under fixed-price contracts. By
offering fixed-price contracts, the Company reduces the execution and pricing
risk for its Strategic Clients in their large-scale outsourcing engagements.
The Company has developed and is continuing to expand its international
service delivery capabilities in order to leverage its Strategic Clients'
increasingly global IT outsourcing efforts.
Large-scale outsourcing engagements typically involve the acquisition of
IT assets by the outsourcing provider from the engagement client. These
assets can range from fixed assets, such as entire data centers and computer
networks, to personnel, such as data center, help desk and programming staff.
The Company's role in outsourcing engagements usually involves the retention
of IT personnel from the Engagement Client. By retaining employees as part
of its new outsourcing engagements, to date the Company's growth has not been
impeded by the availability of qualified technical personnel and the Company
has avoided the significant staffing costs and expenses normally associated
with new engagements within the IT services industry. In each new
outsourcing engagement, the Company utilizes its expertise in IT staffing and
operations to evaluate and retain outsourced staff and to reengineer the
operations of the outsourced function. Through this process, the Company
historically has been able to improve the performance of, and manage on a
more cost-effective basis, the outsourced function for its clients.
-3-
<PAGE>
The Company's goal is to become one of the premier providers of
outsourced IT solutions and professional services by pursuing the following
principal strategies:
Leverage Existing Relationships. By establishing and nurturing close
relationships with a limited number of Strategic Clients, the Company intends
to continue building a reputation for performance that supports the Company's
selection by its clients as a value-added partner of choice. In support of
this strategy, the employees that deliver services to Strategic Clients are
organized in customer teams, with each customer team responsible for a
particular Strategic Client. In addition to designated customer teams, the
Company also maintains engagement managers who are responsible for each
Strategic Client relationship and who seek to identify additional business
opportunities within the Strategic Client organization. As a result of these
relationships, the Company has been granted several engagements by Strategic
Clients without the requirement that the Company submit to a competitive
selection process.
Selectively Expand Base of Strategic Clients. The Company intends to
selectively expand the number of Strategic Clients with which it maintains
relationships by carefully evaluating market opportunities with IT services
and product providers who value the Company's outsourcing approach. The
Company recently began its third engagement with the energy systems group of
Perot Systems and is working towards establishing a Strategic Client
relationship with Perot Systems. The Company is also working to establish
business opportunities with NCR also with the objective of achieving a
Strategic Client relationship. In expanding its base of Strategic Clients,
the Company intends to refrain from pursuing engagement or partnership
opportunities with organizations competing directly with its existing
Strategic Clients.
Increase International Presence. The Company plans to continue to expand
its international presence to capitalize on global outsourcing opportunities
with its Strategic Clients. The Company currently maintains offices in
Canada, Mexico, Brazil and the United Kingdom, and anticipates opening
additional offices within the next 18 months in Continental Europe and the
Asia-Pacific Rim. The Company also uses joint venture relationships with
local IT services providers in order to broaden its international service
capabilities. The Company has established a joint venture relationship with
Capita Managed Services Limited, a local IT service provider in the United
Kingdom, and has executed letters of understanding regarding the
establishment of joint venture relationships with Stefanini Consultoria e
Assessoria em informatica in Brazil and with Comtex Group Limited in New
Zealand.
Develop Industry-Specific Expertise. The Company intends to selectively
develop expertise in industries that may offer higher-margin opportunities
for the Company's IT solutions and professional services. The Company has
invested in developing expertise in the healthcare industry, and has recently
begun an engagement with IBM which leverages the Company's industry expertise
to provide a state-of-the-art health data network to healthcare service
providers. The Company will target other vertical markets that are
undergoing regulatory, technological or competitive changes which provide
opportunities for increased outsourcing of IT functions. The Company will
likely make investments in new technical and service capabilities to enhance
its vertical market strategy.
Pursue Acquisitions and Alliances. The Company intends to pursue
expansion opportunities with other IT service providers by means of
acquisitions or alliances. The Company believes that new technical skills,
additional industry expertise, a broader client base and an expanded
geographic presence may result from these activities.
In the years ended December 31, 1995 and 1996 and in the six months ended
June 30, 1997, the Company's largest Strategic Client, IBM, accounted for
approximately 88.7%, 82.2% and 76.2% of the Company's revenues,
respectively. Dataquest, an industry research firm, estimates that in 1995,
IBM was the leading provider of management/operations and business process
management services in the United States with a 28.9% market share and was
one of the top two outsourcing providers worldwide with a 19.7% market share.
The Company's relationship with Digital has grown by 252.4% from $2.1
million in the six months ended June 30, 1996 to approximately $7.4 million
in the six months ended June 30, 1997. In early 1997, the Company also began
its third engagement with Perot Systems through its energy systems group.
The Company began operations in January 1993 as a division of OAO
Corporation, was incorporated in the State of Delaware in March 1996 and was
spun off from OAO Corporation in April 1996. The Company's principal
executive offices are located at 7500 Greenway Center Drive, Greenbelt,
Maryland 20770 and its telephone number is (301) 486-0400.
-4-
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Description of the Rights Offering . . . . . . . . If you hold Safeguard common shares on ___________, 1997, you will
receive one right to purchase our Common Stock for every five Safeguard
common shares you own. Fractional rights will be rounded up to the next
whole number in determining the number of rights to be issued to
Safeguard shareholders. Each right entitles you to purchase one share
of our Common Stock at a purchase price of $5.00. You must own at least
20 rights to be eligible to exercise your rights. In other words, if
you own fewer than 96 Safeguard common shares, you will receive fewer
than 20 rights and you will not be eligible to exercise your rights
unless you purchase additional rights in the market. Together with the
selling stockholders, we are offering up to 6,400,000 shares of our
Common Stock for purchase through the exercise of rights.
The Exercise Price of the Rights . . . . . . . . . If you wish to exercise your rights to purchase our Common Stock, the
purchase price will be $5.00 per share of Common Stock.
When You Can Exercise Your Rights. . . . . . . . . The rights will only be exercisable from the period beginning on
____________, 1997 and ending on _______ __, 1997 at 5:00 p.m., New
York City time.
How Your Rights Will be Evidenced. . . . . . . . . You will receive certificates that represent your transferable rights.
Offer of Unsubscribed Shares to Other
Purchasers . . . . . . . . . . . . . . . . . . In the event that not all of the rights are exercised, we will offer the
first 300,000 unsubscribed shares and any shares of Common Stock subject
to rights that were not distributed, to certain persons selected by us.
These persons may have a relationship with us, Safeguard or one of
Safeguard's other partnership companies.
Obligations of the Underwriters. . . . . . . . . . The underwriters will purchase any shares offered in the rights offering
that have not been purchased through the exercise of rights and have not
otherwise been sold by us by ___________, 1997 at the exercise
price, less a 4% underwriters' discount and a 3% financial advisory fee.
The underwriters will then offer these shares to the public.
-5-
<PAGE>
Number of Shares of Common Stock Offered
in the Rights Offering . . . . . . . . . . . . Of the 6,400,000 shares offered in the rights offering, we will be
selling 5,915,000 shares and the selling stockholders will be selling
485,000 shares.
Offer of Direct Shares to Direct
Purchasers . . . . . . . . . . . . . . . . . . We are also offering up to 320,000 shares of our Common Stock to certain
persons selected by us. These persons may have a relationship with us,
Safeguard or one of Safeguard's other partnership companies.
Common Stock to be Outstanding After the
Offering . . . . . . . . . . . . . . . . . . . After this offering, 16,235,583 shares of Common Stock will be
outstanding, not including 1,375,875 shares issuable upon the exercise
of outstanding stock options (at a weighted average exercise price of
$2.70 per share) as of June 30, 1997.
How We Intend to Use the Proceeds. . . . . . . . . We will use the money received from the sale of our shares to repay our
outstanding debt, to invest in additional management information
systems, and for continued international expansion, working capital,
general corporate purposes and other capital expenditures. We may also
use a portion of the net proceeds for future acquisitions, although we
currently have no commitments regarding any acquisition. We will not
receive any proceeds from the sale of our shares by the selling
stockholders.
Nasdaq National
Market Symbols. . . . . . . . . . . . . . . . . During the period in which you can exercise your rights, the rights will
trade on the Nasdaq National Market under the symbol OAOTR and the
Common Stock will trade under the symbol OAOTV on a when-issued basis.
After the expiration of the rights period, the Common Stock will trade
under the symbol OAOT.
</TABLE>
-6-
<PAGE>
Summary Consolidated Financial Information
The summary consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this
Prospectus. The statement of operations data for the years ended December
31, 1994, 1995 and 1996, and the balance sheet data as of December 31,
1994, 1995 and 1996 have been derived from consolidated financial
statements of the Company which have been audited by Deloitte & Touche LLP,
independent auditors. The statement of operations data for the year ended
December 31, 1993 and the six months ended June 30, 1996 and 1997 and the
balance sheet data as of December 31, 1993 and June 30, 1997 have been
derived from the Company's unaudited consolidated financial statements
which, in the opinion of management, include all significant, normal and
recurring adjustments necessary for a fair presentation of the financial
position and results of operations for such unaudited period. The Company
began its operations in 1993 as a division of OAO Corporation, was
incorporated in March 1996 and was spun off from OAO Corporation in April
1996.
<TABLE>
<CAPTION>
Six Months
Ended
December 31, June 30,
-------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1993(1) 1994 1995 1996 1996 1997
------- ---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operating Data:
Revenues.......................... $12,142 $22,472 $38,229 $57,891 $24,321 $39,338
Direct costs...................... 8,944 16,503 28,548 43,896 18,170 30,773
Gross profit...................... 3,198 5,969 9,681 13,995 6,151 8,565
Income from operations............ 586 1,226 2,343 3,171 1,277 2,250
Net income........................ $ 322 $ 699 $ 1,089 $ 1,810 $ 725 $ 1,232
------- ---- ---- ---- ---- ----
------- ---- ---- ---- ---- ----
Pro forma net income per common
share (2)........................ .17 .07 .12
Pro forma weighted average number
of common shares outstanding (2). 10,422 10,422 10,414
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------------------------------
Pro Forma
Actual Pro Forma(3) adjusted (4)
------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital................... $ 4,505 $32,498 $32,498
Total asset....................... 20,205 48,198 44,198
Total debt........................ 4,651 4,651 651
Total stockholders' equity........ 7,072 35,065 35,065
</TABLE>
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(1) The Company's initial year of operations began in
1993 as a division of OAO Corporation. The Company was
incorporated in March 1996 and was spun off from OAO Corporation
in April 1996. As these were entities under common control, the
merger was accounted for similar to that of a
pooling-of-interests and as a result, the financial statements of
the Company have been presented at historical cost since its
inception in 1993.
(2) See Note 2 to Notes to the Consolidated Financial Statements for
information concerning calculation of pro forma net income per
common share.
(3) Adjusted to give effect to the sale by the Company of 6,235,000
shares of Common Stock and the receipt and application of
approximately $28.0 million in net proceeds from this offering
after deducting the maximum total underwriting discount with
respect to such shares of approximately $2.2 million and
estimated offering expenses of $1.0 million (including $200,000
representing the maximum applicable non-accountable expense
allowance to the underwriters).
(4) The "Pro Forma As Adjusted" balances reflect the repayment of the
outstanding principal balance under the Company's line of credit
from the proceeds of this offering (which was $4.0 million as of
July 31, 1997). See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
-7-
<PAGE>
RISK FACTORS
An investment in the rights and the shares of Common Stock offered hereby
involves a high degree of risk. Prospective investors should carefully
consider the following risk factors, as well as all other information in this
Prospectus, before investing in the shares of the Common Stock offered
hereby. This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. Future events and the Company's actual
results could differ materially from the results reflected in these
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in the following risk
factors.
Dependence on Key Strategic Clients
Historically, substantially all of the Company's revenue has been derived
from its relationships with its largest Strategic Clients, IBM and Digital.
For the years ended December 31, 1995 and 1996 and for the six months ended
June 30, 1997, IBM accounted for approximately 88.7%, 82.2% and 76.2% of the
Company's revenues, respectively. For the years ended December 31, 1995 and
1996 and for the six months ended June 30, 1997, Digital accounted for
approximately 5.4%, 11.4% and 18.8% of the Company's total revenues,
respectively. The Company expects to continue to derive a significant portion
of its revenue from IBM and Digital for the foreseeable future. The
Company's future revenues are dependent to a large extent on the success of
the outsourcing businesses of IBM and Digital and their continued engagement
of the Company. The termination or nonrenewal of a Strategic Client's
contract by an Engagement Client could have a material adverse effect on the
Company's business, operating results and financial condition. The loss of
IBM or Digital as a Strategic Client or a decrease in the revenue derived
from the Company's relationships with either IBM or Digital would have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that either Strategic Client
will continue to engage the Company's services at historical levels, if at
all.
Limited Ability to Establish New Strategic Client Relationships
Because the Company intends to maintain relationships with a limited
number of Strategic Clients, the Company's opportunity to obtain
engagements from other entities including major competitors of these
Strategic Clients will be significantly limited. There can be no assurance
that the Company will be able to establish new Strategic Client
relationships. As a result, the Company's revenue will likely continue to
be derived from a limited number of clients and the Company's future growth
opportunities will likely be tied to the opportunities presented to its
Strategic Clients. There can be no assurance that the Company's Strategic
Clients will enjoy continued growth opportunities in their outsourcing
businesses, that they will retain the Company to participate in any such
opportunities, or that new contracts with existing Strategic Clients will
generate profits commensurate with the Company's historical level of
profits.
Risks Associated With Fixed-Price Contracts
For the years ended December 31, 1995 and 1996 and for the six months
ended June 30, 1997, approximately 92%, 74% and 62% of the Company's
revenues, respectively, were derived from fixed-price contracts. The
successful use of fixed-price contracts by the Company is dependent on the
Company's ability to maintain a pre-established level of service while
achieving certain operating or managerial efficiencies during the course of
its fixed-price engagements. There can be no assurance that the Company
will successfully achieve these efficiencies, the failure of which would
likely have a material adverse effect on the Company's business, operating
results and financial condition.
Ability to Sustain and Manage Growth
The Company's future growth is dependent upon a number of factors,
including successful execution of the Company's international expansion
plans, implementation of new management information systems, entrance into
new vertical markets, retention of employees, development of complementary
capabilities, execution of its acquisition strategy, and entrance into
alliances and business partnerships. The Company currently has limited
management and
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administrative resources. The Company's growth and expansion has placed
and will likely continue to place a significant strain on the Company's
resources, and the failure to manage growth effectively would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business - Growth
Strategy" and "Management."
Variability of Quarterly Operating Results
The Company has experienced and may in the future continue to
experience fluctuations in its quarterly operating results. Factors that
may cause the Company's quarterly operating results to vary include the
number of active engagements, the loss of major Strategic Clients or
Engagement Clients, the timing of personnel cost increases and the portion
of revenues derived from new client engagements. In addition, certain of
the Company's engagements are terminable by its Strategic Clients without
penalty and any such termination could have an adverse effect on the
Company's business, operating results and financial condition. Due to
these and other factors, there can be no assurance that the Company's
operating results will meet the expectations of investors for any given
fiscal period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Key Personnel
The Company believes that its continued success depends to a
significant extent upon the efforts and abilities of its executive officers
and other key employees. In particular, the loss of the services of
William R. Hill, the Company's President and Chief Executive Officer, or
Edgar M. Fields, the Company's Chief Operating Officer, or any of the
Company's other executive officers or key employees could have a material
adverse effect on the Company's business, operating results and financial
condition. With the exception of Mr. Hill, none of the Company's executive
officers have entered into employment contracts with the Company.
Furthermore, the Company's anticipated growth and expansion into activities
requiring additional expertise will require the hiring of highly skilled
technical, management, financial, sales and marketing personnel.
Competition for such personnel is intense, and the failure of the Company
to effectively hire and retain such personnel could have a material adverse
effect on the Company's business, operating results and financial
condition. See "Management."
Competition
The IT services market is highly competitive and is served by numerous
firms, including systems consulting and integration firms, professional
services companies, application software firms, temporary employment
agencies, the professional service groups of computer equipment companies,
facilities management and management information systems outsourcing
companies, certain "Big Six" accounting firms, and general management
consulting firms. Many participants in the commercial IT services market
have significantly greater financial, technical and marketing resources and
generate greater revenues than the Company. The Company believes that the
principal competitive factors in the commercial IT services industry
include responsiveness to client needs, the ability to cause the transition
of the outsourced services to occur on a prompt and seamless basis, quality
of service, employee relations, price, management capability and technical
expertise. The Company believes that its ability to compete also depends
on a number of competitive factors outside its control, including the
ability of its competitors to hire, retain and motivate skilled technical
and management personnel, the price at which others offer comparable
services and the extent of its competitors' responsiveness to client needs.
As the worldwide IT solutions and services market continues to grow,
the Company believes that it will attract new competitors. There can be no
assurance that the Company will be able to compete successfully which could
result in the failure to obtain new engagements or could compel the Company
to make significant price reductions. The inability of the Company to
successfully compete could result in a material adverse effect on the
Company's business, operating results and financial condition. See
"Business--Competition."
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Risks Associated With International Sales
The Company expects to expand its presence in international markets
and may in the future derive a significant portion of its revenues from
these markets. The Company's current and future international business
activities are subject to a variety of potential risks, including
political, regulatory and trade and economic policy risks. The Company
will also be subject to the risks attendant to transacting in foreign
currencies. In addition, many foreign governments have laws which provide
employees with significantly more favorable severance and other social
welfare benefits than are generally provided in the U.S. Accordingly, the
Company may be subject to unanticipated and significant severance costs
upon the cancellation or expiration of any of its international
engagements. The realization by the Company of any of these risks could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 12 to notes to the
Consolidated Financial Statements.
Dependence on Availability of Qualified Technical Personnel
The Company is dependent upon its ability to attract, hire and retain
personnel who possess the technical skills and experience necessary to meet
the service requirements of its clients. The Company competes for these
individuals with other providers of technical services, systems
integrators, providers of outsourcing services, computer systems
consultants, and temporary personnel agencies. There can be no assurance
that a sufficient number of qualified technical personnel will be available
to the Company or that the Company will successfully retain its existing
personnel. The realization of any of such events could have a material
adverse effect on the Company's business, financial condition and results
of operations.
Liabilities for Client and Employee Actions
The Company often places its employees in the workplace of Strategic
Clients and Engagement Clients. The Company is therefore exposed to
potential liability with respect to actions taken by its employees, such as
damages caused by employee errors, misuse of client-proprietary information
or theft of client property. Due to the nature of the Company's potential
liability with respect to any such actions, there can be no assurance that
any insurance maintained by the Company will be adequate to cover any such
liability. To the extent that such insurance is not sufficient in amount or
scope to cover a loss, the Company's business, financial condition and
results of operations could be materially adversely affected. Another
attendant risk involves possible claims of discrimination, harassment and
other similar claims. A failure to avoid these risks may result in negative
publicity for the Company and the payment by the Company of money damages
or fines or loss of a Strategic Client or Engagement Client relationship.
There can be no assurance that the Company will not experience such
problems in the future.
Intellectual Property and Proprietary Rights
The Company relies upon a combination of trade secret, nondisclosure
and other contractual arrangements to protect the proprietary rights of the
Company and the Company's Strategic Clients and Engagement Clients. The
Company generally enters into agreements with its clients which contain
covenants regarding confidentiality and limits access to, and distribution
of, its clients' proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation of the Company's or its clients' proprietary information
or that the Company will be able to detect unauthorized use or take
appropriate steps to enforce its clients' intellectual property rights.
The Company has recently adopted a policy which requires each new employee
to execute restrictive covenants that require the employee to keep
confidential all proprietary information pertaining to the assets or
business of the Company and its clients.
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Control by Principal Stockholders
After the completion of this offering, Safeguard, Cecile D. Barker and
William R. Hill, the three largest stockholders of the Company
(collectively, the "Principal Stockholders") will beneficially own in the
aggregate approximately 57.5% of the outstanding Common Stock. As a
result, the Principal Stockholders will collectively have the voting power
to elect the Company's entire Board of Directors and to approve all matters
requiring stockholder approval. See "Management--Executive Officers and
Directors" and "Principal and Selling Stockholders."
Broad Discretion in Application of Proceeds; Acquisition Risks
The Company intends to use the net proceeds from this offering to
repay the outstanding principal balance under its line of credit (which was
$4.0 million as of July 31, 1997), for an investment in additional
management information systems (estimated at approximately $4.0 million)
and for continued international expansion, working capital, general
corporate purposes and other capital expenditures. In addition, a portion
of the net proceeds may be used to make acquisitions. Accordingly, the
specific uses for a substantial portion of the net proceeds will be at the
complete discretion of the Board of Directors of the Company and may be
allocated from time to time based upon a variety of circumstances. No
assurance can be given that the Company will deploy such funds in a manner
that will enhance the financial condition of the Company. In addition, no
assurance can be given that acquisitions will be available on terms and
conditions acceptable to the Company. Acquisitions present numerous risks,
including inaccurate assessment of the benefits to be provided by an
acquired business, the assumption of unexpected liabilities, significant
costs and expenses, costs and expenses involved in the integration of the
operations and services of an acquired business, diversion of management's
attention from other business concerns and potential loss of key employees
of the acquired business. Acquisitions of foreign businesses may involve
additional risks, including those associated with assimilating differences
in foreign business practices, overcoming language barriers, transacting in
foreign currencies and assuming severance and other social welfare
obligations. Furthermore, the Company has not previously made any
acquisitions and therefore has no history of avoiding any of these risks.
The realization of any of these risks could be expected to have a material
adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds."
No Prior Market; Possible Volatility of Stock Price
Prior to this offering, there has been no public market for the Common
Stock or the rights, and there can be no assurance that an active public
market will develop or be sustained. The exercise price of the rights has
been determined solely by negotiations among the Company, the selling
stockholders and the underwriters and does not necessarily reflect the
price at which shares of Common Stock may be sold in the public market
during or after this offering. See "The Offering--Why We are Selling
Shares Through a Rights Offering" for a discussion of the factors
considered in determining the exercise price. The public markets, in
general, have from time to time experienced extreme price and volume
fluctuations, which have in some cases been unrelated to the operating
performance of particular companies, and the market for the securities of
IT services companies, may be subject to greater price volatility than the
stock market in general. In addition, factors such as announcements of new
engagements by the Company's competitors or third parties; announcements of
fluctuations in the operating results of the Company or its Strategic
Clients, Engagement Clients or its competitors; strategic alliances
involving the Company's competitors; or general market conditions in the IT
industry may have a significant impact on the market price of the Common
Stock.
Dilution
The average price per share paid upon the original issuance by the
Company of Common Stock prior to this offering was $0.50. Purchasers of
the Common Stock in this offering will suffer an immediate dilution of
$2.84 in the net tangible book value per share of the Common Stock from the
exercise price of the rights. See "Dilution."
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Shares Eligible for Future Sale
A substantial number of outstanding shares of Common Stock and shares of
Common Stock issuable upon exercise of outstanding stock options will become
eligible for future sale in the public market at various times. In addition
to the factors affecting the stock market in general and the market for the
Common Stock discussed above, sales of substantial amounts of Common Stock in
the public market, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock. Upon completion of
this offering, the Company will have 16,235,583 shares of Common Stock
outstanding, excluding 1,375,875 shares of Common Stock subject to stock
options outstanding as of June 30, 1997, and any stock options granted by the
Company after June 30, 1997. Of these shares, the Common Stock sold by the
Company in this offering, except for certain shares described below, will be
freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Act"). The remaining 9,515,583
shares of Common Stock (the "Restricted Shares") were sold by the Company in
reliance on exemptions from the registration requirements of the Act and are
"restricted securities" as defined in Rule 144 under the Act ("Rule 144") and
may not be sold in the absence of registration under the Act unless an
exemption is available, including an exemption afforded by Rule 144 or Rule
701 ("Rule 701") under the Act.
Without considering the contractual restrictions described below, (i)
9,515,168 Restricted Shares will be eligible for sale ninety days after the
date of this Prospectus, subject to volume and other resale conditions
imposed by Rule 144, and (ii) 415 Restricted Shares will be eligible for
future sale subject to the holding period and other conditions imposed by
Rule 144. Certain restrictions on shares of Common Stock are applicable to
(i) any shares of Common Stock purchased in this offering by affiliates of
the Company, which may generally only be sold in compliance with the
limitations of Rule 144, except for the holding period requirements
thereunder, and (ii) the shares of Common Stock beneficially owned by the
Principal Stockholders all of which, together with the shares of Common Stock
beneficially owned by the other executive officers, directors and nominees
for director of the Company and 280,000 shares of Common Stock beneficially
owned by Warren V. Musser (and/or his assignees), are subject to lock-up
agreements (the "Lock-Up Agreements") and pursuant to such agreements will
not be eligible for sale or other disposition until 180 days after the
expiration date of the rights (the "Lock-Up Expiry Date") without the prior
written consent of Wheat, First Securities, Inc. In addition, the Company
has granted certain registration rights to certain of its shareholders
whereby they may cause the Company to register shares of Common Stock. See
"Shares Eligible For Future Sale."
It is anticipated that a registration statement (the "Form S-8
Registration Statement") covering the Common Stock that may be issued
pursuant to the exercise of options awarded by the Company will be filed
and become effective prior to the Lock-Up Expiry Date, and that shares of
Common Stock that are so acquired or offered thereafter pursuant to the
Form S-8 Registration Statement generally may be resold in the public
market without restriction or limitation. Subject to the provisions of any
Lock-Up Agreement, shares of Common Stock may be resold in the public
market beginning 90 days after the date of this Prospectus pursuant to Rule
701 (i) by persons who are not affiliates of the Company, without
compliance with the public information, holding period, volume limitation
or notice provisions of Rule 144 and (ii) by affiliates of the Company,
without compliance with the holding period requirements of Rule 144. See
"Management--Equity Compensation Plan," "Shares Eligible For Future
Sale--Stock Options" and "Underwriting."
Possible Issuance of Preferred Stock
Shares of preferred stock may be issued by the Company in the future
without stockholder approval and upon such terms as the Board of Directors
may determine. The rights of the holders of the Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from acquiring, a majority of the outstanding stock of the Company
and potentially prevent the payment of a premium to stockholders in an
acquisition transaction. There are no shares of preferred stock
outstanding and the Company has no present plans to issue any shares of
preferred stock. See "Description of Capital Stock--Preferred Stock."
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Requirements for Listing Securities on the Nasdaq National Market;
Application of the Penny Stock Rules
The Company has applied with the Nasdaq National Market to have the
Common Stock and rights (the "Listed Securities") approved for listing
(upon completion of this offering with respect to the Common Stock and from
the date of this Prospectus through the expiration date with respect to the
rights). If the Company is unable to maintain the standards for continued
listing, the Listed Securities could be subject to delisting from the
Nasdaq National Market. Trading, if any, in the Listed Securities would
thereafter be conducted on the Nasdaq Small Cap Market. If, however, the
Company did not meet the requirements of the Nasdaq Small Cap Market,
trading of the Listed Securities would be conducted on an electronic
bulletin board established for securities that do not meet the Nasdaq
listing requirements or in what is commonly referred to as the "pink
sheets." As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities.
In addition, if the Company's securities were delisted, they would be
subject to the so-called penny stock rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally
defined as an investor with a net worth in excess of $1.0 million or annual
income exceeding $200,000, or $300,000 together with a spouse). For
transactions covered by this rule, the broker-dealer must make a special
suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale.
Consequently, delisting, if it occurred, may affect the ability of
broker-dealers to sell the Company's securities and the ability of
purchasers in this offering to sell their securities in the secondary
market.
The SEC has adopted regulations that define a "penny stock" to be any
equity security that has a market price (as defined in the regulations) of
less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule relating to the penny stock market.
The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed
control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks. As a result, if the
Common Stock is determined to be "penny stock," an investor may find it
more difficult to dispose of the Company's Common Stock.
No Dividends
To date, the Company has not paid any cash dividends on its Common
Stock, and does not expect to declare or pay any cash or other dividends in
the foreseeable future. In addition, the Company's credit agreement
contains a financial covenant that prohibits the payment of cash dividends.
See "Dividend Policy."
Cancellation of Rights Offering
If the conditions precedent to the sale to the underwriters set forth
in the standby underwriting agreement are not satisfied, the underwriters
may elect, on or before the sixth business day after the expiration date of
the rights (the "Closing Date"), to cancel the rights offering and the
Company and the selling stockholders will not have any obligations with
respect to the rights. Under such circumstances, the exercise price,
without interest, will be promptly returned. See "Underwriting." The
Company has been advised by the NASD that it is likely that trades in the
rights and the when-issued shares of Common Stock in the market would be
canceled if the rights offering is not consummated.
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THE OFFERING
Why We are Selling Shares Through a Rights Offering
We have agreed with Safeguard and the selling stockholders to make a
rights offering to holders of Safeguard common shares. This rights
offering represents the Company's initial public offering of its
securities, although it is different than a traditional public offering in
that securities are directed first to Safeguard shareholders and then to
the general public. We believe that this rights offering will provide
several advantages over a traditional initial public offering. This type
of offering gives us the opportunity to offer our Common Stock to investors
who, as Safeguard shareholders, already have some knowledge of our
business. Our securities will also be distributed to a broader, more
stable shareholder base and underwriting discounts and commissions will be
less than if we pursued a traditional initial public offering. In
addition, Safeguard supports these types of rights offering because it
affords its shareholders the opportunity to purchase shares before the
shares are offered to the general public.
We determined the exercise price through negotiations with the selling
stockholders and the underwriters. In making this determination, we
considered such factors as our future prospects and historical financial
data, our industry in general and our position in the industry; market
valuations of the securities of companies engaged in activities similar to
ours; the quality of our management team; and, the advice of our
underwriters. We will also obtain two independent appraisals to further
support the determination of the final exercise and offering price.
You Can Exercise or Sell Your Rights
Until __________, 1997, you may purchase one share of our Common Stock
for each right you receive, or you may sell your rights in the market.
However, you may not exercise rights for fewer than 20 shares of Common
Stock in a single account, unless you have previously exercised rights for
at least 20 shares in the same account and you provide a letter to
ChaseMellon stating that you have already exercised at least 20 rights. If
you hold Safeguard common shares in multiple accounts, you must meet the
minimum purchase requirement for each account. You may, however,
consolidate your rights into one account. If you receive fewer than 20
rights, you should consider purchasing enough additional rights to be
eligible to exercise your rights or selling your rights in the market. You
should consult with your regular investment advisor and carefully consider
your alternatives.
If the Number of Safeguard Common Shares You Own is Not Divisible by Five
If the number of Safeguard common shares you own is not evenly
divisible by five, we will round up to the next highest whole number in
calculating the number of rights that you are entitled to receive. For
example, if you hold 96 Safeguard common shares, you will receive 20
rights. If you are a nominee for beneficial holders of Safeguard common
shares, we will round the number of rights that you will receive based upon
the amount held by each beneficial holder individually.
When You Can Exercise Your Rights
You can exercise your rights at any time during the period beginning
on ___________, 1997 and ending at 5:00 p.m., New York City time, on
____________, 1997. After that date, you will not be able to exercise or
transfer your rights and they will be worthless. We do not intend to honor
any rights received for exercise by ChaseMellon after _______________,
1997, regardless of when you sent your rights to ChaseMellon for exercise.
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How You Can Transfer Your Rights
You may transfer all or a portion of your rights by endorsing and
delivering to ChaseMellon (at the addresses set forth below) your rights
certificate. You must properly endorse the certificate for transfer, your
signature must be guaranteed by a bank or securities broker and your
certificate must be accompanied by instructions to reissue the rights you
want to transfer in the name of the person purchasing the rights. ChaseMellon
will reissue certificates for the transferred rights to the purchaser, and
will reissue a certificate for the balance, if any, to you if it is able to
do so before _________, 1997. You will be responsible for the payment of any
commissions, fees and other expenses (including brokerage commissions and any
transfer taxes) incurred in connection with the purchase or sale of your
rights. We believe that a market for the rights may develop during the
period in which the rights may be exercised. To facilitate the market, we
have applied with the Nasdaq National Market to have the rights approved for
quotation for the period ___________, 1997 through ____________, 1997. We
have reserved "OAOTR" as the Nasdaq symbol under which the rights will trade.
If you have any questions regarding the transfer of rights, you should
contact ChaseMellon at P.O. Box 3301, South Hackensack, New Jersey 07606,
Attention: Reorganization Department, telephone number (800) 223-6554
.
How You Can Exercise Your Rights
You may exercise your rights by completing and signing the election to
purchase form that appears on the back of each rights certificate. You
must send the completed and signed form, along with payment in full of the
exercise price for all shares that you wish to purchase to ChaseMellon.
ChaseMellon must receive these documents and the payment by 5:00 p.m., New
York City time, on ____________, 1997. We do not intend to honor any
exercise of rights received by ChaseMellon after that date.
We will, however, accept your exercise if ChaseMellon has received
full payment of the exercise price for shares to be purchased through the
exercise of rights, and has received a letter or telegraphic notice from a
bank, trust company or member firm of the New York Stock Exchange or the
American Stock Exchange setting forth your name, address and taxpayer
identification number, the number of shares you wish to purchase, and
guaranteeing that a properly completed and signed election to purchase form
will be delivered to ChaseMellon by 5:00 p.m., New York City time, on
_____________, 1997. If the properly executed documents are not received
by 5:00 p.m. on _________, 1997, we do not intend to accept your
subscription.
We suggest, for your protection, that you deliver your rights to
ChaseMellon by overnight or express mail courier. If you mail your rights,
we suggest that you use registered mail. If you wish to exercise your
rights, you should mail or deliver your rights and payment for the exercise
price to ChaseMellon as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail: By Hand By Overnight/Express Mail
Courier:
ChaseMellon Shareholder ChaseMellon Shareholder
Services Services ChaseMellon Shareholder Services
Reorganization Department Reorganization Department Reorganization Department
P.O. Box 3301 120 Broadway,13 Floor 85 Challenger Road, Mail Drop -
South Hackensack, NJ 07606 New York, New York 10271 Reorg
Ridgefield Park, NJ 07660
</TABLE>
You must pay the exercise price in U.S. dollars by cash, check or
money order payable to the "Safeguard Escrow Account." Until this offering
is closed, your payment will be held in escrow by ChaseMellon, who will
serve as the escrow agent of the Safeguard Escrow Account.
ChaseMellon will deliver certificates to you representing the Common
Stock purchased through the exercise of rights by ____________, 1997.
Until that date, ChaseMellon will hold all funds received in payment of the
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exercise price in escrow and will not deliver any funds to us or to the
selling stockholders until the shares of Common Stock have been issued.
If you are a broker or depository who holds Safeguard common shares
for the account of others and you receive rights certificates for the
account of more than one beneficial owner, you should provide copies of
this Prospectus to the beneficial owners. You should also carry out their
intentions as to the exercise or transfer of their rights.
Safeguard will decide all questions as to the validity, form and
eligibility (including times of receipt, beneficial ownership and
compliance with minimum exercise provisions). The acceptance of
subscription forms and the exercise price also will be determined by
Safeguard. Alternative, conditional or contingent subscriptions will not
be accepted. Safeguard reserves the absolute right to reject any
subscriptions not properly submitted. In addition, Safeguard may reject
any subscription if the acceptance of the subscription would be unlawful.
Safeguard also may waive any irregularities (or conditions) in the
subscription of shares of Common Stock, and its interpretation of the terms
(and conditions) of the rights offering shall be final and binding.
If you are given notice of a defect in your subscription, you will
have five business days after the giving of notice to correct it. You will
not, however, be allowed to cure any defect later than ___________, 1997.
We are not obligated to give you notification of defects in your
subscription. We will not consider an exercise to be made until all
defects have been cured or waived. If your exercise is rejected, your
payment of the exercise price will be promptly returned by ChaseMellon.
How You Can Obtain Additional Information
If you wish to receive additional copies of this Prospectus or
additional information concerning this offering, you should contact Thomas
D. Roberts III, at Wheat, First Securities, Inc., telephone number
804-344-6404, or Dan N. Pickens at Janney Montgomery Scott Inc., telephone
number 215-665-4513.
Expected Exercise of Rights by Safeguard CEO
Warren V. Musser, the Chairman and Chief Executive Officer of
Safeguard (or his assignees) is expected to exercise all rights distributed
to him. As a result, he (or his assignees) is expected to acquire
approximately 560,000 shares of our Common Stock through the rights
offering.
What Happens to the Unsubscribed Shares
The first 300,000 shares of Common Stock that are not subscribed for
at the end of the rights exercise period will be offered at a price of
$5.00 per share to persons selected by us. These persons may have a
relationship with us, Safeguard or one of Safeguard's other partnership
companies. We expect to enter into agreements with these persons to
purchase the unsubscribed shares before the end of the rights exercise
period. If there are less than 300,000 unsubscribed shares at the end of
the rights exercise period, the number of unsubscribed shares offered to
each of these persons will be adjusted accordingly.
To the extent that any unsubscribed shares remain unsold after the
offer to these persons, the underwriters will purchase these shares
pursuant to the standby underwriting agreement. The underwriters must
purchase these shares no later than ____________, 1997.
In connection with this offering, the underwriters will receive a
financial advisory fee of 3% of the exercise price for each share of Common
Stock being offered in this offering, regardless of whether they purchase
any shares in this offering. In addition, if the underwriters purchase any
shares in this offering or through the exercise of certain rights that are
purchased in the open market under certain circumstances, they may purchase
the shares at the exercise price less an underwriting discount of 4% of the
exercise price, subject to certain limitations. The underwriters will
offer shares of Common Stock purchased by them to the public at prices
which may vary from the exercise price. The selling stockholders have
granted to the underwriters an option to purchase an additional 640,000
shares of Common Stock to
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cover over-allotments, if any, during the 20-day period beginning on
___________, 1997. The underwriters will be entitled to purchase these
over-allotment shares at the exercise price less the 3% financial advisory
fee and the 4% underwriting discount. See "Underwriting." We will not
receive any proceeds from the sale of any shares of Common Stock by the
selling stockholders.
We intend to supplement this Prospectus after the rights exercise
period is over to set forth the results of the rights offering, the
transactions by the underwriters during the exercise period, the number of
unsubscribed shares purchased, if any, and any resale transactions.
What Happens if the Rights Offering is Canceled
The underwriters have the right to cancel the rights offering if certain
conditions are not satisfied or if certain circumstances exist prior to the
closing date of this offering. If you exercise rights and the rights
offering is canceled, ChaseMellon will promptly return to you, without
interest, any payment received in respect of the exercise price and you will
not receive any shares of our Common Stock. Along with the selling
stockholders, we have established an escrow account with ChaseMellon to hold
funds received prior to the closing date of this offering. The NASD has
advised us that trades in the rights and the when-issued shares of Common
Stock in the market would be canceled if this offering is not consummated.
Federal Income Tax Consequences
The following is a summary of the material federal income tax
consequences affecting holders of Safeguard common shares receiving rights
in this offering. In the opinion of Morgan, Lewis & Bockius LLP, the
distribution of the rights by the Company to holders of Safeguard common
shares more likely than not will constitute a taxable transaction under the
Internal Revenue Code of 1986, as amended (the "Code"), and may also be
subject to state or local income taxes. Because of the complexity of the
provisions of the Code referred to below and because tax consequences may
vary depending upon the particular facts relating to each holder of
Safeguard common shares, such holders should consult their own tax advisors
concerning their individual tax situations and the tax consequences of this
offering under the Code and under any applicable state, local or foreign
tax laws.
Safeguard has been advised by Morgan, Lewis & Bockius LLP that, under
current interpretations of case law, the Code, and applicable regulations
thereunder, the federal income tax consequences applicable to holders of
Safeguard common shares receiving rights in this offering generally are as
follows:
Distribution of Rights to Holders of Safeguard Shares
The rights, representing the right to acquire shares of Common Stock
from the Company, can be considered as constituting "property" within the
meaning of Section 317(a) of the Code. The federal income tax consequences
of a distribution of the rights by the Company to holders of Safeguard
common shares, as determined under the Code and the regulations thereunder,
are as follows: (i) each noncorporate holder of Safeguard common shares
will be deemed to have received a distribution from Safeguard, generally
taxable as ordinary dividend income, in an amount equal to the fair market
value (if any) of the rights, as of the date of distribution, (ii) each
corporate holder of Safeguard common shares (other than foreign
corporations and S corporations) will be deemed to have received a
distribution from Safeguard (generally taxable as a dividend subject to the
dividends received deduction for corporations (generally 70%, but 80% under
certain circumstances)) in an amount equal to the fair market value (if
any) of the rights, as of the date of distribution; and (iii) the tax basis
of the rights in the hands of each holder (whether corporate or
noncorporate) of Safeguard common shares will be equal to the fair market
value (if any) of the rights as of the date of distribution. Because of
the predominantly factual nature of determining the fair market value, if
any, of the rights, Morgan, Lewis & Bockius LLP has expressed no opinion
with respect to the fair market value of the rights.
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<PAGE>
Since the fair market value of the rights will determine the amount of
taxable income deemed received by the holders of Safeguard common shares,
the determination of the fair market value of each right as of the date of
distribution is critical. The exercise price was determined through
arms-length negotiations among the Company, the selling stockholders and
the underwriters. Based on these negotiations and the two independent
appraisals which will be obtained, Safeguard's Board of Directors
believes that the per share value of Common Stock represented by the rights
at the date of the commencement of this offering approximates the exercise
price, and that the rights should have no value for federal income tax
purposes. However, the Internal Revenue Service is not bound by this
determination. See "The Offering-Why We Are Selling Shares Through a
Rights Offering."
Exercise of Rights
Holders of rights, whether corporate or noncorporate, will recognize
neither gain nor loss upon the exercise of the rights. A holder of rights
who receives shares of Common Stock upon the exercise of the rights will
acquire a tax basis in such shares equal to the sum of the exercise price
paid under this offering and the tax basis (if any) of the holder of rights
in the rights.
Transfer of Rights
The transferable nature of the rights will permit a holder of rights
to sell rights prior to exercise. Pursuant to Section 1234 of the Code, a
rights holder who sells rights prior to exercise will be entitled to treat
the difference between the amount received for the rights and the adjusted
tax basis (if any) of the holder of rights in the rights as a short-term
capital gain or capital loss, provided that Common Stock subject to the
rights would have been a capital asset in the hands of the holder had it
been acquired by him. The gain or loss so recognized will be short-term
since the rights will have been held for less than twelve months.
Non-Exercise of Rights
The income tax treatment applicable to holders of rights who fail to
exercise or transfer their rights prior to the expiration date also is set
forth in Section 1234 of the Code. Holders of rights who allow their rights
to lapse are deemed under the Code to have sold their rights on the date on
which the rights expire. Since upon such lapse no consideration will be
received by a holder of rights, and since the rights will have been held
for less than twelve months, a short-term capital loss equal to the tax
basis (if any) in the rights will be sustained by the holder on such lapse,
provided that Common Stock subject to the rights would have been a capital
asset in the hands of the holder had it been acquired by him.
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<PAGE>
USE OF PROCEEDS
The minimum net proceeds to the Company from the sale of the 6,235,000
shares of Common Stock offered by the Company are estimated to be
approximately $28.0 million after deducting estimated offering expenses
allocable to and payable by the Company and assuming that none of the
rights granted in the rights offering are exercised and the sale of
5,915,000 shares of Common Stock to the underwriters pursuant to the
standby underwriting agreement. Estimated offering expenses include the
maximum applicable non-accountable expense allowance to the underwriters, a
financial advisory fee of 3% of the exercise price and an underwriting
discount of 4% of the exercise price. In the event more of the shares of
Common Stock offered hereby are sold pursuant to the exercise of rights,
the Company will not be obligated to pay the underwriting discount with
respect to such shares and will, therefore, realize an amount of net
proceeds greater than approximately $28.0 million. See "The Offering--What
Happens to the Unsubscribed Shares" and "Underwriting."
The Company intends to use approximately $4.0 million of the net
proceeds from this offering to pay amounts due to CoreStates Bank, N.A.
under its line of credit. The amount outstanding under this line of credit
bears interest, generally at the Company's option, at the bank's prime rate
or other short term rates, and is payable on May 31, 1999. The Company
also intends to use approximately $4.0 million of the net proceeds of this
offering to invest in additional management information systems. The
remainder of the net proceeds will be used for continued international
expansion, working capital, general corporate purposes and other capital
expenditures. The Company may also seek to use a portion of the net
proceeds from this offering to expand its business through acquisitions,
although the Company does not have any acquisition commitments. Other than
to repay the outstanding balance under its credit line and to purchase
additional management information systems, the Company has not made any
determination regarding the amounts or timing of the use of any proceeds
from this offering. See "Risk Factors -- Broad Discretion in Application
of Proceeds; Acquisition Risks." The amounts and the timing of any such
use may vary significantly depending upon a number of factors, including
the Company's revenue growth, asset growth, cash flow and acquisition
activities. Pending such uses, the net proceeds of this offering will be
invested in short-term, investment-grade, interest-bearing securities. The
Company currently anticipates that the net proceeds received by the Company
from this offering, together with amounts available under its existing line
of credit, cash generated from operations and existing cash balances will
be sufficient to satisfy its operating cash needs through December 31,
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common
Stock. The Company currently intends to retain future earnings for use in
its business and, therefore, does not anticipate paying any cash dividends
in the foreseeable future. The payment of future dividends, if any, will
depend among other things, on the Company's results of operations, cash
flows and financial condition and on such other factors as the Company's
Board of Directors may, in its discretion, consider relevant. In addition,
the Company's credit agreement with CoreStates Bank, N.A. contains a
financial covenant that prohibits the payment of any dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of June 30, 1997, and as adjusted to reflect the sale of 6,235,000 shares of
Common Stock by the Company in this offering and the application of the
estimated minimum net proceeds of approximately $28.0 million therefrom. This
table should be read in conjunction with the Consolidated Financial Statements
of the Company and the Notes thereto and other financial information included
elsewhere in this Prospectus.
As of June 30, 1997
------------------------
Actual As Adjusted(1)
------ -------------
(In thousands)
Short term debt and current portion of
long term debt(2) . . . . . . . . . . . . . . . . $4,501 $ 501
------ -------
------ -------
Long term debt . . . . . . . . . . . . . . . . . . 150 150
Stockholders' equity:
Preferred Stock, par value $.01 per share;
5,000,000 shares authorized and no shares issued
and outstanding actual and as adjusted . . . . . -- --
Common Stock, par value $.01 per share; 25,000,000
shares authorized,
and
10,000,583 shares issued and outstanding actual
and 16,235,583 shares issued and outstanding
as adjusted (3) . . . . . . . . . . . . . . . . . 100 162
Additional paid-in capital (3). . . . . . . . . 4,950 32,881
Retained earnings . . . . . . . . . . . . . . . 2,022 2,022
------ -------
Total stockholders' equity . . . . . . . . 7,072 35,065
------ -------
Total capitalization . . . . . . . . . $7,222 $35,215
------ -------
------ -------
- -------------------
(1) Adjusted to give effect to the sale by the Company of 6,235,000 shares of
Common Stock and the receipt and application of approximately $28.0 million
in net proceeds from this offering after deducting the maximum total
underwriting discount with respect to such shares of approximately $2.2
million and estimated offering expenses of $1.0 million.
(2) Represents the outstanding amount under the Company's line of credit and
current portion of balances due under capital leases. The "as adjusted"
total indebtedness reflects the repayment of $4.0 million outstanding under
the Company's line of credit from a portion of the net proceeds from this
offering. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(3) Excludes as of June 30, 1997, 1,375,875 shares of Common Stock issuable
upon the exercise of options at a weighted average exercise price of $2.70
per share (of which options to purchase 352,417 shares were exercisable as
of June 30, 1997). See "Management--Equity Compensation Plan."
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<PAGE>
DILUTION
As of June 30, 1997, the Company had a net tangible book value of
approximately $7.1 million or $0.71 per share of Common Stock. Net tangible
book value per share of Common Stock represents the amount of the Company's
tangible assets less its total liabilities, divided by the total number of
shares of Common Stock outstanding. Without taking into account any changes in
net tangible book value after June 30, 1997, other than to give effect to the
items described in Note 1 appearing immediately below the following table, the
pro forma net tangible book value of the Company as of June 30, 1997, would have
been approximately $36.1 million or $2.16 per share. This represents an
immediate increase in such pro forma net tangible book value of $1.45 per share
to existing stockholders and an immediate dilution of $2.84 per share to
investors purchasing Common Stock at the exercise price in this offering. New
stockholders that acquire Common Stock from the underwriters at a price greater
than the exercise price will experience greater dilution. The following table
illustrates this per share dilution in net tangible book value:
Exercise Price . . . . . . . . . . . . . . . . . . . . $ 5.00
Net tangible book value per share as of
June 30, 1997. . . . . . . . . . . . . . . . . . . $ 0.71
Increase per share attributable to new
stockholders (1) . . . . . . . . . . . . . . . . 1.45
------
Pro forma net tangible book value per share
as of June 30, 1997 . . . . . . . . . . . . . . . . . 2.16
------
Dilution per share to new stockholders . . . . . . . . $2.84
------
------
- -------------------
(1) Reflects the sale by the Company of 6,235,000 shares of Common Stock
and the receipt of approximately $28.0 million in net proceeds from
this offering.
The following table sets forth, on an adjusted basis as of June 30, 1997,
the number of shares of Common Stock issued by the Company, the total
consideration paid and the average price per share paid upon original issuance
to stockholders prior to this offering and by new investors before deducting the
underwriters' discount, financial advisory fees and estimated offering expenses:
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration(1)
----------------------------- ----------------------------- Average Price
Number Percentage Amount Percentage Per Share(1)
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders. . . . . . . 10,000,583 61.6% $ 5,000,000 13.8% $0.50
New stockholders . . . . . . . . 6,235,000 38.4 31,175,000 86.2% 5.00
---------- ---------- ----------- ----------
Total. . . . . . . . . . . 16,235,583 100.0% $36,175,000 100.0%
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
- -------------------
(1) Reflects gross consideration from the issuance of stock, and therefore does
not reflect deductions for stock issuance costs, underwriting discounts,
financial advisory fees and offering expenses.
The foregoing tables assume no exercise of outstanding options. As of June
30, 1997 there were outstanding options to purchase an aggregate of 1,375,875
shares of Common Stock at a weighted average exercise price of $2.70 per share
(of which options to purchase 352,417 shares were exercisable at June 30, 1997),
and the Company had an additional 1,824,125 shares of Common Stock available for
future grants and other issuances under the Company's Amended and Restated 1996
Equity Compensation Plan. See "Management" and Note 8 to the Notes to the
Consolidated Financial Statements.
-21-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the Notes thereto included elsewhere in this Prospectus. The
statement of operations data for the years ended December 31, 1994, 1995 and
1996, and the balance sheet data as of December 31, 1994, 1995 and 1996 have
been derived from consolidated financial statements of the Company which have
been audited by Deloitte & Touche LLP, independent auditors. The statement of
operations data for the year ended December 31, 1993 and the six months ended
June 30, 1996 and 1997 and the balance sheet data as of December 31, 1993 and
June 30, 1997 have been derived from the Company's unaudited consolidated
financial statements which, in the opinion of management, include all
significant, normal and recurring adjustments necessary for a fair presentation
of the financial position and results of operations for such unaudited period.
The Company began its operations in 1993 as a division of OAO Corporation, was
incorporated in March 1996 and was spun off from OAO Corporation in April 1996.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------------------------ ------------------------
1993 (1) 1994 1995 1996 1996 1997
--------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Statement of Operations Data:
Revenues . . . . . . . . . . . . . . . $12,142 $22,472 $38,229 $57,891 $24,321 $39,338
Direct costs . . . . . . . . . . . . . 8,944 16,503 28,548 43,896 18,170 30,773
--------- -------- -------- ------- -------- -------
Gross profit . . . . . . . . . . . . . 3,198 5,969 9,681 13,995 6,151 8,565
Selling, general and administrative. . 2,612 4,743 7,338 10,824 4,874 6,315
--------- -------- -------- ------- -------- -------
Income from operations . . . . . . . . 586 1,226 2,343 3,171 1,277 2,250
Interest expense . . . . . . . . . . . 49 61 115 46 30 87
--------- -------- -------- ------- -------- -------
Income before income taxes . . . . . . 537 1,165 2,228 3,125 1,247 2,163
Provision for income taxes . . . . . . 215 466 1,139 1,315 522 931
--------- -------- -------- ------- -------- -------
Net income . . . . . . . . . . . . . . $ 322 $ 699 $ 1,089 $ 1,810 $ 725 $1,232
--------- -------- -------- ------- -------- -------
--------- -------- -------- ------- -------- -------
Pro forma net income per common
share (2). . . . . . . . . . . . . . . $.17 $.07 $.12
Weighted average number of
common shares outstanding (2). . . . . 10,422 10,422 10,414
</TABLE>
<TABLE>
<CAPTION>
At December 31, At June 30, 1997
---------------------------------------------------- -------------------------
1993 1994 1995 1996 Actual As Adjusted(3)
-------- --------- ---------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Balance Sheet Data:
Working capital . . . . . . . . . . . $ (762) $ (964) $ (1,446) $ 4,718 $ 4,505 $32,498
Total assets . . . . . . . . . . . . 1,139 3,198 5,801 12,828 20,205 44,198
Total debt, including current portion. -- -- 251 476 4,651 651
Total stockholders' equity . . . . . . 257 565 1,654 5,840 7,072 35,065
</TABLE>
- -------------------
(1) The Company's initial year of operations began in 1993 as a division of
OAO Corporation. The Company was incorporated in March 1996 and was spun
off from OAO Corporation in April 1996. As these were entities under
common control, the merger was accounted for similar to that of a
pooling-of-interests and as a result, the financial statements of the
Company have been presented at historical cost since its inception in 1993.
See Notes 1 and 2 to the Consolidated Financial Statements.
(2) See Note 2 to Notes to the Consolidated Financial Statements for
information concerning calculation of pro forma net income per
common share.
(3) Adjusted to give effect to the sale by the Company of 6,235,000
shares of Common Stock and the receipt and application of
approximately $28.0 million in net proceeds from this offering
after deducting the maximum total underwriting discount with
respect to such shares of approximately $2.2 million and
estimated offering expenses of approximately $1.0 million. In
addition,
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<PAGE>
the "as adjusted" balances reflect the repayment of the $4.0 million
outstanding under the Company's line of credit from a portion of the
proceeds of this offering. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto included
elsewhere in this Prospectus. The Company's fiscal year ends on
December 31. This Prospectus contains certain forward-looking
statements that involve risks and uncertainties. Future events and
the Company's actual results could differ materially from the results
reflected in these forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those
discussed in "Risk Factors."
Overview
The Company provides a wide range of outsourced IT solutions and
professional services, including the operation of large-scale data
center complexes and networks ("Megacenter Operations"), distributed
systems management ("DSM"), staffing services and other IT services.
From its inception in January 1993 until March 26, 1996, the Company
was operated as a business division of OAO Corporation, an
organization that provides IT services to governmental entities. OAO
Corporation formed the Company as a separate business division in
order to provide IT solutions and services to corporate clients. The
Company began operations in January 1993 as a division of OAO
Corporation, was incorporated in the State of Delaware in March 1996
and was spun off from OAO Corporation in April 1996. The Consolidated
Financial Statements of the Company and the Notes thereto included in
this Prospectus reflect the Company's operations as if it had been a
separate legal entity since its January 1993 inception.
The Company has experienced substantial growth since its
inception, with revenues increasing to $57.9 million in 1996 from
$12.1 million in 1993. This growth has continued into 1997 with
revenues for the six months ended June 30, 1997 increasing to $39.3
million compared to $24.3 million for the same prior year period. The
Company's operating results, particularly its quarterly results, can
be affected by potentially lower margins on certain incremental
revenue contracts prior to the achievement of expected operating
efficiencies. Engagements which involve new services or services to
new clients may result in lower margins during the early term of the
engagement. The Company has historically experienced margin
improvements over the course of its engagements. In addition,
operating results can be affected by the level of the Company's
investments in international and other business development for which
the Company incurred costs of $1.1 million and $3.1 million for the
six months ended June 30, 1997 and the year ended December 31, 1996,
respectively.
The Company's relationship with its first Strategic Client, IBM,
has continued to expand in terms of revenues, the range of services
provided, the number of engagements and the number of IBM business
units which have engaged the Company's services. While the Company
expects IBM to continue to represent the majority of the Company's
revenues for the foreseeable future, revenues from IBM have been
declining on a percentage basis, accounting for 88.7%, 82.2% and 76.2%
of the Company's total revenues for the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997, respectively. This
revenue trend is primarily attributable to the Company's expanding
relationship with Digital, which became a Strategic Client in 1995.
The Company is currently a major delivery partner of Digital for
outsourcing engagements across Canada and its relationship with
Digital has expanded into other geographic areas. Revenues from
Digital accounted for 5.4%, 11.4% and 18.8% of the Company's total
revenues for the years ended December 31, 1995 and 1996 and for the
six months ended June 30, 1997, respectively. The Company has also
recently expanded its business development activities to include
establishing relationships with Perot Systems and NCR.
For the years ended December 31, 1995 and 1996 and for the six
months ended June 30, 1997, approximately 92%, 74% and 62% of the
Company's revenues, respectively, were derived from fixed-price
contracts. Substantially all of the Company's Megacenter Operations
engagements, which accounted for approximately 60.2% and 46.2% of
revenues
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<PAGE>
for the year ended December 31, 1996 and for the six months ended June
30, 1997, respectively, are performed under multi-year, fixed-price
contracts. These contracts range from three to ten years in length
and are accounted for under the percentage of completion method. A
portion of the Company's DSM engagements are also performed under
multi-year, fixed-price contracts. For the year ended December 31,
1996 and the six months ended June 30, 1997, revenues from fixed-price
DSM contracts accounted for 4.1% and 4.9% of the Company's total
revenues, respectively. The Company's fixed-price contracts generally
require the Company to meet certain pre-established service level
benchmarks. Profitability is generally lower during the early term of
these engagements as the Company invests in assuring a smooth start-up
and in attaining certain performance levels prior to the
implementation of productivity improvements. Upon completion of the
initial performance phase, the Company initiates activities to
increase profitability through improved management practices and the
establishment of new technical and operational methodologies.
In 1995, the Company began an initiative to diversify its
business by increasing the scope of its service offerings and through
geographic expansion. In 1995, the Company entered into its first
engagement to provide DSM services, an area in which the Company had
previously performed only limited services within other engagements.
The Company believes that its DSM services represent a significant
source of future potential growth. The Company's geographic expansion
into international markets began in 1995 and has accelerated during
1996 and 1997. See Note 12 to notes to the Consolidated Financial
Statements. In particular, primarily as a result of its relationship
with Digital, the Company's revenues derived from the Canadian market
grew from $2.1 million for the year ended December 31, 1995 to $6.9
million for the year ended December 31, 1996. The Company's revenues
from the Canadian market were $7.4 million for the six months ended
June 30, 1997. The Company also has been engaged to provide services
in Mexico, South America and the United Kingdom and plans to expand
its business to other international markets. In seeking to expand its
international presence, the Company intends to enter into joint
ventures, partnerships or other types of strategic alliances with
organizations located in these markets.
While the IT services industry has generally experienced labor
shortages and wage inflation in excess of most other industries, the
Company's engagements have not been affected, primarily due to the
Company's practice of retaining the majority of the outsourced
personnel. The Company prices its services under these engagements on
the basis of the historical cost of the outsourced function,
managerial experience and its assessment of evolving technical
factors. The Company also enters into staffing services engagements
requiring high-demand IT specialists for terms ranging up to 18
months, usually on a time and materials basis. The Company is subject
to the same general labor pressures inherent in the IT services
industry when performing these engagements, which are primarily
related to the Company's DSM and systems integration services. In
pricing its services under shorter term engagements, the Company
evaluates the existing labor market for IT specialists and the
expected duration of the engagement.
Results of Operations
The following table sets forth, for the periods indicated,
selected statements of operations data as a percentage of net
revenues:
Year Ended Six Months Ended
December 31, June 30,
-------------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------ ------ -------
Revenues . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs . . . . . . . . 73.4 74.7 75.8 74.7 78.2
------ ------ ------ ------ -------
Gross profit . . . . . . . 26.6 25.3 24.2 25.3 21.8
Selling, general and
administrative expense . . 21.1 19.2 18.7 20.1 16.1
------ ------ ------ ------ -------
Income from operations . . 5.5 6.1 5.5 5.2 5.7
Interest expense . . . . . . 0.3 0.3 0.1 0.1 0.2
------ ------ ------ ------ -------
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<PAGE>
Income before taxes. . . . 5.2 5.8 5.4 5.1 5.5
Provision for income taxes . 2.1 3.0 2.3 2.1 2.4
------ ------ ------ ------ -------
Net income . . . . . . . . 3.1% 2.8% 3.1% 3.0% 3.1%
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Comparison of Six Months Ended June 30, 1997 to Six Months Ended June 30, 1996
Revenues. The Company's revenues increased 61.7% to $39.3 million for the
six months ended June 30, 1997 compared to $24.3 million for the same prior year
period. This increase was generally attributable to volume increases within
existing contracts resulting from growth in the Company's ongoing business, an
expansion of the scope of services requested from the Company, increases in
international revenues and increases in revenues from newer lines of business.
International revenue, primarily from the Company's relationship with Digital in
Canada, increased to $7.4 million for the six months ended June 30, 1997
compared to $2.5 million for the same prior year period. Revenues from the
Company's Megacenter Operations increased by 16.0% to $18.1 million for the six
months ended June 30, 1997 compared to $15.6 million for the same prior year
period. Revenues from the Company's DSM services increased by 209.4% to $9.9
million for the six months ended June 30, 1997 compared to $3.2 million for the
same prior year period.
Direct Costs. The Company's direct costs increased 69.2% to $30.8 million
for the six months ended June 30, 1997 compared to $18.2 million for the same
prior year period. Direct costs consist primarily of direct labor costs and
related fringe benefit costs. As a percentage of revenue, direct costs increased
to 78.2% for the six months ended June 30, 1997 compared to 74.7% for the
comparable period in 1996. This percentage increase is primarily due to the
higher proportion of revenues from new engagements and new services for the six
months ended June 30, 1997 compared to the same period in 1996. In entering new
engagements, the Company may accept short term contracts that do not include the
economies of scale, leverage or short-term opportunities for productivity
improvements that are available in more mature or longer term engagements. The
Company believes that these initial contracts are important in penetrating new
markets and in establishing the degree of customer confidence required to secure
additional business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.6% to $6.3 million in the six months ended
June 30, 1997 compared to $4.9 million for the same prior year period. As a
percentage of revenues, these expenses decreased to 16.1% from 20.1% which the
Company generally attributes to increased economies of scale from higher
revenues. The aggregate increase was primarily the result of the continued
development of additional service capabilities and other expenditures necessary
to support the Company's growth. The Company intends to continue building its
marketing, financial and administrative infrastructure to enable it to support
its growth opportunities.
Interest Expense and Provision for Income Taxes. Interest expense
increased to $87,000 in the six months ended June 30, 1997 compared to $30,000
in the same prior year period. The Company's effective tax rate was 43.1% for
the six months ended June 30, 1997 compared to 41.8% for the six months ended
June 30, 1996. This increase in tax rate was primarily due to changes in the
distribution of income among tax jurisdictions.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Revenues. The Company's revenues increased 51.6% to $57.9 million for the
year ended December 31, 1996, from $38.2 million for the year ended December 31,
1995. This increase was primarily due to volume increases within existing
contracts resulting from growth in the Company's ongoing business, an expansion
of the scope of services provided by the Company, increases in international
revenue and increases in revenues from newer lines of business. International
revenues, primarily from the Company's relationship with Digital in Canada,
increased 214% to $6.9 million for the year ended December 31, 1996 from $2.1
million for the year ended December 31, 1995. Revenues from the Company's
Megacenter Operations increased 14.4% to $34.9 million for the year ended
December 31, 1996 from $30.5 million for the year ended December 31, 1995.
Revenues from the Company's DSM services increased 325.0% to $10.2 million for
the year ended December 31, 1996 from $2.4 million for the year ended December
31, 1995.
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<PAGE>
Direct Costs. The Company's direct costs increased by 54.0% to $43.9
million for the year ended December 31, 1996 from $28.5 million for the year
ended December 31, 1995. As a percentage of revenues, direct costs increased to
75.8% for the year ended December 31, 1996 from 74.7% for the year ended
December 31, 1995. The Company attributes this increase to increased revenues
from DSM engagements and the attendant costs associated with its establishment
and development of this service offering.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 47.9% to $10.8 million for the year ended
December 31, 1996 from $7.3 million for the year ended December 31, 1995. As a
percentage of revenues, these expenses decreased to 18.7% for the year ended
December 31, 1996 from 19.2% for the year ended December 31, 1995 as a result of
increased economies of scale from higher revenues. The Company primarily
attributes the aggregate increase to the costs associated with the expansion of
its international infrastructure and to the costs associated with developing
contacts and marketing in its targeted international markets. Costs associated
with these initiatives were $3.1 million in 1996 compared to an insignificant
amount in 1995. In addition, selling, general and administrative expenses
increased as the result of hiring of additional management and administrative
personnel necessary to support the Company's growth.
Interest Expense and Provision for Income Taxes. Interest expense was not
material in either year as the Company satisfied its working capital needs
through cash generated from operations and in 1996 from a $5.0 million
investment by Safeguard. The effective tax rate decreased to 42.1% in 1996 from
51.1% in 1995 as a result of losses incurred in international tax jurisdictions
during 1995 for which no tax benefit was recorded.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Revenues. The Company's revenues increased 69.8% to $38.2 million for the
year ended December 31, 1995 from $22.5 million for the year ended December 31,
1994. This increase was primarily the result of diversification into new
business areas and volume increases within existing contracts. During 1995, the
Company realized revenues of $2.2 million in Canada, representing the Company's
initial international revenues. In addition, during 1995 the Company began
offering DSM services and recognized revenue of $2.4 million from these
engagements.
Direct Costs. The Company's direct costs increased by 72.7% to $28.5
million for the year ended December 31, 1995 from $16.5 million for the year
ended December 31, 1994. As a percentage of revenues, direct costs increased to
74.7% for the year ended December 31, 1995 from 73.4% for the year ended
December 31, 1994. This increase is attributable primarily to the early
financial performance of a new Megacenter Operations engagement. In these types
of engagements, the Company's business model is to improve margins as
productivity enhancements are identified and implemented. In addition, margins
decreased as a result of the commencement of international revenues in 1995 at
lower margins than the Company's other business.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased 55.3% to $7.3 million for the year ended
December 31, 1995 from $4.7 million for the year ended December 31, 1994. As a
percentage of revenues, these expenses decreased to 19.2% for the year ended
December 31, 1995 from 21.1% for the year ended December 31, 1994 as a result of
increased economies of scale from higher revenues. In addition, a portion of
the increase in selling, general and administrative expenses was attributable to
increased hiring of additional management and administrative personnel necessary
to support the Company's growth.
Interest Expense and Provision for Income Taxes. Interest expense was not
material in either year as the Company satisfied its working capital needs
through cash generated from operations. The effective tax rate increased to
51.1% in 1995 from 40.0% in 1994 as a result of losses incurred in international
tax jurisdictions during 1995 for which no tax benefit was realized.
Unaudited Quarterly Results
Set forth below are selected unaudited financial statements of operations
data for the last ten fiscal quarters of the Company. In Management's opinion,
the results below have been prepared on the same basis as the audited financial
statements contained herein and include all material adjustments, consisting of
only normal recurring adjustments,
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<PAGE>
necessary for a fair presentation of the information for the periods when read
in conjunction with the Consolidated Financial Statements of the Company and
Notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
------ ------ ------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $7,619 $9,284 $11,041 $10,285 $11,498 $12,823 $15,996 $17,574 $19,161 $20,177
Gross profit....... 1,758 2,512 2,805 2,606 2,925 3,227 3,636 4,207 4,341 4,224
Income from
operations........ 398 535 614 796 624 653 767 1,127 1,022 1,228
Income before
income taxes..... 374 517 579 758 601 647 760 1,117 1,017 1,146
------ ------ ------- -------- ------- ------- ------- ------- ------- -------
Net income......... $183 $253 $283 $370 $351 $375 $440 $644 $584 $648
------ ------ ------- -------- ------- ------- ------- ------- ------- -------
------ ------ ------- -------- ------- ------- ------- ------- ------- -------
Pro forma net income
per share....... $.03 $.04 $.04 $.06 $.06 $.06
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
The Company believes that its business is not seasonal. In addition, the
Company's quarterly operating results can be affected by the level of the
Company's investments in international and other business development and other
costs. Quarterly revenues and gross margins can be affected by the
commencement of new contracts and engagements.
Liquidity and Capital Resources
Cash and cash equivalents were $390,000 at June 30, 1997. Cash flow
generated by (used in) operations was $37,000 in 1994, $351,000 in 1995,
($3.4 million) in 1996 and ($3.2 million) in the six months ended June 30,
1997. The Company primarily funded its uses of cash in 1996 and 1997 from
proceeds received from a $5.0 million investment by Safeguard in April 1996
and from borrowings under the Company's credit facility. See "Certain
Transactions." The use of cash in operations in 1996 and in the six months
ended June 30, 1997 was primarily the result of increases in both billed and
unbilled accounts receivable, partially offset by income from operations and
increases in accounts payable and accrued expenses. The Company's accounts
receivable were outstanding an average of 14.0, 37.5 and 60.4 days as of
December 31, 1995, December 31, 1996 and June 30, 1997, respectively. The
overall increase in billed accounts receivable was primarily the result of
increased revenues and an increase in the average time period in which
accounts receivable have been collected. The average time period in which
billed accounts receivable have been collected has increased over time,
primarily because the impact of several contracts with rapid contractual
payment terms has been less significant over time due to the growth of other
revenues of the Company. Unbilled accounts receivable increased from $157,000
at December 31, 1995 to $4.8 million at December 31, 1996 and $6.3 million at
June 30, 1997. The increases in unbilled accounts receivable were primarily
the result of revenue growth and growth in quick response services provided
by the Company. Since the Company receives requests for quick response
services on an as-required basis and reacts immediately to meet its clients'
response needs, these services are often delivered prior to the receipt of
written purchase orders. The Company has begun to take steps to improve its
collection of accounts receivable, including increased sensitivity to payment
terms in the contracting process (including procedures for quick response
orders), initiation of accounts receivable collection incentive compensation,
and increased ongoing monitoring efforts. During 1997, as described below,
the Company obtained a $7.5 million accounts receivable based credit facility
to fund the increase in receivables.
The Company's business is not capital intensive and capital expenditures
in any given year are ordinarily not significant. Capital expenditures amounted
to $51,000 in 1994, $580,000 in 1995, $970,000 in 1996, and $1.4 million for
the six months ended June 30, 1997. Capital expenditures in the first six
months of 1997 included expenditures associated with the Company's new leased
corporate headquarters facility and costs associated with the development of
new operational, administrative and financial information system software.
During the remainder of 1997, the Company expects to incur additional
capitalized costs associated with the development of and implementation of new
management information systems.
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<PAGE>
The Company currently has a $7.5 million line of credit with CoreStates
Bank, N.A., of which $4.0 million was outstanding at July 31, 1997. Advances
under the line of credit are limited to 80.0% of certain eligible accounts
receivable of the Company. As of June 30, 1997, based on the amount of such
accounts receivable, the Company was eligible to borrow $3.2 million of the
remaining $3.5 million which was unused as of such date. The Company is
required to maintain certain financial and other covenants under that facility.
The Company intends to repay the outstanding amount under this facility with a
portion of the proceeds of this offering. See "Use of Proceeds."
The Company may expand its capabilities through the acquisition of other
businesses that are complementary to the Company's existing business. A portion
of the net proceeds from this offering may be used in the future for such
acquisitions. See "Risk Factors -- Broad Discretion in Application of Proceeds;
Acquisition Risks" and "Use of Proceeds."
The Company currently anticipates that the net proceeds received by the
Company from this offering, together with amounts available under its existing
line of credit, cash generated from operations and existing cash balances will
be sufficient to satisfy its operating cash needs through December 31, 1998.
The Company believes that additional bank credit would be available to fund
such operating and capital requirements if the Company's cash needs expand more
rapidly than expected. In addition, the Company could consider seeking
additional public or private debt or equity financing to fund future growth
opportunities. No assurance can be given, however, that such bank credit or
debt or equity financing will be available to the Company on terms and
conditions acceptable to the Company, if at all.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock (as defined). This statement is effective for
financial statements issued for periods ending after December 15, 1997. Had
the statement been effective for the year ended December 31, 1996 and the six
months ended June 30, 1997, income per share would have been presented as
follows:
Year Ended Six Months Ended
December 31, 1996 June 30, 1997
----------------- ----------------
Income per common share $0.23 $0.15
----------------- ----------------
Income per common share
--assuming dilution $0.17 $0.12
----------------- ----------------
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." The Company is required to adopt the provisions of
this statement for the year ending December 31, 1998. This statement continues
the previous requirements to disclose certain information about an entity's
capital structure found in APB Opinions No. 10, "Omnibus Opinion-1996," No. 15,
"Earnings per Share," and FASB Statement No. 47, "Disclosure of Long-Term
Obligations," for entities that were subject to the requirements of those
standards. As the Company has been subject to the requirements of each of
those standards, adoption of SFAS No. 129 will have no impact on the Company's
financial statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. The
Company is required to adopt the provisions of the statement for the year
ending December 31, 1998. Earlier application is permitted; however, upon
adoption the Company will be required to reclassify previously reported annual
and interim financial statements. The Company is presently evaluating the
impact of this new standard on its financial statements.
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<PAGE>
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the Company to
present certain information about operating segments and related information,
including geographic and major customer data, in its annual financial
statements and in condensed financial statements for the interim periods. The
Company is required to adopt the provisions of the statement for the year
ending December 31, 1998. Earlier application is permitted; however, upon
adoption the Company will be required to restate previously reported annual
segment and related information in accordance with the provisions of SFAS No.
131. The Company is presently evaluating the impact of this new standard on
its financial statements.
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<PAGE>
BUSINESS
Overview
The Company provides a wide range of outsourced IT solutions and
professional services, including the operation of large-scale data center
complexes and networks ("Megacenter Operations"), distributed systems
management ("DSM"), staffing services and other IT services. The Company
provides these solutions and services, generally on a long-term, fixed-price
contractual basis, to its Strategic Clients which are global providers of IT
outsourcing services. The Company works with these Strategic Clients as part
of the IT outsourcing team in providing services to a wide range of corporate
Engagement Clients, accepting delivery responsibility for specific functional
roles within the outsourcing engagements. The Company's primary Strategic
Clients have been IBM and Digital. The Company is also working towards
establishing a Strategic Client relationship, with Perot Systems.
Representative Engagement Clients currently include Ameritech, Campbell Soup,
McDonnell Douglas, PECO Energy and Ryder Systems Corp. The Company's
revenues have expanded at a compound annual growth rate of 60.5% to $57.9
million in 1996 from $22.5 million in 1994. Revenues in the first six months
of 1997 increased by 61.7% to $39.3 million compared to $24.3 million in the
first six months of 1996. For the years ended December 31, 1995 and 1996 and
for the six months ended June 30, 1997, approximately 92%, 74% and 62% of the
Company's revenues, respectively, were derived from fixed-price contracts.
As of June 30, 1997, the Company had over 1,300 employees in 14 Company
offices and 82 engagement locations in the United States, Canada, Mexico,
Brazil and the United Kingdom.
The Company believes that it is differentiated from other IT service
providers through its focus on relationships with Strategic Clients, its
ability to perform successfully and profitably under multi-year, fixed-price
contracts and its ability to provide services on a national and international
basis. The Company's strategy is to build long-term relationships with
selected Strategic Clients by understanding their business needs and by
providing specific services within large-scale outsourcing engagements more
cost-effectively than its Strategic Clients. The Company's services range from
basic data center management operations to help desk services, business process
reengineering and software engineering support. The Company delivers its
services through customer teams, each of which has full responsibility for the
delivery of services to a specific Strategic Client. The Company's close
relationships with its Strategic Clients, its ability to rapidly transition and
integrate its management personnel into new engagements, and its ability to
effectively manage personnel in the client environment, allow the Company to
profitably price its services under fixed-price contracts. By offering
fixed-price contracts, the Company reduces the execution and pricing risk for
its Strategic Clients in their large-scale outsourcing engagements. The
Company has developed and is continuing to expand its international service
delivery capabilities in order to leverage its Strategic Clients' increasingly
global IT outsourcing efforts.
Large-scale outsourcing engagements typically involve the acquisition of
IT assets by the outsourcing provider from the engagement client. These assets
can range from fixed assets, such as entire data centers and computer networks,
to personnel, such as data center, help desk and programming staff. The
Company's role in outsourcing engagements usually involves the retention of IT
personnel from the Engagement Client. By retaining employees as part of its
new outsourcing engagements, to date the Company's growth has not been impeded
by the availability of qualified technical personnel and the Company has
avoided the significant staffing costs and expenses normally associated with
new engagements within the IT services industry. In each new outsourcing
engagement, the Company utilizes its expertise in IT staffing and operations to
evaluate and retain outsourced staff and to reengineer the operations of the
outsourced function. Through this process, the Company historically has been
able to improve the performance of, and manage on a more cost-effective basis,
the outsourced function for its clients.
Industry
The use of outsourcing has grown rapidly as corporations have increasingly
determined that it is advantageous to focus on their core competencies and
outsource those functions that are not central to their primary mission.
According to the Yankee Group an industry research firm, the IT outsourcing
market in 1995 was approximately $59 billion in the United States and
approximately $107 billion worldwide. In 1995, Dataquest estimates that IBM
was the leading provider of management/operations and business process
management services in the United
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<PAGE>
States with a 28.9% market share and was one of the top two providers of such
services worldwide with a 19.7% market share.
The Company believes that a number of factors have resulted in a
significant shift in the awareness and acceptance by organizations of the
benefits of IT outsourcing. Historically, most IT outsourcing arrangements
were premised on the primary goal of cost reduction and were often limited to
discrete functions such as the management of data centers. Over the past
several years, however, a number of fundamental developments have occurred
which have caused organizations to reconsider the benefits of outsourcing their
IT functions. These developments include global competition, businesses'
focus on "core competencies," accelerating technological change and the need
for enterprise-wide system integration arising from the rapid growth in the
number of software applications and end-users throughout organizations. The
principal technology-driven change is the continuing movement by large
corporations to open, distributed computer networks using client/server
architecture. The move to open standards based computing environments
continues to accelerate today as a result of improvements in price/performance
ratios for computer systems and advances in open computing standards and
enabling technologies. These technological changes are making it increasingly
difficult and expensive for businesses to maintain in-house the necessary
technical and management capabilities to handle both their current IT needs and
to effectively exploit rapidly evolving technologies.
One of the key trends occurring in the IT outsourcing industry is an
increasing use of business partnerships and alliances among outsourcing vendors
to deliver a broader range of technical skills more cost-effectively to the
Engagement Client. Factors driving this trend include the complexity and
convergence of technology required in outsourcing engagements, lack of
available technical resources, shortened delivery times, and investment costs
of internally building technical capabilities. As a result, outsourcing
providers recognize that it is not practical to internally develop and manage
all of the technical skills and critical resources necessary to perform
increasingly complex outsourcing engagements. Outsourcing engagements are
typically characterized as being long-term in nature and often involve the
transfer by the client of certain of its facilities, technologies and employees
to the outsourcer. The outsourcer's responsibilities under IT engagements may
vary widely from engagement to engagement, ranging from the provision of
certain specific IT functions to the management of a client's entire IT
operation. Within these engagements, the relationships involve the provision
of employees or consultants by the subcontracting vendor to the outsourcing
vendor. The subcontractor is normally paid on a time and materials basis and
the outsourcing vendor retains the managerial responsibility for the IT
services provided by such persons.
The OAO Advantage
The Company's approach is to be a value-added partner of choice to a
limited number of Strategic Clients in the provision of outsourced IT solutions
and professional services. This client focus establishes a "customer intimate"
relationship in which the Company's Strategic Clients are willing to assign
performance management responsibility to the Company for its role in the
outsourcing engagements, usually on a fixed-price basis. The Company's close
relationships with its Strategic Clients, its ability to rapidly transition and
integrate its management personnel into new engagements, and its ability to
effectively manage personnel in the client environment, allow the Company to
profitably price its services under fixed-price contracts. By generally
operating under fixed-price contracts, the Company reduces the execution and
pricing risk for its Strategic Clients in their large-scale outsourcing
engagements. The Company believes that this advantage significantly increases
its ability to compete in the provision of IT solutions and professional
services.
Limited Number of Strategic Clients. The Company intends to continue
focusing on maintaining close relationships with a limited number of Strategic
Clients on a global basis. By limiting the number of these relationships, the
Company believes that it enhances its standing as a value-added partner of
choice, and limits competitive threats to its Strategic Clients. Therefore,
the Company is better positioned to obtain additional engagements which result
from the continued growth in the demand for the global IT outsourcing solutions
and services provided by the Company's Strategic Clients.
Customer-Intimate Relationships. The Company supports its Strategic
Client relationships through a dedicated customer team for each Strategic
Client which seeks to understand the business objectives of that Strategic
Client and to identify common business opportunities. The Company also
supports its Strategic Client relationships by co-locating
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<PAGE>
its offices with those of its Strategic Clients and Engagement Clients and by
supporting each engagement with employees possessing extensive background in
the services required by the Strategic Client. By delegating performance
management responsibility to the Company, the Strategic Client is afforded the
opportunity to place greater focus on other portions of the overall engagement.
Fixed-Price, Multi-year Contracts. The Company believes that it provides
added value by offering fixed-price, multi-year contracts to its Strategic
Clients. Within the industry, IT servicing vendors normally provide employees
to perform or support a specific IT function on a time and materials basis. In
contrast, the Company seeks to assume full performance management
responsibility for its specific IT functions within the total engagement. As a
result, the Company is able to offer its Strategic Clients greater cost
certainty during the course of the engagement and the Company is afforded the
opportunity to realize significant benefits by achieving efficiencies through
improved management practices and the establishment of new technical and
operational methodologies.
Comprehensive IT Outsourcing Solutions and Professional Services. The
Company provides its Strategic Clients with a comprehensive offering of IT
outsourcing solutions and professional services, including: Megacenter
Operations; restructuring of server and PC networks for efficient centralized
operations and management; transition of customer IT environments to new
client/server structures; help desk implementation and operations; development
and sustaining support to applications systems; and system engineering
services. The Company has developed, and is expanding, the capability to
provide such services internationally in response to its Strategic Clients'
increasingly global needs. The Company currently maintains offices in the
United States, Canada, Mexico, Brazil and the United Kingdom.
Retention of Engagement Client Personnel. The Company intends to continue
its practice of selectively retaining the majority of the outsourced personnel.
The Company approaches its new employees on the basis that they, and the
capabilities that they represent, are the most critical assets of the Company.
With the Company, employees have the opportunity to participate in the rewards
of the Company's growth, manage their own areas of responsibility, and advance
in their profession. These practices have provided the Company with a large
number of dedicated and talented employees and have allowed the Company to
minimize recruiting and hiring expenses when entering into new engagements.
As the Company achieves efficiencies at many of its engagements it has
generally been able to reduce personnel requirements. This has enabled the
Company to leverage existing employees to expand its role in existing
engagements and to obtain and support new engagements, while providing these
individuals with more diverse career opportunities.
Seamless Transition. The Company has consistently provided its Strategic
Clients with the capability to transition select functions from its
Engagement Clients to the outsourcing engagement without interruption of
those functions. The customer team organizes its employees, augmented by
Enablement Team personnel, into "Transition Teams," assigning them the task
of selectively retaining a high percentage of the incumbent workforce,
establishing a contingent redundancy in the workforce, and providing
augmentation of key positions with Company personnel during the transition
period.
Growth Strategy
The Company's goal is to become one of the premier providers of outsourced
IT solutions and services by pursuing the following principal strategies:
Leverage Existing Relationships. By establishing and nurturing close
relationships with a limited number of Strategic Clients, the Company intends
to continue building a reputation for performance that supports the Company's
selection by its clients as a value-added partner of choice. In support of
this strategy, the employees that deliver services to Strategic Clients are
organized in customer teams, with each customer team responsible for a
particular Strategic Client. In addition to designated
customer teams, the Company also maintains engagement managers who are
responsible for each Strategic Client relationship and who seek to identify
additional business opportunities within the Strategic Client organization. As
a result of these relationships, the Company has been granted several
engagements by Strategic Clients without the requirement that the Company
submit to a competitive selection process.
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<PAGE>
Selectively Expand Base of Strategic Clients. The Company intends to
selectively expand the number of Strategic Clients with which it maintains
relationships by carefully evaluating market opportunities with IT services
and product providers who value the Company's outsourcing approach. The
Company recently began its third engagement with the energy systems group of
Perot Systems and is working towards establishing a Strategic Client
relationship with Perot Systems. The Company is also working to establish
business opportunities with NCR also with the objective of achieving a
Strategic Client relationship. In expanding its base of Strategic Clients,
the Company intends to refrain from pursuing engagement or partnership
opportunities with organizations competing directly with its existing
Strategic Clients.
Increase International Presence. The Company plans to continue to expand
its international presence to capitalize on global outsourcing opportunities
with its Strategic Clients. The Company currently maintains offices in
Canada, Mexico, Brazil and the United Kingdom, and anticipates opening
additional offices within the next 18 months in Continental Europe and the
Asia-Pacific Rim. The Company also uses joint venture relationships with
local IT services providers in order to broaden its international service
capabilities. The Company has established a joint venture relationship with
Capita Managed Services Limited, a local IT service provider in the United
Kingdom, and has executed letters of understanding regarding the
establishment of joint venture relationships with Stefanini Consultoria e
Assessoria em informatica in Brazil and with Comtex Group Limited in New
Zealand.
Develop Industry-Specific Expertise. The Company intends to selectively
develop expertise in industries that may offer higher-margin opportunities
for the Company's IT solutions and professional services. The Company has
invested in developing expertise in the healthcare industry, and has recently
begun an engagement with IBM which leverages the Company's industry expertise
to provide a state-of-the-art health data network to healthcare service
providers. The Company will target other vertical markets that are
undergoing regulatory, technological or competitive changes which provide
opportunities for increased outsourcing of IT functions. The Company will
likely make investments in new technical and service capabilities to enhance
its vertical market strategy.
Pursue Acquisitions and Alliances. The Company intends to pursue
expansion opportunities with other IT service providers by means of
acquisitions or alliances. The Company believes that new technical skills,
additional industry expertise, a broader client base and an expanded
geographic presence may result from these activities.
OAO's Services
Megacenter Operations Management. The Company's Megacenter Operations
management services cover the entire spectrum of the management and operation
of large scale computing equipment and all of its ancillary equipment,
systems, services and associated networks. This generally includes the
performance of any task associated with the operation or management of a
traditional mainframe data center. IBM currently engages the Company to
provide management and operations services at three of its four Megacenters
in the U.S. Each Megacenter represents the networking of IBM's data centers
across a geographic region.
The Company provides services which support all aspects of data center
management such as policy formulation, planning, process and procedure
creation, service level development, staffing and directing the work force,
budgeting and controlling, relocation and consolidation, and upgrading of
equipment, services and systems. In performing these services, the Company
is normally responsible for the attainment of service level requirements and
has the flexibility of directing the personnel as it deems appropriate.
The Company also provides services which involve all elements of the
technical operations of a data center, including management and operation of
distributed networks of systems, computer room equipment scheduling and
operations, network center operation and management, tape library management,
off-site data storage, disaster planning and recovery, tape and print
equipment operations, print distribution, help desk and call center
operations, move/add/change operations for user equipment, computer and
network systems programming, computer and network systems performance
measurement and tuning, production job scheduling and control for
applications systems, maintenance and development of software applications
systems, and quality assurance for technical operations.
33
<PAGE>
A typical Megacenter engagement involves supporting a Strategic Client
by selectively accepting functions within the total outsourcing engagement.
The Company's role is to assume full responsibility for managing, staffing
and delivering service level requirements for those functions. For example,
in the Company's seven-year contractual engagement to support a very large
IBM Megacenter dispersed across the Northeast region of the U.S., the Company
performs the functions of console operations, network operations, output
processing operations, data storage operations, and user services functions
such as move/add/change operations. This Megacenter utilizes a network of
more than 100 large mainframe computer configurations that support both the
Strategic Client's internal requirements as well as those of its Engagement
Clients. Within this engagement, the Company performs defined functions on a
fixed-price basis and also supports a wide range of additional functions
pursuant to certain staffing service provisions under the contract. These
additional functions may be performed by the Company on a short-or-long-term
basis depending on the requirements of the Strategic Client. The Company
performs these functions in the facilities of both its Strategic Clients and
its Engagement Clients, including regional, national and international
locations of its Engagement Clients.
Distributed Systems Management. The Company's primary focus in DSM
services is on the evolving market for outsourced support of the
desktop-network requirements of its Engagement Clients. The Company has also
been engaged to support mid-range system applications and operations. The
Company believes that the trend toward outsourcing the operation and
management of desktop-network requirements presents a major opportunity for
growth. The services being delivered by the Company vary by engagement and
include: network operating system architecture and implementation; evaluation
and redesign of server architecture; communications network evaluation and
restructuring for improved connectivity and efficiency; design and
implementation of E-mail solutions; rollout of the new desktop system into
the user environment; transition services to support a smooth migration to a
new centrally managed desktop environment; help desk services; deskside
training services; asset management support and control; design and
implementation of automated centralized asset control; and operation support,
including activities associated with changes in technology, the client's
organizational structure or physical plant changes. The Company currently
has engagements in three major Strategic Client programs, two with IBM and
one with Digital.
As an example of the Company's DSM services, the Company has teamed with
IBM to provide support for a major electric utility. This engagement
involves the outsourcing of the Engagement Client's entire
desktop-server-network configuration. The objective of the engagement was
initially to rationalize the environment to enable centralized management and
operations permitting the Strategic Client to improve effectiveness and
control costs. The initial scope of this engagement was for development and
implementation of the network operating system into the existing server
environment. The scope of this engagement has evolved to include designing a
new server structure, support to reengineering the communications
environment, implementation of a new standard desktop configuration, and user
support services to include deskside support. This Engagement Client's
environment includes over 6,000 workstations and approximately 100 servers.
Other IT Outsourcing and Staffing Services. The Company's relationships
with its Strategic Clients, and its posture as a value-added partner of
choice working within client engagements and facilities, provide
opportunities to be highly responsive to evolving client needs. As a
result, the Company is well-positioned to gain insight into market trends and
make investments required to pursue opportunities that result from these
trends. As a result, the Company may more selectively broaden its service
offerings.
System engineering services are a natural adjunct to the Company's other
services and represent a large and growing need of its Strategic Clients.
The Company has completed a number of short to medium term engagements in
this area and recently began an engagement in support of a systems
integration project with Perot Systems. Within this complex project,
involving the development and implementation of a system to support the
operation of the deregulated electric utility market, the Company is
supporting the system test function and providing networking expertise across
the project. The Company believes that there is a growing market for
outsourced IT services in support of deregulation.
Staffing services are a part of the Company's service offerings to its
Strategic Clients. These services, provided on a time and materials basis,
are regularly utilized within engagements to meet short or indefinite term
requirements, to deliver personnel who augment the client's staffing or to
respond to requirements that cannot be sufficiently defined to permit fixed
prices. There are also instances where an engagement has started on a time
and materials basis and evolved to a fixed-price basis as the requirement
became sufficiently defined.
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Industry specific services represent a small, but growing and important
component of the Company's business. The Company has found that it can
provide significant added value to industry-specific markets by melding its
proven capabilities in IT with in-depth expertise in the targeted market.
The Company initially targeted the healthcare industry based upon the
dynamics of the industry. An evaluation of the information aspects of the
industry clearly indicated the value of shared information across the
dispersed providers of healthcare and related businesses such as employers
and insurers. For example, since 1995 the Company has collaborated with a
Strategic Client to determine the market's needs, define a delivery approach
and represent the service offering to potential engagement clients. In 1997,
this Strategic Client awarded the Company a five-year contract to operate the
"hub" of the network solution, provide industry-specific help desk expertise
and provide continuing marketing assistance and customer support services.
This contract has significant growth opportunity if this service is broadly
accepted by the healthcare industry.
Relationships with Strategic Clients
IBM. The Company's relationship with its first Strategic Client, IBM, has
continued to expand in terms of revenues, the range of services provided, the
number of engagements and the number of IBM business units which have engaged
the Company's services. The Company won its first engagement with IBM in
January 1993, successfully competing against several existing IBM
contractors, when it was chosen to perform a number of specific functions in
a large outsourcing contract which IBM has been awarded by McDonnell-Douglas.
The initial three year term of this engagement has subsequently been
extended to a seven year term and the scope of the engagement now encompasses
the performance of functions in support of IBM's Central Megacenter. In
August 1993, the Company won a similar engagement to perform a number of
specific functions in support of IBM's internal computer complex in the
mid-Hudson Valley in New York. The Company employed approximately 100 former
IBM employees at the beginning of this engagement. The initial two year term
of this engagement has subsequently been extended to a seven year term and
the scope of the engagement now encompasses the performance by more than 500
employees of various functions in support of IBM's Northeast Megacenter. In
early 1995, the Company won a three year engagement to perform specific IT
functions in support of IBM's South Megacenter. As a result of these
engagements, IBM currently engages the Company's services at three of its
four U.S. Megacenters.
IBM has also engaged the Company to perform IT services in support of
other large outsourcing contracts which it has been awarded, including
engagements with Ameritech, Amtrak, Blue Cross /Blue Shield of New Jersey and
PECO Energy. In 1995, the Company initiated a relationship with an internal
IBM team that was pursuing a new role for IBM in the rapidly evolving
healthcare industry. The objective of this activity was to apply IBM's
"network-centric computing" approach to the revolution in information needs
in the healthcare industry. As a result of these activities, the Company was
awarded a five year contract to provide industry-specific help desk support,
customer support for marketing and start-up activities, and technical
operations for the Atlanta hub of IBM's new Health Data Network service
offering. The Company was chosen to support Ameritech, IBM's Health Data
Network and PECO Energy engagements without having to submit competitive
bids. In addition, IBM has selected the Company, without competitive bid, as
a partner in at least six major outsourcing engagements for which IBM is
currently in the bidding process.
Digital. Digital became a Strategic Client in January 1995 when the
Company was awarded a contract to provide services in support of an
Engagement Client in Vancouver, British Columbia. Later in 1995, the Company
was awarded additional engagements with Digital in Central and Eastern
Canada. During 1996, the Company became a delivery partner of Digital across
all of Digital's Canadian outsourcing engagements and played an important
role in assisting Digital to obtain a long-term extension of a large
outsourcing contract in Canada. In 1996, Digital was awarded an engagement
to provide services in support of one of the industry's largest desktop
outsourcing engagements. This particular Engagement Client is one of the
world's largest financial institutions and presents other global
opportunities for Digital. As a result of these engagements, the Company's
relationship with Digital has begun to expand into other geographic areas,
including the U.S. and the United Kingdom.
Other Evolving Relationships. The foundation of the Company's business
strategy is to identify and build lasting relationships with certain major
participants in the IT outsourcing market. In 1995, the Company identified
Perot Systems as a high growth provider of IT outsourcing that was not a
direct competitor of its existing Strategic Clients. During 1995, the
Company was awarded a small engagement by Perot System's energy systems
group. In 1996 and 1997, the Company was awarded two larger engagements with
this organization. The Company believes that the
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reputation being built and the client understanding gained in these
engagements provides a platform for the pursuit of a long-term Strategic
Client relationship.
In 1995, the Company began to acquire insight and understanding of the
organization and business plans of NCR (then a part of AT&T). This
commitment has recently begun to yield results as the Company has been
awarded a number of small engagements with NCR in 1997. The Company believes
that there is an opportunity to develop a Strategic Client relationship with
NCR.
Operations
The Company's organizational structure is composed of three parts:
customer teams, an enablement team and corporate management and staff.
Customer teams are responsible for the actual delivery of the Company's
services and provide individual, specific customer focus. Each customer team
has full accountability for the success of the Company's relationship and
business execution with a particular Strategic Client and is directly
responsible for the marketing, closing, and delivery of services to that
client. Within customer teams empowered entrepreneurial business units are
responsible for a single or group of contracts or for a geographical area
with its Strategic Client.
The Company's enablement team is responsible for assisting customer teams
in handling the significant upfront activities which occur during the
beginning and transition phases of engagements. The enablement team precedes
customer teams when entering new geographical locations and establishes the
required infrastructure to service clients at that location. When entering
new international locations, this often means identifying legal, accounting,
bookkeeping, and human resource support; organizing a new business entity;
and acquiring physical facilities. The enablement team also supports
transition efforts (new engagement start-ups) by providing experienced
specialists to provide facility, administrative and other support to the
customer team.
The Company's corporate management and staff, which includes the
Strategic Programs Group, is responsible for establishing the strategic
direction of the Company, strategic marketing, investor relations, corporate
finance and accounting, human resource policy guidance, and other
administrative support services.
In structuring each outsourcing engagement, the Company works with its
Strategic Clients to identify elements within the engagement where the
Company can assume full responsibility for contract performance. The breadth
of the Company's service offerings provides meaningful flexibility to the
Strategic Client in providing a total solution to the Engagement Client's
outsourcing requirements. The Company's roles include providing services both
at Strategic Clients' and Engagement Clients' locations locally, nationally
and internationally.
In a typical engagement, the Company will retain the personnel working
within the function that is being outsourced. The Enablement Team will
support this transition, by establishing the required infrastructure to
support the new work site. In addition, this team will support the process
of transitioning the incumbent personnel, evaluating their capabilities and
selectively hiring productive outsourced personnel as Company employees. The
Company strives to cultivate strong morale and develop its culture with new
employees, emphasizing the degree to which it values these employees, who
often find the opportunity to work with the Company appealing compared to
their previous positions working in a non-core function. The customer team
also focuses on "seamless transitions" by minimizing any disruption within
the outsourced function, often overstaffing new engagements to ensure client
satisfaction. Since the Company normally selects the majority of the staff
on an engagement from incumbent personnel, the recruiting function for each
new engagement is normally minimal. Therefore, the Company's growth to date
has not been impeded by the availability of qualified technical personnel,
and the Company has avoided the significant staffing costs and expenses
normally associated with new engagements within the IT services industry. As
the Company implements efficiencies at an engagement, it is able to
selectively utilize existing employees for other engagements and business
opportunities.
As each outsourcing engagement is transitioned over to the Company,
operational management is inserted into the engagement to oversee the
Company's role on an ongoing basis. Within customer teams, the operational
managers and engagement staff are formed into empowered, entrepreneurial
business units, responsible and accountable for the outcome of this
engagement. During the early stages of each engagement, the outsourced
function is evaluated and
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reengineered for quality of performance and efficiency, as the Company seeks
to drive down operational costs while exceeding service delivery expectations
of the client. Each customer team has full accountability for the success of
the Company's relationships and business execution with its client, and is
directly responsible for delivering contracted solutions and services, and
identifying, marketing and closing additional new business opportunities
within existing engagements.
Sales and Marketing
To date, the Company has focused its marketing efforts on maintaining
and expanding its relationships with a limited number of Strategic Clients.
The Company's customer-intimate business model is the driving force of the
sales and marketing functions. Since the Company has co-located its offices
with those of its Strategic Clients, its customer teams are designed to focus
on and serve the Strategic Client in targeted market segments. Each customer
team includes two or more account executives who have the responsibility to
expand the Company's business with that Strategic Client. Since the customer
teams are closely aligned with and co-located with the Strategic Client, the
Company is in a better position to anticipate and respond to the Strategic
Client's unique needs, thereby creating a competitive advantage by ensuring
account control and growth with its Strategic Clients. After establishing
its customer team in a manner which the Company believes will exceed its
Strategic Client's expectations, the Company seeks to expand its marketing
activities from that location.
Once the customer teams can anticipate the Strategic Client's future
needs, the Company's Strategic Programs Group is responsible for positioning
the Company to meet these needs through new service offerings. Under the
leadership of the Strategic Programs Group, the Company has made and will
continue to make significant investments to position itself in key
industries, technologies and global markets.
Competition
The IT services market is highly competitive and is served by numerous
firms, including systems consulting and integration firms, professional
services companies, application software firms, temporary employment
agencies, the professional service groups of computer equipment companies,
facilities management and management information systems outsourcing
companies, certain "Big Six" accounting firms, and general management
consulting firms. Many participants in the commercial IT services market
have significantly greater financial, technical and marketing resources and
generate greater revenues than the Company. The Company believes that the
principal competitive factors in the commercial IT services industry include
responsiveness to client needs, the ability to cause the transition of the
outsourced services to occur on a prompt and seamless basis, quality of
service, employee relations, price, management capability and technical
expertise. The Company believes that its ability to compete also depends on
a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate skilled technical and management
personnel, the price at which others offer comparable services and the extent
of its competitors' responsiveness to client needs.
Facilities
The Company's headquarters and principal administrative, sales and
marketing functions are located in approximately 11,500 square feet of leased
space in Greenbelt, Maryland. This lease expires in December 2003. The
Company leases office space in seven U.S. cities, as well as in Vancouver,
British Columbia; Toronto, Ontario; Calgary, Alberta; Hortalandia, Brazil;
and Mexico City, Mexico. Additionally, the Company shares an office with a
joint venture partner in London, England.
The Company anticipates that additional space will be required as
business expands and believes that it will be able to obtain suitable space
as needed. In addition, the Company intends to open offices during the next
18 months in Continental Europe and the Asia-Pacific Rim to complement its
current international offices.
Employees
As of June 30, 1997, the Company employed over 1,300 full time persons.
Approximately 120 of these employees have managerial responsibilities, and
over 1,150 have technical responsibilities. The Company typically
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utilizes the services of independent contractors only in certain
international engagements. The Company believes that its relationships with
its employees are good.
Six of the Company's employees are represented by the Southern California
Professional Engineering Association under a collective bargaining agreement
which expires on January 10, 1999. Fourteen of the Company's employees are
represented by the International Association of Machinists and Aerospace
Workers under a collective bargaining agreement which expires on January 15,
1999. Twenty-four of the Company's employees are represented by the Office
and Professional Employees International Union (the "OPEIU") under a
collective bargaining agreement that expired on February 28, 1997 but which
remains in effect and is currently being negotiated. The Company believes
that its relationships with each union is good and it has no reason to
believe that it will not reach a satisfactory new agreement with the OPEIU.
Legal Proceedings
The Company believes that there are no claims or actions against the
Company the ultimate disposition of which will have a material adverse effect
on the Company's results of operations or consolidated financial position.
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MANAGEMENT
Officers and Directors
The names, ages and positions held by the officers and directors of the
Company are as follows:
Name Age Position
- ---- --- --------
Directors and Executive Officers
William R. Hill 51 Chief Executive Officer,
President and Director
Edgar M. Fields 58 Chief Operating Officer
Samuel D. Horgan 48 Chief Financial Officer
and Treasurer
Richard M. Clyne 49 Senior Vice President
Richard Eubanks 55 Senior Vice President
Harvard V. Hopkins, Jr. 59 Senior Vice President
Gerry Lalonde 45 Senior Vice President
Donald G. Miller 60 Senior Vice President
Evelyn A. Scott 43 Senior Vice President
Howard G. Ulep 54 Senior Vice President
Jerry L. Johnson 49 Chairman of the Board of
Directors
Cecile D. Barker 53 Vice Chairman of the
Board of Directors
Thomas C. Lynch 55 Director
Frank B. Foster III (1)(2) 63 Director
Yvonne Brathwaite Burke (1)(2) 65 Person Named to Become a
Director
John Lehman (1)(2) -- Person Named to Become a
Director
Other Company Officers
Christine M. Hazell 38 Vice President
Anderson O. Inniss 48 Vice President
Patrick H. O'Neill 52 Vice President
Shiraz Patel 37 Vice President
Stu Schmidt 40 Vice President
John T. Weisman 52 Vice President
- -------------------
(1) Member or Person Named to become a member of the Compensation Committee
of the Company's Board of Directors
(2) Member or Person Named to become a member of the Audit Committee of the
Company's Board of Directors
William R. Hill has been President and Chief Executive Officer and a
Director of the Company since March 1996. From 1992 to March 1996, Mr. Hill
was the Senior Vice President of the Commercial Systems Group of OAO
Corporation (the "Commercial Systems Group"). From 1990 to 1992, Mr. Hill
was Vice President for Planning Research Corporation ("PRC"), a systems
integration company. From 1985 to 1990, Mr. Hill was Vice President of
Business Development for OAO Corporation. He previously was Director of the
Legislative and Committee Systems Division for the United States House of
Representatives and a systems engineer and national account manager for NCR.
Mr. Hill has over 20 years of experience in the information systems and
services industry.
Edgar M. Fields has been Chief Operating Officer of the Company since
March 1996. From March 1994 to March 1996, Mr. Fields was Group Vice
President of Operations for the Commercial Systems Group and from November
1992 to March 1994, he participated in the formation of the Commercial
Systems Group. From 1987 to
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1991, Mr. Fields was President of the Systems Services Group of PRC. From
1966 to 1987, Mr. Fields held various senior management positions with PRC.
Mr. Fields has over 35 years of experience in the delivery of IT services.
Samuel D. Horgan joined the Company in July 1997 as Chief Financial
Officer and Treasurer. From January 1996 until July 1997, Mr. Horgan was the
Chief Financial Officer for Worldspan, Ltd., a global computer reservation
system and systems integrator in the airline industry. Before joining
Worldspan, Ltd., Mr. Horgan was Chief Financial Officer and Treasurer of
Computer Task Group, Inc., a large publicly traded IT services provider, from
1986 to December 1995. Mr. Horgan began his career at Computer Task Group in
1981 as a financial analyst. Mr. Horgan has over 26 years of experience in
business acquisition, management, finance and operational reorganization.
Richard M. Clyne has been Senior Vice President of the Company since
January 1997 and has responsibility for the Company's relationship with IBM
and international opportunities with this Strategic Client. From 1994 to
January 1997, Mr. Clyne was the Director of Delivery Services in IBM's Asia
Pacific Group. From 1993 to 1994, Mr. Clyne was Site Executive of IBM's
largest outsourcing account in Long Beach, California. From 1990 to 1992,
Mr. Clyne established and managed IBM's Partner and Vendor Relations unit.
Mr. Clyne has over 26 years of experience in the IT industry.
Richard Eubanks has been a Senior Vice President of the Company since
January 1997 and has responsibility for the Company's relationship with IBM
and for the IBM customer team. From 1967 to 1997, Mr. Eubanks held various
technical and executive positions at IBM. In his career at IBM, Mr. Eubanks
developed the first gas panel display using scan technology which
significantly lowered the display manufacturing cost. Mr. Eubanks also
managed IBM's second largest outsourcing operation in Chicago, Illinois. Mr.
Eubanks has 30 years of experience in the IT industry.
Harvard V. Hopkins, Jr. has been a Senior Vice President of the Company
since March 1996 and has responsibility for the support of new engagement
startups and transitioning and oversight of the Company's programs on
commitment to quality. From October 1994 to March 1996, Mr. Hopkins was a
Vice President in the Commercial Systems Group. From September 1990 to
October 1994, Mr. Hopkins served as Executive Vice President of Operations
for KENROB and Associates, an IT consulting firm. From 1988 to 1990, Mr.
Hopkins was Director of Eastern Operations for OAO Corporation's Information
Systems Group and Vice President of its Space Systems Division (the "Space
Systems Division"). Mr. Hopkins was a Group Manager for OAO Corporation in
1987. In 1987, Mr. Hopkins retired from his position as a Colonel in the
United States Marine Corps, where he had held various management, technical
and training positions since 1960. Mr. Hopkins has over 22 years of
experience in the IT field.
Gerry Lalonde has been a Senior Vice President of the Company since March
1996 and has responsibility for the Company's relationship with Digital and
for international opportunities with this Strategic Client. From July 1995
to March 1996, Mr. Lalonde was Chief Operating Officer of the Company's
Canadian subsidiary. From 1985 to July 1996, Mr. Lalonde held various
positions at Digital, including Managing Director and General Manager of
Digital's outsourcing management services for Canada; Business Development
Manager for Western Canada; Chief Financial Officer for Digital's New Zealand
and Fijian subsidiaries; and Manager of Management Information Systems for
Digital's Canadian subsidiary. Mr. Lalonde has over 20 years experience in
finance, IT, business development and management.
Donald G. Miller has been a Senior Vice President of Operations for the
Company since October 1996 and is responsible for the technical execution of
the Company's engagements, development of new service offerings and
international business development. From 1990 to October 1996, Mr. Miller
held various positions at OAO Corporation, including Vice President of the
Network Services Division, Vice President of Systems Management of the
Commercial Systems Group and Vice President of the Space Systems Division.
In 1990, Mr. Miller retired from his position as a Colonel in the United
States Marine Corps, where he held various management positions in the IT
field, including Head of Information Resources Management. Mr. Miller has
over 30 years of management experience in the IT field.
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Evelyn Scott has been a Senior Vice President of the Company since March
1996 and is responsible for new business development in Latin America with
the IBM customer team. From 1983 to March 1996, Ms. Scott held various
positions with OAO Corporation, including President of OAO Systems, Inc., a
subsidiary that focused on local government and regional business
development, Vice President of OAO Services, Inc., a subsidiary that offered
leading edge technology to state and local governments, and Manager of the
Strategic Programs Group. Ms. Scott has over 15 years experience in the IT
field.
Howard G. Ulep has been a Senior Vice President of the Company since
February 1997 and is responsible for the evaluation of acquisition
opportunities and new technologies, services and markets. From July 1995 to
December 1996, Mr. Ulep served as senior management for Northern
Communications Systems. In October 1988, Mr. Ulep founded Wye Technologies, a
telecommunications applications provider, and served as Chief Executive
Officer until July 1995 when it was sold to Northern Communications Systems.
In 1981, Mr. Ulep founded Capital Systems, Inc., a systems integration
provider, where he served as Chief Executive Officer until the company was
purchased in 1986 by SHL Systemhouse. Mr. Ulep served as Vice President of
Strategic Systems for SHL Systemhouse until 1988. Mr. Ulep has previously
held senior management positions with the United States House of
Representatives Computer Center, Computer Sciences Corporation and
Informatics, Inc. Mr. Ulep has over 20 years experience in the IT field.
Jerry L. Johnson has been the Chairman of the Board of Directors of the
Company since April 1996. Mr. Johnson has been the Senior Vice President of
Operations of Safeguard since September 1995. From 1985 to 1995, Mr. Johnson
held various senior executive positions with US West, including Group
Director, Vice President of Network and Technology Services and Vice
President of Residence Planning. From 1983 to 1985, he was President and
Chief Executive Officer of Northwestern Bell Information Technologies, a
subsidiary of Northwestern Bell Telephone Company. Mr. Johnson is a director
of USDATA Corporation, a Safeguard partnership company that is a global
supplier of real-time application development tools, distribution management
software, automatic identification equipment and related consulting and
integration services. Mr. Johnson also is a member of the International
Society of Sloan Fellows.
Cecile D. Barker has been the Vice Chairman of the Board of Directors of
the Company since April 1996. Mr. Barker is the Chairman of the Board, Chief
Executive Officer and majority owner of OAO Corporation, a company which he
founded in 1973. Mr. Barker regularly serves as an advisor to other
corporations, and he is a member of the Advisory Committee for Scientific
Policy for the National Science Foundation and the Science and Technology
Advisory Committee for the Executive Office of the President of the United
States. Mr. Barker has over 28 years of experience in the management of
major scientific, technological and commercial programs.
Thomas C. Lynch became a Director of the Company in April 1996. Mr.
Lynch has been a Senior Vice President of Operations of Safeguard since
November 1995. Prior to that time, Mr. Lynch retired from the U.S. Navy as an
Admiral after 33 years of service, including service as Superintendent of the
U.S. Naval Academy from 1991 through 1994 and Director, Navy Roles and
Missions from 1994 through 1995. Admiral Lynch currently is a director of
Sanchez Computer Associates, Inc., a Safeguard partnership company, a company
that designs, develops and markets banking software. Mr. Lynch is also a
director of The Eastern Technology Council and is a member of the Cradle
Liberty Council, Boy Scouts of America and the U.S. Naval Academy Foundation.
Frank B. Foster, III became a Director of the Company in April 1996. Mr.
Foster will serve as Chairman of the Audit Committee upon the consummation of
this offering. Mr. Foster retired as President and Chief Executive Officer
of Diamond Bathurst (formerly Diamond Glass) in 1986 after almost 30 years of
service. Since 1986, Mr. Foster has served on the boards of numerous
companies and is currently a director of 1838 Investment Advisors, Airgas,
Inc., Contour Packaging Corporation and U.S. Precision Glass Company.
Yvonne Brathwaite Burke will become a Director of the Company upon the
consummation of this offering. Ms. Burke will also become a member of the
Compensation Committee and Audit Committee. Ms. Burke has served as Los
Angeles County Supervisor since 1992. Ms. Burke also serves on the Board
of L.A. Care
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and NAACP Legal Defense and Education Fund. Ms. Burke is a member of the
Board of Trustees of the Amateur Athletic Foundation and the National Academy
of Public Trusteeship. Ms. Burke is a former U.S. Congresswoman, who served
on the Appropriations Committee, Departments of State, Justice and Commerce,
and on the select committee on Assassinations.
John Lehman will become a Director of the Company upon the consummation
of this offering. Mr. Lehman will also become a member of the Compensation
Committee and Audit Committee. Mr. Lehman also serves as Chairman of the
Board of Directors of J.F. Lehman & Co., a private equity firm, Ball
Corporation and Sedgwick Group plc. Mr. Lehman was also an investment banker
at Paine Webber Inc. and served as Secretary of the Navy for six years. He
served as staff member to Dr. Henry Kissinger on the National Security
Council.
Christine M. Hazell has been a Vice President of the Company since
October 1996 and is responsible for the Company's human resources and
provides administrative support for the Company's offices. From 1993 to
October 1996, Ms. Hazell was Vice President of Human Resources and
Administration for OAO Corporation and from 1989 to 1993, Ms. Hazell was
director of Human Resources for OAO Corporation. From 1978 to 1989, Ms.
Hazell coordinated and administered corporate benefits programs for OAO
Corporation. Ms. Hazell has over 15 years of management and leadership
experience in the Human Resources and Administration fields.
Anderson O. Inniss has been a Vice President of the Company since July
1997. From April 1996 to July 1997, Mr. Inniss was the Director of the
Company's healthcare services business. From October 1994 to April 1996, Mr.
Inniss was a Director of the Commercial Systems Group. From 1990 to
September 1994, Mr. Inniss was General Manager of Diagnostic Health Imaging
Systems. From 1973 to 1988, Mr. Inniss was with the Greater Southeast
Community Hospital in Washington, D.C. where he held positions including
Executive Director and President of a subsidiary. Mr. Inniss has more than
24 years experience in the organization and management of healthcare
enterprises.
Patrick H. O'Neill has been a Vice President of the Company since March
1996 and is responsible for managing client engagements and quality assurance
at these engagements. From January 1993 to March 1996, Mr. O'Neill was
manager of the Company's first Megacenter Operations engagement with IBM.
Mr. O'Neill has over 30 years experience in the communications and IT
technology fields. From 1987 to 1993, Mr. O'Neill was Director of
Consolidated Logistics for OAO Corporation.
Shiraz Patel has been a Vice President of the Company since March 1996
and is responsible for the customer team supporting Perot Systems. From 1991
to March 1996, Mr. Patel held various leadership positions with Digital,
including Director of Outsourcing Services. Mr. Patel led Digital's value
migration from a product based, facilities management business into network
centric outsourcing. Prior to 1991, Mr. Patel also held positions as Vice
President at Majesco Software, Inc., Manager of Networks at Crown Life
Insurance, Project Manager, of Networks at Crown Life Insurance, Project
Manager of Networks at Bank of Montreal and Network Engineer at AT&T Canada.
Stu Schmidt has been Chief Operating Officer of the Company's Canadian
subsidiary since March 1996. From 1995 to March 1996, Mr. Schmidt was a
member of the Company's international leadership team. From 1993 to 1995,
Mr. Schmidt assisted several corporations in developing new business in the
government, financial and private industry sectors. From 1977 to 1993, Mr.
Schmidt held various leadership positions at Digital, including Customer
Services Sales Manager of the National Capital District, National Account
Manager for the IT industry and the federal government and Field Service Unit
Manager. From 1976 to 1977, Mr. Schmidt was a Field Service Engineer with
NCR in Canada. Mr. Schmidt has over 22 years experience in the IT field.
John T. Weisman has been a Vice President for the Company since 1996 and
is responsible for the Company's Northeastern U.S. Megacenter Operations.
From 1993 to 1996, Mr. Weisman was Program Manager for the Commercial Systems
Group of OAO Corporation's Northeast Operations. From 1967 to 1993, Mr.
Weisman held various technical and management positions with IBM. Mr.
Weisman has over 31 years of experience in IT and project management.
Director Compensation
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Directors who are not currently receiving compensation as officers,
employees or consultants of the Company or Safeguard are entitled to receive
an annual retainer fee of $6,000 ($7,000 with respect to the Chairman of the
Audit Committee), plus a fee of $1,000 and reimbursement of expenses for each
meeting of the Board of Directors and each Committee meeting that they attend
in person.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, recommendations concerning the aggregate
compensation of the Company's employees were made to the Compensation
Committee by the Chief Executive Officer. The members of the Compensation
Committee prior to this offering were Thomas Lynch and Cecile Barker. There
are currently no compensation committee interlocks with other entities or
insider participation on the Compensation Committee.
Employment Agreements
The Company entered into an employment agreement with William R. Hill as
of April 1, 1996, which provides for the payment of an annual base salary of
$150,000, and incentive bonuses upon the achievement of certain objectives.
For 1997, Mr. Hill is entitled to receive a maximum bonus of $210,000. This
agreement automatically continues for successive one year terms unless
written notice is provided at least 90 days prior to the applicable
expiration date. This agreement generally restricts Mr. Hill from competing
with the Company during the term of the employment agreement and for a period
ending one year after the termination of his employment. The Company may
terminate Mr. Hill's employment without cause provided that it must continue
to pay Mr. Hill his base salary for the remaining term of the agreement and
for such additional period that he remains bound by his non-competition
covenants.
43
<PAGE>
Executive Compensation
The following table sets forth certain information concerning
compensation paid or accrued in fiscal 1996 with respect to the Company's
Chief Executive Officer and its three other most highly compensated executive
officers for the year ended December 31, 1996 who earned total salary and
bonus in excess of $100,000 (collectively, the "Named Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
-----------
Annual Compensation (1) Securities
Name and ----------------------- Underlying Other Annual
Principal Position Year Salary Bonus Options Compensation
- ------------------ ---- ------ ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
William R. Hill 1996 $152,042 $150,000 28,333 $1,440
Chief Executive Officer
and President
Edgar M. Fields 1996 154,027 50,000 100,000 0
Chief Operating Officer
Harvard V. Hopkins 1996 121,120 30,000 66,667 1,600
Senior Vice President
Gerry Lalonde 1996 135,000 27,500 28,333 0
Senior Vice President
</TABLE>
- --------------------------
(1) The annual compensation described in this table reflects actual salary
and bonus paid to such executive officers in fiscal 1996. It does not
include medical, group life insurance or other benefits received by the
Named Officers which are available generally to all salaried employees of
the Company and certain prerequisites and other personal benefits,
securities or property received by the Named Officers which do not exceed
the lesser of $50,000 or 10% of the aggregate of any such Named Officer's
salary and bonus.
The following table provides information on stock options granted by the
Company in 1996 to the Named Officers. All Company option grants depicted
below were made pursuant to the Company's Amended and Restated 1996 Equity
Compensation Plan (the "Equity Compensation Plan").
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Percent of Realizable Potential Value
Number of Total at Assumed Annual Rate of
Shares Options Stock Price Appreciation for
Underlying Granted to Excercise Option Term(1)
Options Employees in Price Per Expiration ----------------------------
Name Granted Fiscal Year Share Date 5% 10%
- ---- ---------- ------------ --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
William R. Hill 23,333 2.6% $2.00 4/1/2002 $19,272 $43,721
Edgar M. Fields 100,000 9.1 2.00 4/1/2002 68,019 154,312
Harvard V. Hopkins 66,667 6.1 2.00 4/1/2002 45,246 102,875
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Percent of Realizable Potential Value
Number of Total at Assumed Annual Rate of
Shares Options Stock Price Appreciation for
Underlying Granted to Excercise Option Term(1)
Options Employees in Price Per Expiration ----------------------------
Name Granted Fiscal Year Share Date 5% 10%
- ---- ---------- ------------ --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Gerry Lalonde 28,333 2.6 2.00 4/1/2002 19,272 43,721
</TABLE>
- ---------------------
(1) The amounts shown are calculated assuming that the market value of the
Common Stock was equal to the exercise price per share as of the date of
grant of the options. This value is the approximate price per share at
which shares of the Common Stock would have been sold in private
transactions on or about the date on which the options were granted. The
dollar amounts under these columns assume a compounded annual market
price increase for the underlying shares of the Common Stock from the
date of grant to the end of the option term of 5% and 10%. This format
is prescribed by the SEC and is not intended to forecast future
appreciation of shares of the Common Stock. The actual value, if any, a
Named Officer may realize, will depend on the excess of the market price
for shares of the Common Stock on the date the option is exercised over
the exercise price. Accordingly, there is no assurance that the value
realized by a Named Officer will be at or near the value estimated above.
The following table sets forth information concerning options exercised
during 1996 and the number and the hypothetical value of certain unexercised
options of the Company held by the Named Officers as of December 31, 1996.
This table is presented solely for purposes of complying with SEC rules and
does not necessarily reflect the amounts the optionee will actually receive
upon any sale of the shares acquired upon exercise of the options.
Aggregated Option Exercises and Last Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-The-
Options at Money Options at
December 31, 1996 December 31, 1996(1)
Shares Acquired Value --------------------------- ----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William R. Hill -- -- -- 28,333 -- $84,999
Edgar M. Fields -- -- 20,000 80,000 $60,000 240,000
Harvard V. Hopkins 167 $333 13,166 53,333 34,498 159,999
Gerry Lalonde -- -- -- 28,333 -- 84,999
</TABLE>
- ---------------------
(1) Assumes, for presentation purposes only, a per share fair market value of
$5.00.Equity Compensation Plan
The Company has adopted the Equity Compensation Plan pursuant to which it
has awarded and may in the future award stock options and equity compensation
awards to its employees, officers, non-employee directors and certain
independent contractors.
The Equity Compensation Plan provides for the issuance to employees,
non-employee directors and eligible independent contractors of up to
3,200,000 shares of Common Stock pursuant to the grant of incentive stock
options ("ISOs"), non-qualified stock options ("NQSOs"), Stock Appreciation
Rights ("SARs"), restricted stock and performance units. The Equity
Compensation Plan is administered by a Committee of directors appointed by
the Board of Directors (the "Committee"). Upon the completion of this
offering, the Committee will consist of two or more "outside directors" as
defined under section 162(m) of the Code and two or more "non-employee
directors" as defined under Rule 16(b)(3) of the Exchange Act. Subject to
the provisions of the Equity Compensation Plan, the Committee has the
authority to determine to whom stock options and other equity compensation
awards will be granted and the terms of any such award, including the number
of shares subject to, and the vesting provisions of, the award. Subject to
the terms of the Equity Compensation Plan, the Committee may also amend the
terms of any outstanding award.
As of June 30, 1997, options to purchase a total of 1,375,875 shares of
Common Stock at a weighted average exercise price per share of $2.70 were
outstanding. Of these options, options to purchase 352,417 shares of Common
Stock were fully vested and exercisable as of June 30, 1997. As of June 30,
1997, the Company had an additional 1,824,125 shares of Common Stock
available for future grants under the Equity Compensation Plan.
45
<PAGE>
The option price per share of Common Stock under the Equity Compensation
Plan is determined by the Committee at the time of each grant, provided,
however, that the option price per share for any ISO shall not be less than
100% of the fair market value of the Common Stock at the time of the grant.
If a person who owns ten percent or more of the Company's Common Stock (a
"10% Stockholder") is granted an ISO, the exercise price shall not be less
than 110% of the fair market value on the date of grant. The term of each
stock option may not exceed ten years and in the case of a 10% stockholder,
the term may not exceed five years. Stock options shall be exercisable at
such time or times as shall be determined by the Committee. Payment for the
exercise of an option shall be made by cash, check or other instrument as the
Committee may accept, including, in the discretion of the Committee,
unrestricted Common Stock of the Company. The Committee may also allow an
option holder to elect to cash out the excess of the fair market value over
the option price of all or a portion of a stock option. The Committee may
also grant, in its sole discretion, a "cashless exercise" feature for the
exercise of stock options.
The Board of Directors may amend the terms of the Equity Compensation
Plan are subject to the requirement to obtain shareholder approval of certain
amendments. Unless sooner terminated, the Equity Compensation Plan will
terminate in 2006.
Under Section 162(m) of the Code, the Company may be precluded from
claiming a federal income tax deduction for total remuneration in excess of
$1.0 million paid to the Chief Executive Officer or to any of the other four
most highly compensated officers in any one year. Total remuneration would
include amounts received upon the exercise of stock options granted under the
Equity Compensation Plan. An exception does exist, however, for
"performance-based compensation," including amounts received upon the
exercise of stock options pursuant to a plan approved by stockholders that
meets certain requirements. The Equity Compensation Plan is intended to meet
the requirements of Treasury Regulation section 1.162-27(f), and the options
and other awards granted under the Equity Compensation Plan are intended to
meet the requirements of "performance-based compensation."
Employee Stock Purchase Plan
The Company intends to consider the adoption of an employee stock purchase
plan during the first six months of 1998 and may submit such a plan for
stockholder approval at its annual meeting of the stockholders held in such
year.
46
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to the terms of a stock purchase agreement dated April 8, 1996
(the "1996 Purchase") among the Company, OAO Corporation, OAO Services, Inc.
("OAO Services") and Safeguard, (i) Safeguard purchased from the Company
5,000,000 shares of the Company's Common Stock at a purchase price of $1.00
per share or $5.0 million in the aggregate, (ii) Safeguard paid $5.0 million
to OAO Services, a subsidiary of OAO Corporation, in return for a grant by
OAO Services to the Company of an option (the "OAO Services Option") to
purchase all of the shares of common stock of OAO Services at an exercise
price based on revenues and earnings levels of OAO Services for the 12 months
prior to the date of exercise, and (iii) Safeguard granted to Cecile D.
Barker, the majority owner of OAO Corporation and a director and significant
stockholder of the Company, an option to purchase 1,000,000 shares of Common
Stock held by Safeguard (the "Barker Option"). Pursuant to the terms of the
1996 Purchase, Safeguard, William R. Hill and Cecile D. Barker were granted
certain registration rights with respect to their shares of Common Stock in
the Company. See "Shares Eligible for Future Sale --Registration Rights."
Pursuant to the terms of a Stock Purchase Agreement dated as of July 11,
1997 between Safeguard and Cecile D. Barker, Safeguard purchased 1,000,000
shares of Common Stock from Mr. Barker for $4.2 million. Contemporaneous
with the consummation of this transaction, Mr. Barker exercised the Barker
Option. In addition, pursuant to the terms of an Option Cancellation
Agreement by and among the Company, Safeguard, Cecile D. Barker, OAO
Corporation and OAO Services, the OAO Services Option was canceled in
consideration of the right to receive certain future payments in the event of
any sale of OAO Corporation or any public offering by OAO Corporation which
occurs prior to April 8, 2000. In particular, the Company and Safeguard are
each to receive one-half of (i) the greater of $1.0 million or an amount
equal to the lesser of $3.0 million or three percent of the total sales price
from the sale of both OAO Corporation and OAO Services which occurs prior to
April 8, 2000, (ii) the greater of $1.0 million or an amount equal to the
lesser of $2.0 million or three percent of the total sales price from any
sale of OAO Corporation which occurs prior to April 8, 2000 and at such time
that OAO Services is not an affiliate of OAO Corporation, (iii) the greater
of $1.0 million or an amount equal to the lesser of $3.0 million or three
percent of the market capitalization of OAO Corporation if OAO Corporation
consummates an initial public offering of its equity securities prior to
April 8, 2000 (an "OAO Corporation IPO"), or (iv) the greater of $1.0 million
or an amount equal to the lesser of $2.0 million or two percent of the market
capitalization of OAO Corporation if OAO Services is no longer affiliated
with OAO Corporation at the time of the OAO Corporation IPO. The market
capitalization of OAO Corporation would be based on the offering price of the
equity securities in the OAO Corporation IPO.
Pursuant to the terms of an Administrative Services Agreement between the
Company and Safeguard, the Company paid Safeguard $250,000 in 1996 in
consideration of administrative support services, including management
consultation, investor relations, legal services and tax planning. The
Company expects to pay Safeguard approximately $500,000 in 1997 for such
services.
Pursuant to the terms of a Transition Services and Operations Services
Agreement dated as of April 8, 1996, the Company paid OAO Corporation
$300,000 in 1996 in consideration of certain transition and operations
services provided to the Company. Cecile D. Barker is the majority owner of
OAO Corporation.
47
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale of the shares offered hereby (i) by each selling
stockholder, (ii) by each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (iii) by
each director of the Company, (iv) by each Named Officer and (v) by all
directors and executive officers of the Company as a group. Unless otherwise
indicated below, to the knowledge of the Company, all persons listed below
have sole voting and investment power with respect to their shares of Common
Stock, except to the extent authority is shared by spouses under applicable
law.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to the Offering Number of After the Offering (1)
--------------------------- Shares to be -------------------------
Number Sold in the Number of
Name and Address of Shares Percentage Offering(11) Shares Percentage
- ---------------- --------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Safeguard Scientifics,
Inc.(1)............... 5,000,000 50.0 -- 5,000,000 30.8
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Cecile D. Barker(2).... 3,997,500 40.0 359,260 3,638,240 22.4
10816 Barnwood Lane
Potomac, MD 20854
William R. Hill(3)..... 757,083 7.6 62,870 694,212 4.3
Hubert Reid(4)......... 316,667 3.1 62,870 253,797 1.6
Edgar M. Fields(5)..... 59,625 * -- 59,625 *
Harvard V. Hopkins(6).. 34,542 * -- 34,542 *
Frank B. Foster III(7).. 4,167 * -- 4,167 *
Jerry L. Johnson(8).... -- -- -- -- --
Thomas C. Lynch(9)..... -- -- -- -- --
Yvonne Brathwaite Burke -- -- -- -- --
John Lehman............ -- -- -- -- --
All executive
officers and directors
as a group
(16 persons)(10)..... 5,020,333 48.9 485,000 4,597,428 27.9
</TABLE>
- -----------------------
* Less than 1% of the outstanding Common Stock
(1) The shares are held of record by Safeguard Scientifics (Delaware), Inc.,
a wholly-owned subsidiary of Safeguard. Includes 274,000 shares of
Common Stock granted by Safeguard to certain of its employees pursuant to
a long term incentive plan (the "LTIP"). Safeguard will continue to
exercise voting control of these shares until the occurrence of certain
vesting requirements. The largest shareholder of Safeguard is Warren V.
Musser, the chairman and chief executive officer of Safeguard, who is the
record holder of approximately 9.5% of the total Safeguard common shares
outstanding. Excludes 2,250,000 shares of Common Stock pledged to
Safeguard to secure a $4.5 million loan made by Safeguard to Mr. Barker.
Includes 2,250,000 shares of Common Stock pledged to Safeguard to secure
a $4.5 million loan made by Safeguard to Mr. Barker.
48
<PAGE>
(3) Includes 7,083 shares of Common Stock issuable pursuant to presently
exercisable options. Mr. Hill's address is 7500 Greenway Center Drive,
Greenbelt, Maryland 20770.
(4) Includes 66,667 shares of Common Stock issuable pursuant to presently
exercisable options and options exercisable upon the completion of this
offering.
(5) Consists of 59,625 shares of Common Stock issuable pursuant to presently
exercisable options.
(6) Includes 34,375 shares of Common Stock issuable pursuant to presently
exercisable options and options exercisable upon the completion of this
offering.
(7) Consists of 4,167 shares of Common Stock issuable pursuant to presently
exercisable options.
(8) Excludes shares of Common Stock owned by Safeguard, of which Mr. Johnson
is a Senior Vice President. Mr. Johnson disclaims beneficial ownership
of such shares. Excludes 30,000 shares of Common Stock allocated to Mr.
Johnson under the LTIP, of which Mr. Johnson has neither dispositive nor
voting power.
(9) Excludes shares of Common Stock owned by Safeguard, of which Mr. Lynch
is a Senior Vice President. Mr. Lynch disclaims beneficial ownership of
such shares. Excludes 30,000 shares of Common Stock allocated to Mr.
Lynch under the LTIP, of which Mr. Lynch has neither dispositive nor
voting power.
(10) Includes, in the aggregate, 278,038 shares of Common Stock issuable
pursuant to presently exercisable options.
(11) These numbers do not include 478,240, 124,630 and 37,130 shares
transferable by Mr. Barker, Mr. Hill and Mr. Reid, respectively, pursuant
to the underwriters' over-allotment option.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, par value $.01 per share, and 5,000,000 shares of preferred
stock, par value $.01 per share.
Common Stock
As of June 30, 1997, there were 10,000,583 shares of Common Stock
outstanding. After giving effect to the issuance of the 6,235,000 shares of
Common Stock offered by the Company hereby, there will be 16,235,583 shares
of Common Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. The election of directors is determined by a
plurality of the votes cast. Accordingly, holders of a majority of the
shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. See "Risk Factors--Control
by Principal Stockholders." Except as required by law, all other matters are
determined by the vote of the holders of the majority of the stock having
voting power present in person or represented by proxy at the meeting.
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally
available therefor, subject to any preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities. Holders of the Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of
Common Stock are, and the shares offered by the Company in this offering will
be, when issued and paid for, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of shares of any series
of preferred stock which the Company may designate and issue in the future.
Preferred Stock
The Company, by resolution of the Board of Directors and without any
further vote or action by the stockholders, has the authority, subject to
certain limitations prescribed by law, to issue from time to time up to an
aggregate of 5,000,000 shares of preferred stock in one or more classes or
series and to determine the designation and the number of shares of any class
or series as well as the voting rights, preferences, limitations and special
rights, if any, of the shares of any such class or series, including the
dividend rights, dividend rates, conversion rights and terms, voting rights,
redemption rights and terms, and liquidation preferences. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of the Company. As of the date of this Prospectus, there
are no shares of preferred stock outstanding, and the Company has no plans to
issue any shares of preferred stock.
Rights
The Company is granting on the date hereof the rights to the holders of
Safeguard common shares. The rights, subject to minimum exercise
requirements, are each exercisable for one share of Common Stock at an
exercise price of $5.00 per share. Persons may not exercise rights for fewer
than 20 shares of Common Stock. For purposes of this offering, a person that
holds Safeguard common shares in multiple accounts must meet the 20 share
minimum purchase requirement in each account. Accordingly, persons holding
fewer than 20 rights in an account should consider the advisability of
consolidating their rights in one account, selling rights, or purchasing
additional rights to comply with the minimum exercise requirements of this
offering. Rights may be transferred, in whole or in part, by endorsing and
delivering to ChaseMellon a rights certificate that has been properly
endorsed for transfer, with instructions to reissue the rights, in whole or
in part, in the name of the transferee. ChaseMellon will reissue
certificates for the transferred rights to the transferee, and will reissue a
certificate for the balance, if any, to the holder of the rights, in each
case to the extent it is able to do so prior to the expiration date of the
rights. This offering will terminate and the rights will expire at 5:00
p.m., New York City time, on the expiration date, which is ______, 1997.
After the expiration date of the rights, unexercised rights will be null and
void. For more information about the rights and the offering process,
reference should be made to "The Offering" and to "Risk Factors--Cancellation
of Rights Offering."
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C., 85 Challenger Road, Overpeck Centre, Ridgefield
Park, New Jersey 07660.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 16,235,583 shares
of Common Stock outstanding, excluding 1,375,875 shares of Common Stock
subject to stock options outstanding as of June 30, 1997 and any stock
options granted by the Company after June 30, 1997. Of these shares, the
Common Stock sold in this offering, except for certain shares described
below, will be freely tradeable
50
<PAGE>
without restriction or further registration under the Act. The remaining
9,515,583 shares of Common Stock (the "Restricted Shares") were sold by the
Company in reliance on exemptions from the registration requirements of the
Act and are "restricted securities" as defined in Rule 144 and may not be
sold in the absence of registration under the Act unless an exemption is
available, including an exemption afforded by Rule 144 or Rule 701. See
"Risk Factors--Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, if two years have
elapsed since the date of acquisition of restricted securities from the
Company or any affiliate and the acquiror or subsequent holder is not deemed
to have been an affiliate of the Company for at least 90 days prior to a
proposed transaction, such person would be entitled to sell such shares under
Rule 144(k) without regard to the limitations described below. If one year
has elapsed since the date of acquisition of restricted securities from the
Company or any affiliate, the acquiror or subsequent holder thereof
(including persons who may be deemed affiliates of the Company) is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then-outstanding shares of Common Stock or the
average weekly trading volume in the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. Sales under Rule
144 are also subject to certain provisions regarding the manner of sale,
notice requirements and the availability of current public information about
the Company. Without considering the contractual restrictions described
below, approximately (i) 9,515,168 Restricted Shares will be eligible for
sale ninety days after the date of this Prospectus, subject to manner of sale
and other resale conditions imposed by Rule 144, and (ii) 415 Restricted
Shares will be eligible for future sale subject to the holding period and
other conditions imposed by Rule 144. Certain restrictions apply to any
shares of Common Stock purchased in this offering by affiliates of the
Company, which may generally only be sold in compliance with the limitations
of Rule 144, except for the holding period requirements thereunder. See
"Risk Factors--Shares Eligible for Future Sale."
Rule 144A under the Act provides a nonexclusive safe harbor exemption
from the registration requirements of the Act of specified resales of
restricted securities to certain institutional investors. In general, Rule
144A allows unregistered resales of restricted securities to a "qualified
institutional buyer," which generally includes an entity, acting for its own
account or for the account of other qualified institutional buyers, that in
the aggregate owns or invests on a discretionary basis at least $100 million
in securities of issuers that are not affiliated with the entity, as long as
these securities when issued were not of the same class as securities listed
on a national securities exchange or quoted on Nasdaq. The shares of Common
Stock outstanding as of the date of this Prospectus would be eligible for
resale under Rule 144A because such shares, when issued, were not of the same
class as any listed or quoted securities.
Stock Options
As of June 30, 1997 there were outstanding options to purchase an
aggregate of 1,375,875 shares of Common Stock (of which 352,417 were
exercisable at June 30, 1997) at a weighted average exercise price of $2.70
per share. As of June 30, 1997, the Company had an additional 1,824,125
shares of Common Stock available for future grant under the Equity
Compensation Plan. The holders of options which are presently exercisable to
purchase a total of 278,205 shares are subject to Lock-Up Agreements, which
restrict, until after the Lock-Up Expiry Date (without the prior written
consent of Wheat, First Securities, Inc.), the holders' ability to sell or
otherwise dispose of Common Stock acquired upon the exercise of such options.
See "Management--Equity Compensation Plan."
The Company issued options and underlying shares of Common Stock to
employees of the Company who were not executive officers and directors of the
Company pursuant to Rule 701. Under Rule 701, employees of the Company who
prior to this offering purchased shares upon the exercise of options grant
under the Equity Compensation Plan are entitled to sell such shares without
having to comply with the public information, holding period, volume
limitation or notice provisions of Rule 144 and they may begin making such
sales on the 90th day after the date of this Prospectus. Rule 701 also
permits the shares subject to unexercised options granted under the Equity
Compensation Plan to be sold upon exercise without having to comply with the
foregoing provisions of Rule 144. As of June 30, 1997, approximately
1,458,958 shares of Common Stock and shares of Common Stock subject to
unexercised options will be eligible for sale under Rule 701 by Company
employees (subject to applicable vesting provisions).
It is anticipated that a Registration Statement on Form S-8 covering the
Common Stock that may be issued pursuant to the options granted under the
Equity Compensation Plan will be filed prior to the Lock-Up Expiry Date and
that shares of Common Stock that are so acquired and offered thereafter
pursuant to this Registration Statement generally may be resold in the public
market without restriction or limitation, except in the case of affiliates of
the Company, whom generally may only resell such shares in accordance with
each provision of Rule 144, other than the holding period requirement.
Lock-Up Agreements
The Principal Stockholders, who will beneficially own 9,330,087 shares of
Common Stock after the completion of this offering, and each other executive
officer, director and nominee for director of the Company have agreed with
the underwriters that they will not sell or otherwise dispose of any shares
of Common Stock until after the Lock-Up Expiry Date without the prior written
consent of
51
<PAGE>
Wheat, First Securities, Inc. In addition, Warren V. Musser has agreed that
he and/or his assignees will not sell or otherwise dispose of 280,000 shares
of Common Stock until after the Lock-Up Expiry Date without the prior written
consent of Wheat, First Securities, Inc.
Registration Rights
The Company has granted certain registration rights to Safeguard, Cecile
D. Barker and William R. Hill. In particular, under certain circumstances
and subject to certain limitations, Safeguard can require the Company to
register under the Act (i) such number of shares of Common Stock held by
Safeguard, Mr. Barker or Mr. Hill having a market value of at least $5.0
million, provided that the Company is not required to effect more than one
such registration, and (ii) on Form S-3 such number of shares of Common Stock
having a market value of at least $1.0 million, provided that the Company is
not required to effect more than one such registration during any
twelve-month period. Safeguard, Mr. Barker and Mr. Hill were also granted
certain "piggy-back" registration rights whereby under certain circumstances
and subject to certain conditions, they may include shares of Common Stock in
any registration of shares of Common Stock under the Act.
52
<PAGE>
UNDERWRITING
The Company, the selling stockholders and the underwriters have entered
into the standby underwriting agreement on the date hereof, pursuant to which
the underwriters are required, subject to certain terms and conditions (all
of which are set forth below), to purchase the shares of Common Stock offered
in the rights offering and not purchased (the "Excess Unsubscribed Shares")
in accordance with the percentages set forth below. If all of the rights are
exercised there will be no Excess Unsubscribed Shares and the underwriters
will not be required to purchase any shares of Common Stock.
% of Underwriter
Underwriters Shares
- ------------ ----------------
Wheat, First Securities, Inc.......... %
Janney Montgomery Scott Inc........... %
The underwriters have agreed, severally and not jointly, subject to the
condition that the Company and the selling stockholders comply with their
obligations under the standby underwriting agreement and subject to the
underwriters' right to terminate their obligations under the standby
underwriting agreement (as specified below), to purchase all of the Excess
Unsubscribed Shares. The Company will pay the underwriters the financial
advisory fee equal to 3% of the exercise price for each share of Common Stock
included in this offering. The financial advisory fee is for services and
advice rendered in connection with the structuring of this offering,
valuation of the business of the Company, and financial advice to the Company
before and during this offering. An additional fee of 4% of the exercise
price will be paid to the underwriters (i) for each share of Common Stock
purchased by the underwriters pursuant to the standby underwriting agreement
and (ii) for each share of Common Stock purchased upon the underwriters'
exercise of rights if such rights were purchased by the underwriters at a
time when the Common Stock was trading (on a "when issued" basis) at a per
share price of less than 120% of the exercise price or if the underwriters
purchase such rights with Safeguard's prior acknowledgment that it would be
entitled to receive the underwriting discount for Common Stock purchased
pursuant to the exercise of such rights. In addition, the Company has agreed
to pay the underwriters a non-accountable expense allowance in the aggregate
amount of $200,000, provided, however, such non-accountable expense allowance
shall be reduced to $100,000 or zero if, on the expiration date of the
rights, the closing price for the Common Stock traded on a "when issued"
basis is at least $7.25 per share or greater than $8.25 per share,
respectively. The selling stockholders have granted to the underwriters a
20-day option commencing on the expiration date to purchase a maximum of
640,000 additional shares of Common Stock at a per share price equal to the
exercise price less a financial advisory fee of 3% of the exercise price and
an underwriting discount of 4% of the exercise price. The underwriters may
exercise such option in whole or in part only to cover over-allotments made
in connection with the sale of shares of Common Stock by the underwriters.
Prior to the expiration date of the rights, the underwriters may offer
shares of Common Stock on a when-issued basis, including shares to be
acquired through the purchase and exercise of rights, at prices set from time
to time by the underwriters. It is not contemplated that this offering price
set on any calendar day will be increased more than once during such day.
After the expiration date of the rights, the underwriters may offer shares of
Common Stock, whether acquired pursuant to the standby underwriting
agreement, the exercise of the rights or the purchase of Common Stock in the
market, to the public at a price or prices to be determined. The
underwriters may thus realize profits or losses independent of the
underwriting discount and the financial advisory fee. Shares of Common Stock
subject to the standby underwriting agreement will be offered by the
underwriters when, as and if sold to, and accepted by, the underwriters and
will be subject to their right to reject orders in whole or in part.
Prior to this offering, there has been no public market for the Common
Stock or the rights. Consequently, the exercise price was determined by
negotiations among the Company, the selling stockholders and the
underwriters. In determining the exercise price, the underwriters, the
selling stockholders and the Board of Directors of the Company considered
such factors as the future prospects and historical growth rate in revenues
and earnings of the Company, its industry in general and the Company's
position in its industry; revenues, earnings and certain other financial and
operating information of the Company in recent periods; market valuations of
the securities of companies engaged in activities similar to those of the
Company; the management of the Company; and, with respect to the Company, the
advice of the underwriters.
The underwriters will be prohibited from engaging in any market making
activities with respect to the Company's when-issued Common Stock and Common
Stock until the underwriters have completed their participation in the
distribution of shares offered hereby. As a result, the underwriters may be
unable to provide a market for the Company's when-issued Common Stock and
Common Stock should they desire to do so, during certain periods while the
rights are exercisable.
53
<PAGE>
In connection with this offering, the underwriters and certain selling
group members may engage in stabilizing, syndicate covering transactions or
other transactions that stabilize, maintain or otherwise affect the market
price of the Common Stock. A "syndicate covering transaction" is the placing
of any bid or the effecting of any purchase on behalf of the underwriters to
reduce a short position created in connection with this offering. After the
opening of quotations for the Common Stock on the Nasdaq National Market,
stabilizing bids for the purpose of preventing or retarding a decline in the
market price may be initiated by the underwriters or selling group members in
any market at a price no higher than the last independent transaction price
for the Common Stock and then maintained, reduced or raised to follow the
independent market. Such transactions may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
The Company and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities arising out of or based upon
misstatements or omissions in this Prospectus or the Registration Statement
of which this Prospectus is a part and certain other liabilities, including
liabilities under the Act, and to contribute to certain payments that the
underwriters may be required to make.
The underwriters may terminate their obligations under the standby
underwriting agreement (i) if any calamitous domestic or international event
or act or occurrence has disrupted the general securities market in the
United States; (ii) if trading in the Common Stock (on a when-issued basis)
shall have been suspended by the SEC or Nasdaq; (iii) if trading on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market or in the over-the-counter market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum
ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the SEC or any other
government authority having jurisdiction; (iv) if the United States shall
have become involved in a war or major hostilities which, in the
underwriters' opinion, will affect the general securities market in the
United States; (v) if a banking moratorium has been declared by any Maryland,
New York, Pennsylvania, Virginia or Federal authority; (vi) if a moratorium
in foreign exchange trading (with respect to a foreign exchange on which the
Company's securities are traded) has been declared; (vii) if the Company
shall have sustained a loss material to the Company by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act,
whether or not such loss shall have been insured, or from any labor dispute
or any legal or governmental proceeding; (viii) if there shall be such
material adverse market conditions (whether occurring suddenly or gradually
between the date of this Prospectus and the closing of this offering)
affecting markets generally as in the underwriters' reasonable judgment would
make it inadvisable to proceed with this offering, sale or delivery of the
shares of Common Stock offered hereby; or (ix) if there shall have been such
material adverse change, or any development involving a prospective material
adverse change, in the financial condition, net worth or results of
operations of the Company since December 31, 1996 or in the business
prospects or condition of the Company since the date of this Prospectus, or
that materially and adversely impacts the standby underwriting agreement.
The Company has agreed that, without the prior written consent of Wheat,
First Securities, Inc., it will not offer, sell, grant any option for the
sale of, or otherwise dispose of any shares of Common Stock (or securities
convertible into shares of Common Stock) (collectively, the "Securities")
acquired in this offering or held by it as of the date hereof until after the
Lock-Up Expiry Date, other than (i) Common Stock to be sold in this offering,
(ii) Company option issuances and sales of Common Stock pursuant to the
Equity Compensation Plan and (iii) Securities issued as consideration for an
acquisition if the party being issued the Securities agrees not to transfer,
sell, offer for sale, contract or otherwise dispose of such Securities until
after the Lock-Up Expiry Date. The Principal Stockholders and each other
executive officer and director of the Company, who beneficially will in the
aggregate own approximately 9,642,867 shares of Common Stock after the
completion of this offering, have agreed with the underwriters that they will
not sell or otherwise dispose of any shares of Common Stock until after the
Lock-Up Expiry Date without the prior written consent of Wheat, First
Securities, Inc. In addition, Warren V. Musser has agreed that he (and/or
his assignees) will not sell or otherwise dispose of 280,000 shares of Common
Stock until after the Lock-Up Expiry Date without the prior written consent
of Wheat, First Securities, Inc. See "Management--Equity Compensation Plan"
and "Shares Eligible for Future Sale."
LEGAL MATTERS
The validity of the rights and shares of Common Stock offered hereby will
be passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering are
being passed upon for the underwriters by Drinker Biddle & Reath LLP,
Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of December 31, 1995 and 1996 and for the years ended December
31, 1994, 1995 and 1996 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors as stated in their reports appearing herein or elsewhere
in the Registration Statement, and have been so included in reliance upon the
report of such firm, given upon their authority of experts in accounting and
auditing.
54
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1 (including all amendments thereto, the "Registration Statement")
under the Act with respect to the Common Stock and rights offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus
omits certain information contained in the Registration Statement. For
further information with respect to the Company and the Common Stock and
rights offered hereby, reference is hereby made to the Registration Statement
and to the exhibits and schedules filed therewith. Statements contained in
this Prospectus regarding the contents of any agreement or other document
filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, DC 20549, and copies of all or any part
thereof may be obtained from such office upon payment of the prescribed fees.
In addition, the Commission maintains a Web site at http://www.sec.gov that
contains reports, proxy statements, information statements and other
information regarding the Company.
55
<PAGE>
OAO Technology Solutions, Inc.
Index to Consolidated Financial Statements
Page
----
Financial Statements:
Independent Auditors' Report....................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and
June 30, 1997 (unaudited)......................................... F-3
Consolidated Statements of Income for the years ended December
31, 1994, 1995 and 1996 and the Six Months Ended June 30, 1996
and 1997 (unaudited).............................................. F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1997 (unaudited)........................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997 (unaudited)............................... F-6
Notes to Consolidated Financial Statements........................ F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OAO Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of OAO
Technology Solutions, Inc. and subsidiaries, as of December 31, 1995 and
1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OAO Technology Solutions,
Inc. and subsidiaries, as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Washington, D.C.
May 5, 1997, except for Note 16, as to which the
date is July 31, 1997
F-2
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
JUNE 30,
ASSETS 1995 1996 1997
--------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................................................ $ 9 $ 876 $ 390
Accounts receivable:
Contracts:
Billed........................................................................ 1,874 5,031 9,892
Unbilled...................................................................... 157 4,831 6,267
--------- --------- ---------
2,031 9,862 16,159
--------- --------- ---------
Deferred income taxes............................................................. 441 352 250
Other current assets.............................................................. 37 330 689
--------- --------- ---------
Total current assets.......................................................... 2,518 11,420 17,488
PROPERTY AND EQUIPMENT--Net....................................................... 659 1,384 2,586
DUE FROM OAO CORPORATION.......................................................... 2,624 -- --
DEPOSITS AND OTHER ASSETS......................................................... -- 24 131
--------- --------- ---------
$ 5,801 $ 12,828 $ 20,205
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit............................................................. $ -- $ -- $ 4,000
Accounts payable................................................................ 533 1,759 2,081
Income taxes payable............................................................ -- 141 541
Accrued expenses................................................................ 2,606 3,681 4,941
Unearned revenue................................................................ 757 931 919
Current maturities of long-term debt............................................ 68 190 501
--------- --------- ---------
Total current liabilities..................................................... 3,964 6,702 12,983
LONG-TERM DEBT.................................................................... 183 286 150
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY: Common stock, par value $.01 per share, authorized,
10,000,000 shares in 1996 (20,000,000 at June 30, 1997-- unaudited); issued
and outstanding, 10,000,000 shares in 1996 (10,000,583 at June 30,
1997--unaudited) -- 100 100
Additional paid-in capital........................................................ -- 4,950 4,950
Retained earnings................................................................. 1,654 790 2,022
--------- --------- ---------
Total stockholders' equity.................................................... 1,654 5,840 7,072
--------- --------- ---------
$ 5,801 $ 12,828 $ 20,205
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------------
1994 1995 1996 1996 1997
--------- --------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES...................................... $ 22,472 $ 38,229 $ 57,891 $ 24,321 $ 39,338
DIRECT COSTS.................................. 16,503 28,548 43,896 18,170 30,773
--------- --------- ------------- ------------- -------------
GROSS PROFIT.................................. 5,969 9,681 13,995 6,151 8,565
SELLING, GENERAL AND ADMINISTRATIVE........... 4,743 7,338 10,824 4,874 6,315
--------- --------- ------------- ------------- -------------
INCOME FROM OPERATIONS........................ 1,226 2,343 3,171 1,277 2,250
INTEREST EXPENSE.............................. 61 115 46 30 87
--------- --------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES.................... 1,165 2,228 3,125 1,247 2,163
PROVISION FOR INCOME TAXES.................... 466 1,139 1,315 522 931
--------- --------- ------------- ------------- -------------
NET INCOME.................................... $ 699 $ 1,089 $ 1,810 $ 725 $ 1,232
--------- --------- ------------- ------------- -------------
PRO FORMA NET INCOME PER COMMON AND COMMON
SHARE EQUIVALENTS (Note 2).................. $ .17 $ .07 $ .12
------------- ------------- -------------
PRO FORMA WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON SHARE EQUIVALENTS
OUTSTANDING (Note 2)........................ 10,421,880 10,421,880 10,414,410
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994......................................... -- $ -- $ -- $ 257 $ 257
Distribution to OAO Corporation.................................. -- -- -- (391) (391)
Net income....................................................... -- -- -- 699 699
--------- ----- ----------- --------- ------------
BALANCE, DECEMBER 31, 1994....................................... -- -- -- 565 565
Net income....................................................... -- -- -- 1,089 1,089
--------- ----- ----------- --------- ------------
BALANCE, DECEMBER 31, 1995....................................... -- -- -- 1,654 1,654
Net income....................................................... -- -- -- 1,810 1,810
Sale of common stock............................................. 5,000 50 4,950 -- --
Merger of subsidiary of OAO Corporation.......................... 5,000 50 -- (2,674) (2,624)
--------- ----- ----------- --------- ------------
BALANCE, DECEMBER 31, 1996....................................... 10,000 100 4,950 790 5,840
Exercise of stock options (unaudited)............................ 1 -- -- -- --
Net income (unaudited)........................................... -- -- -- 1,232 1,232
--------- ----- ----------- --------- ------------
BALANCE, JUNE 30, 1997 (Unaudited)............................... 10,001 $ 100 $ 4,950 $ 2,022 $ 7,072
--------- ----- ----------- --------- ------------
--------- ----- ----------- --------- ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:............................. $ 699 1,089 $ 1,810 $ 725 $ 1,232
Net income
Adjustments to reconcile net income to cash flows (used in)
provided by operating activities:
Depreciation and amortization................................... 19 21 245 50 210
Deferred income taxes........................................... -- 14 89 441 102
Changes in assets and liabilities:
Accounts receivable............................................. (1,257) (1,198) (7,831) (4,793) (6,297)
Other current assets............................................ (27) (37) (293) (5) (359)
Due from OAO Corporation........................................ (738) (1,982) -- -- --
Deposits and other assets....................................... (138) -- (24) -- (107)
Accounts payable................................................ 138 393 331 (246) 322
Accrued expenses................................................ 1,128 1,349 1,970 (97) 1,260
Unearned revenue................................................ 213 702 174 (30) (12)
Income taxes payable............................................ -- -- 141 -- 400
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating activities........... 37 351 (3,388) (3,955) (3,249)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment and software............ (51) (580) (970) (298) (1,412)
--------- --------- --------- --------- ---------
Net cash used in investing activities......................... (51) (580) (970) (298) (1,412)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock..................................... -- -- 5,000 5,000 --
Payments on long-term debt...................................... -- (13) (57) (46) --
Borrowings on long-term debt.................................... 13 250 282 192 175
Borrowing on line of credit..................................... -- -- -- -- 4,000
--------- --------- --------- --------- ---------
Net cash provided by financing activities..................... 13 237 5,225 5,146 4,175
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH................................... (1) 8 867 893 (486)
CASH, BEGINNING OF PERIOD......................................... 2 1 9 9 876
--------- --------- --------- --------- ---------
CASH, END OF PERIOD............................................... $ 1 $ 9 $ 876 $ 902 $ 390
--------- --------- --------- --------- ---------
SUPPLEMENTAL INFORMATION:
Cash payments for interest...................................... $ -- $ 116 $ 45 $ 30 $ 87
--------- --------- --------- --------- ---------
Cash payments for income taxes.................................. $ -- $ -- $ 1,085 $ -- $ 535
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
OAO TECHNOLOGY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
(Dollars in Thousands, Except Share and Per Share Data)
1. DESCRIPTION OF COMPANY AND CORPORATE ORGANIZATION
OAO Technology Solutions, Inc. (the Company) through its wholly owned
subsidiaries provides a wide range of outsourced information technology
solutions and professional services, including the operation of large-scale data
center complexes and networks, distributed systems management, staffing services
and other information technology services.
In March 1996, OAO Technology Solutions, Inc. was formed and incorporated in
the state of Delaware by shareholders of OAO Corporation (OAO). As a result, on
March 26, 1996, OAO transferred 100% of the stock held in each of its wholly
owned subsidiaries, OAO Canada, Ltd., and OAO Systems, Inc., to its wholly owned
subsidiary, OAO Commercial Systems Corporation (CSG). CSG was formed in January
1993, as an operating division of OAO and separately incorporated in September
1995.
On March 26, 1996, OAO assigned to CSG all of its rights and interest in
certain contracts for which CSG was responsible in fulfilling the scope of work
required. CSG also assumed all of the liabilities and obligations associated
with the assigned contracts. In addition, on March 26, 1996, the Board of
Directors agreed to distribute the stock in CSG held by OAO to shareholders of
OAO. Immediately following the spin-off of CSG, the net liabilities and
operations of CSG were merged into OAO Technology Solutions, Inc.
Subsequently, on April 8, 1996, Safeguard Scientifics, Inc., invested $5,000
in the Company in exchange for 5,000,000 shares of common stock, which
represented 50% of the common stock outstanding as of that date.
The accompanying financial statements reflect the Company's operations since
its formation as a division of OAO. Prior to the spin-off and recapitalization
as a new company on March 26, 1996, the Company's financial statements include
allocations of indirect costs of OAO, primarily rent and administrative costs,
of approximately $2,173 and $484 for the years ended December 31, 1995 and 1996,
respectively. These allocations have been based on the relative sales and labor
costs of the Company as compared to the total sales and labor costs of OAO and
its subsidiaries. Such allocations were consistent with that required by the
Defense Contract Audit Agency in connection with the administration of OAO's
U.S. government contracts and are considered reasonable by management. In
connection with the spin-off and subsequent investment by Safeguard, certain
obligations to CSG from OAO as of March 26, 1996, in the amount of $2,600 were
forgiven by the Company. This transaction has been reflected in the accompanying
financial statements as a reduction of stockholders equity at the date of the
spin-off.
Subsequent to the spin-off in 1996, the Company was charged administrative
fees by OAO of approximately $600 through September 30, 1996 for administration
of the accounting and human resource functions. Such charges were negotiated
with OAO based on the charges for such services under the allocation methodology
prior to the spin-off and are considered reasonable by management.
F-7
<PAGE>
The Company has entered into an administrative services agreement with
Safeguard, which provides for payment of a maximum fee of 1% of gross revenues
per year, not to exceed $125 for the six months ended September 30, 1996, and
$500 per year thereafter. The Company charged $250 to operations for the year
ended December 31, 1996, and $250 (unaudited) for the six months ended June 30,
1997 in connection with this agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of OAO Technology Solutions, Inc. (including CSG
prior to March 26, 1996) and its wholly owned subsidiaries (the Company): OAO
Systems, Inc., OAO Canada, Ltd., Canadian Network Resources, Ltd., Canadian
Resources Management, Ltd, OAO France, and OAO Mexico. All accounts of the
non-U.S. subsidiaries have been translated into U.S. dollars and included in the
consolidated financial statements.
The Company's initial year of operations began in 1993 as a division of OAO
Corporation. In March 1996, the Company was incorporated and was spun off from
OAO Corporation in April 1996. As these were entities under common control, the
merger was accounted for similar to that of a pooling-of-interests and as a
result, the financial statements of the Company have been presented at
historical cost since its inception in 1993.
All intercompany accounts and transactions have been eliminated.
Revenue Recognition--The Company provides services under contracts,
primarily to large commercial customers. Revenues under fixed-price contracts
are recognized on the basis of the estimated percentage of completion of
services rendered. Revenues under time-and-materials contracts are recorded at
the contracted rates as the labor hours and other direct costs are incurred.
Anticipated losses on all contracts are recognized as soon as they become known.
Unbilled receivables include certain costs and a portion of the fee and expected
profit, which is billable upon completion of the contracts or the completion of
certain tasks under terms of the contracts. At December 31, 1996, unbilled
receivables are net of a reserve for uncollectible accounts of $400,000.
Cash and Cash Equivalents--The Company considers all highly liquid temporary
investments including those with an original maturity of three months or less to
be cash equivalents. Cash and cash equivalents consist primarily of interest
bearing accounts.
Depreciation and Amortization--Property and equipment is recorded at cost.
The cost of furniture and computer and office equipment is depreciated from the
date of installation using the straight-line method over the estimated useful
lives of the various classes of property, which range from three to seven years.
The cost of software is amortized using the straight-line method over three
years.
Software Development Costs--Software development costs incurred for products
to be used internally are capitalized and are amortized on a straight line basis
over three years. Capitalized software costs are included in property and
equipment in the accompanying consolidated balance sheet. Amortization of these
costs will commence upon completion of the software.
Income Taxes--The provision for income taxes includes Federal and state
income taxes currently payable plus the net change during the year in the
deferred tax liability or asset. The current or deferred tax consequences of all
events that have been recognized in the financial statements are measured based
on provisions of enacted tax law to determine the amount of taxes payable or
refundable in future periods.
F-8
<PAGE>
Net Income Per Share--Net income per common and common share equivalents
at the effective date of the Registration Statement will be computed based
upon the weighted average number of common and common share equivalents
outstanding during the period. Common share equivalents consist of stock
options calculated using the treasury stock method. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, common stock and
options to purchase common stock issued subsequent to August 1, 1996, at
prices below the assumed initial public offering price will be included as
outstanding for all periods presented, using the treasury stock method at the
assumed initial public offering price of $5 per share.
Calculation of pro forma net income per share and weighted average number of
common and common share equivalents outstanding for the year ended December 31,
1996, and the six months ended June 30, 1996, is on a pro forma basis based upon
operations for the period, assuming the incorporation and spin-out and the
issuance of the common stock all took place on January 1, 1996.
Currency Translation--The assets and liabilities of the Company's foreign
subsidiaries whose functional currency is other than the U.S. Dollar are
translated at the exchange rates in effect on the reporting date, and income and
expenses are translated at the weighted average exchange rate during the period.
The net effect of such translation gains and losses are not included in
determining net income but are accumulated if significant, as a separate
component of stockholders' equity. Foreign currency transaction gains and losses
are included in determining net income.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Risk--The Company's largest customer accounted for
approximately 95%, 89%, and 82% of total revenues for the years ended December
31, 1994, 1995, and 1996, respectively. In addition, one other customer
accounted for approximately 11% of total revenues for the year ended December
31, 1996.
Financial instruments that potentially subject the Company to concentration
of credit risk principally consist of accounts receivable. The Company's largest
customer accounted for approximately 65% and 76% of accounts receivable as of
December 31, 1995 and 1996, respectively. In addition, other customers with
balances in excess of 10% accounted for approximately 33% and 19% of accounts
receivable as of December 31, 1995 and 1996, respectively. The Company performs
ongoing credit evaluations of its customers, but generally does not require
collateral to support customer receivables. Losses on uncollectible accounts
have consistently been within management's expectations and have historically
been minimal.
Interim Financial Information--The interim financial statements and related
notes as of June 30, 1997, and for the six-month periods ended June 30, 1996 and
1997, is unaudited. The information reflects all adjustments, consisting only of
normal recurring adjustments that, in the opinion of management, are necessary
to present fairly the financial position and results of operations of the
Company for the periods indicated. Results of operations for the interim periods
are not necessarily indicative of the results of operations for the full year.
Stock-Based Compensation--In 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). However, the
F-9
<PAGE>
Company has not adopted the recognition and measurement provisions of SFAS
No. 123 and therefore provides only the applicable disclosures.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1996, consisted of:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Furniture and equipment.......................................................................... $ 304 $ 820
Leasehold improvements........................................................................... 9 47
Leased equipment................................................................................. 365 578
Capitalized software............................................................................. 207 430
--------- ---------
885 1,875
Less accumulated depreciation and amortization................................................... (226) (491)
--------- ---------
$ 659 $ 1,384
</TABLE>
The Company leases furniture, equipment and automobiles under capital
leases. The capitalized costs and related accumulated amortization, included in
the amounts above, at December 31, 1995 and 1996, are:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Furniture, equipment, and automobiles............................................................. $ 365 $ 578
Less accumulated amortization..................................................................... (90) (172)
--------- ---------
$ 275 $ 406
--------- ---------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1995 and 1996, consisted of:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Accrued salaries, bonuses, and other employee benefits......................................... $ 1,731 $ 2,222
Payroll taxes and amounts withheld from employees.............................................. 562 746
Other.......................................................................................... 313 713
--------- ---------
$ 2,606 $ 3,681
--------- ---------
</TABLE>
5. UNEARNED REVENUE
Unearned revenue at December 31, 1995 and 1996, represents prepayment for
purchases of services that had not been rendered as of the respective dates.
6. CREDIT AGREEMENT (UNAUDITED)
In March 1997, the Company entered into a $5,000 revolving credit agreement
with CoreStates Bank that was increased to $7,500 (unaudited) in July 1997. The
agreement, which matures on May 31,
F-10
<PAGE>
1999, provides for a commitment fee of .375% on the unused portion and
interest at the prime rate and/or, at the Company's option, at the bank's
overnight base rate plus 2% or LIBOR plus 2%. Borrowings under the agreement
are limited to a percentage of eligible billed receivables not greater than
90 days old. The agreement also requires the maintenance of certain financial
covenants and prohibits the payment of dividends.
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Capitalized lease obligations bearing interest at 7.10% to 9.50%, aggregate monthly payments
averaging $17................................................................................... $ 251 $ 476
Less current portion.............................................................................. 68 190
--------- ---------
Long-term portion................................................................................. $ 183 $ 286
--------- ---------
</TABLE>
Maturities under the financing arrangements and long-term debt are
summarized below:
YEAR ENDING CAPITAL
DECEMBER 31, LEASES
- ----------------------------------------------------- -----------
1997........................................ $ 202
1998........................................ 178
1999........................................ 72
2000........................................ 39
2001........................................ 25
516
Less amounts representing interest................ (40)
-----------
Total............................................. $ 476
-----------
8. STOCKHOLDERS' EQUITY
In 1996, the Company adopted the 1996 Equity Compensation Plan (the Plan)
under which the Company is authorized to grant stock options to employees,
officers, directors, and consultants. The Plan provides for the issuance of up
to 1,500,000 shares of common stock pursuant to the grant of incentive stock
options, nonqualified stock options, stock appreciation rights, and restricted
stock awards. Generally, these options vest ratably over a four-year period and
expire ten years after the date of the grant and are granted at the estimated
fair market value at the date of grant.
F-11
<PAGE>
Option activity under the Company's plan for the year ended December 31,
1996, is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
EXERCISE AVERAGE
PRICE EXERCISE
SHARES PER SHARE PRICE
---------- -------------- -----------
<S> <C> <C> <C>
Outstanding, January 1, 1996............................................. --
Options granted.......................................................... 1,133,333 $ 2.00--$2.40 $ 2.02
Options canceled......................................................... (16,667) $ 2.00 $ 2.00
----------
Outstanding, December 31, 1996........................................... 1,116,666 $ 2.00--$2.40 $ 2.02
Options granted (unaudited).............................................. 349,167 $ 2.40--$5.10 $ 4.70
Options canceled (unaudited)............................................. (89,375) $ 2.00 $ 2.00
Options exercised (unaudited)............................................ (583) $ 2.00 $ 2.00
----------
Outstanding, June 30, 1997 (unaudited)................................... 1,375,875 $ 2.00--$5.10 $ 2.70
Options exercisable, December 31, 1996................................... 102,020 $ 2.00 $ 2.00
----------
Shares available for future grant, December 31, 1996..................... 383,333
----------
</TABLE>
As permitted under SFAS No. 123, the Company continues to account for its
employee stock-based compensation plans and options granted under APB No. 25. No
compensation expense has been recognized in connection with options, as all
options have been granted with an exercise price equal to the fair value of the
Company's common stock on the date of grant. Accordingly, the Company has
provided below the additional disclosures specified in SFAS No. 123 for 1996.
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions: risk-free interest rate of
5.93% to 6.26%, expected life of 6 years, expected volatility of zero and
dividend rate of zero percent. Using these assumptions, the fair value of the
stock options granted in 1996 on a per-share weighted average value was $1.02,
which would be amortized as compensation expense over the vesting period of the
options. Had compensation expense been determined consistent with SFAS No. 123
utilizing the assumptions detailed above, the Company's net income and income
per share for the year ended December 31, 1996, would have been reduced to the
following pro forma amounts:
Net income:
As reported.................................... $ 1,810
Pro forma...................................... $ 1,647
Net income per share:
As reported.................................... $ .17
Pro forma...................................... $ .16
The resulting pro forma compensation cost may not be representative of that
expected in future years.
F-12
<PAGE>
9. INCOME TAXES
The Company's provision for income taxes for the years ended December 31,
1994, 1995 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current--Federal....................................................................... $ 737 $ 921 $ 1,006
- -State................................................................................. 184 204 220
--------- --------- ---------
921 1,125 1,226
--------- --------- ---------
Deferred--Federal...................................................................... (372) 11 68
- -State................................................................................. (83) 3 21
--------- --------- ---------
(455) 14 89
--------- --------- ---------
$ 466 $ 1,139 $ 1,315
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected statutory amount................................................................... 34.0% 34.0% 34.0%
Nondeductible expenses...................................................................... 1.4 2.0 2.0
Losses of foreign subsidiaries.............................................................. -- 10.5 --
State income taxes, net of federal benefit.................................................. 4.6 4.6 4.6
--------- --------- ---------
Other....................................................................................... -- -- 1.5
Effective Rate.............................................................................. 40.0% 51.1% 42.1%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
The tax effect of significant temporary differences that comprise the
deferred tax assets and liabilities at December 31, 1995 and 1996, are as
follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued employee benefits........................................................................ $ 441 $ 102
Losses of foreign subsidiaries................................................................... 748 906
--------- ---------
Subtotal......................................................................................... 1,189 1,008
Less valuation allowance......................................................................... (748) (656)
--------- ---------
Total deferred tax assets........................................................................ 441 352
Deferred tax liabilities......................................................................... -- --
--------- ---------
Net deferred tax assets.......................................................................... $ 441 $ 352
--------- ---------
--------- ---------
</TABLE>
A valuation allowance has been provided to reduce the deferred tax assets to
a level that more likely than not, under the requirements of SFAS 109, will be
realized.
F-13
<PAGE>
At December 31, 1996, the Canadian subsidiaries have net operating loss
carryforwards available to offset future taxable income generated by these
subsidiaries of approximately $1,930. These carryforwards expire in 2003.
10. EMPLOYEE BENEFIT PLANS
In 1996, the Company approved the temporary adoption of the OAO Corporation
Employee Savings Plan (the 401(k) Plan) as the employee savings plan. Effective
September 30, 1996, the Company established a separate 401(k) Plan, the OAO
International Corporation Employee Savings Plan, and completed the rollover of
assets held under the OAO Corporation Employee Savings Plan to the new plan. The
401(k) Plan covers substantially all of the Company's U.S. employees.
Participants may contribute to the Plan an amount between 1% and 15% of their
total annual compensation. The Company makes matching contributions of 20% of
each participant's contributions up to 10%. Company matching contributions
amounted to $201 in 1996.
11. COMMITMENTS
The Company has entered into long-term lease agreements for office space and
equipment. The minimum fixed rental commitments related to all noncancelable
operating leases are approximately as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ---------
1997......................... $413
1998......................... 345
1999......................... 290
2000......................... 290
2001......................... 261
Thereafter................... 411
------
$2,010
------
A number of these leases have escalation clauses for increases in real
estate taxes, operating costs, and inflation and provide various renewal options
up to five years. Rent expense for the years ended December 31, 1994, 1995, and
1996, approximated $118, $355, and $421, respectively.
F-14
<PAGE>
12. GEOGRAPHIC AREA INFORMATION
The Company generated substantially all of its revenues in the United States
and Canada during the three years ended December 31, 1996. The following
represents a summary of information by geographic area:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Net revenues:
United States.................................................................... $ 22,472 $ 36,147 $ 51,000
Canada........................................................................... -- 2,082 6,891
Eliminations and other consolidated.............................................. -- -- --
--------- --------- ---------
$ 22,472 $ 38,229 $ 57,891
--------- --------- ---------
Income (loss) before taxes:
United States.................................................................... $ 1,165 $ 2,848 $ 5,682
Canada........................................................................... -- (620) 228
Eliminations and other consolidated.............................................. -- -- (2,785)
--------- --------- ---------
$ 1,165 $ 2,228 $ 3,125
--------- --------- ---------
Identifiable assets:
United States.................................................................... $ 5,948 $ 12,733
Canada........................................................................... 603 2,473
Eliminations and other consolidated.............................................. (750) (2,378)
--------- ---------
$ 5,801 $ 12,828
--------- ---------
</TABLE>
Sales between geographic areas are not material. Costs related to business
development in international locations other than Canada of approximately $3,100
have been included in "Eliminations and other consolidated." Prior to 1996,
costs incurred in this area were not significant. Identifiable assets are those
assets used in the operations in each geographic area.
13. RELATED PARTY TRANSACTIONS
The Company and OAO Services, Inc. (Services), a subsidiary of OAO, are
related parties as a common group of shareholders hold a substantial ownership
interest in both companies. During 1996, the Company entered into several
contracts with Services to serve as a subcontractor. Total revenues recorded
under these contracts amounted to $1,557 for the year ended December 31, 1996.
At December 31, 1996, the Company has $764 and $297 of billed and unbilled
receivables, respectively, which are due from Services.
At the date of its investment in the Company, April 8, 1996 (Note 1),
Safeguard paid $5,000 to Services, in return for a grant by Services to the
Company of an option to purchase at anytime through April 8, 2000, all of the
shares of common stock of Services at an exercise price based on revenues and
earnings levels of Services for the 12 months prior to the date of exercise.
F-15
<PAGE>
14. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (EPS) which
simplifies the standards for computing EPS previously found in APB Opinion
No. 15 and makes them comparable to international EPS standards. The
Statement is effective for financial statements issued for periods ending
after December 15, 1997. Had the following statement been effective for the
year ended December 31, 1996 and the six months ended June 30, 1997, income
per share would have been presented as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
------------------- -------------------
<S> <C> <C>
Income per common share..................................................... $ 0.23 $ 0.15
------------------- -------------------
Income per common share--assuming dilution.................................. $ 0.17 $ 0.12
------------------- -------------------
</TABLE>
15. CONTINGENCIES
The Company is involved in various litigation arising in the normal course
of business. In management's opinion, the Company's ultimate liability or loss,
if any, resulting from this litigation will not have a material adverse effect
on the accompanying financial statements.
16. SUBSEQUENT EVENTS
RECAPITALIZATION
On July 31, 1997, the Board of Directors approved an increase in the number
of authorized shares of common stock to 20 million shares, a par value of $.01
per share, and a split of all shares of common stock at a ratio of 1.6667 to
one. All share amounts have been restated to give effect to the July 31, 1997
stock split. In addition, the Board authorized the issuance of 10 million shares
of preferred stock; however, no shares have been issued.
RELATED PARTY TRANSACTIONS
Pursuant to the terms of an agreement dated July 11, 1997, the Services'
option (Note 13) was canceled in consideration of the right by the Company and
Safeguard to receive certain future payments in the event of any sale of OAO and
Services or any public offering by OAO which occurs prior to April 8, 2000. In
each instance, the minimum amount to be received by the Company would be $500
with the potential for a higher amount based on the value of the transaction.
* * * * * *
F-16
<PAGE>
[PHOTO]
Three photographs of employees surround the
following text: "Our Success is Measured By the Success
[PHOTO] of Our Customers". The Company's logo appears below [PHOTO]
the photographs.
<PAGE>
- -------------------------------------- -----------------------------------
- -------------------------------------- -----------------------------------
No dealer, salesperson or other
person has been authorized to
give any information or to make
any representations other than
those contained in this 6,720,000 Shares
Prospectus in connection with (and Rights to acquire
the offering made hereby, and, up to 6,400,000 of such shares)
if given or made, such
information or representations
must not be relied upon as
having been authorized by the
Company or any underwriters.
This Prospectus does not
constitute an offer to sell, or
a solicitation of an offer to
buy, any security other than the OAO Technology Solutions, Inc.
securities covered by this [LOGO]
Prospectus, nor does it
constitute an offer or
solicitation by anyone in any
jurisdiction in which such offer
or solicitation is not
authorized, or in which the
person making such an offer or
solicitation is not qualified to
do so or to any person to whom
it is unlawful to make such an
offer or solicitation. Neither
the delivery of this Prospectus
nor any sale made hereunder
shall, under any circumstances,
create any implication that
there has been no change in the
affairs of the Company since the Common Stock
dates as of which information is
furnished or the date hereof.
---------------------
TABLE OF CONTENTS ----------
PROSPECTUS
Page ----------
----
Prospectus Summary.............. 3
Risk Factors.................... 8
The Offering.................... 14
Federal Income Tax Wheat First Butcher Singer
Consequences................... 17
Use of Proceeds................. 19 Janney Montgomery Scott Inc.
Dividend Policy................. 19
Capitalization.................. 20
Dilution........................ 21
Selected Consolidated
Financial Data................. 22
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 23 , 1997
Business........................ 36
Management...................... 39
Certain Transactions............ 47
Principal and Selling
Stockholders................... 48
Description of Capital Stock.... 50
Shares Eligible for
Future Sale.................... 50
Underwriting.................... 53
Legal Matters................... 54
Experts......................... 54
Additional Information.......... 55
Index to Consolidated
Financial Statements......... F-1
Until , 1997 (25 days
after the date hereof), all
dealers effecting transactions
in the Common Stock, whether or
not participating in this
distribution, may be required to
deliver a Prospectus. This
delivery requirement is in
addition to the obligation of
dealers to deliver a Prospectus
when acting as underwriters and
with respect to unsold
allotments or subscriptions.
- -------------------------------------- -----------------------------------
- -------------------------------------- -----------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses (other than underwriting discounts and commissions and
underwriters' non-accountable expense allowance) payable in connection with
this offering of the rights and the sale of the Common Stock offered hereby
are as follows:
Securities and Exchange Commission registration fee....................$12,690
NASD filing fee.........................................................$4,180
Nasdaq filing fee......................................................$50,000
Printing and engraving expenses.......................................$160,000
Legal fees and expenses...............................................$175,000
Accounting fees and expenses..........................................$175,000
Blue Sky fees and expenses (including legal fees)......................$25,000
Transfer agent and rights agent and registrar fees and expenses........$25,000
Miscellaneous.........................................................$173,130
Total.................................................................$800,000
Item 14. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation permits
indemnification to the fullest extent permitted by Delaware law. The
Registrant's By-laws require the Registrant to indemnify any person who was
or is an authorized representative of the Registrant, and who was or is a
party or is threatened to be made a party to any corporate proceeding, by
reason of the fact that such person was or is an authorized representative of
the Registrant, against expenses, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such third party proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in, or not
opposed to, the best interests of the Registrant and, with respect to any
criminal third party proceeding (including any action or investigation which
could or does lead to a criminal third party proceeding) had no reasonable
cause to believe such conduct was unlawful. The Registrant shall also
indemnify any person who was or is an authorized representative of the
Registrant and who was or is a party or is threatened to be made a party to
any corporate proceeding by reason of the fact that such person was or is an
authorized representative of the Registrant, against expenses actually and
reasonably incurred by such person in connection with the defense or
settlement of such corporate action if such person acted in good faith and in
a manner reasonably believed to be in, or not opposed to, the best interests
of the Registrant, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged
to be liable to the Registrant unless and only to the extent that the
Delaware Court of Chancery or the court in which such corporate proceeding
was pending shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such
authorized representative is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall deem
proper. Such indemnification is mandatory under the Registrant's By-laws as
to expenses actually and reasonably incurred to the extent that an authorized
representative of the Registrant has been successful on the merits or
otherwise in defense of any third party or corporate proceeding or in defense
of any claim, issue or matter therein. The determination of whether an
individual is entitled to indemnification may be made by a majority of
disinterested directors, independent legal counsel in a written legal opinion
or the stockholders. Delaware law also permits indemnification in connection
with a proceeding brought by or in the right of the Registrant to procure a
judgment in its favor. Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers or persons controlling
the Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable. The Registrant expects to obtain a directors and
officers liability insurance policy prior to the effective date of this
Registration Statement.
The Standby Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Act. Reference is made to Section 8 of the form of
Standby Underwriting Agreement which will be filed by amendment as Exhibit
1.1 hereto.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration statement,
the Registrant has issued the following securities that were not registered
under the Act:
II-1
<PAGE>
On March 26, 1996, the Registrant issued 4,250,000 shares of Common Stock
in connection with its spin-off from OAO Corporation to stockholders of OAO
Corporation.
On March 26, 1996, the Registrant issued 750,000 shares of Common Stock
to William Hill. The shares represented equity earned by Mr. Hill under an
employment agreement with OAO Corporation in 1993 and 1994. This issuance
was made under an exemption from registration provided under Section 4(2) of
the Act.
On April 8, 1996, the Registrant sold 5,000,000 shares of Common Stock to
Safeguard Scientifics (Delaware), Inc. at a price of $1.00 per share. All of
such sales were made under the exemption from registration provided under
Section 4(2) of the Act.
Pursuant to the Registrant's 1996 Equity Compensation Plan, the
Registrant has granted options to purchase a total of 1,375,875 shares of
Common Stock to its employees and certain other persons during the past three
fiscal years at a weighted average exercise price of $2.70 per share.
1,012,822 stock options were granted on August 7, 1996 with an exercise price
of $2.00 per share. The Registrant granted 98,338 stock options between
December 18, 1996 and February 27, 1997 with an exercise price of $2.40 per
share. 379,704 stock options were granted between June 30, 1997 and August
1, 1997 with an exercise price of $5.10 per share. For a more detailed
description of this Plan, see "Management--Equity Compensation Plan" in this
registration statement. In 1997, the Company sold 583 shares of its Common
Stock to two employees at $2.00 per share, pursuant to the exercise of
vested options. In granting the options and selling the underlying securities
upon exercise of the options, the Company is relying upon exemptions from
registration set forth in Section 4(2) of, and Rule 701 promulgated under,
the Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
Exhibit
Number Description Page No.
- ------- ----------- --------
1.1 Form of Standby Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of
the Company.**
3.2 Amended and Restated By-laws of the Company.**
5.1 Opinion of Morgan, Lewis & Bockius LLP.*
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax
matters.*
10.1 Conformed form of Vendor Agreement between the Company
and Integrated Systems Solutions Corporation, as
amended.**
10.2 Basic Order Agreement between Digital Equipment Corporation
and OAO Canada Limited/OAO Technology Solutions, Inc.*+
10.3 Amended and Restated OAO Technology Solutions, Inc. 1996
Equity Compensation Plan.*
10.4 Employment Agreement between William R. Hill and the Company,
dated as of April 1, 1996.**
11.1 Statement Regarding Computation of Earnings Per Share.**
21.1 Subsidiaries of the Registrant.**
23.1 Consent of Deloitte & Touche LLP.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).*
23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 8.1).*
24.1 Power of Attorney (included on signature page).**
27.1 Financial Data Schedule.**
- ------------------------------
* Filed herewith.
** Previously filed.
+ Confidential Treatment Requested. The entire agreement has been filed
separately with the Securities and Exchange Commission.
II-2
<PAGE>
(b) Financial Statement Schedules
SCHEDULE II-- Valuation and Qualifying Accounts
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; and
(iv) To reflect the results of this offering.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby underwriting agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters
during the subscription period, the amount of unsubscribed securities to be
purchased by the underwriters, and the terms of any subsequent reoffering
thereof. If any public offering by the underwriters is to be made on terms
differing from those set forth on the cover page of the prospectus, a
post-effective amendment will be filed to set forth the terms of such
offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Greenbelt, Maryland on October 6, 1997.
OAO TECHNOLOGY SOLUTIONS, INC.
By: /s/ William R. Hill
---------------------------
William R. Hill
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signatures Title (s) Date
- ---------- --------- ----
/s/ William R. Hill
- ------------------------ Chief Executive Officer, October 6, 1997
William R. Hill President and Director
(Principal Executive Officer)
/s/ Samuel Horgan
- ----------------------- Chief Financial Officer October 6, 1997
Samuel Horgan and Treasurer (Principal
Financial and Accounting
Officer)
/s/ *
- ----------------------- Chairman of the Board of October 6, 1997
Jerry Johnson Directors
/s/ *
- ----------------------- Director October 6, 1997
Cecile D. Barker
/s/ *
- ----------------------- Director October 6, 1997
Frank B Foster III
/s/ *
- ----------------------- Director October 6, 1997
Thomas C. Lynch
*By: /s/ Samuel Horgan
-----------------------
Samuel Horgan as
Attorney-in-Fact
II-4
<PAGE>
Schedule II
OAO Technology Solutions, Inc.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS
------------------------
(1) (2)
BALANCE AT CHARGES TO CHARGES TO BALANCE
BEGINNING OF COSTS & OTHER AT END
PERIOD EXPENSES ACCOUNTS(B) DEDUCTIONS OF PERIOD
------------ ---------- ------------ ---------- ---------
Allowance for
uncollectible accounts (A)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994 - - - - -
Year ended December 31, 1995 - - - - -
Year ended December 31, 1996 - - 400,000 - 400,000
Six months ended June 30, 1997 (unaudited) 400,000 - 90,000 - 490,000
</TABLE>
(A) Reflected on the Balance Sheet as a reduction of Accounts Receivable,
Unbilled.
(B) Provided through a reduction of revenue.
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page No.
- ------- ----------- --------
1.1 Form of Standby Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of
the Company.**
3.2 Amended and Restated By-laws of the Company.**
5.1 Opinion of Morgan, Lewis & Bockius LLP.*
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding
tax matters.*
10.1 Conformed form of Vendor Agreement between the Company
and Integrated Systems Solutions Corporation, as amended.**
10.2 Basic Order Agreement between Digital Equipment Corporation
and OAO Canada Limited/OAO Technology Solutions, Inc.*+
10.3 Amended and Restated OAO Technology Solutions, Inc. 1996
Equity Compensation Plan.*
10.4 Employment Agreement between William R. Hill and the
Company, dated as of April 1, 1996.**
11.1 Statement Regarding Computation of Earnings Per Share.**
21.1 Subsidiaries of the Registrant.**
23.1 Consent of Deloitte & Touche LLP.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).*
23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 8.1).*
24.1 Power of Attorney (included on signature page).**
27.1 Financial Data Schedule.**
- --------------------------
* Filed herewith.
** Previously filed.
+ Confidential Treatment Requested. The entire agreement has been filed
separately with the Securities and Exchange Commission.
II-6
<PAGE>
DRAFT DATED 10/1/97
O.A.O. TECHNOLOGY SOLUTIONS, INC.
6,720,000 Shares of Common Stock
($.01 Par Value Per Share)
Standby Underwriting Agreement
October __, 1997
Wheat, First Securities, Inc.
Riverfront Plaza, West Tower
901 East Byrd Street
Richmond, Virginia 23219
Janney Montgomery Scott Inc.
1801 Market Street
Philadelphia, Pennsylvania 19103-1675
Ladies and Gentlemen:
OAO Technology Solutions, Inc., a Delaware corporation (the
"Company"), Safeguard Scientifics (Delaware), Inc., a Pennsylvania corporation
("Safeguard"), Cecile D. Barker ("Barker"), William R. Hill ("Hill") and Hubert
M. Reid ("Reid" and together with Barker and Hill, the "Selling Stockholders")
(the Selling Stockholders together with Safeguard are collectively referred to
herein as the "Principal Stockholders") hereby confirm their respective
agreements with you with respect to:
(i) the proposed distribution by the Company to the Safeguard
Shareholders of up to an aggregate of 6,400,000 rights (the "Rights") (which
represent 5,915,000 shares of the Company's common stock, $.01 par value per
share (the "Common Stock"), to be sold by the Company upon the exercise of
5,915,000 of such Rights and an aggregate of 485,000 shares of Common Stock
being sold by the Selling Stockholders upon exercise of 485,000 Rights with
359,260, 62,870 and 62,870 shares of Common Stock being sold by Barker, Hill and
Reid,
<PAGE>
respectively), with (A) each Right entitling the holder thereof to purchase
at any time prior to the Expiration Date, at a subscription price of $5.00
per share, one share of Common Stock of the Company, and (B) Rights being
distributed on the basis of one Right for each five shares of Safeguard Stock
held (with the holder of a number of shares of Safeguard Stock not evenly
divisible by five entitled to receive the next higher whole number of Rights);
(ii) the proposed sale of all Unsubscribed Shares by the Company
and the Selling Stockholders, acting severally and not jointly, with:
(A) the Other Purchasers Standby Shares being deemed to be
Company Unsubscribed Shares to be sold pursuant to the Other
Purchasers Standby Purchase Agreements; and
(B) all Excess Unsubscribed Shares to be sold to and purchased
by the Underwriters, severally and not jointly, in accordance with the
terms and conditions of this Agreement; and
(iii) the proposed sale by the Company to the Other Purchasers of the
Undistributed Shares; and
(iv) the grant by the Selling Stockholders to the Underwriters of an
option described in Section 3(b) hereof to purchase additional shares of Common
Stock for the purpose of covering over-allotments, if any.
The parties acknowledge that concurrently with the Offering of the
Rights, the Company intends to offer and sell to the Direct Purchasers the
Direct Shares for purchase at a subscription price of $5.00 per share. The
parties also acknowledge that, except as set forth in Section 7, the Direct
Shares shall not be deemed to be Shares for purposes of this Agreement and are
not otherwise a part of this Agreement.
-2-
<PAGE>
1. Certain Definitions. The following terms shall, when used in this
agreement, have the following meanings:
"Act" means the Securities Act of 1933, as amended.
"Adverse Claim" means the term as used in Section 8-302 of the Delaware
Uniform Commercial Code.
"Application" means the application described in Section 9(a)(i)(B) hereof.
"Associated Person Lock-Ups" means the agreements, acceptable in form and
substance to the Underwriters, pursuant to which each of the Company's
officers, directors and principal stockholders listed in Schedule A attached
hereto has agreed not to, without the prior written consent of the
Underwriters, transfer, sell, offer for sale, contract to sell or otherwise
dispose of any shares of Common Stock or any securities exercisable or
exchangeable for or convertible into shares of Common Stock owned by such
person or with respect to which such person has the power of disposition
during a period commencing on the date the Registration Statement is declared
effective by the Commission and ending 180 days following the Expiration
Date, except as otherwise permitted in the Associated Person Lock-Ups.
"Bona Fide Purchaser" means the term as defined in Section 8-302 of the
Delaware Uniform Commercial Code.
"Closing" means 10:00 a.m., New York City time on the sixth business day
after the Expiration Date (or the first business day thereafter), or at such
other time on the same or such other date, not later than ________ ___, 1997,
as shall be agreed to by the Selling Stockholders, the Company and the
Underwriters.
"Closing Date" means the time and date of payment for and delivery of the
Excess Unsubscribed Shares.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the shares of Common Stock, $.01 par value per share,
of the Company.
"Company Unsubscribed Shares" means the shares of Common Stock which had
been offered by the Company pursuant to the Rights but which were not acquired
through the exercise of Rights on or prior to the Expiration Date (after taking
into account the agreement of the Company and the Selling Stockholders that the
560,000 shares of Common Stock that are
-3-
<PAGE>
expected to be sold to Warren V. Musser upon exercise of the Musser Rights
shall be deemed to be sold by the Company).
"Controlling Person" means a person who controls the Underwriters, the
Company or the Selling Stockholders within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act.
"Designated Subsidiaries" means each Significant Subsidiary of the Company
and ___________________________.
"Direct Purchasers" means the certain persons selected by the Company to
whom the Direct Shares are being offered.
"Direct Shares" means the 320,000 shares of Common Stock offered to the
Direct Purchasers.
"Disagreement" means the term as used in Item 304 of Regulation S-K of the
Rules and Regulations.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" means the escrow agent named in the Rights Agent Agreement.
"Excess Unsubscribed Shares" means all of the Unsubscribed Shares other
than the Other Purchasers Standby Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the subscription price of $5.00 per share.
"Expiration Date" means 5:00 p.m., New York City time, on ________ ___,
1997 or such later date as may be agreed upon by the Underwriters and the
Company.
"Intellectual Property" means all patents, trademarks, service marks,
trade names, copyrights, inventions, trade secrets, proprietary techniques,
including, without limitation, all software service codes, processes and
substances, technology and know-how necessary to conduct (or used to conduct)
the business now operated or proposed to be operated by the Company as
described in the Prospectus.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Deloitte & Touche" means Deloitte & Touche, LLP.
-4-
<PAGE>
"Material Adverse Effect" means a material adverse effect on the condition,
financial or otherwise, or on the earnings, business affairs, financial
position, value, operations, properties, results of operation or business of the
Company.
"Musser Group" means Warren V. Musser and/or his assignees.
"Musser Lock-Up" means the agreement of the Musser Group not to, without
the prior written consent of the Underwriters, transfer, sell, offer for
sale, contract to sell or otherwise dispose of any shares of Common Stock
acquired by the Musser Group upon exercise of the Musser Rights or any
securities exercisable or exchangeable for or convertible into Common Stock
(including the Musser Rights) owned on the date hereof or acquired through
the rights offering or with respect to which the Musser Group has the power
of disposition during a period commencing on the date the Registration
Statement is declared effective and ending 180 days after the Expiration
Date; provided, however, that the Musser Group may transfer, sell, offer for
sale, contract to sell or otherwise dispose of up to 280,000 shares of Common
Stock without the prior written consent of the Underwriters.
"Musser Rights" means all Rights granted to the Musser Group as a
shareholder of Safeguard.
"NASD" means the National Association of Securities Dealers, Inc.
"Offering" means the public offering of the Excess Unsubscribed Shares as
set forth in the Prospectus; provided that the Offering shall also include the
Other Purchasers Standby Shares purchased by the Underwriters, if any.
"Option Closing Date" means the time of delivery of any of the Option
Shares."
"Option Shares" means any and all shares of Common Stock to be purchased by
the Underwriters pursuant to the option described in Section 3(b) of this
Agreement.
"Other Purchasers" means certain persons selected by the Company.
"Other Purchasers Standby Purchase Agreement" means the agreements between
the Company and the Other Purchasers to be entered into after the date hereof
and obligating the Other Purchasers to purchase from the Company up to 300,000
Other Purchasers Standby Shares on the Closing Date at a price of $5.00 per
share.
"Other Purchasers Standby Shares" means that number of Unsubscribed Shares
purchased by the Other Purchasers pursuant to the Other Purchasers Standby
Purchase Agreement.
-5-
<PAGE>
"Preliminary Prospectus" means each prospectus subject to completion filed
with the Registration Statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time of the Registration Statement was or is
declared effective).
"Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Act, or, if no prospectus is required to be filed
pursuant to said Rule 424(b), the prospectus included in the Registration
Statement. For purposes of Sections 2 and 8(d)(v) hereof, all references to the
"Prospectus" are deemed to include, in the alternative, the most recent
Preliminary Prospectus if the Prospectus is not in existence.
"Provided Information" means the statements made in the second paragraph
preceding the stabilization legend on the inside of the front cover page, the
stabilization legend on the inside of the front cover page and the third and
sixth paragraph under the heading "UNDERWRITING" in the Prospectus (and the same
paragraphs and stabilization legend in any Preliminary Prospectus).
"Registration Statement" means the registration statement described in
Section 2(a)(i) hereof.
"Reportable Event" means the term as used in Item 304 of Regulation S-K of
the Rules and Regulations.
"Rights Agent" means ChaseMellon Shareholder Services, L.L.C.
"Rights Agent Agreement" means the agreement in the form previously
approved by the Underwriters, dated the date hereof, by and among the Company,
the Escrow Agent and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
"Rules and Regulations" means the rules and regulations adopted by the
Commission under either the Act or the Exchange Act.
"Safeguard Shareholders" means the holders of record of Safeguard Stock as
of June 30, 1997.
"Safeguard Stock" means the common shares, $.10 par value per share, of
Safeguard.
"Selling Stockholders Unsubscribed Shares" means the shares of Common Stock
which had been offered by the Selling Stockholders pursuant to the Rights but
which were not acquired through exercise of the Rights on or prior to the
Expiration Date (after taking into account the agreement of the Company and the
Selling Stockholders that the 560,000 shares of Common
-6-
<PAGE>
Stock that are expected to be sold to Warren V. Musser upon exercise of the
Musser Rights shall be deemed to be sold by the Company).
"Shares" means the Option Shares, the Excess Unsubscribed Shares to be
purchased by the Underwriters and the Other Purchasers Standby Shares purchased
by the Underwriters, if any, pursuant to Section 3.
"Significant Subsidiary" means the term as defined in Rule 405 of the Rules
and Regulations.
"Subsidiary" means the term as defined in Rule 405 of the Rules and
Regulations and includes all of the entities set forth in Schedule B hereto.
"Transfer Agent and Registrar" means the transfer agent and registrar
described in Section 6(a)(ix) hereof.
"Underwriters" means Wheat, First Securities, Inc. and Janney Montgomery
Scott Inc.
"Underwriters' Counsel" means Drinker Biddle & Reath LLP.
"Undistributed Shares" means 6,400,000 shares of Common Stock less those
shares of Common Stock that had been offered by the Company and the Selling
Stockholders pursuant to the Rights if Rights to purchase fewer than 6,400,000
shares of Common Stock are granted to holders of the Safeguard Stock.
"Unsubscribed Shares" means the Selling Stockholders Unsubscribed Shares,
the Company Unsubscribed Shares and the Undistributed Shares.
2. Representations and Warranties of the Company and the Principal
Stockholders.
(a) The Company represents and warrants to, and agrees with, the
Underwriters as follows:
(i) The Company has filed with the Commission a registration
statement on Form S-1 (No. 333-33961), including a prospectus subject to
completion, for the registration of the Rights, the shares of Common Stock
subject to the Rights, the Direct Shares and the Option Shares under the
Act, and have filed with the Commission one or more amendments thereto.
After the execution of this Agreement, the Company will file with the
Commission either (A) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act
as of the time of effectiveness of this Agreement, a prospectus in the form
most recently included in an amendment to such registration statement (or,
if no such amendment shall
-7-
<PAGE>
have been filed, in such registration statement), with such changes or
insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act and as have been provided to and approved by
the Underwriters prior to the execution of this Agreement, or (B) if
such registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act as of the time
of effectiveness of this Agreement, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment
has been furnished to and approved by the Underwriters prior to the
execution of this Agreement;
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or any part thereof and,
to the best knowledge of the Company, no proceedings for a stop order have
been instituted or are pending or threatened. When any Preliminary
Prospectus was filed with the Commission, it contained all statements
required to be stated therein in accordance with, and complied in all
material respects with the requirements of, the Act and the Rules and
Regulations except to the extent that such Preliminary Prospectus did not
contain any such required statements, or did not so comply, in a manner
corrected in the Prospectus. When the Registration Statement or any
amendment thereto was (or is) declared effective, it (A) contained (or will
contain) all statements required to be stated therein in accordance with,
and complied in all material respects (or will comply in all material
respects) with the requirements of, the Act and the Rules and Regulations
and (B) did not or will not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements therein
not misleading. When the Prospectus or any amendment or supplement thereto
is filed pursuant to Rule 424(b) (or, if the Prospectus or such amendment
or supplement is not required to be so filed, when the Registration
Statement or the amendment thereto containing such amendment or supplement
to the Prospectus was or is declared effective) and on the Closing Date and
any Option Closing Date, the Prospectus, as amended or supplemented at any
such time, (A) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph (ii)
do not apply to the Provided Information;
(iii) The Company and each of the Subsidiaries are
corporations duly organized, validly existing and in good standing under
the laws of their respective jurisdictions of incorporation, are duly
qualified to transact business and are in good standing as foreign
corporations in each jurisdiction in which their respective ownership or
leasing of any properties or the character or conduct of their respective
operations requires such qualification, except where failures to be so
qualified, individually or in
-8-
<PAGE>
the aggregate, would not result in a Material Adverse Effect. Other than
the Subsidiaries listed on Schedule B hereto, the Company does not own
any stock of or other equity in, or otherwise control directly or
indirectly, any corporation, firm, partnership, trust, joint venture or
other business entity;
(iv) The Company and each of the Subsidiaries have all
requisite power and authority (corporate and other), and have obtained
and currently maintains in full force and effect and are operating in
compliance with any and all authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or
regulatory officials and bodies (including those having jurisdiction over
environmental or similar matters) necessary or required to own or lease
their respective properties and conduct their respective business as
described in the Registration Statement, the Prospectus and any amendment
or supplement thereto, except where the failure to so maintain or operate
would not result in a Material Adverse Effect. The Company and each of the
Subsidiaries are and have been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state, local and foreign laws, rules and
regulations (including without limitation those relating to employment
matters and the payment of taxes) except as disclosed in the Prospectus and
except where failures to be in compliance, individually or in the
aggregate, would not result in a Material Adverse Effect. Neither the
Company nor any of the Subsidiaries has received any notice or notices of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise or permit
that if the subject of unfavorable decisions, rulings or findings, would,
individually or in the aggregate, result in a Material Adverse Effect;
(v) The Company has duly executed and delivered the
Rights Agent Agreement. The shares of Common Stock to be sold by the
Company and the Selling Stockholders hereunder and upon the exercise of the
Rights are subject to the rights and interests of the Underwriters and the
Rights Agent hereunder and under the Rights Agent Agreement. Except to the
extent otherwise provided therein, the arrangements for custody or
reservation and delivery of the certificates for such shares, made by the
Company hereunder and under the Rights Agent Agreement, are irrevocable, and
are not subject to termination by any acts of the Company, the Selling
Stockholders or by operation of law;
(vi) The Company has all requisite power and authority
(corporate and other) to enter into this Agreement, the Other Purchasers
Standby Purchase Agreements and the Rights Agent Agreement, and to
consummate the transactions provided for herein and therein; and this
Agreement, the Other Purchasers Standby Purchase Agreements and the Rights
Agent Agreement have each been duly authorized by the Company. Each of this
Agreement and the Rights Agent Agreement have been and the Other Purchasers
Standby Purchase Agreements will be prior to the Closing Date
-9-
<PAGE>
duly executed and delivered by the Company. Each of this Agreement and
the Rights Agent Agreement constitutes and the Other Purchasers Standby
Purchase Agreements will constitute prior to the Closing Date, assuming
due authorization, execution and delivery by the other parties to such
agreements, the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with their respective
terms, subject to the effect of general principles of equity (including
standards of materiality, good faith, fair dealing and reasonableness)
whether applied by a court of law or equity, and except as rights to
indemnity and contribution hereunder may be limited by applicable law,
statutory duties or public policy. The Company's execution and
delivery of this Agreement, the Other Purchasers Standby Purchase
Agreements and the Rights Agent Agreement, its performance of its
obligations hereunder and thereunder, the consummation of the
transactions contemplated hereby and thereby by it, and its conduct of
its business as described in the Registration Statement, the Prospectus
and any amendment or supplement thereto, will not conflict with or
result in a breach or violation of any of the terms or provisions of,
or constitute a default under, or result in the creation or imposition
of any material liens, charges, claims, encumbrances, pledges, security
interests, defects or other like restrictions or material equities of
any kind whatsoever upon, any right, property or assets (tangible or
intangible) of the Company or any of the Subsidiaries pursuant to the
terms of (A) the charter or bylaws, each as amended to date, of the
Company or any of the Subsidiaries, (B) any lease, license, permit,
contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement (including any
related to indebtedness) or any other agreement or instrument to which
the Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries is or by which any of them may be
bound or to which any of their respective properties or assets
(tangible or intangible) is or may be subject, except to the extent
that any such conflict, breach, violation or default, individually or
in the aggregate, does not and would not result in a Material Adverse
Effect and does not and would not interfere with the Offering or (C)
any statute, judgment, decree, order, rule or regulation applicable to
the Company or any of the Subsidiaries or any of their respective
activities or properties adopted or issued by an arbitrator, court,
regulatory body or administrative agency or other governmental agency
or body (including those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the
Company or any of the Subsidiaries or of their respective activities or
properties (other than such as may be required under state securities
or "Blue Sky" laws and such as may be required by the by-laws and rules
of the NASD in connection with the purchase and distribution of the
Shares by the Underwriters);
(vii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required in
connection with the offer, issuance and sale of the shares of Common Stock
to be sold by the Company hereunder or upon exercise of the Rights, the
Company's performance of its obligations hereunder,
-10-
<PAGE>
or the consummation by the Company of the other transactions
contemplated hereby, except (A) such as may be required under the state
securities or "Blue Sky" laws of any jurisdiction or as may be required
by the by-laws and rules of the NASD in connection with the purchase
and distribution of the Shares by the Underwriters, (B) any filing of
the Prospectus pursuant to Rule 424(b) or 430A of the Rules and
Regulations and, if the Registration Statement has not been declared
effective, an order of the Commission declaring the Registration
Statement effective under the Act, and (C) such other approvals as have
been obtained and remain in full force and effect;
(viii) The authorized, issued and outstanding capital stock of
the Company is set forth, and conforms to the description thereof
contained, in the Registration Statement, the Prospectus, and any amendment
or supplement thereto. All of the issued shares of capital stock of the
Company, including the shares to be sold by the Selling Stockholders, have
been duly authorized and validly issued, and are fully paid and
nonassessable; the holders thereof have no rights of rescission against the
Company with respect thereto and are not subject to personal liabilities
solely by reason of being such holders (except to the extent that as a
result of acquiring a substantial number of shares of Common Stock a holder
may be subject to claims of personal liability as an affiliate or control
person of the Company, as to which no representation is made hereby); and
none of such shares have been issued in violation of the preemptive rights
of any security holders of the Company arising as a matter of law or under
or pursuant to the Company's Certificate of Incorporation, as amended, the
Company's By-Laws, as amended, or any agreement or instrument to which the
Company is a party or by which it is bound. The shares of Common Stock
offered by the Company and to be sold upon the exercise of the Rights or
pursuant to this Agreement and the Other Purchasers Standby Purchase
Agreements have been duly authorized and at the Closing Date, after payment
therefor in accordance herewith or in accordance with the terms and
conditions of the Rights (as the case may be), will be validly issued,
fully paid and nonassessable and not subject to any Adverse Claim, with no
personal liability attaching to the holder solely as a result of the
ownership thereof (except to the extent that as a result of acquiring a
substantial number of shares of Common Stock a holder may be subject to
claims of personal liability as an affiliate or control person of the
Company, as to which no representation is made hereby). Upon the issuance
and delivery pursuant to this Agreement and the Rights Agent Agreement of
the Shares to be sold by the Company, assuming that each of the
Underwriters is a Bona Fide Purchaser, the Underwriters will acquire good
and marketable title to the Shares free and clear of any liens, charges,
claims, preemptive rights, encumbrances, pledges, security interests,
defects or other like restrictions or like material equity of any kind
whatsoever. The shares of Common Stock offered by the Company and to be
sold upon the exercise of the Rights or pursuant to this Agreement or the
Other Purchasers Standby Purchase Agreements will conform to the
description thereof contained in the Prospectus. There are no preemptive
or other rights to subscribe for or to purchase nor any restriction upon
the voting or transfer of, any
-11-
<PAGE>
shares of Common Stock pursuant to the Company's Certificate of
Incorporation or By-Laws, as each amended to date, or pursuant to any
agreement among stockholders to which the Company is a party, by which
it is bound or of which it has knowledge, and the Shares to be sold by
the Company are not otherwise subject to any preemptive or other
similar rights of any security holder. The Company is not a party to
or bound by any instrument, agreement or other arrangement providing
for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the
Prospectus. Except as described in the Prospectus with respect to
Common Stock that may be registered by the Company in a registration
statement on Form S-8, no holder of any securities of the Company has
the right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the
Company during a period commencing on the date the Registration
Statement is declared effective by the Commission and ending 180 days
following the Expiration Date or to require the Company to file a
registration statement under the Act during such period. All of the
(i) Rights and (ii) outstanding shares of Common Stock and all of the
shares of Common Stock to be issued by the Company as contemplated
herein have been approved for quotation upon notice of issuance on the
Nasdaq National Market of the Nasdaq Stock Market;
(ix) The consolidated financial statements and schedules
of the Company included in the Registration Statement, the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and any amendment or supplement thereto fairly present the
consolidated financial position and results of operations of the Company as
of the dates and for the periods therein specified. Such financial
statements and schedules have been prepared in accordance with generally
accepted accounting principles as in effect in the United States and as
consistently applied throughout the periods involved and in accordance with
the Rules and Regulations. The selected consolidated financial data set
forth under the caption "SELECTED CONSOLIDATED FINANCIAL DATA" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on the basis stated therein, the
information included therein. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (A)
transactions are executed in accordance with management's general or
specific authorizations; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (C)
access to assets is permitted only in accordance with management's
general or specific authorization; and (D) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. The Company's
internal accounting controls are designed to cause the Company to comply in
all material respects with the Foreign Corrupt Practices Act of 1977, as
amended. Deloitte & Touche, whose reports are filed with the Commission
as a part of the Registration Statement, are independent auditors
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as required by the Act and the Rules and Regulations. Since
____________ __, 199_, Deloitte & Touche has been the only public
accountants engaged by the Company, and the Company has not had any
Disagreement with Deloitte & Touche, and has not experienced any
Reportable Event since that date;
(x) The Company and each of the Subsidiaries have filed all
federal, state, local and foreign tax returns that are required to be filed
by them or have duly requested extensions thereof, except in any case in
which the failure so to file, individually or in the aggregate, would not
have a Material Adverse Effect. The Company and each of the Subsidiaries
have paid all taxes required to be paid by them and all other assessments,
fines or penalties, if any, levied against them, to the extent that any of
the foregoing are due and payable, except for (A) any such assessment, fine
or penalty that is currently being contested in good faith or (B) any case
in which the failure so to pay, individually or in the aggregate, would not
have a Material Adverse Effect;
(xi) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with the issuance
by the Company, or the purchase by the Underwriters, of the Shares to be
sold by the Company or any resales of such Shares by the Underwriters;
(xii) The Company has good and marketable title to, or valid
and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, free and
clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other like restrictions or like equities of any kind
whatsoever, other than (A) liens for taxes not yet due and payable, (B)
liens as described or referred to in the Prospectus, and (C) liens that are
not material in amount in relation to the business of the Company and which
do not interfere with the Offering;
(xiii) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
the Company and each of the Subsidiaries own or possess adequate licenses
or other rights, in each case free of fees, charges or royalties payable
after the date hereof, to use the Intellectual Property, except where the
lack thereof would not result in a Material Adverse Effect. Except as
disclosed in the Prospectus, neither the Company nor any of the
Subsidiaries has received any notice of infringement of or conflict with
(and does not know of any such infringement of or conflict with) rights or
claims of others with respect to the Intellectual Property, any of the
activities engaged in, or proposed to be engaged in, by the Company or any
challenge to the ownership or right of the Company with respect to the
Intellectual Property which could result in a Material Adverse Effect or
which could have a material adverse effect on the development, marketing or
sale of any of the Company's existing
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<PAGE>
or contemplated products, services or processes as described in the
Prospectus. None of the products, services or processes of the Company
or any of the Subsidiaries referred to in such Prospectus and relating
to the business of the Company or any of the Subsidiaries now operated
or proposed to be operated by any of them as described in such
Prospectus infringes or conflicts with any right or patent, or with any
discovery, invention, product or process which is the subject of any
patent application known to the Company, in a manner which would result
in a Material Adverse Effect;
(xiv) The Company and each of the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the business in
which they are engaged, and the Company has no reason to believe that it or
any of the Subsidiaries will not be able to renew their respective existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue their
respective business at a cost that would not result in a Material Adverse
Effect;
(xv) Neither the Company nor any of the Subsidiaries is in
breach of, or in default under, any term, covenant or provision of any
license, permit, contract, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, stockholders agreement, note,
loan or credit agreement, or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which
it is a party or by which it may be bound or to which any of its property or
assets (tangible or intangible) is subject or affected, except as disclosed
in the Registration Statement and Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) and except as to
defaults that (A) individually or in the aggregate would not have a Material
Adverse Effect and (B) would not interfere with the Offering. Neither the
Company nor any of the Subsidiaries is in violation of any term or provision
of its charter or bylaws, each as amended to date;
(xvi) Other than as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
there is not pending or, to the Company's knowledge, threatened against the
Company or any of the Subsidiaries or involving the properties or business
of the Company or any of the Subsidiaries (or, to the Company's knowledge,
any circumstance that may give rise to the same), any action, suit,
proceeding, investigation, litigation or governmental proceeding (including
those having jurisdiction over environmental or similar matters), domestic
or foreign, that (A) is required to be disclosed in the Registration
Statement and is not so disclosed, (B) questions the validity of the
capital stock of the Company or the validity or enforceability of this
Agreement, (C) questions the validity of any action taken or to be taken by
the Company pursuant to or in connection with this Agreement, or (D) could
materially adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement or result in a
Material Adverse Effect. Any such
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<PAGE>
proceedings summarized in the Prospectus are accurately summarized in
all material respects;
(xvii) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and except as may otherwise be indicated or contemplated
herein or therein, neither the Company nor any of the Subsidiaries has (A)
issued any securities other than the Rights, the shares of Common Stock to
be sold by the Company upon the exercise of the Rights, the Shares to be
sold by the Company pursuant to this Agreement and shares of Common Stock
issuable upon the exercise of stock options disclosed in the Prospectus as
outstanding as of the date hereof, (B) incurred any liability or
obligation, direct or contingent, for borrowed money, (C) entered into any
transaction other than in the ordinary course of business, (D) declared or
paid any dividend or made any other distribution on or in respect of its
capital stock, or (E) entered into any transactions with any affiliate,
including, without limitation, the Principal Stockholders or their
respective affiliates;
(xviii) The Company and each of the Subsidiaries have
satisfactory employer-employee relationships with their respective
employees. No labor or other dispute with the employees of the Company or
any of the Subsidiaries exists, or, to the best knowledge of the Company,
is imminent;
(xix) Except as disclosed in the Registration Statement or
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), each employee benefit plan, within the meaning of
Section 3(3) of ERISA that is maintained, administered or contributed to by
the Company or any of its affiliates for employees or former employees of
the Company and its affiliates has been maintained in compliance with its
terms and the requirements of any applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Code; no prohibited
transaction, within the meaning of Section 406 of ERISA or Section 4975 of
the Code has occurred with respect to any such plan excluding transactions
effected pursuant to a statutory or administrative exemption; and for each
such plan which is subject to the funding rules of Section 412 of the Code
or Section 302 of ERISA no "accumulated funding deficiency" as defined in
Section 412 of the Code has been incurred, whether or not waived, and the
fair market value of the assets of each such plan (excluding for these
purposes accrued but unpaid contributions) exceeded the present value of
all benefits accrued under such plan determined using reasonable actuarial
assumptions;
(xx) The minutes books of the Company and each of the
Subsidiaries made available to Underwriters' Counsel, (A) contain minutes
and consents from all meetings and actions of the Company's stockholders,
board of directors, and the
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<PAGE>
committees of such board since the respective dates of organization of
the Company and (B) reflect all transactions referred to in such minutes
accurately in all material respects;
(xxi) All agreements filed as exhibits to the Registration
Statement to which the Company or any of the Subsidiaries is a party or by
which the Company or any of the Subsidiaries may be bound or to which any
of their respective assets, properties or businesses may be subject have
been duly and validly authorized, executed and delivered by the Company or
such Subsidiary, as appropriate, and constitute the legal, valid and
binding agreements of the Company or such Subsidiary, as appropriate,
enforceable in accordance with their respective terms, subject in each case
to the effect of general principles of equity (including standards of
materiality, good faith, fair dealing and reasonableness) whether applied
by a court of law or equity and except as rights to indemnity and
contribution under this Agreement may be limited by applicable law,
statutory duties or public policy. The descriptions in the Registration
Statement, the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) and any amendment or supplement thereto
of agreements, whether written or oral, and of other documents are accurate
and fairly present the information required to be shown with respect
thereto by Form S-1 under the Act. There are no agreements, whether
written or oral, or other documents that are required by the Act or the
Rules and Regulations to be described in the Registration Statement or
filed as exhibits to the Registration Statement that are not described or
filed as required;
(xxii) Neither the Company nor any of its officers, directors,
or affiliates (within the meaning of the Rules and Regulations) has taken
or will take, directly or indirectly, any action designed to or that has
constituted or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock or the
Rights in violation of Regulation M under the Exchange Act;
(xxiii) There are no claims, payments, issuances, arrangements
or understandings for services in the nature of a finder's, advisory or
origination fee or otherwise, either with respect to the sale of the shares
of Common Stock to be sold by the Company upon exercise of the Rights, the
sale of the Shares hereunder or with respect to the proceeds received by
the Company from such sales. Other than as reflected in this Agreement,
there are no other arrangements, agreements, understandings, payments or
issuances with respect to the Company or, to the Company's knowledge, any
of its officers, directors, or affiliates that may constitute
"underwriter's compensation," as determined by the NASD;
(xxiv) The Company has delivered or caused to be delivered to
the Underwriters the Associated Person Lock-Ups;
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<PAGE>
(xxv) All of the Rights have been duly authorized, and, when
issued and distributed as set forth in the Prospectus, will be legally
issued and valid and binding obligations of the Company having the rights
summarized in the Prospectus; and none of such Rights will have been issued
in violation of the preemptive rights of any security holders of the
Company arising as a matter of law or under or pursuant to the Company's
Certificate of Incorporation, as amended, the Company's By-Laws, as
amended, or any agreement or instrument to which the Company is a party or
by which it is bound.
(xxvi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
there has not been any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, business, prospects, management, financial position,
stockholders' equity or results of operations of the Company otherwise than
as set forth or contemplated in the Prospectus;
(xxvii) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or Safeguard, on the
other hand, which is required by the Act to be described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) which is not so
described;
(xxviii) The Company is not and, after giving effect to the
Offering, will not be an "investment company" or entity "controlled" by an
"investment company," as such terms are defined in the Investment Company
Act; and
(xxix) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating to
doing business with the Government of Cuba or with any person or affiliate
located in Cuba;
(xxx) To the best of the Company's knowledge, no Unsubscribed
Shares or Direct Shares have been sold to any person listed in Section
IM-2110-1(b)(3)-(8) of the NASD's Conduct Rules.
(b) Each Selling Stockholder severally represents and warrants to,
and agrees with, the Underwriters as follows:
(i) The Selling Stockholder has delivered certificates in
negotiable form for the shares of Common Stock to be sold by him upon the
exercise of the Rights and pursuant to this Agreement to the Company to be
placed in custody for delivery pursuant to the terms of the Rights Agent
Agreement and this Agreement. The shares
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<PAGE>
represented by the certificates so held in custody for the Selling
Stockholder are subject to the interests hereunder of the Underwriters,
the Company and the Rights Agent under the Rights Agent Agreement. The
arrangements for custody and delivery of such certificates are, to the
extent provided hereunder, irrevocable, and are not subject to
termination by any acts of the Selling Stockholder, or by operation of
law;
(ii) The Selling Stockholder has the capacity and legal
right to enter into this Agreement and to sell, transfer and deliver the
Shares proposed to be sold by him hereunder and the shares of Common
Stock to be sold by him upon the exercise of the Rights. This Agreement
has been executed and delivered by the Selling Stockholder and, assuming
due authorization, execution and delivery by the other respective parties
hereto, constitutes the legal, valid and binding obligation of the
Selling Stockholder enforceable against the Selling Stockholder in
accordance with its terms, subject to the effect of general principles of
equity (including standards of materiality, good faith, fair dealing and
reasonableness) whether applied by a court of law or equity, and except
as rights of indemnity and contribution hereunder may be limited by
applicable law, statutory duties or public policy;
(iii) The execution and delivery of this Agreement and the
performance by the Selling Stockholder of his obligations hereunder will
not conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under (A) any lease, permit,
license, contract, indenture, mortgage, deed of trust, voting trust
agreement, shareholders agreement, note, loan or credit agreement or any
other agreement or instrument to which the Selling Stockholder is a party
or by which he is or may be bound or to which any of his properties or
assets (tangible or intangible) is or may be subject, or any indebtedness,
except to the extent that any such conflict, breach, violation or default,
individually or in the aggregate, does not and would not interfere with the
Offering or (B) any statute, judgment, decree, order, rule or regulation
applicable to the Selling Stockholder or any of his activities or
properties adopted or issued by any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including those
having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Selling Stockholder or any of his
activities or properties. No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court is required
for the consummation by the Selling Stockholder of the transactions
contemplated herein, except (A) such as may be required under the state
securities or "Blue Sky" laws of any jurisdiction or as may be required by
the by-laws of the NASD in connection with the purchase and distribution of
the Shares by the Underwriters, (B) any filing of the Prospectus pursuant
to Rule 424(b) or 430A of the Rules and Regulations and, if the
Registration Statement has not been declared effective, an order of the
Commission declaring the Registration Statement effective under the Act,
and (C) such other approvals as have been obtained and remain in full force
and effect;
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<PAGE>
(iv) The Selling Stockholder has, and on the Closing Date
will have, good and marketable title to the Shares proposed to be sold by
the Selling Stockholder hereunder and the shares of Common Stock to be sold
upon the exercise of the Rights, and none of such shares will be subject to
any Adverse Claim. Upon delivery of and payment for the Shares to be
sold by the Selling Stockholder hereunder, assuming that each of the
Underwriters is a Bona Fide Purchaser, the Underwriters will acquire good
and marketable title thereto free and clear of any liens, charges, claims,
preemptive rights, encumbrances, pledges, security interests, voting trusts,
defects or other like restrictions or other like material equity of any kind
whatsoever;
(v) To the best knowledge of the Selling Stockholder, the
Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus or any part thereof and, to the best knowledge of
the Selling Stockholder, no proceedings for a stop order have been
instituted or are pending or threatened.
(vi) The Selling Stockholder has not (a) made or caused to be
effected any transaction, directly or indirectly, designed to or that has
constituted or that might reasonably be expected to cause or result in
stabilization of the price of the Common Stock or the Rights, (b) taken or
will take, directly or indirectly, any action designed to or that has
constituted or that might reasonably be expected to cause or result in
manipulation of the price of the Common Stock or the Rights in violation of
Regulation M under the Exchange Act, or (c) failed to comply with the Act
or the Rules and Regulations in order to effect the transactions
contemplated hereby.
(c) Each of Hill and Barker severally represents and warrants to, and
agrees with, the Underwriters as follows:
(i) To the best knowledge of such Selling Stockholder, the
Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus or any part thereof and, to the best knowledge of
such Selling Stockholder, no proceedings for a stop order have been
instituted or are pending or threatened. When any Preliminary Prospectus
was filed with the Commission, it contained all statements required to be
stated therein in accordance with, and complied in all material respects
with the requirements of, the Act and the Rules and Regulations except to
the extent that such Preliminary Prospectus did not contain any such
required statements, or did not so comply, in a manner corrected in the
Prospectus. To the best knowledge of such Selling Stockholder, when the
Registration Statement (or any amendment thereto) was (or is) declared
effective, it (A) contained (or will contain) all statements required to be
stated therein in accordance with, and complied in all material respects
(or will comply in all material respects) with the requirements of, the Act
and the Rules and Regulations and (B) did not or will not include any
untrue statement of a
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<PAGE>
material fact or omit to state any material fact necessary to make the
statements therein not misleading. To the best knowledge of such Selling
Stockholder, when the Prospectus or any amendment or supplement thereto
is filed pursuant to Rule 424(b) (or, if the Prospectus or such amendment
or supplement is not required to be so filed, when the Registration
Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the
Closing Date and any Option Closing Date, the Prospectus, as amended or
supplemented at any such time, (A) contained or will contain all
statements required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements of, the Act
and the Rules and Regulations and (B) did not or will not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (v) do not apply to the Provided Information;
(ii) To the best knowledge of such Selling Stockholder, the
descriptions in the Registration Statement, the Prospectus and any
amendment or supplement thereto of agreements, whether written or oral, and
of other documents are accurate and fairly present the information required
to be shown with respect thereto by Form S-1 under the Act. To the best
knowledge of such Selling Stockholder, there are no agreements, whether
written or oral, or other documents that are required by the Act or the
Rules and Regulations to be described in the Registration Statement or
filed as exhibits to the Registration Statement that are not described or
filed as required;
(d) Reid represents and warrants to, and agrees with, the
Underwriters as follows:
(i) When any Preliminary Prospectus was filed with the
Commission, it contained all statements specifically relating to Reid
required to be stated therein in accordance with, and such statements
complied in all material respects with the requirements of, the Act and the
Rules and Regulations except to the extent that such were corrected in the
Prospectus. To the best knowledge of Reid, when the Registration Statement
(or any amendment thereto) was (or is) declared effective, it (A) contained
(or will contain) all statements specifically relating to Reid required to
be stated therein in accordance with, and complied in all material respects
(or will comply in all material respects) with the requirements of, the Act
and the Rules and Regulations and (B) did not or will not include any
untrue statement specifically relating to Reid of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading. To the best knowledge of Reid, when the Prospectus or any
amendment or supplement thereto is filed pursuant to Rule 424(b) (or, if
the Prospectus or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus
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<PAGE>
was or is declared effective) and on the Closing Date and any Option
Closing Date, the Prospectus, as amended or supplemented at any such
time, (A) contained or will contain all statements specifically relating
to Reid required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements of, the Act
and the Rules and Regulations and (B) did not or will not include any
untrue statement relating specifically to Reid of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. The foregoing provisions of this paragraph (i) do not
apply to the Provided Information;
(ii) To the best knowledge of Reid, there are no agreements,
whether written or oral, or other documents, in each case in which Reid is
a party, that are required by the Act or the Rules and Regulations to be
described in the Registration Statement or filed as exhibits to the
Registration Statement that are not described or filed as required;
(e) Safeguard represents and warrants to, and agrees with, the
Underwriters as follows:
(i) Safeguard has the legal right, power and authority to
enter into this Agreement. This Agreement has been executed and
delivered by the Safeguard and, assuming due authorization, execution and
delivery by the other respective parties hereto, constitutes the legal,
valid and binding obligation of Safeguard enforceable against Safeguard in
accordance with its terms, subject to the effect of general principles of
equity (including standards of materiality, good faith, fair dealing and
reasonableness) whether applied by a court of law or equity, and except as
rights of indemnity and contribution hereunder may be limited by applicable
law, statutory duties or public policy;
(ii) The execution and delivery of this Agreement and the
performance by Safeguard of its obligations hereunder will not conflict
with or result in a breach or violation of any of the terms and provisions
of, or constitute a default under (A) any lease, permit, license, contract,
indenture, mortgage, deed of trust, voting trust agreement, shareholders
agreement, note, loan or credit agreement or any other agreement or
instrument to which Safeguard is a party or by which it is or may be bound
or to which any of its properties or assets (tangible or intangible) is or
may be subject, or any indebtedness, except to the extent that any such
conflict, breach, violation or default, individually or in the aggregate,
does not and would not result in a material adverse effect on the
condition, financial or otherwise, or on the earnings, business affairs,
financial position, prospects, value, operation, properties, results of
operation or business of Safeguard and does not and would not interfere
with the Offering or (B) any statute, judgment, decree, order, rule or
regulation applicable to Safeguard or any of its
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<PAGE>
activities or properties adopted or issued by any arbitrator, court,
regulatory body or administrative agency or other governmental agency or
body (including those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over Safeguard or any
of its activities or properties. No consent, approval, authorization or
order of, or filing with, any governmental agency or body or any court is
required for the consummation by Safeguard of the transactions
contemplated herein, except (A) such as may be required under the state
securities or "Blue Sky" laws of any jurisdiction or as may be required
by the by-laws of the NASD in connection with the purchase and
distribution of the Shares by the Underwriters, (B) any filing of the
Prospectus pursuant to Rule 424(b) or 430A of the Rules and Regulations
and, if the Registration Statement has not been declared effective, an
order of the Commission declaring the Registration Statement effective
under the Act, and (C) such other approvals as have been obtained and
remain in full force and effect;
(iii) To the best knowledge of Safeguard, the Commission has
not issued any order preventing or suspending the use of any Preliminary
Prospectus or any part thereof and, to the best knowledge of Safeguard, no
proceedings for a stop order have been instituted or are pending or
threatened. When any Preliminary Prospectus was filed with the Commission,
it contained all statements required to be stated therein in accordance
with, and complied in all material respects with the requirements of, the
Act and the Rules and Regulations except to the extent that such
Preliminary Prospectus did not contain any such required statements, or did
not so comply, in a manner corrected in the Prospectus. To the best
knowledge of Safeguard, when the Registration Statement (or any amendment
thereto) was (or is) declared effective, it (A) contained (or will contain)
all statements required to be stated therein in accordance with, and
complied in all material respects (or will comply in all material respects)
with the requirements of, the Act and the Rules and Regulations and (B) did
not or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading. To the best knowledge of Safeguard, when the Prospectus or any
amendment or supplement thereto is filed pursuant to Rule 424(b) (or, if
the Prospectus or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared
effective) and on the Closing Date and any Option Closing Date, the
Prospectus, as amended or supplemented at any such time, (A) contained or
will contain all statements required to be stated therein in accordance
with, and complied or will comply in all material respects with the
requirements of, the Act and the Rules and Regulations and (B) did not or
will not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (iii) do not apply to the Provided
Information;
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<PAGE>
(iv) To the best knowledge of Safeguard, the descriptions
in the Registration Statement, the Prospectus and any amendment or
supplement thereto of agreements, whether written or oral, and of other
documents are accurate and fairly present the information required to be
shown with respect thereto by Form S-1 under the Act. To the best knowledge
of Safeguard, there are no agreements, whether written or oral, or other
documents that are required by the Act or the Rules and Regulations to be
described in the Registration Statement or filed as exhibits to the
Registration Statement that are not described or filed as required;
(v) Safeguard has not (a) made or caused to be effected any
transaction, directly or indirectly, designed to or that has constituted or
that might reasonably be expected to cause or result in stabilization of
the price of the Common Stock or the Rights, (b) taken or will take,
directly or indirectly, any action designed to or that has constituted or
that might reasonably be expected to cause or result in manipulation of the
price of the Common Stock or the Rights in violation of Regulation M under
the Exchange Act, or (c) failed to comply with the Act or the Rules and
Regulations in order to effect the transactions contemplated hereby.
(vi) To the best of Safeguard's knowledge, no Unsubscribed
Shares or Direct Shares have been sold to any person listed in Section
IM-2110-1(b)(3)-(8) of the NASD's Conduct Rules.
3. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, and subject to the terms and conditions herein set
forth, the Company agrees to issue and the Company and the Selling Stockholders
agree, severally and not jointly, to sell to the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase in the percentages
set forth in Schedule C hereto, all of the Excess Unsubscribed Shares at a price
of $5.00 per share.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained and upon not less than two business
days' notice from the Underwriters, for a period of 20 days after the Expiration
Date, the Selling Stockholders agree to sell to the Underwriters all or part of
up to 640,000 Option Shares (representing 478,240, 124,630 and 37,130 Option
Shares being sold by Barker, Hill and Reid, respectively) at a purchase price of
$5.00 per share for the sole purpose of covering over-allotments that may be
made in connection with the offering and distribution of the shares of Common
Stock. The Underwriters may exercise their option to purchase all or any
portion of the Option Shares from the Company up to two times, provided that the
aggregate number of Option Shares purchased by the Underwriters shall not exceed
640,000. Delivery of the Option Shares shall be made
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concurrently with payment therefor. Option Shares may be purchased by the
Underwriters only for the purpose of covering over-allotments that may be
made in connection with the offering and distribution of the shares of Common
Stock. No Option Shares shall be delivered unless the Excess Unsubscribed
Shares (if any are purchased by the Underwriters) shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
(c) Payment of the respective aggregate purchase prices of the Excess
Unsubscribed Shares purchased from the Company and the Selling Stockholders
shall be made by the Underwriters on the Closing Date by wire transfer in same
day funds, payable to or upon the order of the Company and the Selling
Stockholders at the offices of Wheat, First Securities, Inc. at Riverfront
Plaza, West Tower, 901 E. Byrd Street, Richmond, Virginia 23219, or at such
other place as shall be agreed upon by the Underwriters and the Company, upon
delivery of certificates (in form and substance satisfactory to the
Underwriters) representing the Excess Unsubscribed Shares to the Underwriters.
Delivery and payment for the Excess Unsubscribed Shares shall be made at the
Closing. In addition, in the event that any or all of the Option Shares are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Shares shall be made at the above mentioned
office or at such other place as shall be agreed upon by the Underwriters and
the Company, on each Option Closing Date as specified in the notice from the
Underwriters to the Company. Certificates for the Excess Unsubscribed Shares
and the Option Shares, if any, shall be in definitive, fully registered form,
shall bear no restrictive legends and shall be in such denominations and
registered in such names as the Underwriters may request in writing at least two
business days prior to the Closing Date or the relevant Option Closing Date, as
the case may be. The certificates for the Excess Unsubscribed Shares and the
Option Shares, if any, shall be made available to the Underwriters at such
office or such other place as the Underwriters may designate for inspection,
checking and packaging not later than 9:30 a.m., New York City time, on the last
business day prior to the Closing Date or the relevant Option Closing Date, as
the case may be.
(d) Delivery of certificates representing the shares of Common Stock
to be sold pursuant to the exercise of the Rights, and the payment of the
subscription price therefor to the Company and the Selling Stockholders shall be
made at the Closing on the Closing Date pursuant to the Rights Agent Agreement,
irrespective of whether or not any Excess Unsubscribed Shares are to be
purchased by the Underwriters at such Closing.
4. Public Offering of the Excess Unsubscribed Shares.
As soon after the Registration Statement becomes effective as the
Underwriters deem advisable, the Underwriters shall make the Offering.
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5. Registration of Common Stock in Certain States.
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth,
the Underwriters will act (or at their expense, will cause another
broker-dealer registered in such state to act) as the agent of the Company
and the Selling Stockholders to effect the offering of the Rights and the
sale of the shares of Common Stock upon exercise thereof or pursuant to the
Other Purchasers Standby Purchase Agreements in the States of Connecticut,
Florida, Nebraska, Nevada, New Hampshire and New York, such states being
those states in which applicable state law requires that a registered
broker-dealer effect the offering of the Rights or the shares of Common Stock
purchasable upon exercise thereof or pursuant to the Other Purchasers Standby
Purchase Agreements. The Underwriters may delegate their obligations under
the immediately preceding sentence through another registered broker-dealer
satisfactory to them in states where the Underwriters are not registered as
such. The Underwriters shall not be liable under this Section 5(a), except
for gross negligence, lack of good faith and for their obligations expressly
assumed hereunder.
(b) The Company will deliver to the Underwriters, on or before the
day the Registration Statement becomes effective, a "Blue Sky Memorandum"
(herein so called), prepared by Morgan, Lewis & Bockius LLP relating to the
securities or Blue Sky laws of any jurisdictions in which the transfer of the
Rights or the offer and sale of the Common Stock is required to be qualified
or registered, which will set forth the circumstances under which said
transfer or offers and sales may be made and advising that the appropriate
action, if any, will be taken in each of such jurisdictions so as to permit
the transfer of the Rights and the offer and sale of the Common Stock
(whether upon or in connection with the exercise of Rights, as part of the
public offering of the Shares by the Underwriters or pursuant to the Other
Purchasers Standby Purchase Agreements) to the persons resident in the
jurisdictions indicated in such survey. Such Blue Sky Memorandum may be
based upon qualification of the Rights and the Common Stock as necessary with
appropriate persons in such jurisdictions and an examination of the statutes
and regulations, if any, of such jurisdictions as reported in standard
compilations and upon interpretive advice obtained from representatives of
certain securities commissions and such local counsel as may be necessary.
Such Blue Sky Memorandum will be furnished only for the Underwriters' general
information and guidance rather than as an opinion of counsel with regard to
the laws of the jurisdictions referred to therein.
6. Covenants of the Company and the Principal Stockholders.
(a) The Company covenants and agrees with the Underwriters as
follows:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. Unless required by
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law, the Company will not file with the Commission the prospectus or
amendment referred to in the second sentence of Section 2(a)(i) hereof,
any amendment or supplement to such prospectus, any amendment to the
Registration Statement, or any document under the Exchange Act before
termination of the offering of the Shares by the Underwriters of which
the Underwriters shall not previously have been advised and furnished
with a copy, or to which the Underwriters shall have reasonably objected
by notice to the Company in writing after having been provided a copy
thereof, or which is not in compliance with the Act, the Exchange Act or
the Rules and Regulations. During the time when a prospectus relating to
the Shares is required to be delivered under the Act, the Company will
comply with all requirements imposed upon it by the Act and the Rules and
Regulations to the extent necessary to permit the continuance of sales of
or dealings in the Shares in accordance with the provisions hereof and of
the Prospectus, as amended or supplemented. The Company will prepare and
file with the Commission, promptly upon the reasonable request by the
Underwriters or Underwriters' Counsel, any amendments to the Registration
Statement or amendments or supplements to the Prospectus that may be
necessary or advisable in connection with the distribution of the Shares
by the Underwriters, and will use its best efforts to cause the same to
be filed with the Commission as promptly as possible;
(ii) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriters, with a confirmation in
writing, of (A) the time when the Registration Statement or any amendment
thereto has been filed or declared effective or the Prospectus or any
amendment or supplement thereto has been filed, (B) the issuance by the
Commission of any stop order, or of the initiation or threatening of any
proceeding, suspending the effectiveness of the Registration Statement or
any amendment thereto or any order preventing or suspending the use of
any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, (C) the issuance by any state securities commission
of any notice of any proceedings for the suspension of the qualification
of the Shares for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose, (D)
the receipt of any comments from the Commission, and (E) any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information.
The Company will use its best efforts to prevent the issuance of any such
order or the imposition of any such suspension and, if any such order is
issued or suspension is imposed, to obtain the withdrawal thereof as
promptly as possible;
(iii) If required, the Company will file the Prospectus and
any amendment or supplement thereto with the Commission in the manner and
within the time period required by Rule 424(b) and Rule 430A(a)(3) of the
Rules and Regulations;
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(iv) The Company will arrange for the qualification of the
shares of Common Stock for offering and sale under the securities or "Blue
Sky" laws of such jurisdictions in which recipients of Rights and the Other
Purchasers are resident and such jurisdictions as the Underwriters may
reasonably designate and will continue such qualifications in effect for as
long as may be necessary to complete the distribution of the shares of
Common Stock, provided, however, that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction;
(v) If, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event occurs as a
result of which, in the opinion of the Company or counsel for the Company,
the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state a material fact required
to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is otherwise necessary at any time to amend or
supplement the Prospectus to comply with the Act or the Rules and
Regulations, the Company will promptly notify the Underwriters thereof and,
subject to Section 6(a)(i) hereof, prepare and file with the Commission, at
the Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance. If, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any event
occurs as a result of which, in the opinion of the Underwriters or
Underwriters' Counsel, the Prospectus, as then amended or supplemented,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, the Underwriters will promptly notify the Company
thereof and the Company will, subject to Section 6(a)(i) hereof, prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance. The Company
will furnish to the Underwriters and dealers (whose names and addresses
shall be furnished to the Company by the Underwriters) to which Shares may
have been sold on behalf of the Underwriters and to any other dealers upon
request, a reasonable number of copies of any amendment or supplement
prepared pursuant to this paragraph (v);
(vi) The Company will furnish to each of the Underwriters
and to Underwriters' Counsel, without charge, a signed copy of the
registration statement originally filed with respect to the Shares and each
amendment thereto. So long as the Underwriters or any dealer is required by
the Act or the Rules and Regulations to deliver a prospectus, the Company
will also furnish as many copies of each Preliminary
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Prospectus or the Prospectus or any amendment or supplement thereto as
the Underwriters may reasonably request.
(vii) As soon as practicable after the effective date of the
Registration Statement, the Company will make generally available to its
security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Underwriters an earnings statement that will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations;
(viii) For a period of five years following the date hereof,
the Company will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by independent
public accountants) and will deliver to the Underwriters unaudited
quarterly reports of earnings (through delivery of the Company's quarterly
reports filed with the Commission on Form 10-Q or Form 10-QSB) and the
following:
(A) concurrently with furnishing quarterly reports, if any,
to the stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders;
(B) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
public accountants;
(C) as soon as they are available, copies of all reports
(financial or other) mailed to its stockholders;
(D) as soon as they are available, copies of all reports
(other than preliminary proxy materials) and financial statements
furnished to or filed with the Commission, the NASD or Nasdaq which
are available to the public;
(E) as soon as they are available every press release and
every material news item or article of interest to the financial
community in respect of the Company or its affairs that is released or
prepared by the Company; and
(F) any additional information of a public nature
concerning the Company that the Underwriters may reasonably request
from time to time;
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(ix) The Company will maintain a Transfer Agent and
Registrar for the shares of Common Stock. Effective as of the Closing
Date, the Company will cause the Transfer Agent for the shares of Common
Stock to make appropriate "stop transfer" restrictions in its records
relating to the certificates representing all shares of Common Stock subject
to restrictions under the agreements described in Sections 2(a)(xxiv),
2(b)(i) and 6(b)(i) hereof;
(x) During the period commencing on the date the
Registration Statement is declared effective by the Commission and ending
180 days after the Expiration Date, the Company, will not, without the
prior written consent of the Underwriters, (A) directly or indirectly,
transfer, sell, offer for sale, contract for sale, grant any option for the
sale of, or otherwise dispose of (or announce any transfer, sale, offer for
sale, contract for sale, grant of any option for sale of, or other
disposition of) any shares of Common Stock, or other securities convertible
into, or exercisable or exchangeable for, shares of Common Stock (except as
contemplated by this Agreement) or (B) file any registration statement
relating to any such securities with the Commission or any other authority
except as contemplated herein, provided, however, that (1) the Company may
grant or issue securities pursuant to any employee stock option plan or
stock purchase plan or outstanding stock options described in the Prospectus
and, commencing after the Closing Date, may file a registration statement on
Form S-8 with respect to such plans and (2) the Company may issue shares of
Common Stock, or other securities convertible into, or exercisable or
exchangeable for shares of Common Stock, as consideration for any
acquisition by the Company so long as the party being issued such securities
signs an agreement, acceptable in form and substance to the Underwriters,
that such party will not transfer, sell, offer for sale, contract to sell or
otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for shares of Common Stock
owned by such party or with respect to which such party has the power of
disposition during a period commencing on the date of issuance of such
securities and ending 180 days following the Expiration Date;
(xi) The Company will apply the net proceeds from the sale
of the Common Stock sold by it in the manner set forth under "USE OF
PROCEEDS" in the Prospectus. Except as described in the Prospectus, no
portion of the net proceeds will be used directly or indirectly to acquire
any securities issued by the Company;
(xii) The Company will furnish to the Underwriters as early
as practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two full business days prior
thereto, a copy of the latest available unaudited interim financial
statements of the Company (which in each case shall not be earlier than the
last day of the preceding month, unless such month-end shall be less than
three business days prior to the date such statements are to be delivered)
that
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have been read by the Company's independent public accountants, as stated
in their letters to be furnished pursuant to Section 8(h) hereof;
(xiii) The Company will cause the Shares and the Rights to be
approved for quotation on the Nasdaq National Market and will use its
reasonable commercial efforts to maintain such approvals;
(xiv) The Company will file and cause to become effective
prior to the Closing Date a registration statement with respect to the
Common Stock pursuant to Section 12(g) of the Exchange Act and will use its
best efforts to maintain such registration;
(xv) The Company will apply the net proceeds from the sale
of the shares of Common Stock sold by it and conduct its operations in a
manner that will not subject it to registration as an investment company
under the Investment Company Act of 1940, as amended; and
(xvi) The Company will furnish, without charge, to the
Underwriters and Underwriters' Counsel within four months of the Closing
Date such number of closing binders as the Underwriters and Underwriters'
Counsel may reasonably request.
(b) Each Selling Stockholder covenants and agrees with the
Underwriters as follows:
(i) During the period commencing on the date the
Registration Statement is declared effective by the Commission and ending
180 days after the Expiration Date, the Selling Stockholder will not,
without the prior written consent of the Underwriters, directly or
indirectly, transfer, sell, offer for sale, contract for sale, grant any
option for the sale of or otherwise dispose of any shares of Common Stock
or other securities convertible into, or exercisable or exchangeable for,
shares of Common Stock except as contemplated in this Agreement.
(ii) The Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the Underwriters of the
Shares to be purchased by the Underwriters from such Selling Stockholder.
(iii) The Company and the Selling Stockholders covenant and
agree with each other and covenant and agree with the Underwriters that the
Other Purchasers Standby Shares to be sold and the 560,000 shares of Common
Stock that are expected to be sold to the Musser Group upon exercise of the
Musser Rights shall be deemed to be sold by the Company.
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(c) Safeguard covenants and agrees with the Underwriters that during
the period commencing on the date the Registration Statement is declared
effective by the Commission and ending 180 days after the Expiration Date,
Safeguard will not, without the prior written consent of the Underwriters,
directly or indirectly, transfer, sell, offer for sale, contract for sale, grant
any option for the sale of or otherwise dispose of any shares of Common Stock or
other securities convertible into, or exercisable or exchangeable for, shares of
Common Stock except (A) as contemplated in this Agreement or (B) pursuant to
grants or sales of such shares to employees of Safeguard or its subsidiaries,
provided that such transferees agree to be bound by the restrictions contained
in this paragraph.
7. Payment of Expenses; Fees.
(a) As compensation to the Underwriters for their services in
connection with the transactions contemplated by this Agreement and their
commitment hereunder, the Company and the Selling Stockholders hereby agree,
jointly and severally, to pay to the Underwriters, by wire transfer, on the
sixth business day following the Expiration Date, an amount equal to the sum of
(i) 3% of the Exercise Price for each share of Common Stock subject to Rights,
(ii) 3% of the subscription price for each Direct Share and each Undistributed
Share sold to the Direct Purchasers, and (iii) an additional fee of 4% of the
Exercise Price for each share (other than the Option Shares) purchased by the
Underwriters pursuant to Section 3(a) of this Agreement or upon the exercise of
Rights by the Underwriters if such Rights were purchased by the Underwriters at
a time when the Common Stock was trading (on a "when-issued" basis) at a per
share price of less than $6.00 or with the prior acknowledgement of Safeguard
that the Underwriters would be entitled to receive such compensation pursuant to
the exercise of such Rights. As compensation to the Underwriters for their
commitment hereunder, the Company hereby agrees to pay the Underwriters, by wire
transfer, on each Option Closing Date an amount equal to 7% of the Exercise
Price for each Option Share purchased on such date by the Underwriters. As
additional compensation to the Underwriters for their commitment hereunder, the
Company shall reimburse the Underwriters, by wire transfer on the sixth business
day following the Expiration Date, for a non-accountable expense allowance of
(i) $200,000 if, on the Expiration Date, the closing price for the Common Stock
was trading (on a "when-issued" basis) at a per share price of less than $7.25,
(ii) $100,000 if, on the Expiration Date, the closing price for the Common Stock
was trading (on a "when-issued basis) at a per share price between $7.25 and
$8.25 or (iii) no expense allowance if, on the Expiration Date, the closing
price for the Common Stock was trading (on a "when-issued" basis) at a per share
price greater than $8.25.
(b) The Company hereby agrees to pay all expenses and fees incident
to the performance of the obligations by the Company and the Selling
Stockholders under this Agreement, including all expenses and fees of the
Company and the Selling Stockholders
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incurred in connection with or by (i) the engagement of accountants, counsel
for the Company and the Principal Stockholders, the Rights Agent and the
Transfer Agent and Registrar for the Common Stock, (ii) preparation,
duplication, printing, filing and distribution of the registration statement
originally filed with respect to the Shares and any amendments thereto, any
Preliminary Prospectus and the Prospectus and any amendments and supplements
thereto and related documents used in connection with the Offering, including
in each case the cost of all copies supplied to the Underwriters in
quantities as hereinabove stated, (iii) the printing, engraving, issuance and
delivery of certificates representing the Rights and the Shares, (iv) the
qualification of the Shares under state securities or "Blue Sky" laws,
including filing fees, costs of printing and mailing of a "Preliminary Blue
Sky Memorandum" and "Final Blue Sky Memorandum" and disbursements and fees of
4Underwriters' Counsel in connection with the review of such materials (which
shall be paid at the Closing), (v) the approval of the Common Stock and
Rights for quotation on the Nasdaq National Market, (vi) the filing fees of
the Underwriters in connection with any filings required to be made with the
NASD, (vii) travel and out of pocket expenses of the Company in connection
with meetings with prospective investors in the Shares (other than such
expenses as shall have been specifically approved in writing by the
Underwriters to be paid for by the Underwriters), and (viii) any expenses
incurred by the Company in connection with a "road show" presentation to
potential investors.
(c) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 8, Sections 12(a)(vii) or (a)(viii), or Section
13, the Company agrees to reimburse and indemnify the Underwriters for all of
their reasonable accountable out-of-pocket expenses, including the reasonable
fees and disbursements of Underwriters' Counsel and any of the state securities,
"Blue Sky" and NASD fees and expenses identified in Sections 7(b)(iv) and
7(b)(vi) above, that shall have been incurred by them in connection with the
proposed purchase and sale of the Shares.
8. Conditions of the Underwriters' Obligations.
The obligations of the Underwriters to purchase and pay for the Shares
shall be subject, in their sole discretion, to the accuracy of the
representations and warranties of the Company and the Principal Stockholders
herein as of the date hereof and as of the Closing Date, as if they had been
made on and as of the Closing Date, to the accuracy on and as of the Closing
Date of the statements of the officers of the Company and the Principal
Stockholders made in certificates delivered pursuant to the provisions hereof,
to the performance by the Company and the Principal Stockholders on and as of
the Closing Date of their respective covenants and obligations hereunder, and to
the following further conditions:
(a) If the Registration Statement or any amendment thereto filed
prior to the Closing Date has not been declared effective as of the time of
execution hereof, the Registration Statement or such amendment shall have been
declared effective not later than the first full business day next following the
date hereof or such later date and time as shall have been
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consented to in writing by the Underwriters. If required, the Prospectus
shall have been timely filed with the Commission in accordance with Rule
424(b) of the Rules and Regulations. If required, any amendment or
supplement to the Prospectus shall have been filed in accordance with Rule
424(c) under the Act. No stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been issued and no
proceedings for that purpose shall have been instituted or, to the knowledge
of the Company, the Principal Stockholders or the Underwriters, shall be
contemplated by the Commission. The Company shall have complied, to the
reasonable satisfaction of the Underwriters and Underwriters' Counsel, with
any request of the Commission for additional information (to be included in
the Registration Statement, the Prospectus or otherwise).
(b) The Underwriters shall not have advised the Company or any of the
Principal Stockholders that, in the opinion of the Underwriters or Underwriters'
Counsel, (i) the Registration Statement, or any amendment thereto, includes an
untrue statement of a material fact or omits to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading or (ii) the Prospectus, or any amendment or supplement
thereto, includes an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(c) The Underwriters shall have received from Underwriters' Counsel
an opinion dated the Closing Date, with respect to the issuance and sale of the
Shares, the Registration Statement, the Prospectus and such other related
matters as the Underwriters reasonably may request. Underwriters' Counsel shall
have received from the Company and the Principal Stockholders such papers and
information as they may request to enable them to review or pass upon such
matters or in order to evidence the accuracy, completeness or satisfaction of
any of the representations, warranties, or covenants of the Company or any of
the Principal Stockholders contained herein.
(d) The Underwriters shall have received from Morgan, Lewis & Bockius
LLP, counsel to the Company and the Principal Stockholders, an opinion, on or
prior to the date Rights certificates and Prospectuses are first mailed to
Safeguard Shareholders and on the Closing Date, dated the respective dates
thereof and in form and substance satisfactory to Underwriters' Counsel, to the
effect that:
(i) The Company and each of the Designated Subsidiaries are
duly incorporated, validly existing and in good standing under the laws of
their respective jurisdictions of organization and are duly qualified to
transact business as foreign corporations and are in good standing in each
jurisdiction in which the Company has represented to such counsel that they
conduct business;
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(ii) The Company and each of the Designated Subsidiaries
have all requisite corporate power and authority necessary or required to
own or lease their respective properties and conduct its businesses as
described in the Registration Statement and the Prospectus;
(iii) The Company has all requisite power and authority
(corporate and other) to enter into this Agreement, the Rights Agent
Agreement and the Other Purchasers Standby Purchase Agreements and to
consummate the transactions provided for herein and therein; and this
Agreement, the Other Purchasers Standby Purchase Agreements and the Rights
Agent Agreement have each been duly authorized, executed and delivered by
the Company. Each of this Agreement, assuming due authorization, execution
and delivery by the Underwriters, and each of the Other Purchasers Standby
Purchase Agreements, and the Rights Agent Agreement, assuming due
authorization, execution and delivery by the parties thereto other than the
Company, constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, arrangement or similar laws affecting
creditors' rights generally or by general principles of equity (including
standards of materiality, good faith, fair dealing and reasonableness)
whether applied by a court of law or equity, and except as rights to
indemnity and contribution hereunder may be limited by applicable law,
statutory duties or public policy (provided that as of the first date of
the opinion only, such opinion need not express any opinion set forth above
with respect to the Other Purchaser Standby Purchase Agreements that have
not theretofore been executed and delivered). The Company's execution and
delivery of this Agreement, the Other Purchasers Standby Purchase
Agreements and the Rights Agent Agreement, its performance of its
obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby do not and will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, or result in the creation or imposition
of any liens, charges, claims, encumbrances, pledges, security interests,
defects or other like restrictions or equities of any kind whatsoever upon,
any right, property or asset (tangible or intangible) of the Company or any
of the Subsidiaries pursuant to the terms of (A) the charter or bylaws,
each as amended through the date of the opinion, of the Company and each of
the Subsidiaries, (B) any material lease, permit, license, contract,
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note, loan or credit agreement or any other agreement or
instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which any of them is or may be bound or to
which any of their respective properties or assets (tangible or intangible)
is or may be subject, or any indebtedness, except that such counsel need
not express an opinion with respect to any violation based upon any
covenant of a financial or numerical nature or that requires arithmetic
computation and such counsel has not otherwise known of or had reason to
expect the occurrence of such default, or (C) to the knowledge of Company
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counsel, any statute, rule, regulation, judgment, decree or order
applicable to the Company or any of the Subsidiaries or any of their
respective activities or properties adopted or issued by an arbitrator,
court, regulatory body or administrative agency or other governmental
agency or body (including those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the Company
or any of the Subsidiaries or any of their respective activities or
properties (other than such as may be required under state securities or
"Blue Sky" laws and such as may be required by the by-laws and rules of the
NASD in connection with the purchase and distribution of the Shares by the
Underwriters);
(iv) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or, to such counsel's
knowledge, any court is required in connection with the issuance of the
shares of Common Stock to be sold by the Company, the Company's performance
of its obligations hereunder, the Offering, or the consummation by the
Company of the other transactions contemplated hereby, except such as may
be required under the state securities or "Blue Sky" laws of any
jurisdiction or as may be required by the by-laws and rules of the NASD in
connection with the purchase and distribution of the Shares by the
Underwriters and except such other approvals as have been obtained and
remain in full force and effect. Upon the effectiveness of the
Registration Statement, the Common Stock will be registered pursuant to
Section 12(g) of the Exchange Act, and will be included in the Nasdaq
National Market;
(v) At the date or dates indicated in the Prospectus, the
authorized, issued and outstanding capital stock of the Company was as set
forth therein, and conformed as to legal matters, to the extent that it
constitutes matters of law or legal conclusions, to the description thereof
contained therein under the captions "CAPITALIZATION" and "DESCRIPTION OF
CAPITAL STOCK." All of the issued shares of Common Stock of the Company
(including the Shares sold by the Selling Stockholders) have been duly
authorized and validly issued, and are fully paid and non-assessable; the
holders thereof are not subject to personal liabilities solely by reason of
holding such shares; and none of such shares have been issued in violation
of the preemptive rights of any security holders of the Company known to
Company counsel. The Shares to be sold by the Company have been duly
authorized and, when paid for in accordance herewith, will be validly
issued, fully paid and non-assessable, and with no personal liability
resulting solely from the ownership thereof. Upon the issuance and
delivery pursuant to this Agreement of the Shares to be sold by the Company
to the Underwriters, assuming the Underwriters do not have knowledge of any
Adverse Claim, the Underwriters will acquire good and marketable title to
such Shares free and clear of any liens, charges, claims, encumbrances,
pledges, security interests, defects or other like restrictions or like
equities of any kind whatsoever. Except as described in the Prospectus,
there are no preemptive or other rights to subscribe for or to purchase,
nor
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any restriction upon the voting or transfer of, any shares of Common
Stock pursuant to the Company's Certificate of Incorporation or By-Laws,
each as amended to date, or pursuant to any agreement among stockholders to
which the Company is a party or of which it has knowledge, and the Shares
to be sold by the Company are not subject to any preemptive or other
similar rights of any security holder. The Company is not a party to or
bound by any instrument, agreement or, to such counsel's knowledge, other
arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement and as described in
the Prospectus. Except as described in the Prospectus with respect to
stock options (and shares issuable upon exercise thereof) that may be
registered by the Company in a registration statement on Form S-8, no
holder of any securities of the Company or of any options, warrants or
other convertible or exchangeable securities of the Company which are
exercisable for or convertible or exchangeable for securities of the
Company has any right (which has not been waived) to include any securities
issued by the Company in the Registration Statement or any registration
statement to be filed by the Company within the period commencing on the
date the Registration Statement is declared effective by the Commission and
ending 180 days after the Expiration Date or to require the Company to file
a registration statement under the Act during such period. Based on the
form of specimen certificate provided to such counsel, the certificates
representing the Shares are in due and proper form;
(vi) The Registration Statement has become effective under
the Act. Any required filing of the Prospectus pursuant to Rule 424(b) and
430A(a)(3) of the Rules and Regulations has been made in accordance with
the time period required thereby. To such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are
pending or threatened, by the Commission;
(vii) At the time the Registration Statement was declared
effective by the Commission, the Registration Statement and the Prospectus
and any amendment or supplement thereto (other than the financial
statements, and notes thereto, the financial schedules, and the other
financial and statistical data included in the Registration Statement or
the Prospectus or omitted therefrom, as to which such counsel need express
no opinion) complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations;
(viii) Such counsel has reviewed all contracts and other
documents referred to in the Registration Statement and the Prospectus, and
the summaries of and other disclosures regarding such contracts and other
documents included in the Registration Statement and the Prospectus fairly
present the information required to be shown with respect thereto. To such
counsel's knowledge, there are no contracts or other documents of a
character required to be filed as exhibits to the Registration
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Statement or required to be described in the Registration Statement or
the Prospectus that were not filed or disclosed as required;
(ix) Except as disclosed in the Prospectus, to such
counsel's knowledge, there is not pending or threatened or contemplated
against the Company, or involving the properties or business of the
Company, any action, suit, proceeding, inquiry, investigation, litigation
or governmental proceeding (including those having jurisdiction over
environmental or similar matters), domestic or foreign, that (A) is
required to be disclosed in the Registration Statement and is not so
disclosed, (B) questions the validity of the capital stock of the Company
or the validity or enforceability of this Agreement, (C) questions the
validity of any action taken or to be taken by the Company pursuant to or
in connection with this Agreement, or (D) could materially adversely effect
the present or prospective ability of the Company to perform its
obligations under this Agreement or result in a Material Adverse Effect;
(x) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act, nor, by receipt of the proceeds from its sale by it
of the Shares pursuant to this Agreement, will the Company become or be
deemed to be an "investment company" under such Act;
(xi) No transfer taxes are required to be paid in connection
with the sale and delivery of the Common Stock by the Company to the
Underwriters hereunder;
(xii) The certificates evidencing the Rights to be
distributed to the Safeguard Shareholders and the shares of Common Stock to
be delivered hereunder are in due and proper form under Delaware law;
(xiii) All of the Rights have been duly authorized and validly
issued, and, when issued and distributed as set forth in the Prospectus,
will be legally issued and valid and binding obligations of the Company
having the rights summarized in the Prospectus; and none of such Rights
will have been issued in violation of the preemptive rights of any security
holders of the Company arising as a matter of law or under or pursuant to
the Company's Certificate of Incorporation, as amended, the Company's
By-Laws, as amended, or any agreement or instrument to which the Company is
a party or by which it is bound.
(xiv) Each Principal Stockholder has the legal right and
power to enter into this Agreement and each Selling Stockholder has the
requisite capacity and legal right to sell, transfer and deliver hereunder
the Shares proposed to be sold hereunder. This Agreement has been executed
and delivered by each of the Selling Stockholders. This Agreement,
assuming due authorization, execution and delivery by the Underwriters
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constitutes the legal, valid, and binding obligations of each Principal
Stockholder enforceable against each Principal Stockholder in accordance
with its terms, subject to the effect of general principles of equity
(including standards of materiality, good faith, fair dealing and
reasonableness) whether applied by a court of law or equity and except as
rights to indemnity and contribution hereunder or thereunder may be limited
by applicable law, statutory duties or public policy;
(xv) The execution and delivery of this Agreement, the
performance by each Principal Stockholder of its obligations hereunder will
not conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under, or result in the creation
or imposition of any liens, charges, claims, encumbrances, pledges,
security interests, defects or other like restrictions or equities of any
kind whatsoever upon, any right, property or (tangible or intangible) of
each of the Principal Stockholders pursuant to the terms of (A) any
material lease, permit, license, contract, indenture, mortgage, deed of
trust, voting trust agreements, stockholders agreement, note, loan or
credit agreement (including any related to indebtedness) or any other
agreement or instrument to which any Principal Stockholder is a party or by
which he or it is or may be bound or to which any of his or its respective
properties or assets (tangible or intangible) is or may be subject, or (B)
any statute, judgment, decree, order, rule or regulation, known to such
counsel, applicable to any Principal Stockholder or any of his or its
respective activities or properties adopted or issued by any arbitrator,
court, regulatory body or administrative agency or other governmental
agency or body (including those having jurisdiction over environmental or
similar matters), having jurisdiction over any Principal Stockholder or any
of his or its respective activities or properties, in each case except
where such breach, violation or default would not (i) affect the
enforceability of this Agreement, or (ii) affect the Offering or the sale
of the Common Stock contemplated hereby. To such counsel's knowledge, no
consent, approval, authorization or order of, or filing with, any
governmental agency or body or any court is required for the consummation
by any Principal Stockholder of the transactions contemplated herein,
except such as may be required under the state securities or "Blue Sky"
laws of any jurisdiction or as may be required by the by-laws and rules of
the NASD in connection with the purchase and distribution of the Shares by
the Underwriters and except such other approvals as have been obtained and
remain in full force and effect; and
(xvi) To such counsel's knowledge, each Selling Stockholder
has title to the Shares proposed to be sold by such Selling Stockholder
hereunder free of any adverse claims and upon delivery of and payment for
such Shares hereunder, assuming that each Underwriter does not have any
notice of an adverse claim, such Underwriter will be a protected purchaser
(as defined in Section 8-303 of the Uniform Commercial Code as in effect in
the State of Delaware).
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In addition, such opinion shall contain statements substantially
to the following effect:
In the course of the preparation by the Company and its counsel of
the Registration Statement and the Prospectus, such counsel attended
conferences with certain of the officers of, and the independent public
accountants for, the Company, at which the Registration Statement and the
Prospectus were discussed (some of which were attended by representatives of
the Underwriters). Between the date of effectiveness of the Registration
Statement and the Closing Date, such counsel attended (if applicable)
additional conferences with certain of the officers of, and the independent
public accountants for, the Company, at which the contents of the
Registration Statement and the Prospectus were discussed. Given the
limitations inherent in the independent verification of factual matters and
the character of determinations involved in the registration process, such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (other than as set forth in the
first sentence of paragraph (v) and as set forth in paragraph (viii) above).
Subject to the foregoing and on the basis of the information such counsel
gained in the performance of the services referred to above, including
information obtained from officers and other representatives of the Company,
no facts have come to such counsel's attention that cause such counsel to
believe (except that such counsel need not express any opinion or belief
with respect to the financial statements, schedule and the notes thereto and
other financial and statistical data included therein) that (y) the
Registration Statement, at the time it was declared effective by the
Commission, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (z) the Prospectus, as of its date or
the Closing Date, contained or contains an untrue statement of a material
fact or omitted or omits to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
provided such counsel need not express any belief as to the contents of the
eighth paragraph under the heading "UNDERWRITING" in the Prospectus.
In rendering such opinions, such counsel may rely as to matters of
fact, to the extent they deem proper, on the representations and warranties
of the Company and the Principal Stockholders contained in this Agreement and
on certificates and written statements of the Company or responsible officers
of the Company and certificates or other written statements
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of officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be
delivered to Underwriters' Counsel if requested.
The Underwriters are entitled to rely on the opinion of such firm,
filed as an exhibit to the Registration Statement, as to the matters
discussed in the Prospectus under the heading "FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus.
References to the Prospectus and Registration Statement in this
Section 8(d) shall include any amendment or supplement thereto at the date of
such opinion.
(e) The Underwriters shall have received a certificate, dated the
Closing Date and in form and substance satisfactory to the Underwriters, of
the Company signed by each of the Chief Executive Officer and Chief Financial
Officer of the Company to the effect that each of such officers has carefully
examined the Registration Statement, the Prospectus and this Agreement and,
to his best knowledge, that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing
Date, and the Company has complied in all material respects with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best of such officers'
knowledge, are contemplated or threatened by the Commission; and
(iii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, (A)
there has been no material adverse change, or development involving a
prospective material adverse change (including a change in management or
control of the Company), in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company and
the Subsidiaries, on a consolidated basis, except in each case as described
in or contemplated by the Prospectus; (B) neither the Company nor any of
the Subsidiaries has entered into any transactions not in the ordinary
course of business; (C) neither the Company nor any of the Subsidiaries has
incurred any material liabilities or obligations, direct or contingent,
other than as disclosed in the Registration Statement and the Prospectus;
(D) neither the Company nor any of the Subsidiaries has sustained a loss
material to the Company and the Subsidiaries, on a consolidated basis, by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act, whether or not such loss shall have been
insured, or from any labor dispute or from any
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legal or governmental proceeding; (E) no action, suit or proceeding, at
law or in equity, has been filed or, to the knowledge of such officer, is
threatened against the Company or any of the Subsidiaries or affecting
any of their respective properties or businesses before or by any court
or federal, state or foreign commission, board or other administrative
agency that (1) alleges that the conduct of such business as currently
conducted or as proposed to be conducted infringes on any trademarks,
service marks, copyrights, service names, trade names, patents, patent
applications or trade secrets currently held by any third party and (2)
has had as of the date of such certificate or, if pending and if decided
unfavorably, is likely to have a Material Adverse Effect; and (F) there
has not occurred any other event required to be set forth in the
Prospectus that has not been so set forth.
Except as otherwise provided in clause (iii)(A) above, references to
the Prospectus and Registration Statement in this Section 8(f) shall include
any amendment or supplement thereto at the date of such opinion.
(f) The Underwriters shall have received a certificate, dated the
Closing Date, of the Chairman and the Vice President and General Counsel of
Safeguard to the effect that such officers have carefully examined the
Registration Statement, the Prospectus and this Agreement and that the
representations and warranties of Safeguard in this Agreement are true and
correct on and as of the Closing Date, and that Safeguard has complied with
all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Date.
(g) The Underwriters shall have received a certificate, dated the
Closing Date, from each Selling Stockholder to the effect that such Selling
Stockholder has carefully examined the Registration Statement, the Prospectus
and this Agreement and that the representations and warranties of the Selling
Stockholder in this Agreement are true and correct on and as of the Closing
Date, and that the Selling Stockholder has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior
to the Closing Date.
(h) The Underwriters shall have received from Deloitte & Touche
letters dated, respectively, the date hereof and the Closing Date, in form
and substance satisfactory to the Underwriters and Underwriters' Counsel,
with respect to matters set forth below:
(i) confirming that they are and were independent public
accountants with respect to the Company within the meaning of the Act and
the Rules and Regulations;
(ii) stating that it is their opinion that the audited
financial statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the Act
and the Rules and Regulations;
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(iii) stating that, on the basis of certain procedures which
included a reading of the latest available unaudited interim
consolidated financial statements of the Company (with an indication
of the date of the latest available unaudited interim financial
statements), a reading of the latest available minutes of meetings and
actions of the stockholders and board of directors and the various
committees of the board of directors of the Company, inquiries of
officers and other employees of the Company responsible for financial
and accounting matters and other specified procedures and inquiries,
nothing came to their attention that caused them to believe that (A)
the unaudited consolidated financial statements, if any, and schedules
of the Company included in the Registration Statement and the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited consolidated financial statements
of the Company included in the Registration Statement and the
Prospectus, (B) at a specified date not more than five days prior to
the date of such letter, there was any change in the capital stock or
long-term debt of the Company, or any decrease in the stockholders'
equity, or net current assets of the Company, in each case, as
compared with amounts shown in the December 31, 1996 consolidated
balance sheet included in the Registration Statement and the
Prospectus, except for changes set forth in such letter, and (C)
during the period from December 31, 1996 to such specified date, there
was any decrease in consolidated revenues, income before income taxes,
or net income, or any decrease in net income per common share of the
Company, in each case as compared with the corresponding period
beginning January 1, 1996, except for changes set forth in such
letter;
(iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company with the results
obtained from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the
letter and found them to be in agreement; and
(v) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriters may reasonably
request.
In the event that either of the letters referred to above set forth
any such changes, decreases or increases, it shall be a further condition of the
obligations of the Underwriters that
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(A) such letter shall be accompanied by a written explanation of the Company
as to the significance thereof, unless the Underwriters deem such explanation
unnecessary, and (B) such changes, decreases or increases do not, in the sole
judgment of the Underwriters, make it impractical or inadvisable to proceed
with the purchase and delivery of the Shares as contemplated by the
registration statement originally filed with respect to the Shares, as
amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
Section 8(h) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(i) The Associated Person Lock-Ups with respect to each person listed
on Schedule A annexed hereto and the Musser Lock-Up shall be in full force and
effect.
(j) The outstanding shares of Common Stock and the shares of Common
Stock to be issued by the Company as contemplated by this Agreement shall have
been approved for quotation on the Nasdaq National Market (upon notice of
issuance in the case of the latter shares).
(k) No order suspending the sale of the Shares in any jurisdiction
designated by the Underwriters pursuant to Section 6(a)(iv) hereof shall be in
effect on the Closing Date and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Underwriters, shall be
contemplated.
(l) On or prior to the date that Rights certificates are first mailed
to Safeguard Shareholders and on the Closing Date, dated the respective dates
thereof and in form and substance satisfactory to Underwriters' counsel, the
Company shall furnish to the Underwriters such information, certificates and
documents as either of the Underwriters may reasonably request.
If any condition of the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date is not so fulfilled, the Underwriters
may terminate this Agreement or, if the Underwriters so elect, they may waive
any such conditions that have not been fulfilled or extend the time for their
fulfillment. In the event the Underwriters so elect to terminate this
Agreement, all Rights and the Other Purchasers Standby Purchase Agreements shall
become immediately null and void and the Company shall cause the Escrow Agent
under the Rights Agent Agreement to promptly return to the subscribers any
payments received by the Escrow Agent in respect of the exercise price relating
thereto. All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and
Underwriters' Counsel. The Company shall furnish to the Underwriters such
conformed copies of such
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opinions, certificates, letters and documents in such quantities as the
Underwriters and Underwriters' Counsel shall reasonably request.
The obligations of the Underwriters to purchase and pay for any Option
Shares after having exercised an option set forth in Section 3(b) hereof shall
be subject, in its discretion, to each of the foregoing conditions of this
Section 8 to purchase the Excess Unsubscribed Shares, with all references to the
Excess Unsubscribed Shares and the Closing Date being deemed to refer to such
Option Shares and the related Option Closing Date, respectively.
9. Indemnification.
(a) The Company and each Principal Stockholder, jointly and
severally, agree to indemnify and hold harmless each of the Underwriters and
each person, if any, who is a Controlling Person with respect to either of the
Underwriters against any and all losses, claims, damages, expenses and
liabilities, joint or several (and actions in respect thereof), whatsoever
(including any and all reasonable expenses incurred in investigating, preparing
or defending against any litigation, commenced or threatened, or any claim
whatsoever), as such are incurred, (i) to which the Underwriters or such
Controlling Person may become subject under the Act, the Exchange Act or any
other statute or at common law or otherwise or under the laws of foreign
countries, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus (as from time to time amended and
supplemented) or (B) in any application or other document or written
communication (in this Section 9 collectively called "Application") executed by
the Company or the Principal Stockholders or based upon written information
furnished by the Company or the Principal Stockholders in any jurisdiction in
order to qualify the Common Stock under the securities laws thereof or filed
with the Commission, any state securities commission or agency, the Nasdaq
National Market or any other securities exchange, or the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the circumstances
under which they were made, unless such statement or omission was made in
reliance upon, and in strict conformity with, the Provided Information or (ii)
to which the Underwriters or such Controlling Person may become liable to any
party which relate to, or arise out of, the Underwriters' or such Controlling
Person's consummation of the transactions contemplated hereby or the
Underwriters' or such Controlling Person's role in connection herewith
(including without limitation as a result of any breach of any representation or
warranty made by the Company or the Principal Stockholders); provided, however,
that neither the Company nor the Principal Stockholders shall be responsible for
any losses, claims, damages, expenses or liabilities that are finally judicially
determined to have resulted primarily from the gross negligence or intentional
or reckless misconduct of the Underwriters or such Controlling Person. The
indemnity agreement contained in this subsection (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of the Underwriters and
such Controlling Person with respect to a person asserting any such losses,
claims, damages, liabilities or expenses who
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purchased the Shares if at or prior to the written confirmation of the sale
of such Shares a copy of the Prospectus (or the Prospectus as amended or
supplemented) was not sent or delivered to such person and the untrue
statement contained in, or omission of a material fact from, such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented). The indemnity agreements in this subsection (a) shall be in
addition to any liability that the Company or the Principal Stockholders may
have at common law or otherwise.
(b) The Underwriters agree to indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement, the Principal Stockholders and each other Controlling
Person, if any, who controls the Company or the Principal Stockholders, to the
same extent as the foregoing indemnity from the Company and the Principal
Stockholders to the Underwriters but only with respect to statements made in, or
omissions from, any Preliminary Prospectus, the Registration Statement or
Prospectus or any amendment thereof or supplement thereto or in any Application
made in reliance upon, and in strict conformity with, the Provided Information.
(c) Promptly after receipt by any indemnified party or parties under
this Section 9 of notice of the commencement of any action, suit or proceeding,
such indemnified party shall, if a claim in respect thereof is to be made
against one or more indemnifying parties under this Section 9, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party or parties shall not
relieve it from any liability that it may have under this Section 9 except to
the extent that it has been prejudiced in any material respect by such failure
or from any liability that it may have otherwise). In case any such action is
brought against any indemnified party or parties, and it notifies the
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties will be entitled to participate therein, and to the extent it
may elect, by written notice delivered to the indemnified party or parties
promptly after receiving the aforesaid notice from such indemnified party or
parties, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party or parties. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying party in
connection with the defense of such action, (ii) the indemnifying party shall
not have employed counsel reasonably satisfactory to such indemnified party or
parties to have charge of the defense of such action within a reasonable time
after notice to the indemnifying party or parties of commencement of the action,
or (iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them that are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of the indemnified party or parties), in any of which
events such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any
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local counsel) separate from their own counsel for all indemnified parties
in connection with any one action or separate but similar or related actions
in the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 9 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 9, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 9 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
action in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Shares or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (A) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where either the
Company and/or the Principal Stockholders are the contributing parties and the
Underwriters are the indemnified parties, the relative benefits received by the
Company and/or the Principal Stockholders, on the one hand (treated collectively
as one person for this purpose), and the Underwriters, on the other, shall be
deemed to be in the same proportion as the total proceeds from the offering of
the Shares and the shares of Common Stock sold upon exercise of the Rights (net
of underwriting discounts and other commissions paid to the Underwriters but
before deducting the other expenses incurred by the Company and the Principal
Stockholders in connection with the sale of the Shares) bear to the total
underwriting discounts and other commissions received by the Underwriters
hereunder, in each case as set forth in the table on the cover page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact related to information
supplied by the Company and the Principal Stockholders (treated collectively, as
one person for this purpose) or by the Underwriters, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to above in this Section 9(d) shall be
deemed to include any legal or other expense reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this
-46-
<PAGE>
Section 9(d) the Underwriters shall not be required to contribute any amount
in excess of the underwriting discount and other commissions applicable to
the Shares purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 9, each person,
if any, who controls the Company or any Principal Stockholder within the
meaning of the Act, each officer of the Company who has signed the
Registration Statement, and each director of the Company shall have the same
rights to contribution as the Company and the Principal Stockholders, subject
in each case to this Section 9(d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution
may be made against another party or parties under this Section 9(d), notify
such party or parties from whom contribution may be sought, but the omission
so to notify such party or parties shall not relieve the party or parties
from whom contribution may be sought from any obligation it or they may have
hereunder or otherwise than under this Section 9(d), but only to the extent
that such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
10. Representations and Agreements to Survive Delivery.
All representations, warranties, agreements and covenants contained
in this Agreement or contained in certificates of each of the officers of the
Company or of each Principal Stockholder submitted pursuant hereto, shall be
deemed to be representations, warranties, agreements and covenants at the
Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties, agreements and covenants of the Underwriters,
the Company and each Principal Stockholder, and the indemnity agreements
contained in Section 9 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the
Underwriters, the Company and each Principal Stockholder, or any Controlling
Person, and shall survive termination of this Agreement or the issuance and
delivery of the Shares to the Underwriters, provided that to the extent any
such representations, warranties, agreements or covenants are expressly
waived in writing by the Underwriters, the survival of the same shall be as
set forth in such waiver, or, if not so set forth, as provided in this
Section 10.
11. Effective Date.
This Agreement shall become effective at 9:00 a.m., New York time, on
the next full business day following the date hereof or upon the commencement of
the Rights Offering, whichever is earlier; provided, however, that the
provisions of Sections 6, 7, 9, 10 and 12 of this Agreement shall at all times
be effective.
-47-
<PAGE>
12. Termination.
(a) Subject to subsection (c) of this Section 12, the Underwriters
shall have the right to terminate this Agreement (i) if any calamitous domestic
or international event or act or occurrence has disrupted the general securities
market in the United States; (ii) if trading in the Common Stock (on a
when-issued basis) shall have been suspended by the Commission or the Nasdaq
National Market; (iii) if trading on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market or in the over-the-counter market
shall have been suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been required
on the over-the-counter market by the NASD or by order of the Commission or any
other government authority having jurisdiction; (iv) if the United States shall
have become involved in a war or major hostilities which, in the Underwriters'
opinion, affects the general securities market in the United States; (v) if a
banking moratorium has been declared by any Maryland, New York, Pennsylvania,
Virginia or federal authority; (vi) if a moratorium in foreign exchange trading
(with respect to a foreign exchange on which the Company's securities are
traded) has been declared; (vii) if the Company shall have sustained a loss
material to the Company by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act, whether or not such loss shall have
been insured, or from any labor dispute or any legal or governmental proceeding;
(viii) if, in the reasonable judgment of the Underwriters, there shall have been
such material adverse change, or any development involving a prospective
material adverse change in the financial condition, net worth or results of
operations of the Company since December 31, 1996 or in the business prospects
or conditions of the Company since the date of this Prospectus, or that
materially and adversely impacts this Agreement; or (ix) on any date commencing
on the date hereof and ending on the Closing Date, if there shall be such
material adverse market conditions (whether occurring suddenly or gradually
between the date hereof and the Closing Date) affecting the markets generally as
in the Underwriters' reasonable judgment would make it inadvisable to proceed
with the offering, sale or delivery of the Shares.
(b) If the Underwriters elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 12, they
shall so notify the Company on the same day as such election is made by
telephone or telegram, confirmed by letter.
(c) Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including pursuant to Section 13 hereof), and whether or not this Agreement is
otherwise carried out, the provisions of Section 7 and Section 9 shall not be in
any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
-48-
<PAGE>
13. Default by the Company or the Selling Stockholders.
If the Company or the Selling Stockholders shall fail to sell and
deliver to the Underwriters the Excess Unsubscribed Shares to be sold and
delivered by the Company or the Selling Stockholders at the Closing Date or
the Option Shares to be sold and delivered by the Company at any Option
Closing Date under the terms of this Agreement, then the Underwriters may at
their option, by written notice to the Company and Selling Stockholders
either (a) terminate this Agreement without any liability on the part of any
non-defaulting party other than pursuant to Section 12 or (b) purchase the
Shares which the Company and the Selling Stockholders have agreed to sell and
deliver in accordance with the terms hereof. In the event of a failure of
the Selling Stockholders to sell and deliver as referred to in this Section,
either the Underwriters or the Company shall have the right to postpone the
Closing Date or the Option Closing Date, as the case may be, for a period not
exceeding seven business days in order that the necessary changes in the
Registration Statement, Prospectus and any other documents, as well as any
other arrangements, as may be effected. No action taken pursuant to this
Section shall relieve the Company or the Selling Stockholders from liability
in respect of such default.
14. Notices.
All notices and communications hereunder may be mailed or
transmitted by any standard form of telecommunication and, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to
have been duly given when delivered to a notice party hereto at the address
specified herein or at the address subsequently communicated in writing by
the notice parties. Notices to the Underwriters shall be directed to the
Underwriters in care of Wheat, First Securities, Inc., Riverfront Plaza, 901
East Byrd Street, Richmond, Virginia 23219, Attention: Wayne L. Hunter, and
Janney Montgomery Scott Inc., 1801 Market Street, Philadelphia, Pennsylvania
19103-1675, Attention: Michael J. Mufson, with a copy to Drinker Biddle &
Reath LLP, 1000 Westlakes Drive, Suite 300, Five Westlakes Berwyn,
Pennsylvania 19312, Attention: Walter J. Mostek, Jr., Esq. Notices to the
Company shall be directed to the address of the Company as set forth on the
facing page to the Registration Statement, with a copy to Morgan, Lewis and
Bockius LLP, 2000 One Logan Square, Philadelphia, Pennsylvania, Attention:
N. Jeffrey Klauder, Esq. Notices to Safeguard shall be directed to Safeguard
Scientifics, Inc., 800 Safeguard Building, 435 Devon Park Drive, Wayne,
Pennsylvania 19087, Attention: James A. Ounsworth, Esq., with a copy to
Morgan, Lewis and Bockius LLP, 2000 One Logan Square, Philadelphia,
Pennsylvania 19103, Attention: N. Jeffrey Klauder, Esq. In each case a party
may change its address for notice hereunder by a written communication to the
other parties.
-49-
<PAGE>
15. Parties.
This Agreement shall inure solely to the benefit of, and shall be
binding upon, the Underwriters, the Company and the Principal Stockholders
and the Controlling Persons, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed
to have any legal or equitable right, remedy or claim under or in respect of
or by virtue of this Agreement or any provisions herein contained. No
purchaser of Shares from the Underwriters shall be deemed to be a successor
by reason merely of such purchase.
16. Construction.
This Agreement shall be governed by the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles
thereof. The word "including" as used herein shall not be construed so as to
exclude any other thing not referred to or described.
17. Counterparts.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original and all of which taken together
shall be deemed to be one and the same instrument.
18. Entire Agreement.
This Agreement contains the entire agreement between the parties
hereto in connection with the subject matter hereof.
If the foregoing correctly sets forth the understanding among the
Underwriters, the Company and the Principal Stockholders, please so indicate in
the space provided below for that purpose, thereupon this letter shall
constitute a binding agreement among us.
Very truly yours,
OAO TECHNOLOGY SOLUTIONS, INC.
By:
_______________________________________
Name:
Title:
-50-
<PAGE>
SAFEGUARD SCIENTIFICS (DELAWARE), INC.
By:
______________________________________
Name:
Title:
______________________________________
Cecile D. Barker
_____________________________________
William R. Hill
_____________________________________
Hubert M. Reid
Confirmed and accepted
as of the date first
above written:
WHEAT, FIRST SECURITIES, INC. JANNEY MONTGOMERY SCOTT, INC.
By:____________________________ By:_______________________________
Name: Name:
Title: Title:
-51-
<PAGE>
Schedule A
Name
Safeguard Scientifics, Inc.
Safeguard Scientifics (Delaware), Inc.
Cecile D. Barker
Richard Clyne
Richard Eubanks
Edgar M. Fields
Frank Foster
William R. Hill
Harvard V. Hopkins
Samuel Horgan
Jerry L. Johnson
Gerry Lalonde
Thomas C. Lynch
Donald G. Miller
Warren V. Musser (and his assignees, if any)
Hubert M. Reid
Evelyn A. Scott
Howard Ulep
-52-
<PAGE>
Schedule B
List of Subsidiaries
OAO Systems, Inc.
OAO Canada, Ltd.
Canadian Network Resources, Ltd.
Canadian Resource Management, Ltd.
OAO/ICOR De Mexico, S.A. De CV
OAO Puerto Rico, Inc.
OAO/ICOR Do Brasil S-C Ltda
OAO/ICOR New Zealand Limited
OAO/ICOR Australia PTY Limited
OAO France
OAO Deutschland Gmbh
OAO (UK) Limited
OAO/ICOR (UK) Ltd.
OAO Commercial Systems Corp.
-53-
<PAGE>
Schedule C
Name of Underwriters % of Underwriter Shares
Wheat, First Securities, Inc. 55%
Janney Montgomery Scott Inc. 45%
-54-
<PAGE>
[LETTERHEAD]
October 6, 1997
OAO Technology Solutions, Inc.
7500 Greenway Center Drive
Greenbelt, MD 20770
Re: Registration Statement on Form S-1
(File No. 333-33961)
Ladies and Gentlemen:
We have acted as counsel to OAO Technology Solutions, Inc., a
Delaware corporation (the "Company"), in connection with the preparation of
the subject registration statement on Form S-1 (the "Registration Statement")
filed with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), to register the public
offering of up to 7,360,000 shares of common stock, par value $.01 per share,
of the Company (the "Common Stock"), which includes (i) 640,000 shares
purchasable by the underwriters from the Selling Stockholders, solely for the
purpose of covering overallotments, (ii) 6,400,000 shares issuable or
transferable upon the exercise of rights (the "Company Rights") to purchase
the Common Stock of the Company granted by the Company and certain selling
stockholders to the shareholders of Safeguard Scientifics, Inc. and (iii)
320,000 shares purchasable by certain persons selected by the Company from
the Selling Stockholders (collectively, the "Offering"). In connection
herewith, we have examined such records, documents, statutes and decisions as
we have deemed relevant.
In our opinion, (i) the shares of Common Stock to be sold by the
Company, when issued, sold and delivered as contemplated in the Registration
Statement, will be legally issued, fully paid and nonassessable shares of the
Common Stock of the Company, (ii) the shares of Common Stock to be sold by
the Selling Stockholders as contemplated in the Registration Statement are
legally issued, fully paid and nonassessable shares of the Common Stock of
the Company and (iii) the Rights, when issued and distributed as contemplated
in the Registration Statement, will be legally issued and valid and binding
obligations of the Company having the rights summarized in the Registration
Statement.
<PAGE>
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to all references to our firm in the Registration
Statement. In giving such consent, we do not hereby admit that we are acting
within the category of person whose consent is required under Section 7 of
the Act and rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius
------------------------
<PAGE>
Exhibit 8.1
October 6, 1997
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Re: Offering of Rights to Purchase Shares of Common Stock of
OAO Technology Solutions, Inc.
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
aspects of the grant by OAO Technology Solutions, Inc. (the "Company") of
rights (the "Rights") to purchase shares of the Company's Common Stock (the
"Offering"), all as described in the Registration Statement on Form S-1 (File
No. 333-33961), as amended, filed with the Securities and Exchange Commission
on the date hereof (the "Registration Statement"). This opinion also
confirms the opinion set forth in "Federal Income Tax Consequences" in the
Registration Statement. This opinion is based upon our review of the
Registration Statement and our assumption that the Offering will take place
in accordance with the description included in the Registration Statement.
Opinion
Based on the foregoing and on the Internal Revenue Code of 1986, as
amended (the "Code"), the regulations promulgated thereunder, and judicial
and administrative interpretations thereof, all as in effect on the date of
this letter, it is our opinion that the statements of law and conclusions of
law included in the Registration Statement under the heading "The
Offering--Federal Income Tax Consequences" are, in all material respects,
true, correct and complete. No opinion is expressed regarding any
statements, assumptions or opinions regarding factual matters (including,
without limitation, the value of the Rights) contained in the Registration
Statement.
Should any of the facts, assumptions or understandings referred to
above prove incorrect, please let us know so that we may consider the effect,
if any, on our opinion. No
<PAGE>
assurances can be given that any of the foregoing authorities will not be
modified, revoked, supplemented, revised, reversed or overruled or that any
such modification, revocation, supplementation, revision, reversal or
overruling will not adversely affect the opinion set forth above.
We understand that this opinion is to be used in connection with the
registration of the Rights and the Company's Common Stock pursuant to the
Securities Act of 1933, as amended. We consent to the filing of this opinion
in connection with and as a part of the Registration Statement on Form S-1
and amendments thereto. We also hereby consent to the reference to our firm
under the caption "Legal Matters" in the Registration Statement. In giving
such consents, however, we do not thereby admit that we are acting within the
category of persons whose consent is required under Section 7 of the Act and
the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius
<PAGE>
BASIC ORDER AGREEMENT
between
DIGITAL EQUIPMENT CORPORATION
("Buyer")
and
OAO CANADA LIMITED / OAO INTERNATIONAL CORPORATION
("Seller")
for
[xxxxxx xxxxxx] Enterprise Services
BOA Number: 23839
Contract Date: April 1, 1997
Contract Expiration Date: March 31, 2000
[Confidential Treatment requested for redacted portions of document. The
entire agreement has been filed separately with the Securities and Exchange
Commission.]
<PAGE>
TABLE OF CONTENTS
Section I Scope of the Agreement
Section II Purchase Orders
Section III Purchase Period
Section IV Pricing
Section V Delivery
Section VI Payment
Section VII Warranty
Section VIII Confidential Information and Advertising
Section IX Indemnification
Section X Insurance
Section XI Intellectual Property Interests and Indemnity
Section XII Independent Contractor
Section XIII No Implied License
Section XIV Termination for Cause
Section XV Termination for Convenience
Section XVI Force Majeure
Section XVII Set-off
Section XVIII Notices
Section XIX Flow Down Clauses
Section XX Survival
Section XXI Compliance with Laws
Section XXII General
2
<PAGE>
Exhibit A Statement of Work/Services Provided by Seller
Exhibit B Flow Down Clauses
3
<PAGE>
Section I - Scope of Agreement
A. This Basic Order Agreement Is made by DIGITAL EQUIPMENT
CORPORATION ("Buyer") and OAO CANADA LIMITED and OAO INTERNATIONAL
CORPORATION ("Seller"). Buyer has entered into an Agreement with
[xxxxxx] for the provision of Services to [xxxxxx] and its affiliates
("End Users") known as the [xxxxx] Enterprise Agreement ("[xx]
Agreement"). The terms and conditions stated in this Agreement
exclusively govern the anticipated purchase of services by Buyer from
Seller, for the purpose of having Seller furnish services to Buyer or
End Users, in the event Seller is so requested by Buyer. The services
to be provided by Seller shall be those Services known as described in
the Statement of Work (SOW) attached hereto as Exhibit A. Exhibit A
may be supplemented from time to time by Statements of Work attached
to Purchase Orders for Seller's provision of the services at specific
End Users' sites. The term "Services" as used herein shall include the
services described in Exhibit A as well as the services described in
any supplemental Statements of Work attached to Purchase Orders
hereunder.
The parties hereto understand that the provision of Services may
involve the supply of goods necessary to render Services under this
Agreement, and therefore agree that, except as expressly stated
otherwise, the term "Services" shall be understood to include the
supply of any such service parts. It is further understood that the
cost of any such service parts to the Buyer shall be contained in the
fee charged by Seller for the Services provided hereunder.
THIS AGREEMENT IS NOT A REQUIREMENTS CONTRACT AND NEITHER OBLIGATES
THE BUYER TO PURCHASE NOR THE SELLER TO PROVIDE ANY SERVICES BUT ONLY
ESTABLISHES THE TERMS AND CONDITIONS FOR SUCH PURCHASES IF THEY OCCUR.
B. If any term of this Agreement conflicts with any term relating to the
purchases of Services contained in any issued purchase order, this
Agreement shall take precedence.
Section II - Purchase Orders
A. Buyer will authorize the provision of Services by releasing
telegraphic or telephonic orders or its Purchase Order Form ("Purchase
Order"). Buyer shall use reasonable efforts to send a confirming
purchase order ten (IO) days after issuing such telegraphic or
telephonic orders. Each purchase order shall reference this
Agreement by number and shall include any supplemental Statement
of Work applicable to the PO.
[Confidential Treatment requested for redacted portions of document]
4
<PAGE>
B. Seller shall sign and return the acknowledgment copy of each
Purchase Order within thirty (30) days after receipt. If Seller
fails to return such copy, Buyer will conclusively presume that Seller
accepts any Purchase Order which conforms to this Agreement.
Acceptance by Seller is limited to Buyer's offer as contained in this
Agreement and the Purchase Order as accepted by the Seller.
C. In the event the first month of coverage of Service is less than a
full month, the charge for that first month shall be calculated on a
pro-rata basis at the rate of one thirtieth (1/30) of the basic
monthly charge for each day of coverage.
Section III - Purchase Period
This Agreement shall commence on April 1, 1997 and shall end upon
completion of all Services covered by Purchase Orders issued and
accepted hereunder. This Agreement shall expire on March 31, 2000.
Notwithstanding any termination of this Agreement, and unless
otherwise agreed to in writing, Seller's obligations shall continue
with respect to any Purchase Orders entered into with Buyer for the
term of those Purchase Orders.
Section IV - Pricing
A. The Seller pricing for Services shall be set forth in the Purchase
Order or related Statements of Work. Prices shall remain fixed for
the period identified therein.
B. Seller expressly acknowledges and agrees that the prices and any
discounts established are lawful.
C. Prices include all taxes except sales, use and other such taxes
imposed upon the sale of Services. Any such sales, use or like
taxes required to be paid by the Buyer shall be specifically listed
in the appropriate invoices. If any purchase by Buyer is exempt from
such taxes, Buyer shall so indicate in their respective purchase order
and advise Seller of the respective tax exemption number.
Section V - Delivery
Seller shall perform all Services in time period as specified in the
Purchase Order or related Statements of Work. TIME AND RATE OF
DELIVERY OF SERVICES ARE OF THE ESSENCE OF ALL PURCHASES MADE UNDER
THIS AGREEMENT.
5
<PAGE>
Section VI - Payment
Buyer shall pay Seller for performance of all Services on a monthly
basis as set forth in each Purchase Order and payment shall be made
[xxxxxx xxxxx xxxx] after receipt of Seller's correct and conforming
invoice.
Section VII - Warranty
A. For a period of [xxxxx xx xxxx] from the date of the provision of any
Services, Seller hereby warrants that:
1. all Services rendered hereunder shall conform to the service
description stated in the Statements of Work and shall otherwise
be performed in a good, safe, workmanlike manner, and in
accordance with applicable manufacturers practices and procedures
at the time such Services are performed; and
2. all Services rendered hereunder shall be performed by persons who
are adequately trained and skilled such that they are capable of
rendering the Services in a good, safe, and workmanlike manner;
and
3. all such persons shall be fully equipped with the required tools,
systems, spare parts, documentation and diagnostic and test
equipment as is necessary to perform the Services unless
otherwise specified in a SOW; and
4. all service parts furnished by Seller through the provision of
Services shall be free from defects in material, workmanship and
design, and shall conform to the original manufacturer's
specifications in effect at the time of installation; and
5. all service parts furnished by Seller shall be free of all liens
and encumbrances; and
6. Seller has acquired and shall maintain in effect all licenses and
permits necessary for furnishing Services, and the provision of
Services by the Seller shall not violate any other contractual
obligations which Seller may have to any other party.
B. Seller hereby acknowledges that all of the above stated warranties run
to Buyer and to End Users.
[Confidential Treatment requested for redacted portions of document]
6
<PAGE>
Section VIII - Confidential Information and Advertising
A. Seller shall maintain as confidential and shall not disclose to any
person outside of its employ, or use for purposes other than
performance of its obligations pursuant to this Agreement, any
information which Seller learns by virtue of this Agreement, such as
specifications, technical information, business data, and other
confidential information. Upon termination of this Agreement, Seller
shall promptly return to Buyer all confidential information including
copies thereof Seller further agrees to maintain Buyer or End Users
information in confidence in accordance with the terms of the [xxxxx]
Enterprise Agreement.
B. Buyer shall maintain as confidential any Seller confidential
information that Buyer shall receive as a result of the work carried
out under this agreement. Upon termination of this Agreement, Buyer
shall promptly return to Seller all such confidential information
including copies thereof.
C. Without the other party's prior written consent neither party shall
in any manner advertise, or publish the existence or terms or any
transactions under this Agreement.
Section IX - Indemnification
Seller hereby agrees to release, defend, indemnify, and hold Buyer,
including its officers, directors, agents and employees, harmless from
and against any and all claims, losses, expenses (including reasonable
attorney's fees), demands, or judgments ("Claims") for personal
injury, damage to tangible personal property, or damage to real
property, which arise out of or are directly related to:
1. the acts, errors, omissions or negligence of Seller while on the
property of Buyer or End Users, regardless of whether the loss,
damage or injury resulting from same occurs after the Seller
has left such property; or
2. the presence of the equipment, tools, or goods used or supplied
by Seller in the performance of services under this Agreement on
the property of Buyer or End Users;
3. the negligent use by Seller of Buyer's equipment, tools or
facilities ("Equipment") whether or not any Claims are based
upon the condition of the Equipment or Buyer's alleged
negligence in permitting its use. Permission by Buyer to use
the Equipment shall be gratuitous.
[Confidential Treatment requested for redacted portions of document]
7
<PAGE>
4. any Claims brought by End Users arising out of Seller's
performance of its obligations under this Agreement.
Section X - Insurance
A. Seller agrees to carry at all times, and with companies acceptable to
Buyer, insurance of the kinds and in the amounts listed below:
1. Worker's Compensation - Statutory limits in each state or country
in which Seller is required to provide Worker's Compensation
coverage.
2. Employer's Liability - not less than $500,000 per employee.
3. Comprehensive General Liability - Including Contractual
Liability, Independent Contractor's Liability, and Personal
Injury/Property Damage Coverages in a combined single limit
of not less than $ 1,000,000.
4. Automobile Liability - For owned, non-owned, and hired vehicles
in a combined single limit of not less than $1,000,000.
5. Umbrella Liability - a combined single limit of not less than
$2,000,000.
B. Seller further agrees to furnish Buyer with Certificates of Insurance
evidencing the specified coverages and stating that:
1. the policies may not be changed or terminated without at least
ten (I 0) days' prior written notice to Buyer.
2. the policies contain waivers of the insurers subrogation rights
against Buyer.
Section XI - Intellectual Property Interests and Indemnity
Seller shall defend, at its expense, any claim against Buyer alleging
that the Services provided under this Agreement infringe any patent,
copyright, trademark, trade secret, mask work, or other intellectual
property right, and shall pay all costs and damages awarded, if Seller
is notified promptly in writing of such a claim. If a final
injunction against Buyer's use of the Services results from such a
claim (or, if Buyer reasonably believes such a claim is likely) Seller
shall, at its expense, and at Buyer requests, obtain for Buyer the
right to continue using the Services, or
8
<PAGE>
replace or modify the services so that they become noninfringing, but
functionally equivalent. Seller shall further indemnify, defend and
hold harmless from and against any and all damages, losses and
expenses incurred by Buyer as a result of claims brought against Buyer
by End Users or any other third party and arising out of Seller's
performance under this Agreement.
Section XII - Independent Contractor
Seller shall render all Services under this Agreement as an
independent contractor, not as an employee or agent of Buyer. Seller
shall not hold itself out as the agent or employee of Buyer in
connection with the performance of Services under this Agreement, and
Seller shall so instruct and supervise its employees, or agents to
insure that they comply with these provisions.
Section XIII - No Implied License
A. Both parties understand that Buyer owns various patents, copyrights,
trademarks, trade secrets, and other proprietary rights which may
cover, be contained in, or otherwise relate to a portion or ail of the
various computers or peripheral devices which Seller may service
pursuant to this Agreement.
B. The parties understand that neither the terms and conditions of this
Agreement nor the performance or acts of either party arising out of
this Agreement or related to Buyer's request for or use of the
services may be considered in any way as a grant of any license
whatsoever under any of Buyer's present or future patents, copyrights,
trademarks, trade secrets or other proprietary rights; nor is any such
license granted by implication, estoppel or otherwise.
C. The parties agree that both parties reserve all rights to bring suit
for infringement of its patents, copyrights, trademarks, trade
secrets, and other proprietary rights against all manufacturers,
sellers and users including Seller, which infringe their
respective proprietary rights, and that each party intends to enforce
those rights.
D. To the extent that any fiduciary or other similar duties are
established by this Agreement, it is understood and agreed that such
duties are not inconsistent with and will not prevent either party
from bringing said suits for infringement of its patents, copyrights,
trademarks, trade secrets, and other proprietary rights.
9
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Section XIV - Termination for Cause
A. The occurrence of any of the following constitutes a breach and
is cause for Buyer's termination of this Agreement and/or its
Purchase Orders:
1. Seller fails to perform Services in accordance with this
Agreement.
2. Seller fails to perform any material provision of this Agreement
or Buyer's conforming Purchase Order.
3. Seller assigns this Agreement, or any obligation or right under
it (the word "assign" to include, without limitation, a transfer
of a major interest in Seller) or merges with a third party,
not a parent or subsidiary company, without Buyer's prior
written consent, which Buyer shall not unreasonably withhold.
4. Seller becomes insolvent or makes an assignment for the benefit
of creditors, or a receiver or similar officer is appointed to
take charge of all or part of Seller's assets.
B. Seller must cure any of the above breaches and notify Buyer of such
cure within thirty (30) days from receipt of a written notice to cure
from Buyer. If Seller fails to so cure, Buyer may terminate this
Agreement and/or Purchase Orders under it by giving Seller
written notice. Buyer shall have no liability except for payment
of any balance due for conforming Services delivered before the end
of the cure. Buyer may, at its option, end Seller's ability to cure in
the event of Seller's material breach of any provision(s) of this
Agreement more than two (2) times in any twelve (12) month
period.
Section XV - Termination for Convenience
Buyer may terminate this Agreement or any Purchase Order under it for
convenience [xxxxx xxx xxx] after giving the Seller written notice unless
otherwise specified in a SOW. Buyer's [xxx] liability to Seller for such
termination shall be to pay Seller any [xxxxx xxxx xxx] for conforming
Service:
1. performed before receipt of Buyer's termination notice; and
2. ordered by Buyer and actually performed within [xxx xxx xxx]
after Seller's receipt of the termination notice.
[Confidential Treatment requested for redacted portions of document]
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Section XVI - Force Majeure
Neither party shall be liable for failure to perform any of its
obligations under this Agreement during any period in which such
performance is delayed by fire, flood, or other natural disaster, war,
embargo, riot, or the intervention of any government authority
provided that the party so delayed immediately notifies the other
party of such delay. If Seller's performance is delayed for these
reasons for a cumulative period of thirty (30) days, or more, from the
date of such notice, Buyer may terminate this Agreement, or any
Purchase Order issued under this Agreement by giving Seller written
notice. If Buyer terminates, its sole liability under this Agreement
will be to pay for conforming Services delivered by Seller before the
termination date.
Section XVII - Set-off
Buyer shall have the right at any time to set off any amounts owed by
Buyer to Seller pursuant to this Agreement, against any amounts owed
by Seller, or any of its affiliates, to Buyer.
Section XVIII - Notices
Any notice permitted or required to be given under this Agreement
shall be deemed given upon delivery, if delivered by hand, or upon
posting if sent by registered or certified mail, return receipt
requested, to a party at the address set forth below, or to such other
address as the respective party may designate by notice delivered
pursuant to this Section XIX. Any telegraphic notice shall be deemed
given upon receipt, provided that such notice is followed within three
(3) days by written notice given in accordance with this Section XIX.
If to Seller: G. Lalonde If to Buyer: R. Tovell
OAO Canada Limited Digital Equipment Corporation
Suite 520, 220 Laurier Ave W 715 Fifth Ave SW
Ottawa, Ontario K I P 5Z9 Calgary, Alberta T2P 2X6
With copies to: S. Schmidt With copies to: M. Smith
OAO Canada Limited Digital Equipment Corporation
Suite 520, 220 Laurier Ave W Suite 900, Two Penn Plaza
Ottawa, Ontario K I P 5Z9 New York, New York
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Section XIX - Flow Down Clauses
Seller agrees that in delivery of all services under this agreement
that it shall comply and be subject to with all contractual
obligations undertaken by Buyer in Agreements with End Users
("Flow-Down Clauses") which are attached hereto as Exhibit B. In the
event of a conflict between the terms and conditions of any FlowDown
Clause and any term of this Agreement, the term of the Flow-Down
Clause shall prevail.
Section XX - Survival
The following provisions of this Agreement, including any related
Exhibits, shall survive expiration or termination of this Agreement:
Warranty, Intellectual Property Interests Indemnity, Confidential
Information and Advertising, Indemnification, Insurance, Compliance
with Laws, General, Notices, and No Implied License.
Section XXI - Compliance with Laws
A. Seller shall use its best effort to insure that all Services performed
under this Agreement shall comply with all applicable United States
and foreign laws and regulations including, but not limited to,
emission and safety standards, OSHA, pricing and discounts, the
Fair Labor Standards Act of 1938 (29 USC 201-219), the
Contract Work Hours and Safety Standards Act (40 USC 327-332),
the Toxic Substance Control Act of 1976 (15 USC 2601), all laws
restraining the use of convict labor, and Workers' Compensation
Laws. Upon request, Seller agrees to certify compliance with any
applicable law or regulations. Seller's failure to comply with any
of the requirements of this Section XXI shall be considered a
material breach of this Agreement.
B. The following statutes and Executive Orders (E.O.'s) together with
regulations issued thereunder are made part of this Agreement if
applicable: E.O. 11246, Equal Employment Opportunity; E.O. 11625,
as amended, Minority Business Enterprises; E.O. 12138 Women-Owned
Business Concerns; Section 503 of the Rehabilitation Act of 1973 as
Amended, (20 USC 793); and Section 402 of the Vietnam Era
Veterans Readjustment Assistance Act of 1974, as Amended, (38 USC
2012).
C. Digital Equipment Corporation is a major defense contractor within the
meaning of ten (10) U.S.C.s.2397b and 2397c. Seller agrees not to
provide compensation to any person in the performance of this
Agreement in violation of this statute, and agrees to report directly
to the Secretary of Defense, the information required for employees,
agents or subcontractors of Seller.
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D. The provisions of the Clean Air Act (42 USC 7401 et seq.) and the
Clean Water Act (33 USC 1251 et seq.) are made a part of this
Agreement if applicable.
E. The provisions of any applicable state Right-to-Know laws and
regulations are made a part of this Agreement. A copy of the
applicable Material Safety Data Sheets, including updates, shall be
provided by Seller as required under such laws and regulations.
Section XXII - General
A. Only the authorized representatives of the parties may amend or waive
provisions of this Agreement. If either party fails to enforce any
term of this Agreement, failure to enforce on that occasion shall not
prevent enforcement on any other occasion, unless otherwise provided
herein.
B. All rights and remedies conferred by this Agreement, by any other
instrument, or by law are cumulative and may be exercised singularly
or concurrently. If any provision of this Agreement is held invalid
by any law or regulation of any government or by any court, such
invalidity shall not affect the enforceability of other provisions
herein. This Agreement and any Purchase Orders issued hereunder shall
be governed by and interpreted in accordance with the laws of the
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the
__________ day of __________, ______.
OAO CANADA LIMITED/ DIGITAL EQUIPMENT CORPORATION
OAO INTERNATIONAL CORPORATION
By:_____________________________ By:_____________________________
(Duly Authorized) (Duly Authorized)
G. Lalonde
_____________________________ _____________________________
(Typed Name) (Typed Name)
Senior Vice President
_____________________________ _____________________________
(Title) (Title)
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EXHIBIT A
STATEMENT OF WORK
SERVICES PROVIDED
Overview
Digital Equipment Corporation (Digital) has selected OAO Canada
Limited / OAO INTERNATIONAL CORPORATION (OAO/ICOR) as a partner in the
delivery of the [xxxxxxxxxxxxxxxxxxxxxx] contract with [xxxxxxx]. The
contract with [xxxxxxxx] is not only Digital's largest desktop outsourcing
engagement but is also crucial to Digital's long term success in the
desktop-outsourcing marketplace. The arrangement between Digital and
OAO/ICOR is intended to recognize, support and enhance Digital's identity
within [xxxxxxxx] and the outsourcing marketplace.
OAO/ICOR acts as an integral part of Digital's PE Worldwide Operations
organization in many domains of service delivery related to the PE
engagement. These domains include:
- Interim Support Services
- Technology Projects
- Technology Consulting
From time to time, and with the agreement of both parties, additional domains
of service delivery may be added to this statement of work.
Each of these domains of service delivery will have distinct approaches to
the services or work to be performed and the associated pricing methodology
for the work. This document will serve as the master Statement of Work for
each domain, and as such, will define the approach to each. For work to be
performed in any of these domains, Digital will issue a purchase order (PO)
with associated pricing, terms, and conditions relating to the specific work
package or project.
Each of these domains of service will also be subject to the agreements
Digital has with [xxxxxx], including the [xxxxxxxxxxxxxxxxxxxxxxxxxxx], the
PE Statement of Work, and all associated instruments.
Although the actual costs related to the Services provided pursuant to this
agreement are outlined and itemized in the various POs issued the total costs
for these Services is not currently expected to exceed [xxxxxxxxx].
Interim Support Services
In this section, "Customer" refers to Digital's customer, [xxxxxxxxxx], as
defined in the PE Agreement.
Description
The Interim Support Services (ISS) Phase is the period during which Digital
and OAO/ICOR will commence activities to support a non-[xxxxxxxxxxxxxxxx]
LAN environment in its "as-is state" while transitioning the
Customer/Site(s) to a full [xxxxxxxxxxxxxxxxxxxxx] environment. The ISS
Phase consists of two subphases: Conversion Plan Development and As-Is
Operations Support. During the ISS Phase, Digital will immediately start
the Phase 2 through 4 activities as defined in the PE Agreement required to
complete the transition of the Customer/Site(s) to the Phase 5 Services.
The ISS Phase ends with the transition of all End-Users at all
Customer/Site(s) covered by a single Conversion Plan to Phase 5 Operations
Support.
Services or Work to be performed
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OAO/ICOR will be Digital's service delivery an-n for ISS, including both
phases of ISS-1 Conversion Plan Development and As-Is Operations support.
As such, OAO/ICOR will be responsible for all aspects of service delivery
for ISS including but not limited to:
- preparing the Conversion Plan for converting the Customer/Site(s) to
As-Is Operations Support;
- identifying the current Customer Actual Costs associated with the
As-Is state, including staffing, processes, procedures, maintenance,
reports and any other activities performed by the Customer;
- assisting Digital to calculate the mark-up percentage of Customer's
Actual Costs that will be used to calculate the monthly fee to the
Customer;
- converting all service delivery responsibilities from the Customer to
OAO/ICOR;
- performing due diligence to verify the Customer Actual Costs; and
- performing all service delivery responsibilities associated with As-Is
Operations support as identified in the Conversion Plan until such
time as the Customer/Site(s) is fully converted to a full Project
Enterprise environment.
- Develop and seek approval from Digital on the components that will be
included in the calculation of OAO/ICORs margin as discussed below.
Pricing Methodology
The ISS fee will be priced on a [xxxxxxxxxxxxxxxxxxxxxx], and will be
subject to and determined by the method described in, Section 2.4 of
Exhibit 2; ISS Pricing of the [xxxxxxxxxxxxxxxx] Agreement (ISS EX2).
Digital will pay, directly or through [xxxxxx], OAO/ICOR, monthly in
advance, a portion of the monthly ISS fee as described in ISS EX2 for the
period that [xxxxx]p is obligated to pay Digital the monthly ISS fee.
The portion payable to OAO/ICOR will be the
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] as outlined in the
associated ISS Conversion Plan. Should [xxxxxx] delay payment to Digital,
such delay resulting from the delivery of ISS services, then Digital will
delay payment to OAO / ICOR accordingly. Should payments be delayed then
Digital and OAO/ICOR will make every effort to resolve the issue related to
the delay in payment.
Digital acknowledges that OAO/ICOR have a target to make a [xxxxxxxx]
through reducing their costs for delivering ISS services through all forms
of cost reduction or delivery efficiency initiatives, and through all
incremental ISS services. Digital will, in the event that OAO/ICOR is not
able to make a [xxxxxxx] under the ISS program, [xxx]to OAO/ICOR
[xxxxxxxxxxxxxxxxxxxxxxxx] up to a maximum of [xx] of the ISS base line
service amount provided the following:
- Should OAO/ICOR make more then their [xxxxxxxxxxxxxxxxxxxx] that they
will [xxxxxxxxxxxx] Digital
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx].
- Digital will have full access to audit and review all OAO/ICOR costs
and revenues related to ISS.
- Costs and expenses [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] ISS or
costs not pre approved by Digital will not be included in the
calculation of OAO/ICOR's [xxxxxxxxxxxxxxxxxxxxxxxx] ISS.
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Technology Projects
OAO/ICOR will carry out requested technology projects for Digital in the
domain of Change Management. The Change Management Process is comprised of
five component processes that have been designed to manage changes within the
Project Enterprise environment.
1. The Change Request Process;
2. The Work Order Process,
3. The Move/Add/Change (MAC) Process;
4. The Interim MAC Process; and
5. The Issue Resolution Process.
Technology Projects are conducted in the first 4 components in the Change
Management Process. OAO/ICOR will conduct projects as requested by Digital
in these areas. OAO/ICOR will also provide assistance as required in the 5th
component.
Description
The Change Request Process is designed to manage changes to the
[xxxxxxxxxxxxxxx] global environment as defined in the PE Statement of Work
and its associated Appendices. Such changes would apply to all present
and future [xxxxxxxxxxxxxxxx] Customer/Sites.
The Work Order Process is designed to manage changes to the Customer/Site
Agreement where specific variations of the [xxxxxxxxxxxxxxxx] environment
are specified to meet the business requirements and provide the associated
levels of service for individual sites.
The Move/Add/Change (AL4C) PROCESS organizes the effort associated with the
physical move of equipment (hardware or software), the addition of equipment
(hardware or software) to a location, and/or the modification of equipment's
configuration (hardware or software). In addition, this process tracks all
such activity for the purposes of asset management and billing. The MAC
Process takes effect once a site has completed the Transition phase and the
On-Going Operations phase has begun.
The Interim MAC Process is designed to maintain the accuracy of the data
collected during the Assessment phase's physical inventory until the
Customer/Site begins On-Going Operations. Like the MAC process, it
organizes the effort associated with the physical move of equipment
(hardware or software), the addition of equipment (hardware or software)
to a location, and/or the modification of a piece of equipment's
configuration (hardware or software).
THE ISSUE RESOLUTION PROCESS provides the means to manage differences of
opinion between Digital and the Customer through escalation to a level
sufficient to permit their definitive resolution.
Services or Work to be Performed
OAO/ICOR may carry out activities and projects in this area including but
not limited to the following:
- Evaluation of an approved request (a request being any of the Change
Management forms such as a Work Order or Change Request form).
Evaluation would include the analysis and drafting of the response to
the request as required under the terms and conditions defined within
the PE SOW. The response to a request will contain the impact of the
requested changes on various portions of the PE Agreement including
identifying and quantifying changes in services, service levels,
schedules, and/or price.
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- Delivery of approved/accepted requests through completion, adjust any
baseline documents as necessary, obtain approvals, and provide all
deliverables to Digital. Delivery will be conducted by professional
teams trained in the domains required to carry out the request within
the time frames and cost parameters outlined in the request and with
Quality that will delight the customer.
- Provide a team of people capable of responding to requests quickly and
efficiently. This team will have the flexibility to grow to support
the work anticipated under the scope of this section of Operational
work.
Pricing Methodology
Pricing will be [xxxxxxxxxxxxxxxxxxxxxxxxxx]a given approved request, or
[xxxxxxxxxxxxxxxxxx]. The pricing target will be to allow Digital to
[xxxxxxxxxxxxxxxxxx] on Digital's price to [xxxxxx]. Rates for individuals
in support of projects based on PE pricing will [xxxxxxxxxxx] PE rates which
currently are as follows:
Labor Category PE Rate OAO/ICOR Rate
Project Manager [xxxxx] [xxxx]
[xxxxx] Analyst [xxxxx] [xxxx]
[xxxx] Analyst [xxxxx] [xxxx]
[xxxxx] Analyst [xxxx] [xxxx]
Consultants and special [xxxxxxxxx [xxxxxxxxx
project labor xxxxxxxxxxxxxxxx xxxxxxxxxxxxxxx]
xxx]
Technology Consulting
Digital may provide additional service offerings to the Customer that are
not included in the Baseline Services of the PE SOW. Detailed listings of
some of these additional services can be found in Exhibit 2. 1; Pricing
Schedule of the PE SOW. Services are categorized as "Additional On-Going
Services," "One-Time Services," and "Hardware Products." [xxxxxxxxxxxxxxxx]
is a large and complex undertaking. As the work progresses from time to
time there will arise work which either:
- requires skill sets not currently available within PE Worldwide
Operations; or
- requires skill sets available within PE Worldwide Operations but from
people who do not have the time necessary to undertake the task.
- Description
OAO/ICOR will provide to Digital, as required, and from time to time,
additional resources to assist PE Worldwide Operations In overall technology
management and delivery of the services required pursuant to the PE
agreement and associated SOW.
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- Services or Work to be Performed
The work to be performed will be under the direction of the PE Worldwide
Operations Manager and will be subject to the agreements in place between
Digital and the Customer. OAO/ICOR will recruit and supply consultants
with the necessary skills, training and experience to satisfy the
requirements of the additional services being offered.
Pricing Methodology
Pricing will be a [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx] based on the
consultant's skills, training and experience. Pricing will be negotiated
on a case by case basis and shall be competitive with industry norms.
OAO/ICOR will ensure all invoices to Digital will delineate per them costs
and travel expenses and will report these items separately.
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EXHIBIT B
FLOW DOWN CLAUSES
[xxxxxxxxxxxxxxxxxx]
AGREEMENT
This [xxxxxxxxxxxxxxx]e Agreement (hereinafter "Agreement") is made and
entered into as of the 22nd day of December, 1995 (hereinafter "Effective
Date") by and between Digital Equipment Corporation, having a place of
business at Two Penn Plaza, 9th Floor, New York, NY 10 121 (hereinafter
"Digital") and
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
a national banking association organized under the laws of the United States
having its principal place of business at
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
WITNESSETH
WHEREAS, Digital and [xxx]have entered into the [xxxxxxxxxxxxxxxxxxxxxxxxx],
dated April 20, 1994 (the "pilot Agreement"( pursuant to which Digital has
provided, on a pilot basis, managed desktop computing/network utility
services; and
WHEREAS, the parties desire to replace the Pilot Agreement with
this Agreement for the purpose of expanding their relationship and entering
into a longer term agreement for the services; NOW, therefore, in
consideration of the mutual promises and covenants hereinafter contained, the
parties hereto hereby agree as follows:
1. DEFINITIONS
The following words shall have the following meanings when used in this
Agreement:
- - Additional On-Going Services - the Services which are over and above the
Baseline Services, as described in Exhibit 1, and as selected by an End-User
and/or Customer for the Additional On-Going Service Charge.
- - Additional One-Time Services - the Services which are over and above the
Baseline Services, as described in Exhibit 1, which are provided on a
one-time basis as selected by an End-User and/or Customer for the Additional
One-Time Service Charge. Such Additional One-Time Services may include
Services and Product components.
- - Amortized Charges - Charges for Equipment, Digital Provided Software and
Services for which payment has been spread over time and as identified in
the Schedule of Amortized Charges included in the Customer/Site Agreement.
- - Application Software - all Software which is not Operating System Software.
- - Baseline Services - the minimum Services to be provided to End-Users and/or
Customers under this Agreement, as described in Exhibit 1 and which are
provided for the Baseline Service Charge as defined in Exhibit 2.
- - Cabling - the cable specified in the Design Document for each Site and to be
provided by Digital including installation at the Site during Phase 4.
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- - Cabling Termination Equipment - the items of cabling equipment specified in
the Design Document for each Site and to be provided by Digital including
installation at the Site during Phase 4.
- - Citicorp, a U.S. bank holding company, which is the indirect parent of
[xxxxxxxxxxxxxxxxxx].
- - Contract Expiration Charges - those charges to be paid by
[xxxxxxxxxxxxxxxxxxxxxxxxxxx] under certain circumstances of contract
termination as described in Section 3 herein and as set forth in Exhibit 2.
- - Contract Termination Charges - those charges to be paid by [xxxxxxxxxxxxxx]
under certain circumstances of contract termination as described in
Section 3 herein and as set forth in Exhibit 2.
- - Customer - [xxxxxxxxxxxxxxxxxxxxxxxxxxx] and [xxxx] customers, which for
the purposes of this Agreement, shall be limited to [xxxxxxxxxxxx] and
directly or indirectly owned subsidiaries of [xxxxxxxxxxxxxxxxxxx]
customers shall be [xxxxxxxx] subsidiaries in the United States, including
[xxxxxxxxxxxxx] offices in the United States. [xxxxxxxx] customers shall be
its branches and its subsidiaries outside the United States.
- - Customer Assets - all items of computing and networking hardware including
Operating System Software owned by Customer at the time of issuance of a
PO for Customer's Site, and to be deployed in Digital's provision of the
Services hereunder.
- - Customer Provided Software - the Applications Software and Operating System
Software owned by or licensed to Customer.
- - Customer/Site Agreement - an agreement between the parties for delivery of
the Deliverables and Services for a specific Customer or at a specific Site
("Customer/Site"). The Customer/Site Agreement shall include the PO, the
Design Document, the Project Plan, the Service Level Agreement for the
Customer/Site, the Schedule of Amortized Charges and Equipment, Software
and any special terms and conditions agreed upon by the parties for
performance of this Agreement at that Customer/Site, and shall be deemed
to include the terms and conditions of this Agreement.
- - Deliverables - Equipment, Digital Provided Software, Cabling, Cabling
Termination Equipment and Document Deliverables to be provided by Digital
under this Agreement and as described in Exhibit I and Design Documents
developed for Sites in accordance with Exhibit 1.
- - Digital Provided Software - the Application Software and Operating System
Software that is owned by or licensed to Digital as defined in Appendix B
and which will be provided by Digital to Customer for its use.
- - Digital Provided Software Charge - shall be Digitat's charges for the
Digital Provided Software as set forth in Exhibit 2 section entitled
"Products".
- - Design Document - the document developed by Digital during Phase 3 at each
Site which describes the Deliverables to be provided at such Site.
- - Document Deliverables - those documents developed by Digital during the
term of this Agreement and identified in Appendix O.
- - End-User - an individual authorized by Customer and registered with the
Project Enterprise Help Desk, for whom, at a minimum, Baseline Services are
provided.
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- - End-User Desktop Equipment - all items of computing and networking hardware
registered with the Project Enterprise Help Desk to a specific End-User.
The term "End-User Desktop Equipment" also includes the Operating System
Software associated with that Equipment.
- - End-User Desktop Equipment Charge - the charge for Equipment which is not
Infrastructure Equipment and as set forth in Exhibit 2 in section entitled
"Products".
- - Equipment - all items of computing and networking hardware equipment,
including Third Party Equipment, but which is not Cabling or Cabling
Termination Equipment. Equipment includes Infrastructure Equipment and
End-User Desktop Equipment.
- - Equipment Option - shall be the options for payment of the Unpaid Amortized
Charges for Equipment upon the termination or expiration of this Agreement
or any Customer/Site Agreement hereunder, as described in Exhibit 2.
- - Implementation Service Charges - the charges for Services rendered during
Phases I through 4 and as set forth in Exhibit 2 in section entitled
"One-Time Services/Charges".
- - Implementation Services Option - shall be the termination options for
payment of the Unpaid Amortized Implementation Services Charges upon the
termination or expiration of this Agreement or any Customer/Site Agreement
hereunder, as described in Exhibit 2.
- - Infrastructure Equipment - all items of hardware, which is not Cabling,
Cabling Termination Equipment or End Users Desktop Equipment and which is
used by Digital in the delivery of the Services at a Site.
- - Infrastructure Equipment Charge - the charge for Equipment which is not
End-User Desktop Equipment and as set forth in Exhibit 2 section entitled
"Products".
- - Moves, Adds, Changes ("MACS") - A Move is defied as any physical relocation
of Equipment for Software within a Site or between or among Sites. An Add
is identified as any Equipment or Software asset added to the Project
Enterprise asset management database. A Change is defined as any
modification(s) to Equipment or Software assets.
- - Monthly Payment Charge - the monthly payment to be made by Customer for the
Deliverables and includes all Amortized Charges.
- - Normal Business Hours - This period is defined as Monday through Friday,
8:00AM - 5:00PM local time, except during scheduled local Customer holidays
and closings.
- - One-Time Charges - any payments for Deliverables which Customer agrees to
make on a one-time basis and which are not amortized over the term of the
Agreement.
- - Operating System Software - all Software which is necessary to the basic
operation of the Equipment. Operating System Software includes all versions
of, enhancements and upgrades to MS DOS, IBM DOS and MS Windows and such
other system software as may be agreed upon by the parties from time to
time.
- - Phase I Services - Engagement: During this phase, subsequent to CICI's
delivery to Digital of a Qualified Purchase Order for each Customer/Site
and based on the availability of required data/documentation, Digital will
estimate the scope of the Assessment effort and prepare an initial draft
Project Plan.
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- - Phase 2 Services - Assessment: During this phase, Digital will conduct
Customer/Site surveys and inventories to gather date/documentation
required to product Design Documents.
- - Phase 3 Services - Design: During this phase, based on analysis of
data/information collected during Phase 2, Digital will create the Design
Document for implementation of Project Enterprise Services at the
Customer/Site.
- - Phase 4 Services - Transition: Digital will implement the design at the
Customer/Site.
- - Phase 5 Services-On-Going Support: Digital will provide On-Going Support
Services at the Customer/Site.
- - Products - Equipment, Cabling, Cabling Termination Equipment and Digital
Provided Software.
- - Project Enterprise - the name given to the implementation of the Services
and delivery of the Deliverable under this Agreement.
- - Project Enterprise Standards - shall mean the standards contained in
Appendix B hereto.
- - Project Plan - developed by Digital during Phase 3 Services at each Site
and sets forth the timetable for implementation of Phase 4 Services and
Phase 5 Services as described in Exhibit 1. The Project Plan may be
amended, from time to time, by mutual agreement of the parties.
- - Purchase Order or "PO " - a document authorizing Digital to undertake the
Services for a Customer/Site. All POs will be governed by the terms and
conditions stated herein and any other terms mutually agreed upon by the
parties. No preprinted terms on any PO form shall apply.
- - Services - all of the services provided by Digital in the implementation
of Project Enterprise and as described in Exhibit 1.
- - Service Level Agreements - Contained in Appendix A and in individual
Customer/Site Agreements, these specify -- in measurable terms -- the
level of Services to be supplied, and establish the means by which the
quality of Services delivery can be ascertained.
- - Site - the location at which the Services will be implemented as
identified by a PO.
- - Software - means Customer Provided Software, Digital Provided Software
and or Third Party Software, as applicable.
- - Software License Option - shall be the termination options for payment of
the Unpaid Amortized software license fees upon the termination or
expiration of this Agreement or any Customer/Site Agreement hereunder, as
described in Exhibit 2.
- - Standard Termination Charges - those charges to be paid by
[xxxxxxxxxxxxxx] in certain events of termination or cancellation of this
Agreement or any Customer/Site Agreement hereunder as described in
Sections 2 and 3 herein and as set forth in Exhibit 2.
- - Statement of Work - shall mean Exhibit 1 including all appendices
thereto, which defines the Deliverables and Services which are to be
provided by Digital during the term of this Agreement.
- - SupportedSofiware - Software which will be supported by Digital under the
terms of this Agreement as described in the Statement of Work. Such
Software includes the Software products identified in Appendix B.1
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as well as all software products for which Digital offers support as a
standard service offering. A current list of Digital's supported
software is included as Appendix G. Appendix G shall be modified from
time to time as Digital modifies its standard service offering.
Supported Software shall also include such other Software as may be
included in a Customer/Site Agreement.
- - Term of Use - the continuous time period for which a Customer on behalf
of its End Users, agrees to amortize the charges for certain Equipment,
Software and Services.
- - Termination Payment Options - shall be the sum of the Equipment Option,
the Software License Option and Implementation Services Option as
described in Exhibit 2.
- - Third Party Equipment - any Equipment, Cabling and Cabling Termination
Equipment manufactured by a party other than Digital.
- - Third Party Software - Customer Provided Software or Digital Provided
Software licensed by a third party.
- - Unpaid Amortized Charges - the Amortized Charges remaining unpaid at the
time of termination, cancellation or expiration of this Agreement or any
Customer/Site Agreement hereunder and to be paid in accordance with the
options described in Exhibit 2.
- - Unsupported Software - Software which is used by Customer on the
Equipment, and which is not Supported Software. Digital's
responsibilities with respect to Unsupported Software are described in
the Statement of Work.
3. TERM AND TERMINATION
a) The term of this Agreement shall commence on the Effective Date
set forth above and shall continue for a period of three (3) year ("Base
Term") (unless sooner terminated pursuant to the termination provisions
herein) but shall be in effect for however long any Customer/Site
Agreements entered into hereunder continue to be in effect. During the
Base Tenn, the parties shall enter into Customer/Site Agreements for each
Customer/Site at which the Deliverables and Services are to be provided.
The term of each Customer/Site Agreement shall continue for a period of
three (3) years from initiation of delivery of Phase 5 Services at that
Customer/Site unless sooner terminated pursuant to the termination
provisions herein. Neither party may terminate this Agreement in its
entirety for convenience before one (1) year from the Effective Date.
4. TITLE TO DELIVERABLES/RISK OF LOSS
a) Customer shall remain the owner of all right, title and
interest in Customer Assets, Cabling and Cabling Termination Equipment
and licenses to Customer Provided Software and Unsupported Software.
b) Digital shall remain the owner of all right, title and interest
in Equipment and licenses to certain Digital Provided Software, as
described in Appendix B.1, unless title is otherwise assigned by Digital
as provided in Section 7 herein or unless Customer, upon
cancellation/termination, elects the Equipment Option V. A.(B) as
described in Exhibit 2.
c) Title to all Document Deliverables shall vest in Customer upon
receipt of payment from [xxxxxxxxxxxxxx] subject to the terms of Sections
14 and 15 herein.
d) [xxxxxxxxxxxxxx] shall assume and bear the entire risk of loss,
theft, damage to or destruction of the Equipment during the term of this
Agreement that is not caused by negligent or willful
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misconduct of Digital or its employees, agents or subcontractors. Such
risk of loss shall transfer to Customer upon inside delivery at
Customer's Site. Customer will (i) keep the Equipment and Software free
and clear from any claims, liens, encumbrances and legal processes: (ii)
use the Equipment and Software in a good and careful manner, in
compliance with all applicable law, in accordance with manufacturer's
instructions and restrictions: and (iii) not make any alterations or
modifications to or change the location of the Equipment or Software
without Digital's prior written consent.
e) No event of loss shall relieve [xxxxxxxxxxxxxx] from its
obligation to make payments of the Amortized Charges, including the
Monthly Equipment Charges, the Monthly Digital Provided Software Charge
and the Monthly Implementation Services Charges except if the use of the
Equipment is terminated pursuant to Subsection (iii) below.
In the event of loss or damage to any Equipment, not caused by
the negligent or willful misconduct of Digital or its employees, agents
or subcontractors, [xxxxxxxxxxxxxx] shall immediately give notice thereof
to Digital or its Assignee and [xxxxxxxxxxxxxx], shall, at their option:
(i) place such Equipment in good repair, condition and working
order,or
(ii) replace such Equipment with identical Equipment in good
repair, condition and working order, with clear title thereto in
Digital or its Assignee, or
(iii) pay to Digital or its Assignee in cash within thirty (30)
days after demand therefor an amount equal to the total Unpaid
Amortized Equipment Charges remaining and to become due hereunder
plus the amount of all Unpaid Amortized Equipment Charges remaining
and to become due hereunder with respect to the affected Equipment,
discounted to present value at the prime rate in effect at [xxxxxxx]
at the commencement of the Schedule of Amortized Charges set forth
in the Customer/Site Agreement, plus the then fair market value of
the Equipment. Fair market value shall be determined by mutual
agreement of the parties, or absent such mutual agreement, within
thirty (30) days of the initial consultation by an independent
appraiser selected by Digital or its Assignee, at
[xxxxxxxxxxxxxxxxxxxxxxxx] expense.
(iv) In the event of a total loss of all Equipment at a
Customer/Site, [xxxxxxxxxxxxxx] shall pay to Digital or its Assignee
in cash, within thirty (30) days after demand therefor, an amount
equal to the total Unpaid Amortized Charges remaining and to become
due hereunder with respect to such Customer/Site discounted to
present value (as provided above) plus the then fair market value of
the Equipment (determined as set forth above).
In addition to the amounts set forth in (iii) above, where such
loss or damage is not caused by the negligent or willful misconduct of
Digital or its employees, agents or subcontractors. [xxxxxxxxxxxxxxx]
shall pay the amount equal to any increased tax liability to Digital or
its Assignee, including interest and penalties, arising from the loss to
Digital or its assignee of any Federal tax benefits under the Internal
Revenue Code of 1986, as may be amended, with respect to Customer's use
of the affected Equipment.
Upon payment by [xxxxxxxxxxxxxx] as aforesaid, Digital or its
Assignee shall transfer to Customer, WITHOUT RECOURSE OR WARRANTY,
EXPRESS OR IMPLIED (except for usual warranties of title), all of
Digital's or its Assignee's right, title and interest, if any, in such
Equipment on an "AS IS, WHERE IS" basis. The proceeds of any insurance
payable with respect to any loss or damage to the Equipment shall be
applied at the option of [xxxxxxxxxxxxxx] either towards Customer's
replacement, restoration or repair of the Equipment or payment of any of
[xxxxxxxxxxxxxxxx] other obligations under this Agreement.
Where loss or damage is caused by the negligent or willful
misconduct of Digital or its employees, agents or subcontractors Digital
shall immediately perform its obligations under Section 7 and 21 of this
Agreement.
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6. INVOICING AND PAYMENT
a) Digital will invoice [xxxxxxxxxxxxxx] prospectively on the
first day of the month, for the Service Charges and Equipment Charges to
be rendered in that month. The invoices for Implementation Services
Charges (charges associated with Phases 1 through 4) will be rendered on
the first date of the first month following acceptance of the
Deliverables associated with that Phase. The first invoice for Phase 5
Deliverables at a Site will reflect the projected Service and Equipment
Charges for the first month of Service and will be prorated to capture
charges, if any, for Phase 5 Deliverables provided for any portion of the
previous month. All subsequent invoices will be adjusted to reflect the
Service activity rendered in the previous month as well as any Service
Credits and any amounts in dispute resolved in [xxxxxxxxxxxxxxxx] favor.
b) Upon assignment in accordance with Section 7 below, Digital
will render consolidated invoices for each Customer/Site delineating
payments to be made to Digital and payments to be made to Digital's
Assignee.
c) Payment of all invoices will be due to Digital and to Digital's
Assignee within fifteen (15) days from the date of receipt of the invoice.
d) All invoices and payments will be made in the local currency of
the country in which the Deliverables and Services are provided and will
reflect the country uplifts and currency adjustments in accordance with
Sections 5(g) and (h) above.
e) Digital's invoice will be sent to [xxxxxxxxxxxxxx] at the
invoice address as identified on [xxxx] Purchase Order and will reference
the Purchase Order number.
10. DELIVERY
The parties agree to use their best efforts to insure that the
Deliverables and Services are provided within the time frames set forth in
the Statement of Work and the Project Plans which will be developed for each
Site during the delivery of the Phase 3 Services. Each party further agrees
to use its best efforts to insure that End-Users are implemented and
receiving Phase 5 Services in accordance with the Schedule set forth in
Section 2(b) above. Digital agrees to maintain a project management schedule
which sets forth in detail the milestones associated with meeting the
delivery dates therein for each Site. Each party acknowledges that it has an
obligation to meet milestones for which it has responsibility and that
failure to meet milestones may affect the Project Plan schedule and
[xxxxxxxxxxxxxxx] will use its best efforts to insure that other Customers
perform all obligations undertaken by [xxxxxxxxxxxxxxx] under this Agreement
and any Customer/Site Agreement.
11. ACCEPTANCE
Phases 1 through 4 Services are subject to acceptance procedures as
set forth in Exhibit 1 - Statement of Work.
12. WARRANTY
a) Digital shall provide Services in a professional manner using
qualified individuals and in accordance with generally recognized
commercials practices and standards.
b) Cabling and Cabling Termination Equipment is warranted to be
free from defects in workmanship and material for a period of one (1)
year from the date of installation.
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c) In the event that title to any Equipment passes to Customer, in
accordance with Section 4 above, the warranty period shall be the same
period as that which is normally provided by the manufacturer of such
Equipment in the country of installation and shall be deemed to have
commenced on the date of installation.
d) Digital Provided Software shall be warranted as to
functionality and infringement to the extent the manufacturer including
Digital offers such warranties. Digital warrants that any Digital
Provided Third Party Software will operate on Digital manufactured
Equipment. Digital shall replace promptly any copy of Digital Provided
Software which in nonfunctioning due to defective media.
e) If Digital receives notice of defects in material and
workmanship during the warranty period, Digital shall repair or replace
the defective Products. Such warranty shall be deemed to have commenced
on the date of installation.
f) Digital further agrees to provide any additional warranties
regarding Products which are available from the manufacturer or
distributor which Digital can pass through to Customer. Documentation of
such warranties will be provided to Customer upon Customer's request.
g) THE WARRANTIES SET FORTH ABOVE ARE EXCLUSIVE AND NO OTHER
WARRANTY, WHETHER WRITTEN OR ORAL, AS EXPRESSED OR IMPLIED. DIGITAL
SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
13. SOFTWARE
a) Digital and Customer shall be respective licensees of record
for Software as indicated in Appendix B.1. Any software not listed on
Appendix B.1, if provided by Digital under this agreement, shall be
licensed to Customer in accordance with the applicable license terms and
conditions. All Digital Provided Third Party Software shall be licensed
in accordance with the third party's software license terms and
conditions.
b) Each party shall be responsible for insuring the Third Party
Software vendors' permission to allow use of its licensed Software by the
other party consistent with each party's obligations under this
Agreement. Each party shall appoint the other as its agent for the
purpose of permitting the use of Third Party Software in order to perform
the obligations hereunder.
c) Each party shall indemnify, defend and hold harmless the other
party against any claims, suits, actions, demands, judgments or damages
and expenses (including reasonable attorneys' fees) resulting from the
indemnifying party's misappropriation, copying or other use (including
any unauthorized use resulting from the other party's failure to obtain
authorization for the other party's use of the Third Party Software as
provided in Section 13(b) above) of the indemnified party's licensed
software which use is in violation of the license terms and conditions
permitting its use.
14. CONFIDENTIAL INFORMATION
a) For the purpose of this Section 14 and Section 15, (1)
"Recipient" refers to the party receiving Confidential Information hereunder,
and (ii) "Discloser" refers to the party disclosing Confidential Information
hereunder.
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b) Confidential Information of Customer shall mean all information
in any form belonging to Customer which relates to the business operations of
Customer and which is maintained in confidence by Customer. Confidential
Information of Customer includes, but is not limited to marketing plans;
customer information; financial services products; information regarding
information technology products and services; its business practices
including processes and procedures used in running its business operations,
information regarding its network configurations, schematics, designs and
security controls, as well as all information relating to the development of
new systems and products; personal information which may include, but shall
not necessarily be limited to, social security numbers, mothers' maiden
names, addresses, phone numbers and other information of a personal nature.
c) Confidential Information of Digital shall mean all information
in any form belonging to Digital which relates to the business operations of
Digital and which is maintained in confidence by Digital. Confidential
Information of Digital includes, but is not limited to Digital's marketing
plans; customer information; financial services products; information
regarding information technology products and services; its business
practices including processes and procedures used in running its business
operations, information regarding its network configurations, schematics,
designs and security controls, as well as all information relating to the
development of new systems and products. Digital's pricing for the
Deliverables and Services and all background materials relating thereto shall
remain the Confidential Information of Digital.
d) Confidential Information of either party does not include
information:
(i) generally known on a non-confidential basis (through no
fault of Recipient) to companies in Discloser's business;
(ii) lawfully obtained by Recipient without restriction on
disclosure;
(iii) known to Recipient prior to receipt from Discloser without
a duty of confidentiality on the third party; or
(iv) disclosed by Recipient with Discloser's prior written
approval.
e) Recipient shall use the same care and discretion to avoid
disclosure, publication, dissemination or unauthorized use of Confidential
Information as it uses with its own Confidential Information of a similar
nature or importance that it does not wish to disclose, publish or
disseminate, but in no event shall such standard of care be less than what is
reasonable under the circumstances. Recipient will:
(i) limit access to the confidential Information to its
officers, directors, employees and subcontractors who are performing or
supervising the work hereunder and who have a need to know such
Confidential Information for the performance of Services,
(ii) use Confidential Information only in connection with the
delivery or receipt of Deliverables or Services;
(iii) ensure that all persons who may have access to
Confidential Information are advised of the obligations agreed to
hereunder and agree to be bound by such obligations;
(iv) promptly notify Discloser of any unauthorized disclosure
or use; and
(v) only copy Confidential Information to the extent
reasonably necessary in connection with the Services and reproduce all
confidential and other proprietary rights notices appearing on originals
on all such copies.
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f) Upon termination of this Agreement or upon Discloser's request,
Recipient agrees to surrender and deliver to Discloser all Confidential
Information and all copies of the Confidential Information. Recipient will
execute all documents and at Discloser's expense take all other actions
reasonably requested by Discloser, to assist Discloser in perfecting and
enforcing its rights in its Confidential Information.
g) Discloser understands that Recipient is in the business of
developing and acquiring technology for Recipient's own products and services
and that existing or planned technology independently developed or acquired
by Recipient may contain ideas and concepts similar to those contained in
Confidential Information of Discloser. As Discloser hereunder, each of
Digital and Customer agree that this Agreement shall not prevent Recipient
from developing or acquiring technology similar to Discloser's, or from
providing services similar to services provided by Discloser, without
obligation to Discloser provided Recipient does not use Discloser's
Confidential Information to develop such technology or provide such services.
h) The obligation to protect Confidential Information shall
terminate at the later of three (3) years from expiration or termination of
this Agreement or the applicable Customer/Site Agreement to which such
Confidential Information relates.
15. OWNERSHIP/USE OF DELIVERABLES AND MATERIALS
a) All Document Deliverables as described in Appendix 0 hereto (as may
be amended from time to time upon mutual written agreement of the parties)
shall be the sole and exclusive property of Customer. Customer shall own all
right, title, and interest to and in such Document Deliverable subject to
Digital's right to use all ideas, concepts, methodologies, techniques and
other know-how used therein that are not Customer Confidential Information
(as defined in Section 14 of this Agreement).
b) Digital shall remain the exclusive owner of all rights in all
previously existing or independently developed information, including but not
limited to the documents and materials identified as "Digital Property" in
Appendix O. Nothing herein shall be construed as transferring any rights of
ownership or use in Digital Property to Customer hereunder.
c) All information, including but not limited to processes, reports,
studies, flow charts, diagrams and other tangible or intangible information,
including any of the underlying ideas, concepts, techniques and know-how
related to such information, which are not specifically contained within the
Document Deliverables and which is not Digital Property covered by Section
(b) above, and which are developed in performance under this Agreement,
including, but not limited to the Statement of Work and the Service Level
Agreements (hereinafter collectively referred to as the "Materials") shall be
jointly owned by [xxxxxxxxxxxx] and Digital without restriction on the
parties' rights to use except as follows:
In the event Customer wishes to procure Project Enterprise-like
Services from a third party vendor for Customer's own internal use, and in
doing so wishes to disclose such Materials to such third party vendor(s),
such disclosure shall be subject to the following restrictions:
(i) Customer shall not disclose the Materials to any third party in
a manner that directly or indirectly attributes the Materials to Digital;
(ii) Customer's disclosure of the Materials to such third party
vendor(s) shall be made solely for the purpose of soliciting the services
and products for Customer's own internal use and for entering into
agreements and statements of work for delivery of services and products.
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(iii) Customer shall identify the Materials as proprietary and
confidential subject to confidentiality restrictions and shall limit the
third party vendor(s)' use of such Materials to respond to RFPs or vendor
solicitations and in delivery and performance of services such as are
contemplated under this Agreement. Customer shall provide reasonable
cooperation (which shall not be deemed to require expending or incurring
any direct expense) in assisting Digital to enforce its and Customer's
rights against any third party vendor's violation of this confidentiality
commitment.
Nothing herein shall be construed to restrict Customer, as joint
owner of the Material, from disclosing the Materials to other third parties
which are not competitors of Digital and/or from entering into agreements
with Customer's own customers for the provision of Project Enterprise-like
Services by Customer and/or from subcontracting the same in connection with
Customer's provision of the Services.
d) Digital understands that Customer has the right to issue RFPs to
other service providers for Project Enterprise-like services. Such RFPs may
result in an award to vendor(s) other than Digital. Digital understands that
Customer, in its sole discretion, may include any or all of the Document
Deliverables and any or all of the Materials in such RFP or other vendor
solicitation subject to Section 15(c) above. Nothing herein shall be
construed as limiting or restricting, in any way, Customer's right to use and
include in such RFP any and all information which Customer learns or acquires
in working with Digital provided Customer does not copy, use or disclose
Digital's Confidential Information (as defined in Sections 14 and 15(b) and
(c) of this Agreement).
e) The term "Invention" shall mean any idea, concept, know-how or
technique that either party first reduces to practice while in performance of
this Agreement and for which a patent application is filed. Inventions will
be treated as follows:
(i) If made solely by personnel of one of the parties, it shall be
the property of such party ("Inventing Party"). The Inventing Party
hereby grants to the other party ("Licensed Party") a nonexclusive,
irrevocable, worldwide and paid-up license under such Invention, patent
application and all patents issued thereon for use by the Licensed Party,
or its subcontractors, in the internal business operations of the
Licensed Party or any of its parents or its parents directly or
indirectly owned subsidiaries.
(ii) If made jointly by Customer and Digital personnel, it shall be
jointly owned and each party shall have an undivided interest in such
Invention, patent application and all patents issued thereon, without
obligation to account to the other party for any use thereof.
All licenses granted to either party under this provision include
the right to make, have made, use, have used, lease, sell and/or otherwise
transfer any apparatus, and/or practice and have practiced any method and
shall include the right to grant, directly or indirectly, revocable or
irrevocable sublicenses to entities controlling, controlled by, or under
common control with such party.
Nothing contained in this provision shall be deemed to grant any
license under any patent applications arising out of any other inventions of
either party.
f) This Agreement does not currently contemplate the development of any
software products by Digital specifically for Customer and therefore
"Materials" and "Inventions" does not include software. Any such development
would require a separate written agreement between the parties, during which
process the parties will address, among other things, the issue of ownership
of such software.
16. INTELLECTUAL PROPERTY INDEMNIFICATION
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a) The parties hereby warrant to each other that any information,
materials, Equipment, designs, specifications or instructions (collectively
"Information") or the use thereof, provided to the other party by the party
and/or its affiliates does not infringe any patent, utility model, industrial
design, copyright, trade secret or trademark in any country where Digital
provides Deliverables and Services. Digital further warrants to Customer
that any Deliverable or Service or the use thereof provided to Customer does
not infringe any intellectual property right of any third party; including
without limitation any patent, utility model, industrial design, copyright,
trade secret or trademark in any country where Digital provides Deliverables
and Services.
b) Customer warrants that it has the right (through a license or
otherwise) to allow Digital to use Customer Provided Software on Customer's
behalf an/or to permit Digital to perform the Services hereunder. Digital
warrants that it has the right (through license or otherwise) to distribute
to Customer and Customer's affiliates and subsidiaries licenses for Digital
Provided Software.
c) The Indemnitor will defend or settle any claim against the
Indemnitee and/or its affiliated companies that the Information or the
Deliverables or Services or the use thereof infringe a third party's
intellectual property right, including without limitation a patent, utility
model, industrial design, copyright, trade secret or trademark in any country
in which Digital provides Deliverables and Service, except that Digital will
have no responsibility hereunder for claims for infringement based upon:
(i) Customer provided Equipment which may be incorporated into the
Deliverables or Services, or
(ii) any Deliverable or Service provided by Digital where the
claimed infringement results from adherence to any Information including
specifications and standards supplied by Customer, or
(iii) any Third Party Software which is provided as Deliverable
hereunder; and Customer shall have no responsibility for claims for
infringement based upon Customer Provided Software, provided that
Indemnitee:
1) promptly notifies Indemnitor in writing of the claim; and
2) cooperates with Indemnitor in, and grants Indemnitor sole
authority to control the defense and any related settlement.
d) The Indemnitor will pay the cost of such defense and settlement and
any costs, attorney's fees and damages awarded by a court of competent
jurisdiction against the Indemnitee.
e) If a claim is made that any Deliverable or Service provided by
Digital hereunder is infringing, Digital may, at its option,
(i) procure the right (at Digital's sole expense) for Customer or
its affiliate or subsidiary to continue using the Deliverable or Service;
(ii) modify the Deliverable or Service; or
(iii) replace the same.
If the use of the Deliverable or Service is enjoined by a court and
Digital determines that one of these alternatives is not reasonably
available, Digital will take back the Deliverable and refund its depreciated
value as defined by the original invoice based on three year straight line
depreciation; provided, however, that if use of a Service is
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enjoined, Digital will modify the Service and provide substitute Services
acceptable to Customer that do not infringe, or refund Customer for payments
made for Services which are subject to any injunction.
f) If a claim is made that any Deliverable or Service provided by
Digital hereunder is infringing as a result of the use of, or adherence to,
any Information provided by Customer, Customer may, at its option,
(i) procure that right (at Customer's sole expense) for Digital to
continue providing the Deliverable or Service,
(ii) request Digital to modify the Deliverable or Service, or
(iii) request Digital to replace the same.
In the event of (ii) or (iii), Digital's modification or replacement
shall be treated as a Change Request in accordance with Section 22 - CHANGE
MANAGEMENT PROCESS.
g) These terms state the entire liability of either party for claims of
infringement by the Information supplied by either party and of Digital for
Deliverables or Services supplied by Digital. EACH PARTY DISCLAIMS ALL OTHER
LIABILITY FOR VIOLATION, MISAPPROPRIATION OR INFRINGEMENT OF INTELLECTUAL
PROPERTY RIGHTS, AND FURTHER DISCLAIMS ANY LIABILITY TO THE OTHER PARTY FOR
INCIDENTAL AND CONSEQUENTIAL DAMAGES.
17. EXPORT REGULATIONS
a) Each party agrees that it will comply with all applicable
export/import laws and regulations in performing its obligations under this
agreement.
b) Neither party shall export or re-export Equipment, Software or
technical data provided by the other party in violation of the applicable
export regulations.
c) Either party may suspend Services under this Agreement if the other
party deals with the Equipment, Software or technical data in violation of
the applicable export regulations.
d) Unless prior written authorization is obtained from [xxxx] and the
United States Department of Commerce or other relevant agency of the U.S.
Government, Digital will not export or re-export, directly or indirectly, any
software or technology received from [xxxx] or its parent or any of its
affiliates, or allow the direct product thereof to be exported or
re-exported, directly or indirectly, to:
(i) any country in Country Group s or Z of the Export
Administration Regulations of the Department of Commerce (currently
Libya, Cuba and North Korea); or
(ii) any non-civil (i.e. military) end-users of for any non-civil
end-uses in any country in Country Group Q, W, or Y of the Export
Administration Regulations of the Department of Commerce (currently
Albania, Bulgaria, Cambodia, Estonia, Laos, Latvia, Lithuania, Mongolian
People's Republic, Romania, the geographic area formerly known as the
Union of Soviet Socialist Republics, and Vietnam) or the People's
Republic of China; or
(iii) any country subject to sanctions administered by the office of
Foreign Assets Control (currently Cuba, Iran, Iraq, Libya, North Korea,
and Yugoslavia [Serbia and Montenegro only]; or
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(iv) Syria.
Digital agrees to indemnify and hold harmless [xxxx] and its parent
and affiliates from any costs, penalties or other losses caused by, or
related to, any violation of this provision.
18. MULTINATIONAL APPLICABILITY
a) The terms and conditions of this Agreement shall govern to the
extent permitted by local country law. In the event said terms and
conditions are not permitted, this Agreement shall be deemed amended to
comply with local law and to have consequences which are substantially the
same a what was intended by the parties had the terms and conditions been
permitted.
b) Additional terms and conditions dealing with specific country
requirements, currency, working hours and other variations will be
incorporated into this Agreement as required.
19. INSURANCE
a) Digital shall obtain and maintain in force, at its own expense,
during the term of the Agreement, insurance coverage against claims,
regardless of when asserted, that may arise out of, or result from, Digital's
operations, the operations of its subcontractors and of any other entity
directly engaged by Digital in connection with its provision of the
Deliverables or Services. All such insurance carried by Digital and their
subcontractors and agents shall be placed with insurers rated "A" or better
by Bests Rating Service. Evidence of such coverage and limitations are set
forth in Exhibit 3, Certificate of Insurance.
This insurance shall include the following coverage with limits no
less than those set forth below with insurers and under forms of policies
satisfactory to Customer whose acceptance of such insurers and forms shall
not be unreasonably withheld:
- - General Liability: Combined Single Limit (CSL) providing coverage
against liability for bodily injury, death, and property damages in the
minimum amount of five million ($5000,000) dollars. Such liability
coverage shall include contractual liability coverage.
- - Workers Compensation and Employer's Liability: Workers Compensation
coverage must be at the maximum statutory amount and Employer's Liability
coverage must be in the minimum amount of one million ($1,000,000)
dollars.
- - Fidelity Coverage: Fidelity coverage for losses incurred as a result of
dishonesty on the part of Digital's employees, agents or subcontractors
in the amount of ten million ($10,000,000) dollars.
b) Digital will be required to submit a certificate of insurance to
Customer within ten (10) days of contract execution. Said certificate shall
further provide that no less than thirty (30) days advance notice will be
given in writing to Customer prior to cancellation, termination, or
alteration of the policies of insurance.
c) Risk of loss or damage to the Equipment will pass to Customer upon
inside delivery at the Site in accordance with Section 4 above. Customer
will be required to submit a Certificate of Insurance to Digital, in the form
attached as Exhibit 4, within ten (10) days of contract execution evidencing
adequate coverage for the full replacement value of the Equipment. The
Certificate of Insurance shall further provide that no less than thirty (30)
days advance notice will be given in writing to Customer prior to
cancellation, termination or alteration of the policies of insurance.
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20. FORCE MAJEURE
Neither party will be liable or deemed to be in default for any delay or
failure in performance arising out of conditions beyond its reasonable
control and without its fault or negligence. Such causes may include, but
are not limited to, acts of God, acts of the public enemy, fires, floods,
accidents, strikes, embargoes and Digital's suppliers inability to deliver
due to a force majeure event. If any such condition occurs, the party
claiming force majeure excuse will promptly give notice to the other.
Performance by both parties will be suspended for the duration of the
condition and will resume once the condition ceases to exist.
Notwithstanding the foregoing, nothing herein shall relieve
[xxxxxxxxxxxxxxxxxx] from continuing to make their respective monthly
payments of Amortized Charges.
21. INDEMNIFICATION/LIMITATION OF REMEDIES AND LIABILITIES
a) Digital agrees to defend, indemnify, and hold Customer harmless from
and against third party claims for tangible property damage, personal injury
or death to the extent attributable to Digital's or its agents', employees'
or subcontractor'' negligence or willful misconduct in connection with the
Deliverables or Services provided hereunder, provided however, that Digital
will assume any liability for damages which are covered under Digital's
worker's compensation insurance policy, and furthermore that Digital's
liability hereunder for tangible property damage caused by Digital (other
than Digital's gross negligence and willful misconduct) shall not exceed
$5,000,000 in the aggregate.
b) Digital agrees to defend, indemnify, and hold Customer harmless from
and against third party claims for losses incurred by Customer and its
affiliates as a result of dishonesty attributable to Digital or its agents,
employees or subcontractors performance in connection with the Deliverables
and Services provided hereunder- Digital's liability hereunder shall not
exceed $10,000,000 in the aggregate.
c) THE REMEDIES PROVIDED IN ARTICLES 12, 13, 16, 17, 21 AND 25 ARE
CUSTOMER'S SOLE AND EXCLUSIVE REMEDIES. DIGITAL'S LIABILITY FOR ANY CAUSE
WHATSOEVER, INCLUDING BUT NOT LIMITED TO DIGITAL'S FAILURE TO PERFORM ITS
WARRANTY OR SERVICE RESPONSIBILITIES SHALL BE LIMITED TO DIRECT DAMAGES IN
THE AMOUNT OF $5,000,000. THE FOREGOING LIMITATION SHALL NOT APPLY TO
DAMAGES RESULTING FROM DIGITAL'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OR
FROM DIGITAL'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OR INFRINGEMENT OF
THIRD PARTIES' INTELLECTUAL PROPERTY RIGHTS OR DAMAGES FOR PERSONAL INJURY
INCLUDING DEATH. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR
INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES. DIGITAL SHALL NOT BE
LIABLE FOR LOST PROFITS, LOSS OF DATA, LOSS OF SOFTWARE PROGRAMS, LOSS OF USE
OF DATA, OR LOSS OF USE OF SOFTWARE PROGRAMS. THE AFORESAID LIMITATIONS
APPLY REGARDLESS OF THE LEGAL THEORY UPON WHICH DAMAGES ARE BASED.
22. CHANGE MANAGEMENT PROCESS
A change management process is defined in the Statement of Work, Appendix
C. The change management process is comprised of four component processes to
provide a method for effecting changes in scope of the Services and
Deliverables. These processes are the:
- Change Request Process
- Work Order Process
- Move/Add/Change (MAC) Process
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- Interim MAC Process
23. MISCELLANEOUS
a) Except as provided in Sections 7 and 8 above, neither party may assign
any rights or obligations under this Agreement without the prior
consent of the other which consent shall not be unreasonably withheld.
b) Any disputes arising in connection with this Agreement will be governed
by and construed in accordance with the laws of the [xxxxxxxxxxxxxxx
xx].
c) All components and installation services provided by Digital will
conform to the National Electric Code and/or the applicable codes in
the location where the installation is performed.
d) Whenever Customer has actual knowledge of asbestos and/or any other
hazardous materials in the workplace where Digital is to perform work.
Customer will notify Digital of the known hazardous material. Customer
shall be responsible for all costs associated with any necessary
precautions while working in a hazardous environment and/or necessary
removal of hazardous material, as appropriate.
e) In the event that Customer finds a representative of Digital performing
services hereunder to be conducting himself/herself in an
unprofessional manner or if Customer finds the representative
inadequately performing Services, Customer may request Digital in
writing to remove the representative providing written explanation of
the conduct motivating the request, and upon mutual agreement with
Digital's project manager, said person will be removed from the
project. Additionally, in the event of willful misconduct on the part
of Digital's representative Customer shall have the right to
immediately remove the representative from the job site provided
Customer immediately thereafter provides written explanation for the
removal.
f) The provisions of Articles 1, 4, 12, 13, 14, 15, 16, 17, 19, 21, 23
(b) and (k), and 26 and Exhibit 2.3 Sections V.D and E shall survive
the termination of this Agreement.
g) Any provision of this Agreement which is held to be invalid will be
deleted, but the remainder of the Agreement will not be affected.
h) Digital will ship according to Digital standard commercial practice.
i) Digital agrees that it will comply with all of the Sites' standard
physical security and work policies, procedures and practices in place
at the Sites where Digital is performing work, provided that Digital
has been advised thereof. Additionally, for any employee of Digital or
Digital's subcontractors hereunder who:
(i) is working at Customer premises for a period of more than
fourteen (14) consecutive business days; or
(ii) has direct or remote access to and knowledge of Customer's
passwords, IP addresses or network architecture; or
(iii) has access to such other sensitive Customer information as may
be designated by [xxxxxxxxxxxxxxx] from time-to-time during the
term of this Agreement:
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such employees or subcontractors shall, prior to beginning his/her
assignment to the delivery of [xxxxxxxxxxxxxxxxxxxxxxxxx] (or at such
time during the assignment that any of the foregoing conditions are
satisfied), be required to undergo fingerprinting in accordance with
Customer's standard policies unless otherwise prohibited by law. In
such event, Digital will use all reasonable efforts to:
a) utilize employees in such assignments who are willing to consent
to such fingerprinting, or, in the event of unavailability of any
such employees,
b) obtain the consent of employees to be utilized in such positions
for [xxxxxxxxxxxxxx] to conduct criminal background checks that
are reasonable under the circumstances. The foregoing requirement
shall not apply to Digital employees or subcontractors solely
engaged in the provision of installation services of Cabling and
Cabling Termination Equipment.
j) Digital agrees that it will comply with Customer's information
security procedures as amended and as defined in Appendix B.3.
Customer acknowledges that security breaches cannot be totally
prevented and therefore Digital shall not be liable for breaches of
security except where such breaches are due to the negligence of
willful misconduct of Digital. In no event shall Digital be relieved
from designing and implementing Customer/Site networks in
conformance with Customer's security requirements standards, as set
forth in Appendix B.3, unless authorized to deviate from such
standards in writing by Customer.
k) Digital will remain fully responsible for any obligations and the
performance of Digital subcontractors and suppliers. Unless
otherwise mutually agreed upon in writing, Digital will be
responsible for payments due subcontractors and suppliers. Digital
will be responsible to ensure that all work effort performed by its
suppliers, affiliates, subcontractors and/or agents is performed in
substantial compliance with all the terms and conditions of this
Agreement. In the event it becomes necessary for Digital to utilize
subcontractors or suppliers other than those approved by Customer in
the Design documentation, Digital will notify Customer of the need
to utilize an alternative subcontractor or supplier and identify
such subcontractor or supplier. Customer shall have the right to
approve such subcontractor or supplier, which approval shall not be
unreasonably withheld. Customer will use best efforts to approve
such subcontractor or supplier within five business days of
notification by Digital.
l) At all times Digital shall perform all Services and provide
Deliverables hereunder as an independent contractor, and nothing
contained herein shall be deemed to create any association,
partnership, joint venture, or relationship of principal and agent
of master and servant, or employer and employee between the parties
hereto or any affiliates or subsidiaries thereof, or to provide
either party with the right, power or authority whether expressed or
implied, to create any such duty or obligation on behalf of the
other party.
m) All public statements, media releases, public announcements, public
disclosures, or use of the other party as a reference, by either
party or its employees or agents relating to this Agreement or its
subject matter, including without limitation promotional or
marketing materials and internal corporate newspapers or similar
publications but not including internal memoranda or internal
electronic messages or any disclosure required be legal, accounting,
or regulatory requirements beyond the reasonable control of either
party, shall be subject to the written approval of the other party,
which approval shall not be unreasonably withheld or delayed.
n) Subject to paragraph o) below, neither party shall directly or
indirectly solicit for employment or hire any employees of the other
party involved in the performance of this Agreement during the term
of this Agreement and for one (1) year after termination of this
Agreement or any Customer/Site Agreement.
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o) Digital agrees that, if it needs to hire employees to implement the
Services, it will notify Customer as far in advance as reasonably
practicable of fulfilling such need and, with Customer's prior
consent, will consider and interview any Customer employees for such
positions to the extent such employees possess the appropriate
skills and qualifications. In the event a Customer employee applies
for Digital's position, and possesses skills and qualifications at
least equal to or better than any other applicant (other than a
Digital employee applicant) Digital agrees to give preference to the
Customer employee applicant in its decision to hire. In the event
any such employee is hired by Digital, Digital agrees to apply
Digital's then current policies and practices regarding eligibility
for benefits. Under Digital's current policies, employees are
immediately eligible for all medical, dental, disability and life
insurance benefits and participation in employee savings plans
(including employee supplemental retirement savings plans) upon
enrollment. Digital further agrees to recognize the employee's
length of service with Customer for the purpose of establishing
vacation accrual. Digital agrees to advise Customer of the salary
accepted by any such employee provided such employee consents to
such disclosure. Customer hereby agrees to maintain such
information in confidence.
Digital commits that, if it hires any Customer employee pursuant to
the terms of this Agreement, Digital's Program Management team for
[xxxxxxxxxxxxxxxx] will pursue with Digital's senior management
whether Digital will agree to recognize such employees' past service
with Customer for the purposes of eligibility and vesting, if
applicable, under Digital's retirement plan.
p) Digital agrees to provide reasonable cooperation, as may be
required, in working with other vendors for the implementation and
integration of [xxxxxxxxxxxxxxxx] and [xxxxxxxxxxxxxxxx] services as
provided by other vendors. In the event, this Agreement is
terminated for any reason, including breach by Digital, Digital
agrees to use its best efforts to work with the Customer and
Customer's subcontractors for the on-going implementation of
[xxxxxxxxxxxxxxxx] services. Such cooperation may include, but
shall not be limited to temporary on-site technical support, network
designs and addresses, asset lists, assignment or sublicense of
licenses and such other support as may be required to effectively
transition the services from Digital to the Customer and its
subcontractors.
q) The parties have agreed to an Issue Resolution Process as set forth
in Appendix C.6. The parties agree to follow this process as a
first step toward resolution of all disputes arising under this
Agreement and any Customer/Site Agreement hereunder. Nothing herein
shall be construed to relieve [xxxxxxxxxxxxxxx] from making payments
of Amortized Charges to Digital's Assignee during the Issue
Resolution Process.
r) In the event that Customer sells or otherwise transfers its
beneficial ownership interest in a major business unit or line of
business ("Unit") the following is available to Customer: where
[xxxxxxxxxxxxxxxxxxxxxxxxx]designates such Unit as eligible to
continue to receive the benefits of this Agreement, Digital will
extend the pricing and other terms and conditions specified herein
to Unit for the duration of the service term of the applicable
Customer/Site Agreement(s) provided (i) Unit will remain subject to
the terms and conditions, including the non-disclosure obligations,
stated herein as if such entity were still owned by Customer, and
(ii) [xxxxxxxxxxxxxx] will continue to be financially responsible
for the Unit's charges. Unit's usage of Digital's Services will
continue to count toward satisfaction of the PO/End Users schedule
for purposes of this Agreement.
26. AUDIT
During the ten-n of this Agreement and for a period of two (2) years from
expiration or termination of each Customer/Site Agreement hereunder,
Digital shall maintain records verifying the correctness of all Digital
invoices for each Customer/Site Agreement. [xxxxxxxxxxxxxxx] shall have
access to all such records upon
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<PAGE>
reasonable notice, during normal business hours at Digital's premises, in
order to verify the correctness of Digital invoices.
Furthermore, during the term of the Agreement Digital shall give
reasonable access, upon prior notice, to [xxxx] auditors, [xxxxxx]
auditors, [xxxxxx]external auditors and regulators to audit those
procedures and operations of Digital used in the performance of the
Services under this Agreement to ensure Customer's compliance with laws,
regulations and internal [xxxxxx] policies and procedures affecting the
Services hereunder. [xxxxxxxxxxxxxxx] shall insure that such auditors
are bound by the confidentiality terms set forth in Section 15 herein.
Nothing herein shall be construed as obligating Digital to insure
Customer's compliance with any specific laws and regulations unless
specifically advised of such in writing by Customer.
ISS Amendment
This Amendment dated April 1, 1997 to [xxxxxxxxxxxxxxxxx] Agreement dated
December 22, 1995, between [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxx] and Digital Equipment Corporation ("Digital")
(the "Agreement") is hereby amended as follows:
1. The definition of "Purchase Order or PO" in Section 1 is deleted in its
entirely.
The following definitions are added to Section 1:
"Customer/Site Order or CSO" - a document authorizing Digital to
undertake the Services (except for those Interim Support Services
described in Section 3 of Exhibit 1) for a Customer/Site in the form
attached hereto as Appendix R to Exhibit 1. [xxxx] will issue CSOs for
Customer/Sites in the United States and [xxxxxxxxx], will issue [x]SOs
for Customer/Sites outside the United States. All CSOs will be governed
by the terms and conditions stated herein and any other terms mutually
agreed upon by the parties. No terms and conditions on any CSO form
shall apply.
"Customer/Site Order for Interim Support Services or COI" - a document
authorizing Digital to undertake Interim Support Services described in
Section 3 of Exhibit I for a Customer/Site in the form attached hereto as
Appendix S to Exhibit 1. [xxxx] will issue COI's for Customer/Sites in
the United States and [xxxxxxxxxxx] will issue COI's for Customer/Sites
outside the United States. All COI's will be governed by the terms and
conditions stated herein (except as specifically stated in Item 5 of this
Amendment # 1) and any other terms mutually a-reed upon by the parties.
No terms and conditions on any COI form shall apply.
Except as stated in Item 5 of this Agreement #1, whenever the defined
terms Purchase Order or PO appear in the Agreement, they shall be
replaced with the terms Customer/Site Order or CSO or COI respectively.
2. Section I of the Agreement is amended by adding the following definitions:
"Interim Support Services" - those services described in Section 3 of
Exhibit 1.
[xxxxxxxxxxxxxxxxx] Services" - those services described in Exhibit 1 but
not including Interim Support Services as described in Section 3 of
Exhibit 1.
"Service Level" - a measurable specification of quality and/or quantity of
the Services or services delivered.
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9. Section 6 shall be amended as follows:
a) In paragraph a) line 5 add the following as a new third sentence:
"Invoicing for Equipment Charges will commence on the first day of
the month following the date of acceptance and shall be prorated for
the number of days between the date of acceptance and the date of
first invoice."
b) Delete paragraph e) in its entirely and replace with,, ""Digital's
invoice will be sent to [xxxx] or [xxxxxxxxxxxxxx] at the address on
the applicable Customer/Site Order and will reference the applicable
Customer/Site Order numbers and will detail the charges by business
unit within each Site."
10. Section 13(b) of the Agreement is deleted and the following is inserted
in its place: "Each of [xxxx]and [xxxxxxxxx], on behalf of itself and its
Customers, on the one hand, and Digital, on behalf of itself, its
subsidiaries and affiliates, on the other hand, shall be responsible for
insuring the Third Party Software vendor's permission to allow use of its
licensed Software by the other and Customers and employees and agents of
the other and Customers, consistent with each party's and Customer's
obligations under this Agreement. Each of [xxxx]and [xxxxxxxx], on the
one had, and Digital, on the other hand, hereby appoint the other as its
agent for the purpose of permitting the use of Third Party Software in
order to perform the obligations hereunder."
11. Section 23(l) is amended as follows: On line 2, after the word "and " and
before the word "nothing", add the following phrase: ", except as
provided in Section 13(b) and Section 3 of Exhibit 1, as amended,".
12. Section 23(o) is amended by deleting the last paragraph in its entirely.
13. Section 3, Interim Support Services, to Exhibit I of the Agreement is
replaced by a new Section 3 attached hereto as Exhibit A.
14. Appendix 0, the Document Deliverables/Digital Property, to Exhibit I of
the Agreement is replaced by a new Appendix 0 attached hereto as Exhibit
B.
15. Appendix Q, the Customer/Site Agreement form to Exhibit I of the
Agreement is replaced by a new Appendix Q attached hereto as Exhibit C.
16. A new Appendix R, the Customer/Site Order form is attached hereto as
Exhibit D.
17. A new Appendix S, the Customer/Site Order for ISS form is attached hereto
as Exhibit E.
18. A new Exhibit 6, ISS Staffing Procedures and Employment Ten-ns, is
attached hereto as Exhibit F.
Exhibit 6 ISS Staffing Procedures and Employment Terms
1.0 Staffing Procedures
During the Conversion Plan Development subphase of ISS, the Customer Team
Leader ("CTL") and Digital will work together to identify which Customer
employees (hereinafter referred to as "Employee" or collectively referred to
as Employees") and contractors engaged by Customer currently providing LAN
management services in the "as- s state", will be required by Digital to
provide As Is Operations Support i.e., Key Employees/Contractors. The
Conversion Plan for the Customer/Site will include the following processes
for facilitating Digital's access to these Key Employees/Contractors:
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<PAGE>
a) Customer will use best efforts to insure that Key Employees/Contractors
are not advised of Customer's decision to order ISS services from Digital
prior to the notification date agreed upon in the Conversion Plan.
b) During the Conversion Plan Development subphase, the CTL will provide
Digital with the names of all Employees and contractors used by Customer
to provide LAN management services in the "as-is state" i.e., for the
period of ninety (90) days immediately preceding Customer's issuance of
the COI. In addition to naming such Employees and contractors, Customer
shall provide the following information regarding such
Employees/contractors:
i) For Employees: Individual and organizational responsibilities,
reporting relationships, salary ranges and job title.
ii) For Contractors: Copy of contract and all amendments and updates
thereto including price and payment obligations, terms regarding
term and termination, individual and organizational
responsibilities, and reporting relationships.
c) Digital will notify Customer which Employees and contractors it considers
Key Employees/Contractors. Customer will notify Digital which Key
Employees/Contractors it will:
i) Not release for service during the ISS Phase;
ii) Second to Digital for the period specified in the Conversion Plan;
iii) Make known and available to Digital or its designated third party
subcontractor in accordance with Section 23 o) of the Agreement, as
amended, those Employees that Digital or its designated third party
subcontractor may consider for an employment opportunity with
Digital or its designated third party subcontractor.
d) For Contractors, Digital and Customer will agree on which Contractors
Digital or its designated third party subcontractor desires to take by
agency. Customer will execute an agency letter effecting the appointment
of Digital or its subcontractor as agent of Customer for the purpose of
Contractor's performance of its obligations.
e) Digital and Customer will agree in the Conversion Plan on a date on which
Customer will:
i) Notify Key Employees/Contractors of the decision to move to ISS;
ii) Notify Employees who will be seconded to Digital,
iii) Notify those Employees who will be made available to Digital for
employment;
iv) Notify Contractors, of Customer's decision to terminate the contract
or appoint Digital or its subcontractor as Customer's agent.
Customer will give such notice on the agreed upon date notifying the
affected Employees/Contractors where and when to meet with Digital and/or
its third party subcontractor.
f) Digital and/or its designated third party subcontractor (collectively
"Employer") will set up a schedule for meeting with Key Employees.
Interviews for employment, as appropriate, will be conducted at such
meetings. It is expressly understood and agreed that Customer shall not
participate in any way whatsoever in the interviewing of any Employee or
Employer's selection for employment or the extension by Employer of any
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offer of employment to any Employee, but shall cooperate by making
Employees and Contractors available at reasonable times to be interviewed.
g) Employer shall have no obligation, under this Agreement or otherwise, to
offer employment to any Employees. Customer shall make known to the
Employer the Employees salary upon notification to Customer that Employer
is considering offering employment to Employee. Offer letters for
employment will be made to Key Employees whom Employer decides to offer
employment after the interviewing process.
2.0 Employment Terms
If Digital or any of its subcontractors (collectively "Employer") in
performance of its obligations under Section 3, Phase 0: Interim Support
Services (ISS), of the Statement of Work decide to hire any Employees in
accordance with Section 1.0 above ("Hired Employees"), such offers of
employment shall be on an "at will" basis and shall include the following
which terms shall be applicable solely to Employees hired by Employer in the
United States:
a) [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
b) [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
c) Saving Incentive Plan (SIP): As of the hiring date, Employer shall cause
each Hired Employee, who was eligible to participate in the Customer's
SIP, [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxx] under Employer's 401 (k) or like defined contribution
plan for al I service credited to such Employees under Customer's SIP for
such purposes.
d) Other Benefits: All Hired Employees will be [xxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxx] to receive benefits under all of Employer's welfare plans as
defined under section 3(i) of the Employee Retirement Income Security Act
of 1974. Employer shall also cause its medical and dental benefit plans
to grant each such Hired Employee and any eligible dependent [xxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxx] Employee is hired.
e) Vacation: Commencing on the date of hire, Employer shall provide Hired
Employees with vacation time under [xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxand shall grant [xxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxx] under such policy(ies) to Hired Employees for
all service credited to Hired Employees as of the hiring date under the
vacation policy of the Customer.
f) Severance: Employer shall recognize [xxxxxxxxxxxxxx] of Hired Employees
with Customer for the purpose of determining [xxxxxxxxxxxxxxx]. With
respect to severance pay benefits, Employer expressly agrees that in the
event a Hired Employee's employment with Employer terminates by reason
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx]
Employer policy, such Hired Employees shall be eligible to receive from
[xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxx] plan in effect on the date of Hired Employees termination by
Customer. In the event such severance pay benefits during
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<PAGE>
[xxxxxxxxxxxxxxxxxxx] the amount the Employer would have paid under the
Employer's plan, the [xxxxxxxxxxxxxxxxxxxxxxxx] severance pay benefits
shall be[xxxxxxxxxxxxxxx].
g) Defined Benefit Retirement Plans: Employer shall grant [xxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxx]o each Hired Employee for [xxxxxxxxxxxxxxxxxxxxx]
purposes under Employers defined benefit retirement plan, [xxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxx]o such Hired Employees under Customers defined benefit
retirement plan for such purposes.
h) Subject to the foregoing obligations and notwithstanding anything to the
contrary, nothing shall prevent Employer from amending or terminating any
employee benefit plan, program, policy, practice or procedure at any time
on or after the date of this Agreement.
3.0 Terms of Seconded Employees
Seconded Employees shall remain employees of Customer and Customer shall be
solely responsible and liable for payment of all compensation and benefits to
such Employees and for payment of all applicable employment withholding taxes
and contributions, including but not limited to, unemployment compensation
and worker's compensation (collectively "Employment Expenses") relating to
the employment of such seconded Employees. Customer agrees to indemnify,
defend and hold Digital harmless from and against any claims arising out of
Customer's failure to pay such Employment Expenses and arising out of any
finding that such seconded Employees are employees of Digital in connection
with such Employment Expenses.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as of
the ____ day of_________________________________________________.
OAO CANADA LIMITED DIGITAL EQUIPMENT CORPORATION
OAO INTERNATIONAL CORPORATION
By: By:
-------------------------- ------------------------------
(Duly Authorized) (Duly Authorized)
-------------------------- ------------------------------
(Typed Name) (Typed Name)
-------------------------- ------------------------------
(Title) (Title)
43
<PAGE>
Exhibit 10.3
AMENDED AND RESTATED OAO TECHNOLOGY SOLUTIONS, INC.
1996 EQUITY COMPENSATION PLAN
[The OAO International Corporation 1996 Equity Compensation Plan was adopted by
the Board of Directors on May 3, 1996 and approved by the stockholders on
September 4, 1996; the Amended and Restated OAO Technology Solutions, Inc. 1996
Equity Compensation Plan was adopted by the Board of Directors on September 26,
1997 and approved by the stockholders on ___________________.]
The purpose of the Amended and Restated OAO Technology Solutions, Inc.
1996 Equity Compensation Plan (the "Plan") is to provide (i) designated
employees of OAO Technology solutions, Inc. (the "Company") and its
subsidiaries, (ii) certain Key Advisors and advisors who perform services for
the Company or its subsidiaries and (iii) non-employee members of the Board
of Directors of the Company (the "Board") with the opportunity to receive
grants of incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock and performance units. The Company
believes that the Plan will encourage the participants to contribute
materially to the growth of the Company, thereby benefiting the Company's
shareholders, and will align the economic interests of the participants with
those of the shareholders.
1. Administration
(a) Committee. The Plan shall be administered and interpreted by a
committee appointed by the Board (the "Committee"). Prior to the effective
date of an initial public offering of the Company's stock as described in
Section 22(b)(a "Public Offering"), the Board may exercise any power or
authority of the Committee under the Plan and, in such case, references to
the Committee hereunder, as they relate to Plan administration, shall be
deemed to include the Board as a whole. After a Public Offering, the
Committee may consist of two or more persons appointed by the Board, all of
whom may be "outside directors" as defined under section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code") and related Treasury
regulations and may be "non-employee directors" as defined under Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
unless grants authorized by such non-employee directors are specifically
approved by the Board.
(b) Committee Authority. The Committee shall have the sole
authority to (i) determine the individuals to whom grants shall be made under
the Plan, (ii) determine the type, size and terms of the grants to be made to
each such individual, (iii) determine the time when the grants will be made
and the duration of any applicable exercise or restriction period, including
the criteria for exercisability and the acceleration of exercisability and
(iv) deal with any other matters arising under the Plan.
(c) Committee Determinations. The Committee shall have full power
and authority to administer and interpret the Plan, to make factual
determinations and to adopt or amend such rules, regulations, agreements and
instruments for implementing the Plan and for the conduct
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<PAGE>
of its business as it deems necessary or advisable, in its sole discretion.
The Committee's interpretations of the Plan and all determinations made by
the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all persons having any interest in the Plan or in
any awards granted hereunder. All powers of the Committee shall be executed
in its sole discretion, in the best interest of the Company, not as a
fiduciary, and in keeping with the objectives of the Plan and need not be
uniform as to similarly situated individuals.
2. Grants
Awards under the Plan may consist of grants of incentive stock options as
described in Section 5 ("Incentive Stock Options"), nonqualified stock
options as described in Section 5 ("Nonqualified Stock Options")(Incentive
Stock Options and Nonqualified Stock Options are collectively referred to as
"Options"), restricted stock as described in Section 6 (Restricted Stock"),
stock appreciation rights as described in Section 7 ("SARs"), and performance
units as described in Section 8 ("Performance Units") (hereinafter
collectively referred to as "Grants"). All Grants shall be subject to the
terms and conditions set forth herein and to such other terms and conditions
consistent with this Plan as the Committee deems appropriate and as are
specified in writing by the Committee to the individual in a grant instrument
(the "Grant Instrument") or an amendment to the Grant Instrument. The
Committee shall approve the form and provisions of each Grant Instrument.
Grants under a particular Section of the Plan need not be uniform as among
the grantees.
3. Shares Subject to the Plan
(a) Shares Authorized. Subject to the adjustment specified below,
the aggregate number of shares of common stock of the Company ("Company
Stock") that may be issued or transferred under the Plan is 3,200,000 shares.
After a Public Offering, the maximum aggregate number of shares of Company
Stock that shall be subject to Grants made under the Plan to any individual
during any calendar year shall be 1,600,000 shares. The shares may be
authorized but unissued shares of Company Stock or reacquired shares of
Company Stock, including shares purchased by the Company on the open market
for purposes of the Plan. If and to the extent Options or SARs granted under
the Plan terminate, expire, or are canceled, forfeited, exchanged or
surrendered without having been exercised, or if any shares of Restricted
Stock or Performance Units are forfeited, the shares subject to such Grants
shall again be available for purposes of the Plan.
(b) Adjustments. If there is any change in the number or kind of
shares of Company Stock outstanding (i) by reason of a stock dividend,
spinoff, recapitalization, stock split or combination or exchange of shares,
(ii) by reason of a merger, reorganization or consolidation in which the
Company is the surviving corporation, (iii) by reason of a reclassification
or change in par value, or (iv) by reason of any other extraordinary or
unusual event affecting the outstanding Company Stock as a class without the
Company's receipt of consideration, or if the value of outstanding shares of
Company Stock is substantially reduced as a result of a spinoff or the
Company's payment of an extraordinary dividend or distribution, the maximum
number of shares
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<PAGE>
of Company Stock available for Grants, the maximum number of shares of
Company Stock that any individual participating in the Plan may be granted in
any year, the number of shares covered by outstanding Grants, the kind of
shares issued under the Plan, and the price per share or the applicable
market value of such Grants shall be appropriately adjusted by the Committee
to reflect any increase or decrease in the number of, or change in the kind
or value of, issued shares of Company Stock to preclude, to the extent
practicable, the enlargement or dilution of rights and benefits under such
Grants; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated. Any adjustments determined by the Committee
shall be final, binding and conclusive.
4. Eligibility for Participation
(a) Eligible Persons. All employees of the Company and its
subsidiaries ("Employees"), including Employees who are officers or members
of the Board, and members of the Board who are not Employees ("Non-Employee
Directors") shall be eligible to participate in the Plan. Key Advisors and
advisors who perform services to the Company or any of its subsidiaries ("Key
Advisors") shall be eligible to participate in the Plan if the Key Advisors
render bona fide services and such services are not in connection with the
offer or sale of securities in a capital-raising transaction.
(b) Selection of Grantees. The Committee shall select the
Employees, Non-Employee Directors and Key Advisors to receive Grants and
shall determine the number of shares of Company Stock subject to a particular
Grant in such manner as the Committee determines. Employees, Key Advisors
and Non-Employee Directors who receive Grants under this Plan shall
hereinafter be referred to as "Grantees".
5. Granting of Options
(a) Number of Shares. The Committee shall determine the number of
shares of Company Stock that will be subject to each Grant of Options to
Employees, Non-Employee Directors and Key Advisors.
(b) Type of Option and Price.
(i) The Committee may grant Incentive Stock Options that are
intended to qualify as "incentive stock options" within the meaning of
section 422 of the Code or Nonqualified Stock Options that are not intended
so to qualify or any combination of Incentive Stock Options and Nonqualified
Stock Options, all in accordance with the terms and conditions set forth
herein. Incentive Stock Options may be granted only to Employees.
Nonqualified Stock Options may be granted to Employees, Non-Employee
Directors and Key Advisors.
(ii) The purchase price (the "Exercise Price") of Company Stock
subject to an Option shall be determined by the Committee and may be equal
to, greater than, or less than
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the Fair Market Value (as defined below) of a share of Company Stock on the
date the Option is granted; provided, however, that (x) the Exercise Price of
an Incentive Stock Option shall be equal to, or greater than, the Fair Market
Value of a share of Company Stock on the date the Incentive Stock Option is
granted and (y) an Incentive Stock Option may not be granted to an Employee
who, at the time of grant, owns stock possessing more than 10 percent of the
total combined voting power of all classes of stock of the Company or any
parent or subsidiary of the Company, unless the Exercise Price per share is
not less than 110% of the Fair Market Value of Company Stock on the date of
grant.
(iii) If the Company Stock is publicly traded, then the Fair Market
Value per share shall be determined as follows: (x) if the principal trading
market for the Company Stock is a national securities exchange or the Nasdaq
National Market, the last reported sale price thereof on the relevant date or
(if there were no trades on that date) the latest preceding date upon which a
sale was reported, or (y) if the Company Stock is not principally traded on
such exchange or market, the mean between the last reported "bid" and "asked"
prices of Company Stock on the relevant date, as reported on Nasdaq or, if
not so reported, as reported by the National Daily Quotation Bureau, Inc. or
as reported in a customary financial reporting service, as applicable and as
the Committee determines. If the Company Stock is not publicly traded or, if
publicly traded, is not subject to reported transactions or "bid" or "asked"
quotations as set forth above, the Fair Market Value per share shall be as
determined by the Committee.
(c) Option Term. The Committee shall determine the term of each
Option. The term of any Option shall not exceed ten years from the date of
grant. However, an Incentive Stock Option that is granted to an Employee
who, at the time of grant, owns stock possessing more than 10 percent of the
total combined voting power of all classes of stock of the Company, or any
parent or subsidiary of the Company, may not have a term that exceeds five
years from the date of grant.
(d) Exercisability of Options. Options shall become exercisable in
accordance with such terms and conditions, consistent with the Plan, as may
be determined by the Committee and specified in the Grant Instrument or an
amendment to the Grant Instrument. The Committee may accelerate the
exercisability of any or all outstanding Options at any time for any reason.
(e) Termination of Employment, Disability or Death.
(i) Except as provided below, an Option may only be exercised
while the Grantee is employed by the Company as an Employee, Key Advisor or
member of the Board. In the event that a Grantee ceases to be employed by
the Company for any reason other than a "disability", death or "termination
for cause", any Option which is otherwise exercisable by the Grantee shall
terminate unless exercised within 90 days after the date on which the Grantee
ceases to be employed by the Company (or within such other period of time as
may be specified by the Committee), but in any event no later than the date
of expiration of the Option term. Any of the Grantee's Options that
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are not otherwise exercisable as of the date on which the Grantee ceases to
be employed by the Company shall terminate as of such date.
(ii) In the event the Grantee ceases to be employed by the
Company on account of a "termination for cause" by the Company, any Option
held by the Grantee shall terminate as of the date the Grantee ceases to be
employed by the Company.
(iii) In the event the Grantee ceases to be employed by the
Company because the Grantee is "disabled", any Option which is otherwise
exercisable by the Grantee shall terminate unless exercised within one year
after the date on which the Grantee ceases to be employed by the Company (or
within such other period of time as may be specified by the Committee), but
in any event no later than the date of expiration of the Option term. Any of
the Grantee's Options which are not otherwise exercisable as of the date on
which the Grantee ceases to be employed by the Company shall terminate as of
such date.
(iv) If the Grantee dies while employed by the Company or
within 90 days after the date on which the Grantee ceases to be employed on
account of a termination of employment specified in Section 5(e)(i) above (or
within such other period of time as may be specified by the Committee), any
Option that is otherwise exercisable by the Grantee shall terminate unless
exercised within one year after the date on which the Grantee ceases to be
employed by the Company (or within such other period of time as may be
specified by the Committee), but in any event no later than the date of
expiration of the Option term. Any of the Grantee's Options that are not
otherwise exercisable as of the date on which the Grantee ceases to be
employed by the Company shall terminate as of such date.
(v) For purposes of Sections 5(e), 6, 7, 8 and 13:
(A) "Company," when used in the phrase "employed by the
Company," shall mean the Company and its parent and subsidiary corporations.
(B) "Employed by the Company" shall mean employment or service
as an Employee, Key Advisor or member of the Board (so that, for purposes of
exercising Options and SARs and satisfying conditions with respect to
Restricted Stock and Performance Units, a Grantee shall not be considered to
have terminated employment or service until the Grantee ceases to be an
Employee, Key Advisor and member of the Board), unless the Committee
determines otherwise.
(C) "Disability" shall mean a Grantee's becoming disabled
within the meaning of section 22(e)(3) of the Code.
(D) "Termination for cause" shall mean, except to the extent
specified otherwise by the Committee, a finding by the Committee that the
Grantee has breached his or her employment,
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service, noncompetition, nonsolicitation or other similar contract with the
Company, or has been engaged in disloyalty to the Company, including, without
limitation, fraud, embezzlement, theft, commission of a felony or dishonesty
in the course of his or her employment or service, or has disclosed trade
secrets or confidential information of the Company to persons not entitled to
receive such information. In the event a Grantee's employment is terminated
for cause, in addition to the immediate termination of all Grants, the
Grantee shall automatically forfeit all shares underlying any exercised
portion of an Option for which the Company has not yet delivered the share
certificates, upon refund by the Company of the Exercise Price paid by the
Grantee for such shares, and any option gain realized by the Grantee from
exercising all or a portion of an Option within the two-year period prior to
the event shall be paid by the Grantee to the Company.
(f) Exercise of Options. A Grantee may exercise an Option that has
become exercisable, in whole or in part, by delivering a notice of exercise
to the Company with payment of the Exercise Price. The Grantee shall pay the
Exercise Price for an Option as specified by the Committee (x) in cash, (y)
with the approval of the Committee, by delivering shares of Company Stock
owned by the Grantee for the period necessary to avoid a charge to the
Company's earnings for financial reporting purposes (including Company Stock
acquired in connection with the exercise of an Option, subject to such
restrictions as the Committee deems appropriate) and having a Fair Market
Value on the date of exercise equal to the Exercise Price or (z) by such
other method as the Committee may approve, including after a Public Offering
payment through a broker in accordance with procedures permitted by
Regulation T of the Federal Reserve Board. Shares of Company Stock used to
exercise an Option shall have been held by the Grantee for the requisite
period of time to avoid adverse accounting consequences to the Company with
respect to the Option. The Grantee shall pay the Exercise Price and the
amount of any withholding tax due (pursuant to Section 9) at the time of
exercise.
(g) Limits on Incentive Stock Options. Each Incentive Stock Option
shall provide that, if the aggregate Fair Market Value of the stock on the
date of the grant with respect to which Incentive Stock Options are
exercisable for the first time by a Grantee during any calendar year, under
the Plan or any other stock option plan of the Company or a parent or
subsidiary, exceeds $100,000, then the option, as to the excess, shall be
treated as a Nonqualified Stock Option. An Incentive Stock Option shall not
be granted to any person who is not an Employee of the Company or a parent or
subsidiary (within the meaning of section 424(f) of the Code).
6. Restricted Stock Grants
The Committee may issue or transfer shares of Company Stock to an
Employee or Key Advisor under a Grant of Restricted Stock, upon such terms as
the Committee deems appropriate. The following provisions are applicable to
Restricted Stock:
(a) General Requirements. Shares of Company Stock issued or
transferred pursuant to Restricted Stock Grants may be issued or transferred
for consideration or for no
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consideration, as determined by the Committee. The Committee may establish
conditions under which restrictions on shares of Restricted Stock shall lapse
over a period of time or according to such other criteria as the Committee
deems appropriate. The period of time during which the Restricted Stock will
remain subject to restrictions will be designated in the Grant Instrument as
the "Restriction Period."
(b) Number of Shares. The Committee shall determine the number of
shares of Company Stock to be issued or transferred pursuant to a Restricted
Stock Grant and the restrictions applicable to such shares.
(c) Requirement of Employment. If the Grantee ceases to be
employed by the Company (as defined in Section 5(e)) during a period
designated in the Grant Instrument as the Restriction Period, or if other
specified conditions are not met, the Restricted Stock Grant shall terminate
as to all shares covered by the Grant as to which the restrictions have not
lapsed, and those shares of Company Stock must be immediately returned to the
Company. The Committee may, however, provide for complete or partial
exceptions to this requirement as it deems appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate.
During the Restriction Period, a Grantee may not sell, assign, transfer,
pledge or otherwise dispose of the shares of Restricted Stock except to a
Successor Grantee under Section 10(a). Each certificate for a share of
Restricted Stock shall contain a legend giving appropriate notice of the
restrictions in the Grant. The Grantee shall be entitled to have the legend
removed from the stock certificate covering the shares subject to
restrictions when all restrictions on such shares have lapsed. The Committee
may determine that the Company will not issue certificates for shares of
Restricted Stock until all restrictions on such shares have lapsed, or that
the Company will retain possession of certificates for shares of Restricted
Stock until all restrictions on such shares have lapsed.
(e) Right to Vote and to Receive Dividends. Unless the Committee
determines otherwise, during the Restriction Period, the Grantee shall have
the right to vote shares of Restricted Stock and to receive any dividends or
other distributions paid on such shares, subject to any restrictions deemed
appropriate by the Committee.
(f) Lapse of Restrictions. All restrictions imposed on Restricted
Stock shall lapse upon the expiration of the applicable Restriction Period
and the satisfaction of all conditions imposed by the Committee. The
Committee may determine, as to any or all Restricted Stock Grants, that the
restrictions shall lapse without regard to any Restriction Period.
7. Stock Appreciation Rights
(a) General Requirements. The Committee may grant stock
appreciation rights ("SARs") to an Employee or Key Advisor separately or in
tandem with any Option (for all or a portion of the applicable Option).
Tandem SARs may be granted either at the time the Option is
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granted or at any time thereafter while the Option remains outstanding;
provided, however, that, in the case of an Incentive Stock Option, SARs may
be granted only at the time of the Grant of the Incentive Stock Option. The
Committee shall establish the base amount of the SAR at the time the SAR is
granted. Unless the Committee determines otherwise, the base amount of each
SAR shall be equal to the per share Exercise Price of the related Option or,
if there is no related Option, the Fair Market Value of a share of Company
Stock as of the date of Grant of the SAR.
(b) Tandem SARs. In the case of tandem SARs, the number of SARs
granted to a Grantee that shall be exercisable during a specified period
shall not exceed the number of shares of Company Stock that the Grantee may
purchase upon the exercise of the related Option during such period. Upon
the exercise of an Option, the SARs relating to the Company Stock covered by
such Option shall terminate. Upon the exercise of SARs, the related Option
shall terminate to the extent of an equal number of shares of Company Stock.
(c) Exercisability. An SAR shall be exercisable during the period
specified by the Committee in the Grant Instrument and shall be subject to
such vesting and other restrictions as may be specified in the Grant
Instrument. The Committee may accelerate the exercisability of any or all
outstanding SARs at any time for any reason. SARs may only be exercised
while the Grantee is employed by the Company or during the applicable period
after termination of employment as described in Section 5(e). A tandem SAR
shall be exercisable only during the period when the Option to which it is
related is also exercisable. No SAR may be exercised for cash by an officer
or director of the Company or any of its subsidiaries who is subject to
Section 16 of the Exchange Act, except in accordance with Rule 16b-3 under
the Exchange Act.
(d) Value of SARs. When a Grantee exercises SARs, the Grantee
shall receive in settlement of such SARs an amount equal to the value of the
stock appreciation for the number of SARs exercised, payable in cash, Company
Stock or a combination thereof. The stock appreciation for an SAR is the
amount by which the Fair Market Value of the underlying Company Stock on the
date of exercise of the SAR exceeds the base amount of the SAR as described
in Subsection (a).
(e) Form of Payment. The Committee shall determine whether the
appreciation in an SAR shall be paid in the form of cash, shares of Company
Stock, or a combination of the two, in such proportion as the Committee deems
appropriate. For purposes of calculating the number of shares of Company
Stock to be received, shares of Company Stock shall be valued at their Fair
Market Value on the date of exercise of the SAR. If shares of Company Stock
are to be received upon exercise of an SAR, cash shall be delivered in lieu
of any fractional share.
8. Performance Units
(a) General Requirements. The Committee may grant performance
units ("Performance Units") to an Employee or Key Advisor. Each Performance
Unit shall represent the
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right of the Grantee to receive an amount based on the value of the
Performance Unit, if performance goals established by the Committee are met.
A Performance Unit shall be based on the Fair Market Value of a share of
Company Stock or on such other measurement base as the Committee deems
appropriate. The Committee shall determine the number of Performance Units
to be granted and the requirements applicable to such Units.
(b) Performance Period and Performance Goals. When Performance
Units are granted, the Committee shall establish the performance period
during which performance shall be measured (the "Performance Period"),
performance goals applicable to the Units ("Performance Goals") and such
other conditions of the Grant as the Committee deems appropriate.
Performance Goals may relate to the financial performance of the Company or
its operating units, the performance of Company Stock, individual
performance, or such other criteria as the Committee deems appropriate.
(c) Payment with respect to Performance Units. At the end of each
Performance Period, the Committee shall determine to what extent the
Performance Goals and other conditions of the Performance Units are met and
the amount, if any, to be paid with respect to the Performance Units.
Payments with respect to Performance Units shall be made in cash, in Company
Stock, or in a combination of the two, as determined by the Committee.
(d) Requirement of Employment. If the Grantee ceases to be
employed by the Company (as defined in Section 5(e)) during a Performance
Period, or if other conditions established by the Committee are not met, the
Grantee's Performance Units shall be forfeited. The Committee may, however,
provide for complete or partial exceptions to this requirement as it deems
appropriate.
9. Qualified Performance-Based Compensation.
(a) Designation as Qualified Performance-Based Compensation. The
Committee may determine that Performance Units or Restricted Stock granted to
an Employee shall be considered "qualified performance-based compensation"
under Section 162(m) of the Code. The provisions of this Section 9 shall
apply to Grants of Performance Units and Restricted Stock that are to be
considered "qualified performance-based compensation" under Section 162(m) of
the Code.
(b) Performance Goals. When Performance Units or Restricted Stock
that are to be considered "qualified performance-based compensation" are
granted, the Committee shall establish in writing (i) the objective
performance goals that must be met in order for restrictions on the
Restricted Stock to lapse or amounts to be paid under the Performance Units,
(ii) the Performance Period during which the performance goals must be met,
(iii) the threshold, target and maximum amounts that may be paid if the
performance goals are met, and (iv) any other conditions, including without
limitation provisions relating to death, disability, other termination of
employment or Reorganization, that the Committee deems appropriate and
consistent with the Plan and Section 162(m) of the Code. The performance
goals may relate to the Employee's business unit or the
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performance of the Company and its subsidiaries as a whole, or any
combination of the foregoing. The Committee shall use objectively
determinable performance goals based on one or more of the following
criteria: stock price, earnings per share, net earnings, operating earnings,
return on assets, shareholder return, return on equity, growth in assets,
unit volume, sales, market share, or strategic business criteria consisting
of one or more objectives based on meeting specific revenue goals, market
penetration goals, geographic business expansion goals, cost targets or goals
relating to acquisitions or divestitures.
(c) Establishment of Goals. The Committee shall establish the
performance goals in writing either before the beginning of the Performance
Period or during a period ending no later than the earlier of (i) 90 days
after the beginning of the Performance Period or (ii) the date on which 25%
of the Performance Period has been completed , or such other date as may be
required or permitted under applicable regulations under Section 162(m) of
the Code. The performance goals shall satisfy the requirements for
"qualified performance-based compensation," including the requirement that
the achievement of the goals be substantially uncertain at the time they are
established and that the goals be established in such a way that a third
party with knowledge of the relevant facts could determine whether and to
what extent the performance goals have been met. The Committee shall not
have discretion to increase the amount of compensation tat is payable upon
achievement of the designated performance goals.
(d) Maximum Payment. If Restricted Stock, or Performance Units
measured with respect to the fair market value of the Company Stock, are
granted, not more than 1.6 million shares of the Company Stock may
be granted to an Employee under the Performance Units or Restricted Stock for
any Performance Period. If Performance Units are measured with respect to
other criteria, the maximum amount that may be paid to an Employee with
respect to a Performance Period is $1 million.
(e) Announcement of Grants. The Committee shall certify and
announce the results for each Performance Period to all Grantees immediately
following the announcement of the Company's financial results for the
Performance Period. If an to the extent that the Committee does not certify
that the performance goals have been met, the grants of Restricted Stock or
Performance Units for the Performance Period shall be forfeited.
10. Withholding of Taxes
(a) Required Withholding. All Grants under the Plan shall be
subject to applicable federal (including FICA), state and local tax
withholding requirements. The Company shall have the right to deduct from
all Grants paid in cash, or from other wages paid to the Grantee, any
federal, state or local taxes required by law to be withheld with respect to
such Grants. In the case of Options and other Grants paid in Company Stock,
the Company may require the Grantee or other person receiving such shares to
pay to the Company the amount of any such taxes that the Company is required
to withhold with respect to such Grants, or the Company may deduct from
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other wages paid by the Company the amount of any withholding taxes due with
respect to such Grants.
(b) Election to Withhold Shares. If the Committee so permits, a
Grantee may elect to satisfy the Company's income tax withholding obligation
with respect to an Option, SAR, Restricted Stock or Performance Units paid in
Company Stock by having shares withheld up to an amount that does not exceed
the Grantee's maximum marginal tax rate for federal (including FICA), state
and local tax liabilities. The election must be in a form and manner
prescribed by the Committee and shall be subject to the prior approval of the
Committee.
11. Transferability of Grants
(a) Nontransferability of Grants. Except as provided below, only
the Grantee may exercise rights under a Grant during the Grantee's lifetime.
A Grantee may not transfer those rights except by will or by the laws of
descent and distribution or, with respect to Grants other than Incentive
Stock Options, if permitted in any specific case by the Committee, pursuant
to a domestic relations order (as defined under the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or the
regulations thereunder). When a Grantee dies, the personal representative or
other person entitled to succeed to the rights of the Grantee ("Successor
Grantee") may exercise such rights. A Successor Grantee must furnish proof
satisfactory to the Company of his or her right to receive the Grant under
the Grantee's will or under the applicable laws of descent and distribution.
(b) Transfer of Nonqualified Stock Options. Notwithstanding the
foregoing, the Committee may provide, in a Grant Instrument, that a Grantee
may transfer Nonqualified Stock Options to family members or other persons or
entities according to such terms as the Committee may determine; provided
that the Grantee receives no consideration for the transfer of an Option and
the transferred Option shall continue to be subject to the same terms and
conditions as were applicable to the Option immediately before the transfer.
12. Right of First Refusal
Prior to a Public Offering, if at any time an individual desires to sell,
encumber, or otherwise dispose of shares of Company Stock distributed to him
under this Plan, the individual shall first offer the shares to the Company
by giving the Company written notice disclosing: (a) the name of the proposed
transferee of the Company Stock; (b) the certificate number and number of
shares of Company Stock proposed to be transferred or encumbered; (c) the
proposed price; (d) all other terms of the proposed transfer; and (e) a
written copy of the proposed offer. Within 30 days after receipt of such
notice, the Company shall have the option to purchase all or part of such
Company Stock at the same price and on the same terms as contained in such
notice.
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In the event the Company (or a shareholder, as described below) does not
exercise the option to purchase Company Stock, as provided above, the
individual shall have the right to sell, encumber or otherwise dispose of his
shares of Company Stock on the terms of the transfer set forth in the written
notice to the Company, provided such transfer is effected within 30 days
after the expiration of the option period. If the transfer is not effected
within such period, the Company must again be given an option to purchase, as
provided above.
The Board, in its sole discretion, may waive the Company's right of first
refusal pursuant to this Section 12 and the Company's repurchase right
pursuant to Section 13 below. If the Company's right of first refusal or
repurchase right is so waived, the Board may, in its sole discretion, pass
through such right to the remaining shareholders of the Company in the same
proportion that each shareholder's stock ownership bears to the stock
ownership of all the shareholders of the Company, as determined by the Board.
To the extent that a shareholder has been given such right and does not
purchase his or her allotment, the other shareholders shall have the right to
purchase such allotment on the same basis.
On and after a Public Offering, the Company shall have no further right
to purchase shares of Company Stock under this Section 12 and Section 13
below, and its limitations shall be null and void.
Notwithstanding the foregoing, the Committee may require that a Grantee
execute a shareholder's agreement, with such terms as the Committee deems
appropriate, with respect to any Company Stock distributed pursuant to this
Plan. Such agreement may provide that the provisions of this Section 12 and
Section 13 below shall not apply to such Company Stock.
13. Purchase by the Company
Prior to a Public Offering, if a Grantee ceases to be employed by the
Company, the Company shall have the right to purchase all or part of any
Company Stock distributed to him under this Plan at its then current Fair
Market Value (as defined in Section 5(b)); provided, however, that such
repurchase shall be made in accordance with applicable accounting rules to
avoid adverse accounting treatment.
14. Reorganization of the company.
(a) Reorganization. As used herein, a "Reorganization" shall be
deemed to have occurred if the shareholders of the Company approve (or, if
shareholder approval is not required, the Board approves) an agreement
providing for (i) the merger or consolidation of the Company with another
corporation where the shareholders of the Company, immediately prior to the
merger or consolidation, will not beneficially own, immediately after the
merger or consolidation, shares entitling such shareholders to more than 50%
of all votes to which all shareholders of the surviving corporation would be
entitled in the election of directors (without consideration of the rights of
any
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class of stock to elect directors by a separate class vote), (ii) the sale or
other disposition of all or substantially all of the assets of the Company,
or (iii) a liquidation or dissolution of the Company.
(b) Assumption of Grants. Upon a Reorganization where the Company
is not the surviving corporation (or survives only as a subsidiary of another
corporation), unless the Committee determines otherwise, all outstanding
Options and SARs that are not exercised shall be assumed by, or replaced with
comparable options or rights by, the surviving corporation.
(c) Other Alternatives. Notwithstanding the foregoing, in the
event of a Reorganization, the Committee may take one or both of the
following actions: the Committee may (i) require that Grantees surrender
their outstanding Options and SARs in exchange for a payment by the Company,
in cash or Company Stock as determined by the Committee, in an amount equal
to the amount by which the then Fair Market Value of the shares of Company
Stock subject to the Grantee's unexercised Options and SARs exceeds the
Exercise Price of the Options or the base amount of the SARs, as applicable,
or (ii) after giving Grantees an opportunity to exercise their outstanding
Options and SARs, terminate any or all unexercised Options and SARs at such
time as the Committee deems appropriate. Such surrender or termination shall
take place as of the date of the Reorganization or such other date as the
Committee may specify.
(d) Limitations. Notwithstanding anything in the Plan to the contrary,
in the event of a Reorganization, the Committee shall not have the right to
take any actions described in the Plan (including without limitation actions
described in Subsection (b) above) that would make the Reorganization
ineligible for pooling of interests accounting treatment or that would make
the Reorganization ineligible for desired tax treatment if, in the absence of
such right, the Reorganization would qualify for such treatment and the
Company intends to use such treatment with respect to the Reorganization.
15. Requirements for Issuance or Transfer of Shares
(a) Shareholder's Agreement. The Committee may require that a
Grantee execute a shareholder's agreement, with such terms as the Committee
deems appropriate, with respect to any Company Stock distributed pursuant to
this Plan.
(b) Limitations on Issuance or Transfer of Shares. No Company
Stock shall be issued or transferred in connection with any Grant hereunder
unless and until all legal requirements applicable to the issuance or
transfer of such Company Stock have been complied with to the satisfaction of
the Committee. The Committee shall have the right to condition any Grant
made to any Grantee hereunder on such Grantee's undertaking in writing to
comply with such restrictions on his or her subsequent disposition of such
shares of Company Stock as the Committee shall deem necessary or advisable as
a result of any applicable law, regulation or official interpretation
thereof, and certificates representing such shares may be legended to reflect
any such restrictions. Certificates representing shares of Company Stock
issued or transferred under the Plan will be
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subject to such stop-transfer orders and other restrictions as may be
required by applicable laws, regulations and interpretations, including any
requirement that a legend be placed thereon.
16. Amendment and Termination of the Plan
(a) Amendment. The Board may amend or terminate the Plan at any
time; provided, however, that the Board shall not amend the Plan without
shareholder approval if such approval is required by Section 162(m) of the
Code.
(b) Termination of Plan. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date, unless the
Plan is terminated earlier by the Board or is extended by the Board with the
approval of the shareholders.
(c) Termination and Amendment of Outstanding Grants. A termination
or amendment of the Plan that occurs after a Grant is made shall not
materially impair the rights of a Grantee unless the Grantee consents. The
termination of the Plan shall not impair the power and authority of the
Committee with respect to an outstanding Grant. Whether or not the Plan has
terminated, an outstanding Grant may be terminated or amended in accordance
with the Plan or, may be amended by agreement of the Company and the Grantee
consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling
document. No other statements, representations, explanatory materials or
examples, oral or written, may amend the Plan in any manner. The Plan shall
be binding upon and enforceable against the Company and its successors and
assigns.
17. Funding of the Plan
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event
shall interest be paid or accrued on any Grant, including unpaid installments
of Grants.
18. Rights of Participants
Nothing in this Plan shall entitle any Employee, Key Advisor or other
person to any claim or right to be granted a Grant under this Plan. Neither
this Plan nor any action taken hereunder shall be construed as giving any
individual any rights to be retained by or in the employ of the Company or
any other employment rights.
19. No Fractional Shares
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No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Grant. The Committee shall determine whether
cash, other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
20. Headings
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section
shall control.
21. Effective Date of the Plan.
(a) Effective Date. Subject to the approval of the Company's
shareholders, the Plan shall be effective as of May 3, 1996.
(b) Public Offering. The provisions of the Plan that refer to a
Public Offering, or that refer to, or are applicable to persons subject to,
section 16 of the Exchange Act or section 162(m) of the Code, shall be
effective, if at all, upon the initial registration of the Company Stock
under section 12(g) of the Exchange Act, and shall remain effective
thereafter for so long as such stock is so registered.
22. Miscellaneous
(a) Grants in Connection with Corporate Transactions and Otherwise.
Nothing contained in this Plan shall be construed to (i) limit the right of
the Committee to make Grants under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including Grants
to employees thereof who become Employees of the Company, or for other proper
corporate purposes, or (ii) limit the right of the Company to grant stock
options or make other awards outside of this Plan. Without limiting the
foregoing, the Committee may make a Grant to an employee of another
corporation who becomes an Employee by reason of a corporate merger,
consolidation, acquisition of stock or property, reorganization or
liquidation involving the Company or any of its subsidiaries in substitution
for a stock option or restricted stock grant made by such corporation. The
terms and conditions of the substitute grants may vary from the terms and
conditions required by the Plan and from those of the substituted stock
incentives. The Committee shall prescribe the provisions of the substitute
grants.
(b) Compliance with Law. The Plan, the exercise of Options and
SARs and the obligations of the Company to issue or transfer shares of
Company Stock under Grants shall be subject to all applicable laws and to
approvals by any governmental or regulatory agency as may be required. With
respect to persons subject to section 16 of the Exchange Act, it is the
intent of the Company that the Plan and all transactions under the Plan
comply with all applicable provisions of
15
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Rule 16b-3 or its successors under the Exchange Act. The Committee may
revoke any Grant if it is contrary to law or modify a Grant to bring it into
compliance with any valid and mandatory government regulation. The Committee
may also adopt rules regarding the withholding of taxes on payments to
Grantees. The Committee may, in its sole discretion, agree to limit its
authority under this Section.
(c) Governing Law. The validity, construction, interpretation and
effect of the Plan and Grant Instruments issued under the Plan shall
exclusively be governed by and determined in accordance with the law of State
of Delaware.
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Exhibit 21.1
Subsidiaries of Registrant
Subsidiaries Jurisdiction
- ------------ ------------
OAO Systems, Inc. Illinois
OAO Canada, Ltd. New Brunswick, Canada
Canadian Network Resources, Ltd. New Brunswick, Canada
Canadian Resource Management, Ltd. British Columbia, Canada
OAO/ICOR De Mexico, S.A. De C.V. Mexico
OAO Puerto Rico, Inc. Puerto Rico
OAO/ICOR Do Brasil S-C LTDA. Brazil
OAO/ICOR New Zealand Limited New Zealand
OAO/ICOR Australia PTY Limited Australia
OAO France France
OAO Deutschland GmbH Germany
OAO (UK) Limited United Kingdom
OAO/ICOR (UK), Ltd. United Kingdom
OAO Commercial Systems Corp. Nevada
OAO Healthcare Solutions, Inc. California
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registration Statement
of OAO Technology Solutions, Inc. on Form S-1 of our report dated May 5,
1997, except as to Note 16, as to which the date is July 31, 1997 appearing
in the Prospectus, which is a part of the Registration Statement, and the
references to us under the headings "Selected Consolidated Financial Data"
and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of OAO Technology
Solutions, Inc., listed in Item 16(b). This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Washington D.C.
October 6, 1997
