<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1998
REGISTRATION NO. 333-59457
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
APPLIED SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7373 36-4236010
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
200 APPLIED PARKWAY
UNIVERSITY PARK, IL 60466
(708) 534-5575
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TIMOTHY J. MCINTYRE
CHIEF FINANCIAL OFFICER
APPLIED SYSTEMS, INC.
200 APPLIED PARKWAY
UNIVERSITY PARK, IL 60466
(708) 534-5575
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
<TABLE>
<S> <C>
FREDERICK C. LOWINGER CHRISTOPHER D. LUEKING
SIDLEY & AUSTIN LATHAM & WATKINS
ONE FIRST NATIONAL PLAZA 233 S. WACKER DRIVE, SUITE 5800
CHICAGO, IL 60603 CHICAGO, IL 60606
(312) 853-7000 (312) 876-7700
</TABLE>
-------------------------
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 SECTION 8(A), MAY
DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
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 OF 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.
SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1998
PROSPECTUS
SHARES
APPLIED SYSTEMS, INC.
APPLIED SYSTEMS, INC.
COMMON STOCK
Of the shares of Common Stock offered hereby,
are being sold by Applied Systems, Inc. ("Applied Systems"
or the "Company") and are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
Prior to this Offering (the "Offering"), there has been no public market
for the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $ and $ per share. See
"Underwriting" for information relating to the determination of the initial
public offering price. Application has been made for quotation of the Common
Stock on the Nasdaq National Market under the symbol "APPS."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.
------------------------
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.
<TABLE>
<CAPTION>
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- --------------------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total(3)................ $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Selling Stockholders have granted to the Underwriters a 30-day option to
purchase up to an aggregate of additional shares of Common
Stock solely to cover over-allotments, if any. See "Underwriting." If all
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Selling Stockholders will be $ , $ and
$ , respectively.
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by them and subject to their right to reject
orders in whole or in part. It is expected that delivery of the certificates for
the shares of Common Stock will be made on or about , 1998.
WILLIAM BLAIR & COMPANY NATIONSBANC MONTGOMERY SECURITIES LLC
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
[THE INSIDE FRONT COVER OF THE PROSPECTUS INCLUDES A DIAGRAM DEPICTING THE FLOW
OF INFORMATION AMONG INSURANCE CARRIERS, INSURANCE AGENCIES AND INSURANCE
CUSTOMERS, AS WELL AS TEXT DESCRIBING THE KEY FUNCTIONS OF THE COMPANY'S THE
AGENCY MANAGER AND DIAMOND SYSTEM AUTOMATION PRODUCTS.]
"The Agency Manager" is a registered trademark of the Company. The Diamond
System, TAM-The Vision Series, TAM Advantage, FirstRate and PolicyMiner are
trademarks of the Company. This Prospectus also includes product names and other
trade names, service marks and trademarks of other companies.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS DURING AND AFTER THE OFFERING.
SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, contained
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus gives effect, immediately prior to the consummation of the
Offering, to the Reorganization as described in "Reorganization and S
Corporation Distribution." References herein to the "Company" or "Applied
Systems" shall be deemed, unless the context otherwise indicates, to include (i)
with respect to periods following the consummation of the Offering, Applied
Systems, Inc., a Delaware corporation, and its subsidiaries, and (ii) with
respect to periods preceding the consummation of the Offering, ASI, Asktom and
TAM UK, each as defined in "Reorganization and S Corporation Distribution."
Unless otherwise indicated, the information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." Certain
technical terms are used throughout this Prospectus and are defined in a
glossary of terms below. See "Glossary of Terms."
THE COMPANY
Applied Systems is a leading designer, developer and marketer of automation
software for independent insurance agencies. The Company's principal product,
The Agency Manager(R) ("TAM"), significantly improves the productivity and
efficiency of independent property and casualty ("P&C") insurance agencies by
combining client management, policy pricing, electronic data interchange
("EDI"), policy and claims servicing, and accounting and back office
administration into an easy to use, completely integrated, single-entry software
solution. Since the Company's founding in 1980, the Company's products have been
designed to operate on a personal computer platform, and currently support
implementations ranging from single users to large local area and wide area
networks. A significant advantage of TAM over competing products is that it
enables agencies to electronically transmit and receive industry standard
information to and from multiple insurance carriers through EDI. Estimates
prepared by ACORD, an independent insurance industry association, indicate that
the Company leads the P&C insurance industry in EDI capabilities, with TAM
enabling over 40% of all industry standard electronic communication links
between agencies and carriers. The Company expects general release of its newest
TAM product, TAM-Vision Series, in the fourth quarter of 1998. TAM-Vision Series
is a Windows NT, 32-bit, client/server product that is designed to support the
next generation of industry object-based EDI standards. The Company currently
serves over 7,500 agencies, representing over 70,000 concurrent licensed users.
Fifteen percent of the approximately 44,000 independent P&C insurance agencies
in the U.S. are currently customers of Applied Systems.
The Company has begun to leverage its insurance industry expertise through
the introduction of software solutions for P&C insurance carriers. The Company's
Diamond System is a fully integrated Microsoft Windows-based insurance carrier
automation system that offers real-time processing of policies and claims,
automates billing and facilitates the production of regulatory and statistical
reports. The Diamond System provides established EDI connections with the
Company's insurance agency customers, which the Company believes comprise the
largest base of independent agencies on a single EDI-enabled system, as well as
with other insurance agencies operating on industry standard systems. The
Company has sold the Diamond System to 13 insurance carriers to date, and
recently began an active marketing program for the product. There are
approximately 2,400 insurance carriers in the P&C industry in the U.S., most of
which have multiple lines of business in a number of states, representing an
attractive market opportunity for the Diamond System.
Applied Systems also provides its customers with support and maintenance
services, implementation and consulting services, and third-party equipment and
software. In 1997, approximately 35% of the Company's revenue was attributable
to support and maintenance agreements. These agreements entitle customers to
unlimited support as well as product enhancements and new versions of the
Company's products. Product enhancements and new versions are introduced
regularly to offer additional functionality and respond to changes in state
insurance regulations and other insurance industry and technological
developments. As evidence of their high level of satisfaction with the Company's
products and services, approximately 96% of TAM customers since 1996 have
annually renewed their support and maintenance agreements.
3
<PAGE> 5
A.M. Best Company estimates that approximately $276 billion in total
premiums were written in the P&C insurance industry in the U.S. in 1997. The
Company estimates that agencies and carriers collectively spend a total of
approximately 3-4% of such premiums on information technology, including
automation software and data processing. The Company expects this spending to
increase as competitive pressures on premiums for carriers and on commissions
for agencies continue to necessitate productivity and efficiency improvements.
Management believes insurance agencies are automating to become more efficient
across all areas of their business, allowing them to dedicate more time to
providing customer service, soliciting and developing new clients and retaining
and leveraging existing accounts. Insurance carriers are also focusing on
automation, with many upgrading their systems to more current technologies,
often developed and serviced by third-party vendors, in order to realize
efficiencies and to reduce the size of their in-house technical and data
processing staffs. In addition to efforts to improve automation internally, P&C
insurance carriers are actively promoting automation for the independent
agencies who sell their products. Some insurance carriers provide incentives to
agencies that elect to automate, such as offering financing for or subsidizing
the purchase of an automation system or paying higher commissions to automated
agencies. Automation and EDI allow insurance agencies to efficiently access
policy and pricing data electronically from insurance carriers. Both insurance
agencies and carriers are focusing on EDI because it allows for a higher level
of cost-efficient communication with fewer redundant steps and reduced exposure
to errors and omissions.
Applied Systems, Inc. was incorporated in Delaware in June 1998 and is the
holding company for a business founded in 1980. The Company's principal place of
business is located at 200 Applied Parkway, University Park, IL 60466, and its
telephone number is (708) 534-5575. The Company's Internet site is
http://www.appliedsystems.com.
THE OFFERING
Shares Offered by the Company................. shares
Shares Offered by the Selling Stockholders.... shares
Common Stock Outstanding Immediately After the
Offering...................................... shares(1)
Use of Proceeds............................... General corporate purposes,
including working capital,
product development and
possible acquisitions. See "Use
of Proceeds."
Proposed Nasdaq National Market Symbol........ APPS
- -------------------------
(1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under
the Company's Stock Option Plan, including shares of Common Stock
reserved for issuance pursuant to stock options being granted to certain
employees in connection with the Offering at the initial public offering
price, and (ii) 350,000 shares of Common Stock reserved for issuance
pursuant to the Company's Employee Stock Purchase Plan. See
"Management -- Stock Plans."
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................... $48,696 $61,041 $63,234 $64,956 $76,068 $34,898 $45,334
Gross profit...................... 25,009 27,514 29,464 29,828 36,688 16,199 22,425
Harbor Software litigation and
related items(1)............. -- 54 137 6,237 (3,508) 251 --
Operating income (loss)........... 1,762 1,964 2,878 (2,919) 8,713 1,249 4,111
Net income (loss)(2).............. 1,336 1,577 2,492 (3,288) 8,487 1,088 4,057
PRO FORMA STATEMENT OF OPERATIONS DATA(3):
Operating income.................. $(1,775) $ 9,783 $ 1,784 $ 4,321
Income tax provision (benefit).... (707) 3,841 693 1,739
Net income........................ (1,106) 6,008 1,083 2,720
Net income per share.............. $ $ $ $
Weighted average shares
outstanding(4).................
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 6,977
Working capital (deficit)................................. (11,478)
Total assets.............................................. 32,762
Total debt................................................ 249
Stockholders' equity...................................... 176
</TABLE>
- -------------------------
(1) Represents a charge (credit) related to litigation between the Company and
Harbor Software, Inc. ("Harbor"). See Note 12 of Notes to Combined Financial
Statements. See "Risk Factors -- Proprietary Rights; Risk of Infringement."
(2) Net income (loss) excludes (i) accretion related to the redemption feature
on certain common shares of ASI and (ii) the provision for federal and
certain state income taxes due to ASI's status as an S corporation. ASI's S
corporation status will terminate at the end of the day preceding the
Reorganization. See "Reorganization and S Corporation Distribution."
(3) Pro forma to give effect to: (i) the elimination of employee compensation
for Robert R. Eustace and Elsa M. Eustace, who upon consummation of the
Offering will no longer be employed by the Company or receive compensation
from the Company; (ii) the elimination of accretion resulting from the
elimination of the redemption feature on certain shares of ASI common stock;
and (iii) income tax expense that would have been recorded based on
effective tax rates had ASI been taxed as a C corporation during these
periods. The duties performed by Robert R. Eustace have been transitioned to
James P. Kellner, who is receiving additional compensation effective January
1998 to reflect these added responsibilities. Mr. Kellner has been President
of ASI since 1991. During 1997 Mr. Kellner was promoted to CEO and during
1998 he was promoted to Chairman. The duties performed by Elsa M. Eustace
have been transitioned to Timothy J. McIntyre, who has been employed by ASI
since May of 1998. A portion of Mr. McIntyre's compensation is attributable
to these added responsibilities.
5
<PAGE> 7
The following is a tabular reconciliation of the historical and pro forma
amounts:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -----------------
1996 1997 1997 1998
------- ------- ------ -------
<S> <C> <C> <C> <C>
Net income (loss) available to common stockholders,
as reported........................................ $(3,288) $ 8,409 $1,088 $ 4,025
Elimination of Robert R. and Elsa M. Eustace's
salary(i).......................................... 1,244 1,170 585 215
Additional compensation for James P. Kellner and
Timothy J. McIntyre(i)............................. (100) (100) (50) (5)
Elimination of accretion(ii)......................... -- 77 -- 32
Tax benefit (expense)(iii)........................... 1,038 (3,548) (540) (1,547)
------- ------- ------ -------
Pro forma net income (loss).......................... $(1,106) $ 6,008 $1,083 $ 2,720
======= ======= ====== =======
</TABLE>
(4) The number of shares estimated to be outstanding after the Reorganization,
but prior to consummation of the Offering.
(5) Pro forma as adjusted to give effect to (i) payment of an aggregate amount
of $11.0 million to ASI's current stockholders, representing the estimated
undistributed previously taxed S corporation earnings through the date of
the Offering, approximately $6.0 million of which is cash and approximately
$5.0 million of which is represented by the S Corporation Notes (as defined
herein), (ii) the recording of a deferred tax asset that will be recognized
as a result of the termination of ASI's S corporation status, which amount
would have been approximately $2.6 million as of June 30, 1998, and (iii)
the sale of shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $ , and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds." See "Reorganization and S Corporation Distribution."
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors in evaluating an
investment in the shares of Common Stock offered hereby. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the following risk factors.
Product Concentration. The Company has derived substantially all of its
revenues from the sale of a limited number of automation products and related
services and third-party products for the P&C insurance industry. Agency system
licenses and related implementation and consulting services and third-party
products incorporated into the Company's TAM product line represented over 60%
of the Company's revenues in each of the three most recent fiscal years. The
Company expects that revenues related to this product line will continue to
account for a majority of the Company's total revenues for the foreseeable
future. The life cycle of the TAM product line is difficult to estimate due to
the potential effect of new products, applications and product enhancements in
the insurance software industry and future competition. Accordingly, the
Company's future operating results will depend, in part, on maintaining and
increasing acceptance of these products and related services. Any factors
adversely affecting the pricing of, or demand for, these products and services
or an increase in competition for such products and services could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Agency Systems" and "-- Product
Development; Technological Change."
Product Development; Technological Change. The computer software industry
is subject to rapid technological change, changing customer requirements,
frequent new product introductions and evolving industry standards that may
render existing products and services obsolete. As a result, the Company's
position in its existing market or other markets that it may enter could be
altered rapidly by technological advancements not implemented by the Company.
The life cycles of the Company's products are difficult to estimate. The
products must keep pace with technological developments, conform to evolving
industry standards and address increasingly sophisticated customer needs. In
particular, the Company believes that it must continue to respond quickly to
users' needs for broad functionality and multi-platform support and to advances
in hardware and operating systems. Introduction of new products embodying new
technologies and the emergence of new industry standards or migration by
customers to new operating systems could render the Company's products obsolete
and unmarketable. There can be no assurance that the Company will not experience
future difficulties that could delay or prevent the successful development,
introduction and marketing of new products, or that new products and product
enhancements will meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable to develop and introduce products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
could be materially adversely affected.
Dependence on New Product Acceptance. As part of its product development,
the Company is continually evolving and offering new versions of its products.
The Company has developed TAM-Vision Series ("TAM-Vision"), its new version of
TAM, which is a 32-bit, client/server application. The Company introduced its
beta version of TAM-Vision in the third quarter of 1998 and plans a general
release of the product in the fourth quarter of 1998. The Company is also in the
process of actively marketing the Diamond System for insurance carriers. There
can be no assurance that TAM-Vision and the Diamond System will meet the
requirements of the marketplace and achieve market acceptance. Any delay in the
commercial availability or market acceptance of such products could have a
material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Insurance Industry. Since the Company's inception,
substantially all of its revenues have been derived from sales of its automation
products and related services and third-party products to the P&C insurance
industry, and its future growth is critically dependent on increased revenues
from these sources. The success of many of the Company's customers is
intrinsically linked to the health of the P&C insurance industry. The Company
believes that demand for its products and services could be disproportionately
affected by instability or downturns in the P&C insurance industry which may
cause existing and potential customers
7
<PAGE> 9
to exit the industry or delay, cancel or reduce any planned expenditures for
insurance automation products and related services.
Fluctuations in Quarterly Operating Results. The Company has experienced,
and expects to continue to experience, significant fluctuations in quarterly
operating results. The Company's future operating results will depend upon a
number of factors, including the demand for the Company's products, the size and
timing of specific sales and product shipments, the delay or deferral of
customer implementations, the level of product and price competition that it
encounters, the length of its sales cycles, the timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of products and services sold, the timing of new hires, general economic
conditions and its ability to develop and market new products and control costs.
Historically, the Company's revenues have been significantly higher in December
and January. The Company's Diamond System product, which is expected to
represent an increasing portion of the Company's revenues as the Company
continues its aggressive marketing program, has a significantly higher unit
sales price, longer sales cycle and a potentially longer implementation period
than the Company's other products, all of which could increase quarterly
fluctuations in the Company's operating results. In addition, a customer's
decision to purchase and implement an insurance software system is usually
discretionary, involves a significant commitment of customer resources and is
subject to delays, budget cycles and internal authorization procedures of the
Company's customers. The loss or delay of individual orders could have a
significant impact on the Company's operating results, particularly on a
quarterly basis. As a result of these and other factors, the Company's operating
results for any quarter are subject to significant variation, and the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. It is likely that the Company's future quarterly operating results
from time to time will not meet the expectations of market analysts or
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations" and "-- Absence of a Public Trading Market; Offering Price; Possible
Volatility of Stock Price."
Insurance Industry Consolidation. The Company believes that the P&C
insurance industry is experiencing a period of consolidation resulting in a
decrease in the number of independent agencies, which may affect the demand for
the Company's products and its ability to generate revenues. Although the
Company has not experienced a decrease in the number of TAM users to date, the
acquisition of TAM agencies by agencies using a competitor's product could
result in such a decrease. Any resulting decline in demand for the Company's
products could have a material adverse effect on the business, operating results
and financial condition of the Company.
Competition. The market for the Company's products is highly competitive.
The Company competes on the basis of product features, support and maintenance
programs, and price. A variety of companies currently offer products that
compete with one or more of the Company's product lines. In addition, as the
Company targets new markets and introduces new product lines, it expects to
encounter competition from additional competitors. In the independent insurance
agency market, the Company believes that its most significant competition comes
from systems developed by other insurance software vendors such as AMS and
Delphi. In the P&C insurance carrier market, the Company believes that its most
significant competition comes from policy and claims administration and
information systems developed in-house by insurance carriers. Carriers that
perform in-house administration typically have made a significant investment in
their policy and claims administration systems. In addition, insurance carrier
personnel have a vested interest in maintaining these responsibilities in-house.
The Company also competes with carrier software vendors, including PMSC and
INSpire. Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical and
marketing resources than the Company. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competition will not have a material adverse effect on the Company's
business, operating results and financial condition.
Management of Growth, Recruitment and Retention of Technical Personnel. The
growth in the size and complexity of the Company's business and expansion of its
product lines and its customer base have placed,
8
<PAGE> 10
and are expected to continue to place, a significant strain on the Company's
management and operations. The Company's ability to compete effectively and to
manage any future growth will depend on its ability to continue to implement and
upgrade insurance software products on a timely basis and will require it to
recruit and hire additional senior managers, as well as a substantial number of
technology, sales and marketing, and training and support personnel. At various
times, the Company has experienced delays in implementations of its systems due
to a shortage of technical employees and may continue to experience delays in
the future. Competition for technical, marketing, sales and management employees
is intense and the process of locating personnel with the combination of skills
and attributes required to execute the Company's strategy can be difficult,
time-consuming and expensive. There can be no assurance that the Company will be
successful at hiring or retaining such personnel, or that the Company's
personnel, system procedures and controls will be adequate to support the
Company's operations. Any failure to implement and upgrade the Company's
insurance software products or to attract, train, motivate or manage employees
could have a material adverse effect on the Company's business, operating
results and financial condition. See "-- Dependence on Key Personnel," "Business
- -- Employees" and "Management."
Product Liability; Product Defects. The Company's software products are
highly complex and sophisticated and could, from time to time, contain design
defects or software errors that could be difficult to detect and correct.
Despite extensive testing, the Company from time to time has discovered defects
or errors in its products only after its systems have been used by customers. In
addition, the Company or its customers may from time to time experience
difficulties relating to the integration of the Company's products with other
hardware or software in the customer's environment. There can be no assurance
that such defects, errors or difficulties will not cause future delays in
product introductions and shipments, result in increased costs and diversion of
development and support resources, require design modifications or impair
customer satisfaction with the Company's products. Design defects, software
errors, misuse of the Company's products, incorrect data from external sources
or other potential problems within or outside of the Company's control that may
arise from the use of the Company's products could result in financial or other
damages to the Company's customers. The Company does not maintain a separate
product liability insurance policy. Although the Company's license agreements
with its customers typically contain provisions designed to limit the Company's
exposure to potential claims as well as any liabilities arising from such
claims, such provisions may not effectively protect the Company against such
claims and the liability and costs associated therewith. Accordingly, any such
claim could have a material adverse effect on the Company's business, operating
results and financial condition.
Proprietary Rights; Risk of Infringement. The Company's success is heavily
dependent upon its proprietary technology. The Company relies primarily on a
combination of trade secret, copyright and trademark law, confidentiality
agreements and contractual restrictions on copying and disclosure contained in
its customer licenses and nondisclosure agreements with its employees and
contractors to protect proprietary rights in its software. The Company has no
patents or patent applications pending, and existing trade secret and copyright
laws afford only limited protection. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult
and, while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem, particularly in international markets and as a result of the growing
use of the Internet. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as the laws of the
U.S. There can be no assurance that the steps taken by the Company to protect
its proprietary rights will be adequate or that the Company's competitors will
not independently develop products or technologies that are substantially
equivalent or superior to the Company's products or technologies. See "Business
- -- Intellectual Property Rights and Licenses."
The Company was involved in litigation in which Harbor alleged, and a trial
court found, misappropriation of trade secrets. The litigation with Harbor was
recently settled for $5.0 million. See Note 12 of Notes to Combined Financial
Statements. There can be no assurance that other third parties will not assert
infringement claims against the Company in the future with respect to past,
current or future products. As the
9
<PAGE> 11
number of software products in the industry increases and the functionality of
these products further overlaps, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time-consuming and expensive to defend, cause product
shipment delays or require the Company to alter or abandon its products or enter
into royalty or licensing agreements. Such royalty agreements, if required, may
not be available on terms acceptable to the Company. Successful infringement
claims against the Company could have a material adverse effect on the Company's
business, operating results and financial condition.
Reliance on Microsoft Technologies. The Company's software products are
designed primarily to operate with Microsoft technologies, including Windows NT,
Windows 95, Windows 3.x, Microsoft Office and SQL Server, and the Company
believes it is important that its products and technology continue to be
compatible with new developments in Microsoft technology. A decreasing portion
of the Company's products are also designed to operate with Microsoft DOS.
Although the Company believes that Microsoft technologies are currently widely
utilized by businesses of all sizes, there can be no assurance that businesses
will (i) continue to adopt such technologies as anticipated, (ii) migrate from
older Microsoft technologies (such as DOS or earlier versions of Windows) to
newer Microsoft technologies or (iii) not adopt alternative technologies that
the Company does not support. If businesses do not migrate from older
technologies and adopt the Microsoft technologies with which the Company's
products are compatible or adopt alternative technologies that the Company does
not support, the Company's business, operating results and financial condition
could be materially adversely affected.
Effects of Year 2000. Certain computer software programs will be unable to
process two-digit year-date codes after December 31, 1999 (the "Year 2000
Problem"). The Year 2000 Problem could have a material adverse effect on the
Company's business, operating results and financial condition if its internal
systems, agency and carrier products, vendors and suppliers or third party
hardware and software are not Year 2000 compatible or if other agencies and
carriers with whom its customers communicate information are not Year 2000
compatible. Although the Company's insurance carrier software and the current
version of its agency management software are designed to be compatible with the
Year 2000, certain of the Company's agency customers continue to utilize prior
versions of the Company's agency management software that may be affected by the
Year 2000 Problem. Moreover, the compatibility of the Company's software with
the Year 2000 cannot be fully ascertained in advance of the Company's customers
using its products in the Year 2000. There can also be no assurance that
operating systems which support the Company's systems or third-party software
incorporated into the Company's agency management software will be fully
compatible with the Year 2000. The Company also faces risk to the extent that
suppliers of products, services and systems purchased by the Company and others
with whom the Company transacts business may not comply with Year 2000
requirements. To the extent the Year 2000 Problem affects the Company's software
or associated third party software or prevents third parties from timely
delivery of products or services required by the Company, the Company's
business, operating results and financial condition could be materially
adversely affected. Further, as automated insurance agencies explore ways to
mitigate the Year 2000 Problem, the Company may experience a slight increase in
sales of its Year 2000 compatible agency management software that may cause a
one-time increase in revenues to a level that the Company may not be able to
maintain and may, in fact, result in comparatively lower sales of its agency
management software in the periods following such increase. The Company does not
currently have an insurance policy which covers losses arising from the Year
2000 Problem. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000."
Dependence on Key Personnel. The Company's future success depends, in
significant part, upon the continued services of James P. Kellner, its Chairman
of the Board, President and Chief Executive Officer, as well as other executive
officers and key personnel. The loss of services of Mr. Kellner or one or more
of the Company's other executive officers or key employees could have a material
adverse effect on the Company's business, financial condition and results of
operations, and there can be no assurance that the Company will be able to
retain its executive officers or key personnel. See "Management."
Acquisitions. The Company may, from time to time, pursue acquisitions of
businesses, customer bases, products or technologies that complement or expand
its existing business. The Company evaluates potential
10
<PAGE> 12
acquisition opportunities from time to time, including those that could be
material in size and scope. Acquisitions involve a number of risks, including
the diversion of management's attention from day-to-day operations to the
assimilation of the operations and personnel of the acquired companies and the
incorporation of acquired operations, customer bases, products or technologies.
Such acquisitions could also have adverse effects on the Company's operating
results, and could result in dilutive issuances of equity securities and
dilution of earnings, the incurrence of debt and the loss of key employees. In
addition, many business acquisitions must be accounted for as purchases and,
because most software-related acquisitions involve the purchase of significant
intangible assets, these acquisitions typically result in substantial
amortization charges and charges for acquired research and development projects,
which could have a material adverse effect on the Company's operating results.
There can be no assurance that any such acquisitions will occur or that, if such
acquisitions do occur, the acquired businesses, customer bases, products or
technologies will generate sufficient revenue to offset the associated costs or
effects.
Reliance on Third-Party Software and Hardware. The Company incorporates
into its software products certain application software licensed from third
parties. In addition, occasionally the Company will purchase servers, network
software and other software and hardware products which the Company resells to
its customers and installs together with the Company's products to provide a
fully operational system. If any of these third parties ceases to do business or
abandons or fails to maintain or enhance a particular software or hardware
product line or if the Company ceases to be an authorized reseller of such
products, the Company may need to seek other suppliers. Any delay in finding
alternative suppliers could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, there can be
no assurance that the Company would be able to find alternative suppliers of
products acceptable to its customers or that the Company's current suppliers
will not significantly alter their pricing in a manner adverse to the Company.
The Company does not intend to pursue the sale of third-party software and
hardware as a strategic growth opportunity, and these sales represent a
declining portion of the Company's revenue mix. See
"Business -- Products -- Agency Systems -- Third Party Products."
International Operations; Foreign Currency Fluctuations. The Company's
customers outside the U.S. historically have been located principally in Canada
and the U.K. In the future, the Company may decide to conduct business in other
foreign countries. The Company's operations outside the U.S. are subject to
certain risks, including unexpected changes in regulatory requirements, tariffs
and other barriers, political and economic instability, difficulties in managing
distributors or representatives, difficulties in staffing and managing foreign
subsidiary operations, difficulties or delays in translating products and
product documentation into foreign languages, and potentially adverse tax
consequences. In addition, certain of the Company's business conducted abroad is
denominated in foreign currencies. The Company does not engage in currency
hedging and, therefore, is vulnerable to exchange rate risk. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, operating results and financial condition.
Anti-takeover Effects of Charter and Statutory Provisions. Certain
provisions of the Company's Restated Certificate of Incorporation and Restated
By-Laws and certain sections of the Delaware General Corporation Law, including
those which authorize the Company's Board of Directors to issue shares of
preferred stock and to establish the voting rights, preferences and other terms
thereof without further action by stockholders, may be deemed to have
anti-takeover effects and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers which some stockholders may deem to
be in their best interests). These provisions could delay or frustrate the
removal of incumbent directors or the assumption of control by an acquirer, even
if such removal or assumption of control would be beneficial to stockholders.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy contest, even if such events would be beneficial to the interests
of stockholders. Such provisions include, among other things, (i) a classified
Board of Directors serving staggered three-year terms, (ii) the elimination of
stockholder voting by written consent, (iii) that only the Chief Executive
Officer or the Board of Directors may call special meetings of stockholders,
(iv) that directors may be removed only for cause and then only by the holders
of at least 75% of the outstanding voting power, (v) permission for the Board of
Directors, when considering a tender offer, merger or other acquisition
proposal, to take into account factors in addition to potential economic
benefits to stockholders and (vi) certain advance notice requirements for
stockholder proposals and nominations for
11
<PAGE> 13
election to the Board of Directors. The Company is subject to Section 203 of the
Delaware General Corporation Law which will, subject to certain exceptions,
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless (i) the
interested stockholder attained such status with the approval of the Board of
Directors, (ii) the business combination is approved in a prescribed manner or
(iii) the interested stockholder owns at least 85% of the outstanding voting
stock as a result of the transaction in which it became an interested
stockholder. However, Section 203's restrictions do not apply if the business
combination is with an interested stockholder who became an interested
stockholder when the restrictions did not apply (as was the case when Robert R.
Eustace became an interested stockholder). See "Description of Capital
Stock -- Delaware Law and Certain Charter and By-Law Provisions."
Ownership by Management and Principal Stockholders. After consummation of
the Offering, Robert R. Eustace, the Company's founder, together with Elsa M.
Eustace, will beneficially own approximately % of the outstanding shares of
Common Stock and, together with officers, directors and relatives of certain
directors, will beneficially own approximately % of the outstanding shares
of Common Stock. By virtue of such holdings, and if and to the extent such
stockholders act in concert (although no agreement or arrangement exists
requiring them to do so), such stockholders will have substantial influence over
the election of directors and other matters, including the outcome of certain
fundamental corporate transactions (such as certain mergers and sales of assets)
requiring stockholder approval. The interests of such stockholders could
conflict with the interests of other stockholders of the Company. See "Principal
and Selling Stockholders."
Benefits of the Offering to Existing Stockholders. The Selling Stockholders
will significantly benefit from this Offering. They will be entitled to receive
an estimated $ ($ if the Underwriters' overallotment option is exercised
in full) in net proceeds from the Offering, based on an assumed initial public
offering price of $ per share. See "Use of Proceeds" and "Principal and
Selling Stockholders." This will create for each of them an unrealized gain
equal to the difference between the effective acquisition cost of their shares
and the value of such shares after the Offering based upon the public market
price. See "Dilution." In addition, it is anticipated that the Offering will
create a public market for the Company's Common Stock, thus allowing existing
stockholders to sell stock in the public market from time to time pursuant to
Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or
other exemptions from registration or pursuant to subsequently filed
registration statements, subject to lock-up agreements entered into in
connection with the Offering. See "Shares Eligible for Future Sale."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market after the Offering could adversely affect the
market price of the Common Stock. In addition to the shares
of Common Stock offered hereby, substantially all of the remaining shares of the
Common Stock owned by current stockholders of the Company (approximately
shares) have been held for more than one year and, as such, will be
eligible for sale in the public market beginning upon the expiration of the
lock-up agreements described below, subject to certain volume and manner of sale
restrictions imposed by Rule 144. Sales of a substantial number of shares of
Common Stock in the public market following the Offering, or the perception that
such sales could occur, could adversely affect the market price of the Common
Stock. See "Shares Eligible for Future Sale."
All existing stockholders of the Company have agreed not to publicly offer,
sell or otherwise dispose of any shares of Common Stock owned by them for 180
days from the date of this Prospectus without the consent of William Blair &
Company, L.L.C. However, William Blair & Company, L.L.C. may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to such lock-up agreements. See "Underwriting."
Absence of a Public Trading Market; Offering Price; Possible Volatility of
Stock Price. Prior to the Offering, there has been no public market for the
Common Stock, and there can be no assurance that an active market will develop
upon consummation of the Offering. Consequently, the offering price of the
Common Stock will be determined by negotiations among the Company and
representatives of the Underwriters, and may not be indicative of the market
price of the Common Stock after the Offering. See
12
<PAGE> 14
"Underwriting" for a description of the factors to be considered in the
determination of the initial public offering price of the Common Stock. The
trading price of the Common Stock also could be subject to significant
fluctuations in response to variations in quarterly operating results, the gain
or loss of significant contracts, changes in management or new products or
services offered by the Company or its competitors, general trends in the
industry, changes in analyst estimates and other events or factors. In addition,
the stock market has experienced price and volume fluctuations which have
particularly affected the market price of many companies in similar industries
and which often have been unrelated to the operating performance of these
companies. These market fluctuations may adversely affect the market price of
the Common Stock.
S Corporation Distribution; Prior Tax Periods. In connection with the
distribution of estimated undistributed taxable S corporation earnings by ASI to
the current stockholders of ASI, on or before the day preceding the day of the
Reorganization ASI will make the S Corporation Distribution (as defined herein)
consisting of a cash payment of $6.0 million and the S Corporation Notes (as
defined herein). Amounts due on the S Corporation Notes will be payable only out
of future cash flow from ASI operations and none of the proceeds of the Offering
will be used to repay the S Corporation Notes. Nevertheless, the payment of the
S Corporation Distribution to the current stockholders of ASI will reduce the
amount of cash that would otherwise be available to the Company for other
corporate purposes. The actual amount of the S Corporation Distribution will
depend upon a number of factors, including actual cash receipts and
disbursements of ASI prior to the termination of ASI's S corporation status. Any
increase in the undistributed taxable S corporation earnings over the amount
currently estimated will increase the amount of the distribution to current
stockholders of ASI. See "Reorganization and S Corporation Distribution."
Since January 1987, ASI has elected to be treated for federal income tax
purposes as an "S corporation" under the Internal Revenue Code, of 1986, as
amended (the "Code") and similar treatment has been elected in certain states in
which ASI has conducted business. As an S corporation, ASI's stockholders,
rather than ASI, have been and are required to pay federal and certain state
income taxes based on ASI's taxable earnings, whether or not such earnings have
been distributed to ASI's stockholders. Notwithstanding this election, ASI might
be liable for income taxes and other taxes with respect to taxable periods prior
to the day of the Offering. For example, in jurisdictions in which ASI was not
treated as an S corporation, subsequent tax adjustments upon audit of
pre-Offering periods might result in additional tax liability of ASI. ASI might
also be liable, upon audit or otherwise, for additional non-income taxes (sales,
use, payroll and other non-income taxes) in all jurisdictions (whether or not
that jurisdiction treats ASI as an S corporation). Furthermore, if the Internal
Revenue Service (or state taxing authorities) were to challenge the status of
ASI as an S corporation and prevail, then ASI would be liable for
corporate-level federal (and state) income taxes that would have been imposed on
ASI had it filed as a C corporation. The current ASI stockholders have agreed to
provide certain tax indemnities in that regard. See "Certain Transactions."
Substantial Dilution. Purchasers of the Common Stock in the Offering will
incur an immediate substantial dilution in the net tangible book value per share
of Common Stock. Based on an assumed initial public offering price of
$ per share, as of March 31, 1998 such dilution, on a pro forma basis,
would have been $ per share. See "Dilution."
Significant Unallocated Net Proceeds. A substantial portion of the
anticipated net proceeds of the Offering has not been designated for specific
uses. Therefore, the Company will have broad discretion with respect to the use
of the net proceeds of the Offering. See "Use of Proceeds."
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $ million, assuming an initial public offering price of
$ per share and after deducting the underwriting discount and estimated
offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of shares of Common Stock by the Selling Stockholders.
The principal purposes of the Offering are to obtain funds for general corporate
purposes, including working capital and product development, to facilitate the
Company's access to the public equity markets as a means of attracting and
retaining key employees and to enhance the Company's ability to use its Common
Stock as consideration for possible acquisitions. A portion of the net proceeds
may also be used to acquire or invest in complementary businesses, products or
services; however, there are no commitments or agreements with respect to any
such transaction at the present time. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment-grade obligations. None of the proceeds of the
Offering will be used to pay the S Corporation Distribution.
DIVIDEND POLICY
The Company does not expect to declare or pay any cash dividends on its
Common Stock in the foreseeable future following the Offering. The Company
intends to retain earnings to finance the growth and development of its
business. The Company's current credit facility prohibits the payment of cash
dividends. Any payment of cash dividends in the future will depend upon the
financial condition, capital requirements and earnings of the Company,
limitations on dividend payments pursuant to the terms of debt agreements and
such other factors as the Board of Directors may deem relevant.
Historically, as an S corporation, ASI has made substantial cash
distributions to its stockholders. As discussed below under "Reorganization and
S Corporation Distribution," on or before the day preceding the day of the
Reorganization, ASI will make the S Corporation Distribution. Purchasers of
Common Stock in the Offering will not receive any portion of such distribution.
REORGANIZATION AND
S CORPORATION DISTRIBUTION
The business of the Company is conducted by three affiliated entities:
Applied Systems, Inc., an Illinois corporation ("ASI"); Asktom, Ltd., an Ontario
corporation ("Asktom"); and The Agency Manager Limited, a United Kingdom
unlimited liability company ("TAM UK"). In contemplation of the Offering,
Applied Systems, Inc., a Delaware corporation, was formed in June 1998.
Effective immediately prior to the consummation of the Offering, all of the
equity interests in ASI and Asktom will be contributed by their holders to the
Company in exchange for Common Stock (and cash in lieu of fractional shares of
Common Stock, if any), and the stockholders (each of which is a corporation) of
TAM UK will be merged with and into the Company and those individuals owning the
capital stock of such stockholders will receive Common Stock (and cash in lieu
of fractional shares of Common Stock, if any) in such mergers (such
contributions and mergers, collectively, the "Reorganization.") See "Certain
Transactions."
Since January 1987, ASI has elected to be treated for federal and certain
state income tax purposes as an "S corporation" under the Code. As a result,
ASI's stockholders, rather than ASI, have been and are required to pay federal
and certain state income taxes based on ASI's taxable earnings, whether or not
such earnings have been distributed to ASI's stockholders. ASI will terminate
its S corporation status at the end of the day (the "Termination Date")
preceding the day of the Reorganization. The Company, ASI and the current
stockholders of ASI will enter into an agreement which, generally, will provide
that the current stockholders of ASI shall be severally liable for, and
indemnify the Company and ASI against, any taxes based on net income imposed on
ASI by a federal, state or local taxing jurisdiction with respect to a taxable
year or period ending on or prior to the Termination Date (or, in the case of a
taxable year or period beginning before and ending after the Termination Date,
the portion of the taxable year or period ending at the close of the Termination
Date) that, with respect to such jurisdiction, ASI filed tax returns on the
basis that it was entitled to be taxed
14
<PAGE> 16
as, or in a manner similar to, an "S corporation" within the meaning of Section
1361 of the Code. See "Certain Transactions." In connection with the termination
of its S corporation status, on or prior to the Termination Date, ASI will make
one or more distributions of undistributed previously taxed S corporation
earnings to its current stockholders in the aggregate estimated amount of $11
million (the "S Corporation Distribution"), consisting of (i) $6.0 million in
cash and (ii) $5.0 million aggregate principal amount of promissory notes
bearing interest at a rate of 7.25%, payable on or before five years from the
date of issuance (the "S Corporation Notes"). The actual amount of such
undistributed previously taxed S corporation earnings will depend upon a number
of factors, including actual cash receipts and payments prior to the Termination
Date. Any increase or decrease in such undistributed taxable S corporation
earnings will increase or decrease, as the case may be, the amount of the S
Corporation Notes. Amounts due on the S Corporation Notes will be payable only
out of future cash flow from ASI operations, and none of the proceeds of the
Offering will be used to repay the S Corporation Notes. In the event the Company
is unable to pay the S Corporation Notes out of future cash flow from ASI
operations on or prior to the date when they become due, the Company would be in
default on such Notes and, therefore, subject to enforcement proceedings by the
holders of the S Corporation Notes. In addition, such non-payment could trigger
cross-default provisions of other instruments of indebtedness of the Company.
ASI, as a subsidiary of the Company, will become subject to corporate income
taxation as a C corporation under the Code and certain state laws. In accordance
with Statement of Financial Accounting Standards No. 109, ASI will record a net
deferred income tax asset at the Termination Date. If ASI were a C corporation
as of June 30, 1998, approximately $2.6 million of net deferred income tax
assets would have been recorded. The estimated net deferred income tax asset
will be revised based upon the results of operations and financial condition of
ASI from June 30, 1998 through the Termination Date and may be significantly
larger or smaller than the foregoing amount. See Note 2 of Notes to Combined
Financial Statements.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth at June 30, 1998 (i) the actual total
short-term debt and total capitalization of the Company, (ii) such short-term
debt and capitalization on a pro forma basis to give effect to the S Corporation
Distribution, the reclassification of the deficit to additional paid-in capital
in connection with the termination of the Company's S corporation tax status,
the recording of a deferred tax asset that will be recognized as a result of the
termination of the Company's S corporation tax status, which amount would have
been approximately $2.6 million as of June 30, 1998, the elimination of the
redemption feature on certain shares of ASI common stock, and the adoption of
the Restated Certificate of Incorporation and (iii) such pro forma short-term
debt and capitalization as adjusted to reflect the sale of the
shares of Common Stock offered hereby and application of the net proceeds
therefrom, after deducting the underwriting discount and estimated offering
expenses. This table should be read in conjunction with the Company's Combined
Financial Statements and related Notes thereto and other financial information
appearing elsewhere in this Prospectus. See "Use of Proceeds," "Reorganization
and S Corporation Distribution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt........................ $ 224 $ 224
======= ======== ========
Long-term debt:
Long-term debt, less current portion..................... $ 25 $ 25
S Corporation Notes...................................... -- 5,000
------- -------- --------
Total long-term debt, less current portion....... 25 5,025
------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued and outstanding,..............
Common stock, $.01 par value; 45,000,000 shares
authorized, 77 shares issued and outstanding,
actual; shares issued and outstanding, pro
forma; and shares issued and outstanding, pro
forma as adjusted(1)................................ 318 323
Additional paid-in capital............................... 2,610 (10,768)
Cumulative translation adjustment........................ 55 55
Retained earnings (deficit).............................. (2,487) 2,600
Treasury stock........................................... (320) (320)
------- -------- --------
Total stockholders' equity............................ 176 (8,110)
------- -------- --------
Total capitalization............................. $ 201 $ (3,085)
======= ======== ========
</TABLE>
- -------------------------
(1) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under
the Company's Stock Option Plan, including shares of Common Stock
reserved for issuance pursuant to stock options being granted to certain
employees in connection with the Offering at the initial public offering
price, and (ii) 350,000 shares of Common Stock reserved for issuance
pursuant to the Company's Employee Stock Purchase Plan. See "Management --
Stock Plans."
16
<PAGE> 18
DILUTION
At June 30, 1998, the Company's net tangible book value was $ or
$ per share of Common Stock. Net tangible book value per share
represents the Company's total net tangible assets less total liabilities
divided by the number of shares of Common Stock that will be outstanding
immediately after the Reorganization. Without taking into account any other
changes in net tangible book value after June 30, 1998, other than to give
effect to the receipt of its portion of the estimated net proceeds of the
Offering, at an assumed initial public offering price of $ per share,
the payment of the estimated S Corporation Distribution and the recording of net
deferred tax assets of approximately $2.6 million, the pro forma net tangible
book value of the Company on June 30, 1998 would have been $ or
$ per share. This represents an immediate increase in net tangible book
value to existing stockholders of approximately $ per share and an
immediate dilution to purchasers of Common Stock in the Offering of $
per share, as illustrated by the following:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $
Net tangible book value per share as of June 30,
1998................................................ $
Net decrease per share attributable to the S
Corporation Distribution and deferred taxes......... $
Increase attributable to new investors................
-------
Pro forma net tangible book value after the Offering..... $
-------
Dilution per share to new investors...................... $
=======
</TABLE>
The following table summarizes at June 30, 1998 on a pro forma basis after
giving effect to the Offering, the difference between existing stockholders and
new investors with respect to the number of shares of Common Stock purchased
from the Company, the total cash consideration paid to the Company, and the
average price per share paid by existing stockholders and by the purchasers of
the shares offered by the Company hereby (at an assumed initial public offering
price of $ per share):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)...................... % $ % $
New stockholders(2)..............................
--- --- --- ---
Total.................................. 100% $ 100%
=== === === ===
</TABLE>
- -------------------------
(1) The sale of Common Stock by the Selling Stockholders in the Offering will
reduce the number of shares held by existing stockholders to
shares, or approximately % of the total number of shares of Common
Stock to be outstanding after the Offering, and will increase the number of
shares held by the new stockholders to shares, or
approximately % of the total number of shares of Common Stock to be
outstanding after the Offering. See "Principal and Selling Stockholders."
(2) Excludes (i) 1,500,000 shares of Common Stock reserved for issuance under
the Company's Stock Option Plan, including shares of Common Stock
reserved for issuance pursuant to stock options being granted to certain
employees in connection with the Offering at the initial public offering
price, and (ii) 350,000 shares of Common Stock reserved for issuance
pursuant to the Company's Employee Stock Purchase Plan. See
"Management -- Stock Plans."
17
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes thereto included elsewhere herein. The
statement of operations data set forth below with respect to the years ended
December 31, 1995, 1996 and 1997 are derived from, and are qualified by
reference to, the audited financial statements of the Company included elsewhere
in this Prospectus. The statement of operations data set forth below with
respect to the years ended December 31, 1993 and 1994 and the selected financial
data for the six month periods ended June 30, 1997 and June 30, 1998 have been
derived from the unaudited financial statements of the Company. The unaudited
financial statements have been prepared on the same basis as the audited
financial statements and, in the opinion of management of the Company, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the information set forth therein. The results of
operations for the six month period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the full fiscal year. The
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Combined Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License......................... $11,070 $14,878 $13,836 $ 15,435 $20,291 $ 8,759 $11,737
Service......................... 16,910 20,474 25,861 29,125 34,793 16,614 21,761
Third-party equipment and
software...................... 20,716 25,689 23,537 20,396 20,984 9,525 11,836
------- ------- ------- -------- ------- -------- -------
Total revenue.............. 48,696 61,041 63,234 64,956 76,068 34,898 45,334
------- ------- ------- -------- ------- -------- -------
Cost of revenue:
License......................... 50 1,097 244 585 994 518 852
Service......................... 10,788 15,681 17,830 20,232 22,546 11,016 12,740
Third-party equipment and
software...................... 12,849 16,749 15,696 14,311 15,840 7,165 9,317
------- ------- ------- -------- ------- -------- -------
Total cost of revenue......... 23,687 33,527 33,770 35,128 39,380 18,699 22,909
------- ------- ------- -------- ------- -------- -------
Gross profit...................... 25,009 27,514 29,464 29,828 36,688 16,199 22,425
------- ------- ------- -------- ------- -------- -------
Operating expenses:
Research and development........ 5,520 7,351 7,728 7,876 9,738 4,415 5,968
Sales and marketing............. 6,970 8,893 9,067 8,224 10,182 4,813 5,883
General and administrative...... 10,757 9,252 9,654 10,410 11,563 5,471 6,463
Harbor Software litigation and
related items(1).............. -- 54 137 6,237 (3,508) 251 --
------- ------- ------- -------- ------- -------- -------
Total operating expenses...... 23,247 25,550 26,586 32,747 27,975 14,950 18,314
------- ------- ------- -------- ------- -------- -------
Operating income (loss)........... 1,762 1,964 2,878 (2,919) 8,713 1,249 4,111
Other income (expense), net....... (384) (299) (160) (38) 66 (8) 139
------- ------- ------- -------- ------- -------- -------
Income (loss) before income
taxes........................... 1,378 1,665 2,718 (2,957) 8,779 1,241 4,250
Provision for income taxes........ 42 88 226 331 292 153 193
------- ------- ------- -------- ------- -------- -------
Net income (loss)(2).............. $ 1,336 $ 1,577 $ 2,492 $ (3,288) $ 8,487 $ 1,088 $ 4,057
======= ======= ======= ======== ======= ======== =======
PRO FORMA STATEMENT OF OPERATIONS
DATA (UNAUDITED)(3):
Operating income.................. $ (1,775) $ 9,783 $ 1,784 $ 4,321
Income tax provision (benefit).... (707) 3,841 693 1,739
Net income........................ (1,106) 6,008 1,083 2,720
Net income per share.............. $ $ $ $
Weighted average shares
outstanding(4)..................
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 3,829 $ 2,385 $ 2,144 $ 1,780 $ 4,379 $ 2,813 $ 6,977
Working capital (deficit)......... (2,366) (5,377) (5,370) (13,380) (8,248) (13,982) (11,478)
Total assets...................... 16,034 20,871 20,423 20,676 32,577 21,362 32,762
Total debt........................ 4,075 3,617 4,050 1,039 536 754 249
Total stockholders' equity
(deficit)....................... (375) 555 (1,030) (5,880) (47) (6,149) 176
</TABLE>
(See footnotes on following page)
18
<PAGE> 20
(Footnotes from previous page)
- -------------------------
(1) Represents a charge (credit) related to litigation between the Company and
Harbor. See Note 12 of Notes to Combined Financial Statements and "Risk
Factors -- Proprietary Rights; Risk of Infringement."
(2) Net income (loss) excludes (i) accretion related to the redemption feature
on certain common shares of ASI and (ii) the provision for federal and
certain state income taxes due to ASI's status as an S corporation. If
accretion were reflected as a reduction of net income, net income available
to common stockholders would have been $8,409,000 and $4,025,000 for the
year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. ASI's S corporation status will terminate at the close of the
Termination Date. See "Reorganization and S Corporation Distribution."
(3) Pro forma to give effect to: (i) the elimination of employee compensation
for Robert R. Eustace and Elsa M. Eustace, who upon consummation of the
Offering will no longer be employed by the Company or receive compensation
from the Company; (ii) the elimination of accretion resulting from the
elimination of the redemption feature on certain shares of ASI common stock;
and (iii) income tax expense that would have been recorded based on
effective tax rates had ASI been taxed as a C corporation during these
periods. The duties performed by Robert R. Eustace have been transitioned to
James P. Kellner, who received additional compensation effective January
1998 to reflect these added responsibilities. Mr. Kellner has been President
of ASI since 1991. During 1997 Mr. Kellner was promoted to CEO and during
1998 he was promoted to Chairman. The duties performed by Elsa M. Eustace
have been transitioned to Timothy J. McIntyre, who has been employed by ASI
since May of 1998. A portion of Mr. McIntyre's compensation is attributable
to these added responsibilities.
The following is a tabular reconciliation between the historical and pro
forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -----------------
1996 1997 1997 1998
------- ------- ------ -------
<S> <C> <C> <C> <C>
Net income (loss) available to common stockholders,
as reported........................................ $(3,288) $ 8,409 $1,088 $ 4,025
Elimination of Robert R. and Elsa M. Eustace's
salary(i).......................................... 1,244 1,170 585 215
Additional compensation for James P. Kellner and
Timothy J. McIntyre(i)............................. (100) (100) (50) (5)
Elimination of accretion(ii)......................... -- 77 -- 32
Tax benefit (expense)(iii)........................... 1,038 (3,548) (540) (1,547)
------- ------- ------ -------
Pro forma net income (loss).......................... $(1,106) $ 6,008 $1,083 $ 2,720
======= ======= ====== =======
</TABLE>
(4) The number of shares estimated to be outstanding after the Reorganization,
but prior to the consummation of the Offering.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. Information contained in this Prospectus concerning markets for the
Company's products and trends in the Company's operations or financial results,
as well as other statements including words such as "believe," "estimate," and
"expect" and other similar expressions, constitute forward-looking statements.
These forward-looking statements are subject to business and economic risks,
including, but not limited to those discussed in "Risk Factors," and actual
results may differ materially from historical results and those currently
anticipated.
OVERVIEW
Applied Systems designs, develops and markets comprehensive automation
solutions for independent insurance agencies and P&C insurance carriers. The
Company's revenue consists of fees derived from the licensing of its automation
systems, service revenue from support and maintenance services and
implementation and consulting services, and revenue from the resale of
third-party equipment and software. The Company's license revenue consists
primarily of sales of its newest versions of its agency and carrier automation
products to new customers. The Company does not normally sell earlier versions
to new customers, but does occasionally sell additional user licenses of these
earlier versions to existing customers. Since the Company's inception,
substantially all of its revenue has been derived from automation system
licenses and related services and third-party products for the P & C insurance
industry. The Company has developed and recently began an active marketing
program for its automation system for insurance carriers. The Company currently
serves over 7,500 independent insurance agencies with its agency automation
products and has sold its carrier system to 13 insurance carriers.
Revenue from the licensing of the Company's agency automation products is
recognized when a product is delivered to the customer. License fees for agency
systems are payable on a cash on delivery basis. For carrier systems, the
Company uses the percentage-of-completion accounting method to recognize license
revenue and related cost of revenue. Carrier system license fees are payable in
installments based on specified events, beginning with contract signing and
ending with a final payment due upon customer acceptance of the completed
system.
Service revenue from support and maintenance services and implementation
and consulting services is driven by the licensing of the Company's automation
systems. Support and maintenance agreements entitle customers to unlimited
technical support as well as product enhancements and new versions of the
Company's products. The majority of these support and maintenance fees are
payable annually in advance. Revenue from support and maintenance services is
recognized ratably over the term of the support agreement. Fees related to
implementation and consulting services are recognized as the services are
performed.
Revenue from the sale of third-party hardware and software products, which
are sold in connection with agency systems, is payable and recognized upon
delivery. Although margins on third-party equipment and software typically are
significantly lower than on licenses of the Company's automation systems, the
Company offers third party equipment and software to customers in need of a
turn-key automation solution.
Cost of license revenue consists primarily of the costs of media, product
manuals, shipping and fulfillment, royalties paid to third parties and personnel
related costs associated with configuration of carrier systems. Cost of service
revenue is comprised primarily of personnel related costs associated with
support and maintenance services and implementation and consulting services.
Cost of third-party equipment and software consists primarily of computer and
peripheral equipment and license fees and royalties for third-party software.
Research and development expenses are comprised primarily of personnel
related costs incurred to enhance the Company's existing products and develop
new products. Sales and marketing expenses consist primarily of personnel
related costs of the Company's sales, marketing and advertising activities.
General and
20
<PAGE> 22
administrative expenses include personnel related costs for accounting, human
resources and executive management, as well as professional fees and property
and sales taxes.
The Company has not capitalized any of its software development expenses
because the development costs incurred during the period between achieving
technological feasibility and general release of the product to customers have
not been material.
In connection with the termination of its S corporation status, on or
before the Termination Date, ASI will make the S Corporation Distribution,
consisting of cash and the S Corporation Notes. Amounts due on the S Corporation
Notes will be payable only out of future cash flow from ASI operations and none
of the proceeds of the Offering will be used to repay the S Corporation Notes.
See "Reorganization and S Corporation Distribution."
ASI's pro forma effective tax rate was 39.0% in 1997, 1996 and 1995 and for
each of the six-month periods ended June 30, 1998 and 1997.
RESULTS OF OPERATIONS
The following table sets forth certain historical and pro forma statements
of operations data as a percentage of total revenue for the periods indicated
and the percentage change in such data versus the prior comparable period. The
trends illustrated in the following table are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
PERCENTAGE INCREASE (DECREASE)
SIX MONTHS ----------------------------------
YEARS ENDED ENDED FIRST
DECEMBER 31, JUNE 30, HALF
---------------------------- ---------------- 1995 1996 1997 TO
1995 1996 1997 1997 1998 TO 1996 TO 1997 1998
---- ---- ---- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License........................... 21.9% 23.8% 26.7% 25.1% 25.9% 11.6% 31.5% 34.0%
Service........................... 40.9 44.8 45.7 47.6 48.0 12.6 19.5 31.0
Third-party equipment and
software........................ 37.2 31.4 27.6 27.3 26.1 (13.3) 2.9 24.3
----- ----- ----- ----- -----
Total revenue................... 100.0 100.0 100.0 100.0 100.0 2.7 17.1 29.9
----- ----- ----- ----- -----
Cost of revenue:
License........................... 0.4 0.9 1.3 1.5 1.9 140.5 69.8 64.7
Service........................... 28.2 31.1 29.6 31.6 28.1 13.5 11.4 15.6
Third-party equipment and
software........................ 24.8 22.0 20.8 20.5 20.5 (8.8) 10.7 30.0
----- ----- ----- ----- -----
Total cost of revenue........... 53.4 54.0 51.7 53.6 50.5 4.0 12.1 22.5
----- ----- ----- ----- -----
Gross profit........................ 46.6 46.0 48.3 46.4 49.5 1.2 23.0 38.4
Operating expenses:
Research and development.......... 12.2 12.1 12.8 12.6 13.2 1.9 23.6 35.2
Sales and marketing............... 14.3 12.7 13.4 13.8 13.0 (9.3) 23.8 22.2
General and administrative........ 15.3 16.0 15.2 15.7 14.2 7.8 11.1 18.1
Non-recurring charge (credit)..... 0.2 9.6 (4.6) 0.7 0.0 NM NM (100.0)
----- ----- ----- ----- -----
Total operating expenses........ 42.0 50.4 36.8 42.8 40.4 23.2 (14.6) 22.5
----- ----- ----- ----- -----
Operating income (loss)............. 4.6 (4.4) 11.5 3.6 9.1 (201.4) NM 229.2
Other income (expense), net......... (0.3) (0.2) 0.1 0.0 0.3 76.5 NM NM
----- ----- ----- ----- -----
Income (loss) before income taxes... 4.3 (4.6) 11.6 3.6 9.4 (208.8) NM 242.5
Provision for income taxes.......... 0.4 0.5 0.4 0.5 0.4 46.6 (11.7) 26.0
----- ----- ----- ----- -----
Net income (loss)................... 3.9% (5.1)% 11.2% 3.1% 9.0% (232.0)% NM 272.8%
===== ===== ===== ===== =====
Pro Forma Data (unaudited):
Operating income.................. -- 7.3% 8.4% 5.1% 9.5% -- 34.1% 142.2%
Income tax provision.............. -- 2.8 3.3 2.0 3.8 -- 36.6 150.9
Net income........................ -- 4.4% 5.2% 3.1% 6.0% -- 36.6% 151.2%
</TABLE>
- ---------------
NM indicates such percentage is not meaningful and has been omitted.
21
<PAGE> 23
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
License Revenue. License revenue for the six month period ended June 30,
1998 increased by 34.0% to $11.7 million from $8.8 million for the comparable
period in 1997 and, as a percentage of total revenue, increased to 25.9% from
25.1% over the same period. The dollar increase in license revenue was primarily
due to growth in agency system license revenue, which grew by 30.0% to $10.1
million for the six months ended June 30, 1998 from $7.7 million for the same
period in 1997. The growth in agency system license revenue was primarily driven
by a 19.5% increase in the number of agency system licenses sold in the U.S. and
a trend toward licensing larger agency systems in the U.S. Carrier system
license revenue increased to $1.7 million for the six months ended June 30, 1998
from $1.0 million for the comparable period in 1997. License revenue as a
percentage of total revenue increased for the six month period ended June 30,
1998 compared to the comparable period in 1997 due to faster growth in license
revenue than service revenue and third-party equipment and software revenue.
Service Revenue. Service revenue increased by 31.0% to $21.8 million for
the six month period ended June 30, 1998 from $16.6 million for the comparable
period in 1997 and, as a percentage of total revenue, increased to 48.0% from
47.6% over the same period. The dollar increase in service revenue was primarily
due to a $3.5 million increase in support and maintenance revenue, caused by fee
increases in January 1997 and January 1998 and growth in the number of users
paying support and maintenance fees as a result of additional agency system
licenses sold. The January 1997 fee increase had a larger positive impact on
support and maintenance revenue for the six months ended June 30, 1998 than the
comparable period in 1997 due to the fact that a large portion of annual support
and maintenance agreements were not subject to the increase until they were
renewed later in 1997. Implementation and consulting services revenue increased
by $1.6 million due to growth in agency system license sales.
Third-Party Equipment and Software Revenue. Third-party equipment and
software revenue for the six month period ended June 30, 1998 increased by 24.3%
to $11.8 million from $9.5 million for the comparable period in 1997 and, as a
percentage of total revenue, decreased to 26.1% from 27.3% over the same period.
The dollar increase in third-party equipment and software revenue was primarily
driven by growth in agency system license sales, which are often accompanied by
the sale of third-party equipment and software. The dollar revenue increase was
also due to upgrade sales of newer versions of third-party equipment and
software to existing customers. Third-party equipment and software as a
percentage of total revenue decreased as the Company continued to implement its
strategy of selling these items solely as an accommodation to its agency system
customers and not as a strategic growth opportunity.
Cost of Revenue. Cost of license revenue increased to $0.9 million for the
six month period ended June 30, 1998 from $0.5 million for the comparable period
in 1997 and, as a percentage of license revenue, increased to 7.3% from 5.9%
over the same period. Cost of license revenue increased primarily due to growth
in carrier system license revenue, because carrier systems entail additional
configuration costs. Cost of service revenue for the six month period ended June
30, 1998 increased by 15.6% to $12.7 million from $11.0 million for the
comparable period in 1997 and, as a percentage of service revenue, decreased to
58.5% from 66.3% over the same period. This decrease was primarily attributable
to improved productivity of the Company's service organization which allowed for
slower growth in service personnel related costs than the growth experienced in
service revenue. Cost of third-party equipment and software revenue for the six
month period ended June 30, 1998 increased by 30.0% to $9.3 million from $7.2
million for the comparable period in 1997 and, as a percentage of third-party
equipment and software revenue, increased to 78.7% from 75.2% over the same
period. This increase in the cost as a percentage of related revenue was due to
an increase in costs for these products without a commensurate increase in price
to customers, as a result of increasingly competitive market conditions for
these products.
Research and Development Expenses. Research and development expenses for
the six month period ended June 30, 1998 increased by 35.2% to $6.0 million from
$4.4 million for the comparable period in 1997 and, as a percentage of total
revenue, increased to 13.2% from 12.6% over the same period. The increase in
research and development expenses was primarily due to increased costs related
to development of the TAM-Vision and Diamond System products. The Company
introduced its beta version of TAM-Vision in the
22
<PAGE> 24
third quarter of 1998 and plans a general release of the product in the fourth
quarter of 1998. The Company has substantially completed its efforts necessary
to bring this product to the marketplace and expects to successfully market
TAM-Vision upon its general release. See "Risk Factors -- Dependence on New
Product Acceptance."
Sales and Marketing Expenses. Sales and marketing expenses increased by
22.2% to $5.9 million for the six month period ended June 30, 1998 from $4.8
million for the comparable period in 1997 and, as a percentage of total revenue,
decreased to 13.0% from 13.8% over the same period. The dollar increase in sales
and marketing expenses was due to increased personnel related costs necessary to
support the Company's sales growth and a $0.3 million write-off of a bad debt
associated with the sale of one of the Company's earliest carrier systems. The
Company's current carrier system product has been further refined from previous
versions, and it is expected that such bad debts are less likely to recur in the
future.
General and Administrative Expenses. General and administrative expenses
increased by 18.1% to $6.5 million for the six month period ended June 30, 1998
from $5.5 million for the comparable period in 1997 and, as a percentage of
total revenue, decreased to 14.2% from 15.7% over the same period. The dollar
increase in general and administrative expenses was primarily due to an increase
in personnel related expenses and professional fees necessary to manage and
support the expansion of the Company's operations.
Harbor Software Litigation and Related Items. For the six month period
ended June 30, 1998 there was no Harbor Software litigation and related items
charge or credit. For the comparable period in 1997, there was a $0.3 million
charge incurred in connection with litigation between the Company and Harbor.
Other Income (Expense), Net. Other income (expense), net was $146,398 more
favorable for the six-month period ended June 30, 1998 than the comparable
period in 1997 due to a $121,101 increase in interest income arising from
increased cash and cash equivalent balances and a $25,297 reduction in interest
expense.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
License Revenue. License revenue increased by 31.5% to $20.3 million in
1997 from $15.4 million in 1996 and, as a percentage of total revenue, increased
to 26.7% in 1997 from 23.8% in 1996. The increase in license revenue was mainly
attributable to growth in agency system license revenue, which increased by
27.7% to $18.4 million in 1997 from $14.4 million in 1996. The growth in agency
system license revenue was mainly driven by an 11.4% increase in the number of
agency systems licenses sold in the U.S. and a trend towards licensing larger
agency systems in the U.S. Carrier system license revenue increased to $1.9
million in 1997 from $1.1 million in 1996. Canadian license revenue decreased by
$0.7 million, or 30.1%, in 1997 compared to 1996 due to increased competition
that caused a decline in the number of agency system licenses sold. United
Kingdom license revenue declined $0.3 million, or 49.8%, in 1997 compared to
1996, also resulting from increased competition in agency automation.
Service Revenue. Service revenue increased by 19.5% to $34.8 million in
1997 from $29.1 million in 1996 and, as a percentage of total revenue, increased
to 45.7% in 1997 from 44.8% in 1996. The increase in service revenue was
primarily due to a $5.2 million increase in support and maintenance revenue,
caused by a fee increase in January 1997 and growth in the number of users
paying support and maintenance fees resulting from additional agency system
licenses sold. Implementation and consulting services revenue increased by $0.5
million in 1997 compared to 1996 due to growth in agency system licenses sold.
Third-Party Equipment and Software Revenue. Third-party equipment and
software revenue increased by 2.9% to $21.0 million in 1997 from $20.4 million
in 1996 and, as a percentage of total revenue, decreased to 27.6% in 1997 from
31.4% in 1996. The dollar increase in third-party equipment and software revenue
was primarily driven by growth in agency system license sales which are often
accompanied by the sale of third-party equipment and software, and due to
upgrade sales of newer versions of third-party equipment and software to
existing customers. Third-party equipment and software revenue as a percentage
of total revenue decreased in 1997 compared to 1996 as the market for these
products became increasingly competitive, and as the Company continued to
implement its strategy of selling these items only as an accommodation to its
agency system customers and not as a strategic growth opportunity.
23
<PAGE> 25
Cost of Revenue. Cost of license revenue increased by $0.4 million to $1.0
million in 1997 from $0.6 million in 1996 and, as a percentage of license
revenue, increased to 4.9% in 1997 from 3.8% in 1996. Cost of license revenue
increased primarily due to growth in carrier system license revenue, because
carrier systems entail additional configuration costs. Cost of service revenue
increased by 11.4% to $22.5 million in 1997 from $20.2 million in 1996 and, as a
percentage of service revenue, decreased to 64.8% in 1997 from 69.5% in 1996 as
service personnel related costs grew more slowly than service revenue due to
improved productivity of the Company's service organization. Cost of third-party
equipment and software revenue increased by 10.7% to $15.8 million in 1997 from
$14.3 million in 1996 and, as a percentage of third-party equipment and software
revenue, increased to 75.5% in 1997 from 70.2% in 1996. The increase in this
cost as a percentage of related revenue was due to an increasingly competitive
market for these products and the Company's decision to address these market
conditions by decreasing selling prices and gross margins on these products.
Research and Development Expenses. Research and development expenses
increased by 23.6% to $9.7 million in 1997 from $7.9 million in 1996 and, as a
percentage of total revenue, increased to 12.8% in 1997 from 12.1% in 1996. The
increase in research and development expenses was mainly due to the development
of TAM-Vision, the Diamond System and the Year 2000-compliant version of TAM.
Sales and Marketing Expenses. Sales and marketing expenses increased by
23.8% to $10.2 million in 1997 from $8.2 million in 1996. As a percentage of
total revenue, sales and marketing expenses increased to 13.4% in 1997 from
12.7% in 1996. The dollar increase in sales and marketing expenses was due to
increased personnel related costs necessary to support the Company's sales
growth. The increase in sales and marketing expenses as a percentage of total
revenue was due to disproportionate growth in license revenue, which carries
higher sales commissions than the Company's other types of revenue.
General and Administrative Expenses. General and administrative expenses
increased by 11.1% to $11.6 million in 1997 from $10.4 million in 1996. As a
percentage of total revenue, general and administrative expenses decreased to
15.2% in 1997 from 16.0% in 1996. The dollar increase in general and
administrative expenses was primarily due to an increase in personnel related
expenses and professional fees necessary to manage and support the expansion of
the Company's operations.
Harbor Software Litigation and Related Items. In 1997 there was a credit of
$3.5 million resulting from an insurance recovery in connection with litigation
between the Company and Harbor. In 1996 there was a charge of $6.2 million
related to the same litigation.
Other Income (Expense), Net. Other income (expense), net was $103,765 more
favorable in 1997 than 1996 due to a $91,759 reduction in interest expense and a
$12,006 increase in interest income.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
License Revenue. License revenue increased by 11.6% to $15.4 million in
1996 from $13.8 million in 1995 and, as a percentage of total revenue, increased
to 23.8% in 1996 from 21.9% in 1995. The increase in license revenue was mainly
attributable to an increase in carrier system license revenue, which grew to
$1.1 million in 1996 from $0.1 million in 1995. Agency system license revenue
increased 4.4% to $14.4 million in 1996 from $13.8 million in 1995, primarily
due to a 4.1% increase in the number of agency system licenses sold in the U.S.
License revenue as a percentage of total revenue grew in 1996 compared to 1995
primarily due to a decline in third-party equipment and software revenue, as
discussed below.
Service Revenue. Service revenue increased by 12.6% to $29.1 million in
1996 from $25.9 million in 1995 and, as a percentage of total revenue, increased
to 44.8% in 1996 from 40.9% in 1995. The increase in service revenue was
attributable to a $3.6 million increase in support and maintenance revenue,
driven by a January 1995 fee increase that was not fully reflected in annual
contracts until 1996, and growth in the number of users paying support and
maintenance fees resulting from additional agency system licenses sold. This
increase was partially offset by a $0.4 million decrease in implementation and
consulting services revenue in 1996 compared to 1995, due to longer lead times
in some agency system implementations and relatively modest growth in agency
system license sales. Service revenue as a percentage of total revenue increased
in
24
<PAGE> 26
1996 compared to 1995 primarily due to a decline in sales of third-party
equipment and software, as discussed below.
Third-Party Equipment and Software Revenue. Third-party equipment and
software revenue decreased by 13.3% to $20.4 million in 1996 from $23.5 million
in 1995. As a percentage of total revenue, third-party equipment and software
decreased to 31.4% in 1996 from 37.2% in 1995. The decline in third-party
equipment and software revenue was due to the Company's decision during 1996 to
attempt to stabilize selling prices and gross margins for these products in the
face of increasingly competitive pricing conditions.
Cost of Revenue. Cost of license revenue increased to $0.6 million in 1996
from $0.2 million in 1995 and, as a percentage of license revenue, increased to
3.8% in 1996 from 1.8% in 1995. Cost of license revenue increased primarily due
to growth in carrier system license revenue, because carrier systems entail
additional configuration costs. Cost of service revenue grew by 13.5% to $20.2
million in 1996 from $17.8 million in 1995 and, as a percentage of service
revenue, increased to 69.5% in 1996 from 68.9% in 1995. Cost of third-party
equipment and software revenue decreased by 8.8% to $14.3 million in 1996 from
$15.7 million in 1995 and, as a percentage of third-party equipment and software
revenue, increased to 70.2% in 1996 from 66.7% in 1995. The dollar decrease in
cost of third-party equipment and software revenue was mainly due to a decline
in related revenue. The Company believes that the increase in this cost of
revenue as a percentage of related revenue was due to increasingly competitive
conditions in the marketplace for these products, partly mitigated by the
Company's effort to stabilize selling prices and gross margins for these
products.
Research and Development Expenses. Research and development expenses
increased by 1.9% to $7.9 million in 1996 from $7.7 million in 1995 and, as a
percentage of total revenue, decreased to 12.1% in 1996 from 12.2% in 1995.
Research and development expenses were relatively stable in 1996 compared to
1995 as the Company's pace of enhancing and developing systems remained steady
year-to-year.
Sales and Marketing Expenses. Sales and marketing expenses decreased by
9.3% to $8.2 million in 1996 from $9.1 million in 1995 and, as a percentage of
total revenue, decreased to 12.7% in 1996 from 14.3% in 1995. The decrease in
sales and marketing expenses was due to a decrease in sales commissions and
personnel related costs in 1996 compared to 1995 due to the elimination of
certain sales management positions and incentive programs, which also resulted
in a reduction in the Company's sales force.
General and Administrative Expenses. General and administrative expenses
increased by 7.8% to $10.4 million in 1996 from $9.7 million in 1995 and, as a
percentage of total revenue, general and administrative expenses increased to
16.0% in 1996 from 15.3% in 1995. The increase in general and administrative
expenses was mainly due to $0.3 million in higher rent expenses as a result of
the Company occupying its new corporate headquarters and moving out of smaller,
lower rent facilities during 1996.
Harbor Software Litigation and Related Items. In 1996 and 1995, charges of
$6.2 million and $0.1 million, respectively, were incurred in connection with
litigation between the Company and Harbor.
Other Income (Expense), Net. Other income (expense), net was $122,609 more
favorable in 1996 than 1995 due to a $120,117 decrease in interest expense and
$2,492 increase in interest income.
25
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth, for the six quarters beginning January 1,
1997 and ending June 30, 1998 (i) certain historical and pro forma statement of
operations data and (ii) certain historical and pro forma statement of
operations data expressed as a percentage of total revenue. In management's
opinion, the unaudited quarterly statement of operations data have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the Company's Combined Financial Statements and related Notes
included elsewhere in this Prospectus. The Company believes that
quarter-to-quarter comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License............................................ $ 3,967 $ 4,792 $ 4,982 $ 6,550 $ 5,788 $ 5,949
Service............................................ 8,185 8,429 8,990 9,189 10,628 11,133
Third-party equipment and software................. 4,664 4,861 4,862 6,597 5,540 6,296
------- ------- ------- ------- ------- -------
Total revenue.................................. 16,816 18,082 18,834 22,336 21,956 23,378
------- ------- ------- ------- ------- -------
Cost of revenue:
License.............................................. 83 435 100 376 478 374
Service.............................................. 5,447 5,569 5,664 5,866 5,946 6,794
Third-party equipment and software................... 3,497 3,668 3,686 4,989 4,365 4,952
------- ------- ------- ------- ------- -------
Total cost of revenue.......................... 9,027 9,672 9,450 11,231 10,789 12,120
------- ------- ------- ------- ------- -------
Gross profit.......................................... 7,789 8,410 9,384 11,105 11,167 11,258
------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............................. 2,075 2,340 2,594 2,729 2,743 3,225
Sales and marketing.................................. 2,374 2,439 2,595 2,774 2,993 2,890
General and administrative........................... 2,607 2,864 3,047 3,045 3,349 3,114
Harbor Software litigation and related items......... 135 116 245 (4,004) -- --
------- ------- ------- ------- ------- -------
Total operating expenses....................... 7,191 7,759 8,481 4,544 9,085 9,229
------- ------- ------- ------- ------- -------
Operating income...................................... 598 651 903 6,561 2,082 2,029
Other income (expense), net........................... (10) 2 27 47 63 76
------- ------- ------- ------- ------- -------
Income before income taxes............................ 588 653 930 6,608 2,145 2,105
Provision for income taxes............................ 71 82 83 56 124 69
------- ------- ------- ------- ------- -------
Net income............................................ $ 517 $ 571 $ 847 $ 6,552 $ 2,021 $ 2,036
======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF OPERATIONS DATA:
Operating income..................................... $ 865 $ 919 $ 1,170 $ 6,829 $ 2,282 $ 2,039
Income tax provision................................. 333 360 467 2,681 914 825
Net income........................................... 522 561 730 4,195 1,430 1,290
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License........................................... 23.6% 26.5% 26.5% 29.3% 26.4% 25.5%
Service........................................... 48.7 46.6 47.7 41.2 48.4 47.6
Third-party equipment and software................ 27.7 26.9 25.8 29.5 25.2 26.9
----- ----- ----- ----- ----- -----
Total revenue................................. 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of revenue:
License............................................. 0.5 2.4 0.5 1.7 2.2 1.6
Service............................................. 32.4 30.8 30.1 26.3 27.1 29.1
Third-party equipment and software.................. 20.8 20.3 19.6 22.3 19.8 21.1
----- ----- ----- ----- ----- -----
Total cost of revenue......................... 53.7 53.5 50.2 50.3 49.1 51.8
----- ----- ----- ----- ----- -----
Gross profit......................................... 46.3 46.5 49.8 49.7 50.9 48.2
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development............................ 12.4 12.9 13.8 12.2 12.5 13.8
Sales and marketing................................. 14.1 13.5 13.8 12.4 13.6 12.4
General and administrative.......................... 15.5 15.8 16.1 13.6 15.3 13.3
Harbor Software litigation and related items........ 0.8 0.7 1.3 (17.9) 0.0 0.0
----- ----- ----- ----- ----- -----
Total operating expenses...................... 42.8 42.9 45.0 20.3 41.4 39.5
----- ----- ----- ----- ----- -----
Operating income..................................... 3.5 3.6 4.8 29.4 9.5 8.7
Other income (expense), net.......................... (0.0) 0.0 0.1 0.2 0.3 0.3
----- ----- ----- ----- ----- -----
Income before income taxes........................... 3.5 3.6 4.9 29.6 9.8 9.0
Provision for income taxes........................... 0.4 0.5 0.4 0.3 0.6 0.3
----- ----- ----- ----- ----- -----
Net income........................................... 3.1% 3.1% 4.5% 29.3% 9.2% 8.7%
===== ===== ===== ===== ===== =====
PRO FORMA STATEMENT OF OPERATIONS DATA:
Operating income.................................... 5.1% 5.1% 6.2% 30.6% 10.4% 8.7%
Income tax provision................................ 2.0 2.0 2.5 12.0 4.2 3.5
Net income.......................................... 3.1% 3.1% 3.9% 18.8% 6.5% 5.5%
</TABLE>
The Company has experienced significant fluctuations in quarterly operating
results primarily due to the seasonality of its sales. Historically, the
Company's revenue has been significantly higher in December and
26
<PAGE> 28
January than other months due to the Company's sales force incentive programs,
as well as year-end performance incentives earned by agencies from carriers that
can provide agencies with additional funds for a new system purchases. December
sales, which are typically higher than January sales, also benefit from the
accelerated tax benefits agencies receive by making such purchases before the
end of the year.
Operating results also fluctuate due to variations in costs of revenue.
Cost of license revenue has fluctuated significantly due to variations in
license revenue for lower margin carrier systems. Cost of service revenue as a
percentage of service revenue declined during 1997 primarily as a result of a
support and maintenance fee increase in January 1997 and increased productivity
of the Company's service organization.
The Company incurred non-recurring charges and credits during the periods
shown related to litigation between the Company and Harbor, which caused
significant fluctuations in operating income.
The Company expects that it will continue to experience significant
fluctuations in quarterly operating results. The Company's future operating
results will depend upon a number of factors including the demand for its
products, the size and timing of specific sales and product shipments, the delay
or deferral of customer implementations, the level of product and price
competition encountered, the length of its sales cycles, the timing of new
product introductions and enhancements by the Company and its competitors, the
mix of products and services sold, the timing of new hires, general economic
conditions and its ability to develop and market new products and control costs.
In addition, if carrier system license revenue represents a larger percentage of
total revenue, the Company could experience greater fluctuations in operating
results due to the higher price and related cost of these systems which may
shift between quarters.
As a result of these and other factors, the Company's operating results for
any quarter are subject to significant variation, and the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
It is likely that the Company's future quarterly operating results from time to
time will not meet the expectations of market analysts or investors. In such
event, the price of the Company's Common Stock would likely be materially and
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from cash flow from
operations. At June 30, 1998, the Company had cash and cash equivalents of $7.0
million and negative working capital of $11.5 million. The working capital
deficit primarily results from receiving cash payment for support and
maintenance services and implementation and consulting services not yet
performed, which is recorded as unearned support and services (a liability).
Liquidity may be materially affected by the amount of unearned support and
services existing at any point in time. Historically, the other key factors
impacting the Company's liquidity on both a short- and long-term basis have been
its profitability, distributions to stockholders and the level of accounts
receivable.
For 1997 and the six month period ended June 30, 1998, net cash provided by
operating activities was $6.6 million and $10.9 million, respectively. For both
periods, net cash provided by operating activities consisted primarily of net
income before depreciation, amortization and charges and credits from the Harbor
Software litigation and related items. Accounts receivable increased by $5.2
million during 1997, due to sales growth during 1997 and a greater seasonal
increase in sales in the last quarter compared to the comparable period in 1996.
Accounts receivable balances decreased by $3.3 million during the six month
period ended June 30, 1998, due to a seasonal slowdown in sales activity.
Unearned support and services increased by $4.5 million in 1997 primarily due to
sales growth during 1997 and greater seasonality in sales in the last quarter
compared to the comparable period in 1996. Sharp increases in sales can often
lead to an increased backlog of unperformed implementation and consulting
services, as was the case in late 1997. Accounts payable and accrued expenses
fluctuated during 1997 and the six month period ended June 30, 1998, primarily
due to varying sales levels which entail changes in purchases of third-party
equipment and software.
Net cash used in investing activities for 1997 and the six month period
ended June 30, 1998 was $0.9 million and $4.2 million, respectively. In 1997,
net cash used in investing activities consisted mainly of purchases of property
and equipment related to the Company's new corporate headquarters, which were
first
27
<PAGE> 29
occupied in late 1996, partly offset by the proceeds from the sale and
lease-back of certain office equipment. For the six month period ended June 30,
1998, net cash used in investing activities consisted primarily of a net
increase in a receivable from Applied Properties (as defined herein) and
purchases of property and equipment related to the Company's corporate
headquarters. See "Certain Transactions."
Net cash used in financing activities for 1997 and the six month period
ended June 30, 1998 was $3.0 million and $4.1 million, respectively, consisting
mainly of distributions to stockholders. The Company has historically
distributed a significant portion of its earnings as S corporation dividends.
See "Reorganization and S Corporation Distribution."
The Company has a $7,000,000 line of credit with First Midwest Bank which
expires on July 1, 1999. Borrowings under this line of credit bear interest at
the prevailing prime rate of interest, 8.5% at June 30, 1998, are secured by all
of the Company's assets, including accounts receivable, inventories, equipment
and buildings, and are personally guaranteed by certain stockholders. Further,
any borrowings under the line of credit are payable on demand. As of August 31,
1998, the Company had no borrowings under this line of credit. Available
borrowings are reduced by letters of credit. As of August 31, 1998, the Company
had no letters of credit outstanding. The majority stockholder of the Company
has assigned his $5,000,000 life insurance policy to First Midwest Bank. The
Company is currently negotiating a new line of credit in an effort to obtain
more favorable terms.
In connection with its conversion to C corporation status, to be effected
immediately prior to the Offering, the Company expects to make the S Corporation
Distribution. Approximately $6.0 million of the S Corporation Distribution will
be paid in cash, and approximately $5.0 million will be paid by issuance of the
S Corporation Notes. The Company expects to repay the S Corporation Notes from
future cash flows from operations, and none of the proceeds from the Offering
will be used to pay any part of the S Corporation Distribution.
In July 1998, the Company settled its lawsuit with Harbor which resulted in
a $2.5 million cash payment by the Company, net of an insurance reimbursement.
The Company does not expect to have significant capital expenditures in
either 1998 or 1999.
The Company believes that the net proceeds from the Offering, together with
existing sources of liquidity and anticipated cash flow from operations, will
satisfy the Company's anticipated working capital and capital expenditure
requirements through at least 1999. However, depending on its rate of growth,
profitability, product development efforts and possible acquisitions, the
Company may require additional equity or debt financing to meet its financing
needs in the future. There can be no assurance that additional financing will be
available when required or, if available, on terms satisfactory to the Company.
YEAR 2000
Certain computer software programs will be unable to process two-digit date
codes after December 31, 1999 (the "Year 2000 Problem"). As a result, computer
systems and software used by many companies in a wide variety of applications
will experience operating difficulties unless they are modified or upgraded to
adequately process information involving, related to or dependent upon the
century change.
The Company has conducted a review of its internal systems and has
developed a plan to modify or replace programs as necessary. Most of the
remediation of the Company's internal systems is completed and the remainder is
expected to be completed by the second quarter of 1999. The Company is also
assessing the potential overall impact of the Year 2000 Problem on the Company's
products. Based on the Company's assessment to date, while the Company believes
its current versions of its software products are substantially compatible with
the Year 2000, this compatibility cannot be fully ascertained in advance of the
Year 2000. Certain of the Company's agency customers are currently using
versions of its products that are not compatible with the Year 2000. The Company
has been notifying customers of the need to upgrade to the Year 2000 compatible
version of TAM via mail, telephone calls, newsletters and user group-initiated
seminars and publications. At the current rate the Company is converting its
customers, the Company expects most of its customers will be using Year 2000
compatible versions of the Company's products by the second quarter of
28
<PAGE> 30
1999. The Company has provided no explicit warranties for problems caused by the
Year 2000 that occur relative to its software.
The Company faces risk to the extent that suppliers of products, services
and systems purchased by the Company and others with whom the Company transacts
business do not comply with Year 2000 requirements. The Company has put in place
a contingency plan for disruption of its supply of hardware, telephone and
package delivery services that includes establishing relationships with multiple
suppliers where feasible to minimize its exposure. With respect to third-party
software, the Company relies on relationships with large software providers for
widely accepted, industry standard software, commonly believed to be Year 2000
compatible.
The costs that the Company has incurred and expects to incur in addressing
the Year 2000 Problem, including remediating its internal systems, reducing its
exposure to individual vendors and suppliers, creating Year 2000 compatible
products and securing sources of Year 2000 compatible third-party hardware and
software, have not been and are not expected to be material to the Company's
financial results.
It is possible the Company's customers could incur business interruptions
due to either the lack of Year 2000 compatibility of the Company's automation
products or due to problems with the customers' hardware or third-party
software, or with other non-Year 2000 compatible connected systems, for which
the customers may attempt to hold the Company responsible. These problems could
be exacerbated if customers do not upgrade to the Company's Year 2000 compatible
version of TAM. If the Company's products do not perform adequately in the Year
2000, the Company will have to incur additional programming costs to fix the
problem and support costs to implement any required enhancements. Also, the
Company could be subject to the costs of addressing, litigating and settling
actual or threatened lawsuits that occur relative to the Year 2000 Problem.
While the Company has a contingency plan in place that it believes substantially
addresses these Year 2000 exposures, it can provide no assurances that the Year
2000 Problem will not have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors -- Effects of the
Year 2000."
INFLATION
The Company believes that inflation generally has not had a material effect
on the results of its operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement introduces an approach to defining the Company's segments for
financial reporting purposes on a basis consistent with how the Company's
management evaluates the operations of the business. This statement is effective
for the Company's year ended December 31, 1998. All periods presented must
comply with the required disclosures. The Company does not believe that this
standard will have any impact on its financial statement disclosures.
29
<PAGE> 31
BUSINESS
Applied Systems is a leading designer, developer and marketer of automation
software for independent insurance agencies. The Company's principal product,
The Agency Manager(R) ("TAM"), significantly improves the productivity and
efficiency of independent P&C insurance agencies by combining client management,
policy pricing, EDI, policy and claims servicing, and accounting and back office
administration into an easy to use, completely integrated, single-entry software
solution. The Company currently serves over 7,500 agencies, representing over
70,000 concurrent licensed users. Fifteen percent of the approximately 44,000
independent P&C insurance agencies in the U.S. are currently customers of
Applied Systems. The Company has begun to leverage its insurance industry
expertise through the introduction of software solutions for P&C insurance
carriers. The Company's Diamond System is a fully integrated Microsoft
Windows-based P&C insurance carrier automation system that offers real-time
processing of policies and claims, automates billing and facilitates the
production of regulatory and statistical reports. The Company has sold the
Diamond System to 13 insurance carriers to date and recently began an active
marketing program for the product. Applied Systems also provides its customers
with support and maintenance services and implementation and consulting services
as well as third-party equipment and software. In 1997, approximately 35% of the
Company's revenue was attributable to support and maintenance agreements.
INDUSTRY BACKGROUND
The insurance industry is composed of several markets including P&C
insurance, life insurance, medical insurance and disability insurance. P&C
insurance provides financial protection for individuals, businesses and others
against losses of property or losses by third parties for which the insured is
liable. P&C insurers underwrite policies that cover various types of risk, which
can generally be categorized as commercial lines covering businesses, and
personal lines covering individuals. Commercial lines, which represent
approximately 44% of annual P&C insurance premiums, cover property, general
liability, workers' compensation, vehicles and equipment, directors' and
officers' liability, theft, medical malpractice as well as other commercial
risks. Personal lines, which represent approximately 49% of annual P&C insurance
premiums, include coverages such as automobile (physical damage and liability)
and homeowners' insurance. Reinsurance premiums account for the remaining 7% of
annual P&C insurance premiums. Approximately 75% of commercial policies are
written through independent agencies while 60% of personal policies are sold
through captive agents.
P&C insurance policies in the U.S. are underwritten by insurance carriers
and sold either by agents and brokers or directly to the consumer. An
"independent" agent or broker is one who sells the policies of a number of
different insurance carriers, while a "captive" agent offers and sells the
policies of a single insurance carrier. Certain carriers sell policies directly
to the consumer through direct response channels upon the initiative of the
consumer via telephone and, more recently, the Internet. The Company believes
there are approximately 44,000 independent insurance agencies serving the P&C
insurance industry in the U.S. and approximately 2,400 insurance carriers
writing P&C insurance.
The P&C insurance industry is subject to supervision and regulation on a
state-by-state basis. State insurance regulators closely regulate the product
offerings, claims processes and premium structure of insurance carriers. These
state regulations are continually changing, requiring standard industry forms to
be continually updated.
The P&C insurance industry has experienced significant changes during the
last two decades, driven primarily by downward pressure on premiums for carriers
and on commissions for agencies, consolidation of independent agencies and, most
recently, increased utilization of direct response channels in personal lines.
Extensive price competition in the form of lower premiums has resulted from high
investment returns for carriers on invested premiums and the entry of new
competitors in the market. Lower insurance premiums have reduced agencies'
commissions. As a result, both agencies and carriers are focusing on writing
higher volumes of insurance, achieving higher renewal and retention rates,
reducing operating costs and producing efficiencies in order to remain
competitive. Automation has been a principal means by which to achieve these
objectives.
30
<PAGE> 32
According to A.M. Best Company, approximately $276 billion in total P&C
premiums were written in the U.S. in 1997. The Company estimates that agencies
and carriers spend a total of approximately 3-4% of such premiums on information
technology, including automation software and data processing. The Company
expects the market for third-party automation software to grow for the reasons
described below.
The functions performed by independent insurance agencies are highly data
intensive. These tasks include gathering information from prospective customers,
generating proposals, preparing customer applications, communicating with
carriers, servicing policies and billing customers. Independent insurance
agencies must perform these functions efficiently to be competitive and
profitable. As a result, agencies are increasingly automating activities that
were previously performed manually or handled inefficiently by outdated systems
that were not easy to use, lacked broad functionality and scalability, and were
not fully integrated.
In addition, consolidation among agencies is increasing the demand for
automation. As competition has increased and P&C insurance carriers have
demanded higher premium volumes from agencies, many agencies have found it
necessary to merge with other agencies resulting in fewer, larger agencies.
Consolidation of independent agencies primarily affects smaller agencies that
are unable to automate cost-effectively. As a result of such consolidation,
certain agencies are becoming candidates for automation, or are combining with
automated agencies and adding licensed users to those automated systems.
Similarly, insurance carriers need to process larger amounts of information
efficiently to be competitive. Communicating with agencies, processing policies,
handling claims, billing customers and producing regulatory and statistical
reports are all tasks that can be performed more efficiently through automation.
Insurance carriers historically have utilized customized, platform-specific
legacy software developed internally or licensed from third-party suppliers.
Carrier legacy applications generally require large MIS and data processing
departments, are expensive to implement and support, are difficult and expensive
to scale with growth and have limited interoperability with the variety of
information resources and systems available today. Insurance carriers are
increasingly upgrading their automation systems to more current technologies to
become more efficient, and often rely on third-party providers rather than
in-house alternatives for these improvements.
In addition to efforts to improve automation internally, insurance carriers
are actively promoting automation for independent agencies. Some insurance
carriers provide incentives to agencies that elect to automate, such as offering
financing for or subsidizing the purchase of an automation system or paying
higher commissions to automated agencies. Both insurance carriers and agencies
are focusing on EDI because it allows a higher level of cost-efficient
communication with fewer redundant steps and reduced exposure to errors and
omissions. Replacing paper-based information and data flows with computer
networks has led to decreased costs for all industry participants, including
insurance carriers, independent agencies and insureds. The use of EDI for the
exchange of data, including the upload of application information from agencies
to carriers and the download of policies and forms from carriers to agencies, is
increasing. The Agency-Company Organization for Research and Development
("ACORD"), a nonprofit, independent insurance industry association, has also
been instrumental in the development of EDI.
THE APPLIED SYSTEMS SOLUTION
Complete Automation Solution for Insurance Agencies. TAM is an easy to use,
completely integrated, single-entry application that significantly improves the
productivity and efficiency of independent agencies by combining client
management, policy pricing, EDI, policy and claims servicing, and accounting and
back office administration into a single software solution. The Company believes
TAM enables agencies to become more efficient across all areas of their
business, allowing them to dedicate more time to providing customer service,
soliciting and developing new clients and retaining and leveraging existing
accounts. This software is designed to operate on a personal computer platform
and supports implementations ranging from single users to large local area and
wide area networks, allowing the system to be easily and cost-effectively scaled
to meet the changing needs of independent agencies. In addition, the Company's
ability to download an agency's entire database of customer information from its
various carriers allows for an efficient transition from an older legacy system.
The Company expects general release of TAM-Vision, its newest version of TAM, in
the fourth
31
<PAGE> 33
quarter of 1998. TAM-Vision is a 32-bit, client/server application that features
increased functionality and speed.
Support and Maintenance Program. The Company provides comprehensive support
and maintenance services to its customers who participate in the Company's
support and maintenance program. This program entitles customers to unlimited
support as well as product enhancements and new versions of the Company's
products. Product enhancements and new versions are introduced regularly to
offer additional functionality and respond to changes in state insurance
regulations and other insurance industry and technological developments.
Management believes that its comprehensive support services reduce its
customers' need for internal MIS and regulatory support personnel. The Company
does not provide extensive customization to its agencies and carriers, which
minimizes the costs associated with providing support and maintenance.
Improvements in features and functionality, including those requested by
customers through the Company's user group, are incorporated into the Company's
base product through upgrades. In addition, the Company is committed to
providing the highest level of customer service through its toll-free support
system staffed by approximately 220 employees. The Company also provides a
rigorous training program that the Company believes enhances customer
satisfaction and reduces costs related to customer support. The Company
continues to expand its customer service resources and offerings and integrate
new technologies as a means to further differentiate itself from its
competitors. As evidence of their high level of satisfaction with the Company's
products and services, approximately 96% of TAM customers since 1996 have
renewed their support and maintenance agreements.
Interface Between Insurance Agencies and Insurance Carriers. The Company's
TAM product fully integrates internal EDI functionality, allowing agencies to
perform industry standard uploads and downloads without relying on third-party
software. TAM features a superior single-entry, multiple carrier capability that
supports more agency/carrier interfacing pairs than any competing product. Based
on data from ACORD, TAM enables over 60% of all industry standard electronic
communication links for the upload of data from agencies to carriers and over
40% of all links for downloads from carriers to agencies. Due to the Company's
accomplishments in the area of EDI, it has been awarded ACORD's Download Vendor
of the Year and Upload Vendor of the Year each year for the past four years. The
Company believes its award-winning capabilities in EDI have enabled agencies and
carriers to lower costs, improve productivity and reduce errors and omissions.
Automated Policy and Claims Processing, Billing, and Regulatory and
Statistical Reporting for Insurance Carriers. The Company's Diamond System is a
fully integrated Microsoft Windows-based system that offers real-time processing
of policies and claims, automates billing and facilitates the production of
regulatory and statistical reports. Unlike many competing systems, the Diamond
System operates in a local area network environment and has a scalable open
architecture. The Company has maintained a common code base across its Diamond
System customers allowing the Company to cost-effectively implement enhancements
and upgrades to those customers. This standardization also minimizes the time
needed for installation. The Diamond System provides carriers with established
EDI connections with the Company's agency customers, which the Company believes
comprise the largest base of independent agencies on a single EDI-enabled
system, as well as with other insurance agencies operating on industry standard
systems.
STRATEGY
The Company is committed to maintaining and enhancing its position as a
leading provider of automation software for independent insurance agencies and
becoming a leading provider of systems to insurance carriers in the P&C market.
The Company believes that the following factors are important to achieving these
goals.
Continue to Focus on Independent Agencies. Since its inception, the Company
has targeted independent insurance agencies in the P&C industry. This focus has
enabled the Company to understand the needs of its agency customers and to use
that knowledge to develop its products and services to meet the specific
requirements of the insurance agency market. The Company plans to continue to
leverage its experience and reputation in the insurance agency market to enhance
its competitive position. The Company currently serves over 7,500 agencies,
representing over 70,000 concurrent licensed users. Fifteen percent of the
approximately
32
<PAGE> 34
44,000 independent P&C insurance agencies in the U.S. are currently customers of
Applied Systems. The Company intends to continue to target the remaining 85%
that are operating on competing systems or are not yet automated.
Further Penetrate Market for Insurance Carrier Systems. The Company plans
to aggressively market its Diamond System to P&C insurance carriers. The Company
currently has low penetration among the approximately 2,400 insurance carriers
in the P&C industry in the U.S., most of which have multiple lines of business
in a number of states, representing an attractive market opportunity for the
Diamond System. The Company is currently focusing the marketing of the Diamond
System on personal lines of insurance, which is a high transaction and low
premium sector of the insurance market characterized by intense price
competition and a focus on cost reduction. The Company believes that the Diamond
System will enable carriers to achieve the operating efficiencies necessary to
compete successfully in this sector of the insurance market and allow them to
enter new markets more efficiently.
Advance Position as Industry Innovator in Interface Technology. The Company
is committed to maintaining and enhancing its position as the leading innovator
of EDI technology in the P&C insurance automation software market. By working
closely with agencies and carriers to develop new EDI functionality for its
products, the Company has been successful in creating a number of EDI
innovations. The Company was the first to deliver a complete automation solution
for agencies capable of single-entry, multiple company interface utilizing ACORD
standards. The Company also performed the industry's first exchange of industry
standard data between an agency and a carrier over the Internet and continues to
facilitate information downloads from carriers to agencies using low-cost
Internet connections. The Company intends to continue to enhance its EDI
capabilities in order to differentiate its products and further penetrate both
the agency and carrier markets.
Maintain Technological Leadership. The Company commits substantial time and
resources to technological development, which it believes is key to the
successful sale and implementation of its products. The Company intends to
maintain its technology leadership position in the insurance software industry
by anticipating and responding to evolving industry needs and by adopting
technological advances in software and hardware to address those needs. The
latest version of TAM operates on a 32-bit platform, the most advanced platform
currently offered in the P&C insurance agency software market. The Company also
developed the Diamond System to respond to the needs of insurance carriers for
complete policy, billing and claims automation and interface capability. The
Company continues to develop new interface solutions and is currently designing
its products to support ACORD's object-based technology, ACORD Objx.
Leverage Relationships in Insurance Agency and Insurance Carrier Customer
Bases. The Company provides complementary systems to both P&C insurance agencies
and carriers, which generate significant opportunities for the Company to
leverage its customer base. Through TAM, the Company has established a broad
base of EDI-enabled insurance agency customers capable of effecting
state-of-the-art information transfers. In marketing the Diamond System, the
Company intends to emphasize the potential benefits of immediate access to this
customer base. In addition, the Company believes that as carriers increasingly
target TAM agencies due to the increased efficiencies that result from the TAM
system, more agencies will demand the TAM product.
PRODUCTS
The Company offers a complete automated management system for independent
agencies and offers policy, billing and claims administration software to meet
the needs of insurance carriers. The Company develops, markets, installs and
offers support and maintenance, and implementation and consulting services for
all of its products.
Agency Systems
The Agency Manager. The Agency Manager is a fully integrated management
system primarily designed for independent P&C agencies. The Company believes
that TAM has the broadest range of features offered in a single product for
agencies in the P&C insurance software industry. TAM is designed to operate on a
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personal computer platform and can support implementations ranging from single
users to large local area and wide area networks. TAM provides efficient
integration of customer/policy databases, accounting, policy rating, ACORD
forms, automated marketing, transactional filing, digital imaging, network
faxing, motor vehicle reports and integration with Microsoft Office and Mail. In
addition, TAM offers advanced features such as carrier, agency and
state-specific forms and custom reports. TAM fully integrates internal EDI
functionality allowing agencies to perform industry standard uploads and
downloads without relying on third party software.
In developing its software products, the Company works closely with the
Applied Systems Client Network ("ASCnet"), the TAM user group that compiles
suggestions for product enhancements from its members and communicates them to
the Company. ASCnet has played a valuable role in the evolution of TAM.
The Company has continually added new features and functionality to
successive versions of TAM, successfully integrating each of these new features
into the base TAM product. The Company believes that these new features increase
an agency's productivity and efficiency. Approximately 15% of all independent
P&C agencies in the U.S. are currently utilizing TAM and over 40% of all P&C
industry standard EDI communication links include TAM agencies. Further
establishing its role as a technological leader, the Company expects general
release of the newest TAM product, TAM-Vision, in the fourth quarter of 1998.
TAM-Vision is a Windows NT, 32-bit, client/server product that is designed to
support ACORD's Objx standards. License fees for TAM vary depending on the
number of users and sites being licensed.
TAM Advantage.(TM) TAM Advantage is the Company's competitively priced
solution specifically designed for smaller agencies that require a simpler
version of TAM. TAM Advantage offers the same technology as TAM, but is tailored
to meet the needs of these agencies.
FirstRate.(TM) FirstRate is a comparative pricing/rating system for
personal and commercial lines of insurance that fully integrates with TAM or may
be operated on a stand-alone basis. FirstRate equips independent insurance
agencies with a fast and accurate comparative rating system. The Company has
licensed approximately 2,100 FirstRate systems.
Third-Party Products. The Company offers insurance agencies complete
third-party computer hardware systems such as servers, workstations and
printers, and computer software such as Windows NT, Microsoft Office, SQL Server
and the Microsoft BackOffice line. The Company offers these third-party products
as part of its commitment to providing its agency customers with a complete
automation solution.
Insurance Carrier Systems
The Diamond System. The Diamond System provides an automation solution for
regional and national P&C insurance carriers. The Company's Diamond System is a
fully integrated Microsoft Windows-based system that offers real-time processing
of policies and claims, automates billing and facilitates the production of
regulatory and statistical reports. The Diamond System offers established EDI
connections with the Company's insurance agency customers, which the Company
believes comprise the largest base of independent agencies on a single
EDI-enabled system, as well as other insurance agencies operating on industry
standard systems. The Company has sold the Diamond System to 13 insurance
carriers to date and recently began an active marketing program for the product.
The Diamond System is designed to operate on local area and wide area
networks, and does not require a proprietary, single-purpose hardware platform.
Traditionally, insurance carrier processing has been served by main frame-based
systems which require an overnight batch cycle in order to process each day's
transactions. Any errors in data input or processing using a batch system are
not identified and corrected until the next day. The Company believes that
on-line, real-time processing for insurance carrier transactions can lead to a
significant reduction in transaction processing expenses.
In developing the Diamond System, the Company incorporated insurance
functions, business rules and database structures common to all insurance
companies into its "Diamond Base." The Company configures
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the Diamond Base for each insurance carrier by incorporating carrier-specific
rate formulas, underwriting rules, third-party data access, billing plans and
policy forms.
PolicyMiner(TM) and Policy-Rollover.(TM) PolicyMiner is a tool designed to
assist P&C insurance carriers and agencies in electronically analyzing policies
currently in effect and maintained on TAM systems to determine whether or not to
recommend a change in carrier for a given policy. If a change in carrier is
decided upon, PolicyMiner electronically transfers that policy upon renewal to
the new carrier via EDI. PolicyMiner eliminates the need for individual analysis
of the high volume of policies managed by an agency. PolicyMiner and
Policy-Rollover are products that identify "blocks" of policies within an
existing agency system that are to be "rolled," or transferred to a carrier,
based on a number of user-selected attributes such as type of policy, location
and policy effective period. PolicyMiner-Plus is a product that contains the
same features as PolicyMiner and Policy-Rollover, but adds a carrier-specific
pricing and underwriting feature for premium and commission comparison between
each existing policy version and a proposed new policy version. This allows the
carrier and agency to "mine" the agency's database utilizing premium and
commission comparisons.
SERVICES
Support and Maintenance. All of the Company's agency customers receive one
year of support and maintenance service with the initial system purchase.
Customers may enter into support and maintenance agreements thereafter that
entitle them to continued support as well as product enhancements and new
versions of the Company's products. Technological system advances, including
those requested by customers through the Company's user group, ASCnet, are
incorporated into the Company's base product through product enhancements and
new versions. Upgrades of the Company's products are introduced regularly to
respond to changes in state insurance regulations and other insurance industry
and technological developments. The Company employs approximately 20 individuals
dedicated to incorporating each state's regulations into its products. By
providing upgrades to all of its agency customers participating in the Company's
support and maintenance program, the Company is able to minimize the cost of
supporting multiple versions of its products.
Implementation and Consulting Services. The Company offers full
implementation services, including installation, data conversion, training and
consulting services. The Company's training services provide customers with a
formalized program to ensure that applications will be utilized in an efficient
and cost-effective manner. The Company offers extensive training at its
facilities in University Park, Illinois and its regional training centers in
California, Florida, Massachusetts, Minnesota, New Jersey, Texas, Washington and
Ontario, Canada. The Company's consulting services are performed on site and are
designed to assist customers with agency-specific workflows and enhance system
utilization.
PRODUCT DEVELOPMENT
Applied Systems has a history of introducing innovations and adopting
leading edge technology in its products. The market for the Company's products
is characterized by rapidly changing technology, the need to comply with varied
and continuously changing state insurance regulations and frequent introductions
of new products and enhancements. The Company's future success depends in part
on its ability to enhance its existing products and services and develop new
products and services to meet changing customer requirements. To this end, the
Company relies in part on input from its licensed user group, ASCnet, to improve
the functionality and ease of use of its agency systems. The Company offers
upgrades to all of its customers who participate in the Company's support and
maintenance program. The Internet has facilitated updates on a more regular
basis. The Company's product development efforts are focused on enhancement of
existing products and services, expansion of operating system compatibility and
development of new applications for the insurance software market. The latest
example of the Company's product development efforts is TAM-Vision, which is a
Windows NT-based, 32-bit, client/server version of TAM expected for general
release in the fourth quarter of 1998.
Since inception, the Company has made substantial investments in enhancing
and developing its products and services. The Company spent approximately $7.7
million, $7.9 million and $9.7 million in 1995, 1996 and
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1997, respectively, on research and development and the Company intends to
devote substantial resources to product development in the future. The Company
has approximately 235 employees who specialize in product development and
participate in the initial installations of new products.
SALES AND MARKETING
The Company markets and sells its products through its direct sales force
which consists of approximately 75 employees located primarily in North America.
Approximately 70 of these salespeople are responsible for selling agency
products and services. The Company's U.S. agency sales force is divided into
four regional sales units and one national accounts unit. The regional sales
units are supervised by regional managers and are responsible for sales to
small- and medium-sized independent insurance agencies. The national accounts
unit sells to larger agencies.
The Company dedicates approximately 75% of its agency sales force to new
customer sales. Sales prospects originate primarily from the Company's
advertising and marketing, current customer referrals and industry trade shows.
Any inquiries from potential customers as a result of these marketing efforts
are channeled through the Company's central headquarters to the appropriate
regional or national accounts salesperson. Sales presentations are conducted at
the prospective agency and include a full demonstration of the product. The
balance of the agency sales force focuses on generating revenue from the
Company's current customer base through sales of additional user licenses and
third-party hardware and software. These employees also maintain and strengthen
customer relationships by disseminating information regarding product
enhancements and technical specifications for software compatibility.
The Company's carrier system salespeople are based at the Company's
headquarters. The Company intends to add sales resources to this group as it
begins to more aggressively market the Diamond System. The Company currently
provides incentives to a portion of its existing agency sales force to generate
leads for Diamond System sales.
A substantial portion of sales force compensation is based on commissions,
with additional incentives offered for new user sales. The Company believes that
its commission based compensation system optimizes sales productivity.
The Company markets its products through participation in trade shows,
target marketing and advertising in trade publications. The Company maintains
control over the content and timing of its advertising and promotional materials
by producing substantially all of its marketing materials in-house, thus
reducing costs and ensuring timely development and delivery.
CUSTOMERS
The Company has a diverse customer base. During 1997, no single customer
accounted for more than 2% of total sales. The quality of the Company's support
and maintenance has been a key factor in its 96% customer retention rate since
1996 for support and maintenance agreements and the development of a strong
relationship with its user group. Customers for the Company's agency products
range from small- to medium-sized independent insurance agencies to large
national agencies. The Company currently serves over 7,500 independent insurance
agencies. Customers for the Company's insurance carrier products are regional
and national insurance carriers. The Company has sold its Diamond System to 13
insurance carriers to date.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
The Company provides its products to customers on a "right-to-use" basis
under exclusive and non-exclusive licenses containing confidentiality and
nondisclosure provisions. The Company seeks to protect its software and other
intellectual property through a combination of trade secret, copyright and
trademark law. In addition, the Company relies on confidentiality agreements and
contractual restrictions on copying and disclosure contained in its licenses and
nondisclosure agreements with its employees and contractors.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary.
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Policing unauthorized use of the Company's products is difficult and, while the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the U.S. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's products and technologies. In addition, certain technology used in the
Company's products is licensed from third parties. See "Risk Factors -- Reliance
on Microsoft Technologies."
In November 1992, Harbor filed suit against ASI alleging copyright
infringement, misappropriation of trade secrets, and other claims. The other
claims were ultimately withdrawn or dismissed. A verdict was returned in favor
of ASI on the copyright infringement claim, but in favor of Harbor on the trade
secret claim. The trade secrets involved in the claim were never identified by
the plaintiff. In July 1998, a settlement agreement was entered into, pursuant
to which ASI paid Harbor $5.0 million. ASI recovered $2.5 million from its
insurers to partially offset the amount paid to Harbor. ASI did not admit
liability and Harbor agreed not to assert specified additional claims against
ASI and its products. The settlement agreement did not convey to Harbor or ASI
the right to use the intellectual property that was the subject of the
litigation. However, Harbor and its principal stockholder released ASI from all
claims past and future relating to any intellectual property of ASI and agreed
not to assert specified additional claims against ASI and its products. There
can be no assurance that other third parties will not assert infringement claims
against the Company in the future with respect to past, current or future
products. See "Risk Factors -- Proprietary Rights; Risk of Infringement," and
Note 12 of Notes to Combined Financial Statements. As the number of software
products in the industry increases and the functionality of these products
further overlap, the Company believes that software developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, can be time-consuming and expensive to defend, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
COMPETITION
The market for the Company's products is highly competitive. A variety of
companies currently offer products that compete with one or more of the
Company's product lines. In addition, as the Company targets new markets and
introduces new product lines, it expects to encounter competition from
additional software vendors. The Company competes on the basis of product
features and functionality, price and maintenance and support programs. The
Company believes that its products generally compete effectively with respect to
these factors.
In the independent insurance agency market, the Company believes that its
most significant competition comes from systems developed by other insurance
software vendors such as AMS and Delphi. In the P&C insurance carrier market,
the Company believes that its most significant competition comes from policy and
claims administration and information systems developed in-house by insurance
carriers. Carriers that perform in-house administration typically have made a
significant investment in their policy and claims administration systems. In
addition, insurance carrier personnel have a vested interest in maintaining
these responsibilities in-house. The Company also competes with outside software
vendors including PMSC and INSpire. Many of the Company's existing competitors,
as well as a number of potential new competitors, have significantly greater
financial, technical and marketing resources than the Company.
FACILITIES
The Company's corporate headquarters, its principal administrative, product
development, sales and marketing operations and its principal customer training
center are located in University Park, Illinois in a building with approximately
160,000 square feet of office space. The Company leases the property from an
entity controlled by the founder and principal stockholder of the Company and
the current Chairman, Chief Executive Officer and President of the Company. See
"Certain Transactions." The lease is scheduled to expire in August 2018 and
currently provides for an annual base rent of $2.1 million with annual increases
of 2%. The Company owns an office building in Canada which is approximately
13,000 square feet and is used for the
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Company's Canadian operations. In addition, the Company leases office space in
eleven locations in the U.S. for sales and training facilities and in one
location in the U.K. The U.S. properties are located throughout the country and
range in size from approximately 1,000 square feet to 18,000 square feet. The
leases generally have terms expiring between late 1998 and 2001. The Company
also owns two office buildings in Illinois, one of which is 33,000 square feet
and the other of which is 38,000 square feet. The 38,000 square foot facility is
located in Matteson, Illinois, is not currently being used by the Company and is
expected to be disposed of by the Company in 1999. The Company believes that its
existing facilities are suitable and adequate for its present needs and that
suitable additional space will be available as needed to accommodate any
expansion of operations.
EMPLOYEES
As of June 30, 1998, the Company had approximately 1,100 employees, of
which approximately 235 employees perform software and product development, 570
perform customer services, 135 are engaged in sales and marketing activities,
135 perform corporate functions and 25 perform configuration and evaluation of
hardware. Of the Company's employees, 970 are located within the U.S. and 130
are located outside the U.S. None of the Company's employees is represented by a
collective bargaining unit. The Company considers its relations with its
employees to be good.
LEGAL PROCEEDINGS
The Company is party to various claims, legal actions and complaints
arising in the ordinary course of business. Management does not believe that any
such matters individually or in the aggregate could have a material adverse
effect on the Company's financial condition or results of operation.
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GLOSSARY OF TERMS
AGENCY/COMPANY ORGANIZATION FOR RESEARCH AND DEVELOPMENT (ACORD)
ACORD is a nonprofit insurance association whose mission is to increase the
efficiency of the agency distribution system and the insurance industry as a
whole. ACORD accomplishes its mission by developing and maintaining standard
forms to support policy processing, providing EDI standards for the industry,
and promoting the effective use of agency automation and process improvement.
Approximately 1,000 insurance companies are affiliated with ACORD, as are
35,000 insurance agencies, the major agency software providers, the national
producer associations, user groups, and other industry associations. The Company
is a member of ACORD.
APPLIED SYSTEMS CLIENT NETWORK (ASCNET)
ASCnet is an international association of insurance agents and brokers who
use the Company's software to run their businesses. ASCnet is an independent,
not-for-profit organization that facilitates knowledge sharing and improved
business practices. They also work closely with the Company in developing future
products and in industry lobbying efforts.
BETA SOFTWARE
Beta software is a test version of a computer product that is provided to a
large number of users prior to general commercial release. Beta testing is the
last stage of testing, where the software is sent to test sites outside the
company for real-world exposure. Beta testing is often preceded by a round of
testing called alpha testing, the internal testing of the software by the
software's manufacturer.
CLIENT/SERVER APPLICATION
Client/server is a network architecture in which each computer or process
on the network is either a client or a server and where the client computer
requests information from the server computer or machine. Servers are powerful
computers or processors dedicated to managing databases, disk drives (file
servers), printers (print servers), or network traffic (network servers).
Clients are PCs or workstations on which users run applications. Clients rely on
servers for resources, such as database queries, files, devices, and even
processing power. A client/server application leverages this architecture for
improved performance.
DOWNLOAD
Download refers to the process of transmitting informational files from one
computer to another, in this case, an insurance carrier electronically sending
information "down" to the insurance agent or broker (See "Electronic data
interchange").
ELECTRONIC DATA INTERCHANGE (EDI)
EDI is the electronic communication of business information without human
intervention. Through EDI, the receiving system is updated with each piece of
information (data) received from the sending system. For example, if an agent is
sending a policy change request to a carrier, the policy number, effective and
expiration dates, etc. are electronically transmitted from the agent's system to
the carrier's without the carrier having to re-enter them. In this manner,
carriers and agencies electronically share data.
LOCAL AREA NETWORK (LAN)
A LAN is a communications network that serves users within a confined
geographical area and is made up of servers, workstations, a network operating
system and a communications link. A LAN takes advantage of the proximity of
computers to offer relatively efficient, higher-speed communications than
wide-area networks.
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OBJECT-BASED
Object-based refers to a computer application that is broken down into
modules or objects. These objects can be combined like building blocks in new
ways or used by third-parties to exchange information between separate systems.
OPEN ARCHITECTURE
Open architecture refers to an architecture whose specifications are public
and is therefore designed to interconnect with a variety of products. This
includes officially approved standards as well as privately designed
architectures whose specifications are made publicly available by the designers.
POLICY PRICING
Policy pricing enables agents and carriers to provide consumers with a
price for an insurance policy, taking into account customer specific and carrier
specific information to determine the price.
REAL-TIME PROCESSING
Real-time processing allows for production of and changes to a policy to
occur immediately after all information is submitted to the software application
rather than waiting for an overnight or lengthy process to make the policy or
its changes effective.
SQL SERVER
Microsoft(R) SQL Server(R) consists of a database and database tools that
run on a network server and is designed for client/server use. Client
workstations send requests for data to SQL Server which processes those requests
and returns data to the client workstation.
UPLOAD
Upload refers to the process of transmitting informational files from one
computer to another, in this case an insurance agent or broker electronically
sending information "up" to the insurance carrier (See "Electronic data
interchange").
WIDE AREA NETWORK (WAN)
A WAN is a computer network that spans a relatively large geographical
area. Typically, a WAN consists of two or more local-area networks (LANs).
WINDOWS NT
Microsoft(R) Windows NT(R) is a 32-bit operating system for both clients
and servers. Combined with either the Intel 32-bit microprocessors or Digital
Equipment Corporation's Alpha microprocessors, Windows NT provides support for
32-bit applications.
WINDOWS 3.X
Microsoft(R) Windows(R) 3.x is an older computer operating system that is
superceded by Microsoft(R) Windows NT(R) and Microsoft(R) Windows95(R). Windows
3.x is a 16-bit operating system and cannot run applications designed for
Windows NT(R) or Windows95(R), which are 32-bit applications.
WINDOWS 95
Microsoft(R) Windows 95(R) is a 32-bit operating system that serves as an
upgrade to Microsoft's Windows(R) 3.x and Microsoft DOS operating systems.
Running only on Intel microprocessors (the 386 family and greater), it supports
32-bit applications as well as the older, 16-bit applications.
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MANAGEMENT
The following table sets forth certain information concerning each of the
Company's executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James P. Kellner................ 40 Chairman of the Board, President and Chief Executive Officer
Timothy J. McIntyre............. 40 Executive Vice President, Chief Financial Officer and
Secretary
Thomas H. Carruth............... 37 Executive Vice President-Software Services
John J. Higginson............... 30 Executive Vice President-Technology
Patrick J. Kellner.............. 37 Executive Vice President-Sales
Patricia E. Ruisz............... 42 Executive Vice President-Operations
Glen R. Eustace................. 28 Vice President-Financial Management and Director
William A. Huff................. 52 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
James P. Kellner was appointed President of the Company in 1991, Chief
Executive Officer in April 1997 and Chairman of the Board of Directors in June
1998. He joined the Company in 1985 as a programmer/analyst. In 1988, he was
selected to head the Company's newly formed Large Systems Division and was
responsible for marketing automation systems to large independent insurance
agencies. Mr. Kellner received his B.A. from Augustana College. James P. Kellner
and Patrick J. Kellner are brothers.
Timothy J. McIntyre began his employment with the Company in May 1998.
Prior to joining the Company, he was General Manager of Investor Relations and
Financial Management from 1996 to May 1998 and Manager of Financial Planning
from 1993 to 1996 at Ryerson Tull, a materials distribution company. Mr.
McIntyre has an accounting degree from the University of Notre Dame, an M.B.A.
from the University of Chicago and is a C.P.A. and a C.C.M. (Certified Cash
Manager).
Thomas H. Carruth joined the Company in 1991 as Vice President/General
Manager for the Indianapolis (Liberty) operation. In 1993 he assumed the
additional responsibilities of the Marietta support operation and, in 1994, he
began managing the Company's rating operation located in Minneapolis. Mr.
Carruth was appointed Executive Vice President-Software Services in 1995. Mr.
Carruth received his B.A. from Miami University, Oxford, Ohio.
John J. Higginson joined the Company in 1990 as a Customer Support
Engineer. In 1995, Mr. Higginson was promoted to Vice President-Software
Services with responsibility for the operation of the Company's U.S. customer
support center. In 1997, Mr. Higginson was promoted to his current position of
Executive Vice President-Technology. Mr. Higginson received his B.A. from
Northern Illinois University and is a Certified Netware Engineer and a Microsoft
Certified Systems Engineer.
Patrick J. Kellner joined the Company in 1987 as a regional sales
specialist in Wisconsin. In 1991, Mr. Kellner was promoted to Vice President,
National Sales Manager and in 1996 was promoted to the new position of Vice
President-Sales for the Company Systems Division. In 1997, Mr. Kellner was named
Executive Vice President-Sales and is responsible for the Sales and Marketing of
all the Company's products in the U.S. Mr. Kellner received his B.A. from
Augustana College.
Patricia E. Ruisz joined the Company in 1984. In 1985, she became the
manager of the Company's Customer Order Processing Department. Between 1988 and
1989, Ms. Ruisz was primarily responsible for overseeing the commencement of the
Company's operations in Canada. In 1989, she was promoted to the position of
Chief Operating Officer and in July 1998 such title was changed to Executive
Vice President-Operations.
Glen R. Eustace began his career at the Company in 1994 as Director,
Financial Planning. In late 1995, he was promoted to Executive Vice
President-Business Development and in 1998 became Vice President --
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Financial Management. For the three year period prior to joining Applied
Systems, he was a financial analyst with Baxter Healthcare Corporation where his
duties included financial planning, international treasury functions and general
accounting. Mr. Eustace has a B.S. in Finance from the University of Illinois.
Glen R. Eustace is the son of Robert R. and Elsa M. Eustace, the founders and
principal stockholders of the Company.
William A. Huff has served as a director of the Company since its
incorporation on April 1, 1986. He also serves as a member of the board of
directors of GreatBank, N.A. in Evanston, Illinois and First National Bank in
Chicago Heights, Illinois. Mr. Huff received his B.S. from Indiana University
and his J.D. from the University of Illinois. Mr. Huff has been engaged in the
private practice of law since 1979 and provides legal services to the Company
from time to time. See "Certain Transactions."
BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Company's
Board of Directors. The Board of Directors is currently composed of three
directors, including two executive officers of the Company. Following the
Offering, the directors will be divided into three classes. Upon the expiration
of the term of each class of directors, directors comprising that class will be
elected for a three-year term at the next succeeding annual meeting of
stockholders. Each director holds office until that director's successor has
been duly elected and qualified. The Company intends to expand the Board of
Directors prior to the consummation of the Offering to include two individuals
who are not officers or employees of the Company. One director will be in Class
I and will stand for election at the annual meeting of stockholders to be held
in 1999. The other additional director and Mr. Huff will be in Class II and will
stand for election at the annual meeting of stockholders to be held in 2000. Mr.
Kellner and Mr. Eustace will be in Class III and will stand for election at the
annual meeting of stockholders to be held in 2001. Officers of the Company are
elected at each annual meeting of the Board of Directors and serve at the
discretion of the Board.
BOARD COMMITTEES
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee. The directors who will comprise such committees after
the consummation of the Offering have not yet been determined. The Audit
Committee recommends the firm to be appointed as independent accountants to
audit financial statements and to perform services related to the audit, reviews
the scope and results of the audit with the independent accountants, reviews
with management and the independent accountants the Company's year-end operating
results and considers the adequacy of the internal accounting procedures. The
Compensation Committee reviews and recommends the compensation arrangements for
all officers, approves such arrangements for other senior level employees and
administers and takes such other action as may be required in connection with
certain compensation and incentive plans of the Company (including the grant of
stock options).
COMPENSATION OF DIRECTORS
Directors who are officers or employees of the Company do not receive
compensation for serving as directors. Non-employee directors receive a $12,000
annual retainer and an additional fee of $500 per meeting of the Board of
Directors or a committee thereof. All directors are reimbursed for out-of-pocket
expenses incurred in connection with attendance at meetings of the Board of
Directors and meetings of committees of the Board of Directors.
In connection with the Offering, the Company has adopted the Stock Option
Plan. See "Management -- Stock Plans." Pursuant to this plan, on the
consummation of the Offering (or, if later, on the date on which a person is
first elected or begins to serve as a non-employee director) each non-employee
director will be granted a nonqualified option to purchase 5,000 shares of
Common Stock which will vest one-half each on the first and second anniversaries
thereof and, on the last day of each calendar quarter of the year, each person
who is a non-employee director will be granted a nonqualified option to purchase
500 shares of Common Stock which will vest on the day prior to the first
anniversary of the date of grant. The per share exercise price of such options
will be equal to the fair market value of the Common Stock on the date of grant
of such option.
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<PAGE> 44
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this Offering, all executive officer compensation decisions have
been made by the entire Board of Directors of the Company, including James P.
Kellner and Glen R. Eustace. Following the Offering, all executive officer
compensation decisions will be made by the Compensation Committee.
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth compensation awarded
to, earned by or paid for services rendered to the Company in all capacities
during the fiscal year ended December 31, 1997 by the Company's Chief Executive
Officer and each of the Company's other five most highly compensated executive
officers who were serving as such at the close of fiscal 1997 (collectively, the
"Named Executives").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND CAPACITY SERVED SALARY BONUS
------------------------ ------ -----
<S> <C> <C>
James P. Kellner............................................ $202,000 $260,521(2)
Chairman, Chief Executive Officer and President
Robert R. Eustace(3)........................................ 709,362 --
Former Chairman and Chief Executive Officer
Elsa M. Eustace(4).......................................... 460,560 --
Former Corporate Secretary
Patrick J. Kellner.......................................... 136,000 95,350
Executive Vice President -- Sales
Thomas H. Carruth........................................... 125,000 50,350
Executive Vice President -- Software Services
Dawn M. Eustace(5).......................................... 150,000 23,750
Executive Vice President -- Hardware
Glen R. Eustace(6).......................................... 150,000 23,600
Executive Vice President -- Business Development
</TABLE>
- -------------------------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted, because the aggregate amount of such perquisites and other
personal benefits was the lesser of either $50,000 or 10% of the total
annual salary and bonus of the Named Executive for such year.
(2) Includes a grant by the Company of shares of the Company's Common Stock
on January 2, 1997, representing 0.5% of the outstanding Common Stock on
such date. The Company valued such grant at approximately $35,000, based on
the book value as of the date of grant. The grant was made without
registration under the Securities Act (in reliance upon Section 4(2) of the
Securities Act) and was not made pursuant to a formal stock compensation
plan.
(3) Robert R. Eustace resigned as Chief Executive Officer in April 1997 and as
Chairman of the Board of Directors in June 1998 and, upon consummation of
the Offering, will cease employment with the Company.
(4) Elsa M. Eustace resigned as Corporate Secretary in June 1998 and, upon the
consummation of the Offering, will cease employment with the Company.
(5) Effective upon the consummation of the Offering, Dawn M. Eustace will cease
employment with the Company.
(6) In July 1998, Glen R. Eustace became Vice President -- Financial Management.
43
<PAGE> 45
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Mr. McIntyre in May
1998 that has an initial term of two years and provides for automatic renewal
periods of one year each unless either party receives timely notice of
non-renewal. Pursuant to such employment agreement, Mr. McIntyre receives an
annual base salary of $135,000 and is eligible for an annual discretionary bonus
and participation in other compensatory plans of the Company from time to time.
If Mr. McIntyre's employment is terminated by the Company without cause or by
Mr. McIntyre with cause, he will receive a severance allowance equal to six
months of base salary on the date of termination and continued health insurance
benefits at the Company's expense. If Mr. McIntyre's employment is terminated by
the Company with cause or by Mr. McIntyre without cause, no severance benefits
will be provided. The employment agreement further provides that Mr. McIntyre
may not consult, control or be employed by any direct competitor of the Company
for a period of two years following his employment with the Company.
STOCK PLANS
Stock Option Plan
In connection with this Offering, the Board of Directors of the Company
adopted and the Company's stockholders approved the Company's Stock Option Plan.
Up to an aggregate of 1,500,000 shares of Common Stock may be issued upon the
exercise of stock options granted under the Stock Option Plan. These stock
options may be either incentive stock options ("ISOs") within the meaning of
Section 422 of the Code, or nonqualified stock options. No stock options may be
issued under the Stock Option Plan later than ten years after the effective date
of such Plan.
The purposes of the Stock Option Plan are to align the interests of the
Company's stockholders and the recipients of options under the Stock Option Plan
by increasing the proprietary interest of such recipients in the Company's
growth and success and to advance the interests of the Company by attracting and
retaining officers and other key employees and well-qualified independent
directors.
The Stock Option Plan is administered by the Compensation Committee.
Subject to the terms of the Stock Option Plan, the Compensation Committee is
authorized to select eligible officers and other key employees for participation
in the Stock Option Plan and to determine the number of shares of Common Stock
subject to each option granted thereunder, the exercise price of such option,
the time and conditions of exercise of such option and all other terms and
conditions of such option.
The Compensation Committee may delegate some or all of its power and
authority under the Stock Option Plan to the Chief Executive Officer or other
executive officer of the Company as it deems appropriate. However, the
Compensation Committee generally may not delegate its power and authority with
regard to the selection for participation in the Stock Option Plan of an officer
or other person who is a "covered employee" within the meaning of Section 162(m)
of the Code or who, in the Compensation Committee's judgment, is likely to be a
covered employee at any time during the period in which an option to such
employee would be outstanding or who is subject to Section 16 of the Exchange
Act or decisions concerning the time, pricing or amount of an option grant to
such an officer or other person.
The purchase price of shares of Common Stock subject to an option granted
under the Stock Option Plan is determined by the Compensation Committee at the
time of grant, but, in the case of an incentive stock option, may not be less
than 100% of the fair market value of such shares of Common Stock on the date of
grant. The aggregate fair market value (determined as of the date the option is
granted) of the stock with respect to which ISOs are exercisable for the first
time by the optionee in any calendar year (under the Stock Option Plan and any
other incentive stock option plan of the Company) may not exceed $100,000.
Options granted under the Stock Option Plan may not be exercised after ten years
from the date of grant. In the case of any eligible employee who owns or is
deemed to own stock representing more than 10% of the total combined voting
power of all classes of stock of the Company, the exercise price of any ISOs
granted under the Stock Option Plan may not be less then 110% of the fair market
value of the Common Stock on the date of grant, and the exercise period may not
exceed five years from the date of grant.
44
<PAGE> 46
Options granted under the Stock Option Plan are not transferable by the
optionee other than by will or under the laws of descent and distribution.
Unless otherwise provided for in the option agreement relating to an option,
each option terminates on the earlier of the date of the expiration of the
option or three months after the date the optionee terminates employment with
the Company for any reason other than termination for cause or the retirement on
or after age 65 after a minimum of five years employment with the Company or the
death or disability of the optionee. Unless otherwise provided for in the option
agreement relating to an option, during such post-employment period, the
optionee may exercise the option in respect of the number of shares that were
exercisable on the date of termination of employment. Unless otherwise provided
for in the option agreement relating to an option, in the event of retirement of
an optionee on or after age 65 after a minimum of five years of employment with
the Company or the death or disability of an optionee before the date of
expiration of the option, the option terminates on the earlier of the date of
expiration or one year following the date of termination of employment, during
which period the option may be exercised in respect of the number of shares
remaining subject to the option on the date of termination of employment. If an
optionee's employment is terminated for cause, all options held by such optionee
will terminate automatically on the effective date of such optionee's
termination of employment.
The Stock Option Plan provides that an option agreement may permit an
optionee to tender previously owned shares of Common Stock in partial or full
payment for shares to be purchased on exercising an option. Unless sooner
terminated by action of the Board of Directors, the Stock Option Plan will
terminate in ten years. Subject to certain exceptions, it may be amended,
altered or discontinued by the Board of Directors without stockholder approval.
In the event of a Change in Control of the Company (as defined in the Stock
Option Plan), each outstanding stock option will become exercisable in full.
The Compensation Committee will make grants under the Stock Option Plan,
subject to completion of this Offering, of options to purchase Common Stock as
follows: , and received non-qualified stock options to
purchase and shares of Common Stock, respectively. Each such
stock option has a per share exercise price equal to the initial public offering
price and will expire ten years after the date of grant. Such options will
become exercisable in equal portions in annual installments over five years
subsequent to the date of grant. Additional grants of non-qualified options
covering an aggregate of shares of Common Stock with a per share
exercise price equal to the initial public offering price will be made, subject
to completion of this Offering, to other employees of the Company.
Employee Stock Purchase Plan
In connection with the Offering, the Board of Directors of the Company
adopted and the Company's stockholders approved the Company's Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 350,000 shares of Common Stock
have been reserved for issuance under the Purchase Plan, none of which has been
issued. The Purchase Plan provides eligible employees with an opportunity to
purchase Common Stock at a discount through automatic payroll deductions. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code.
Employees eligible to participate in the Purchase Plan include each
employee of the Company who has been an employee for at least twelve consecutive
months on a given enrollment date, except that employees who own stock
representing 5% or more of the total voting power of the Common Stock are not
eligible to participate in the Purchase Plan.
Eligible employees acquire Common Stock under the Purchase Plan by electing
to have an amount up to 8% of their earnings withheld pursuant to the Purchase
Plan (subject to the maximum limitation described in the next paragraph). The
amount withheld is then used to purchase shares of Common Stock on one or more
specified purchase dates during any six-month period ("Offering Period").
Offering Periods commence on each June 1 and December 1; the initial Offering
Period will commence December 1, 1998 and expire on May 31, 1999. No interest
will be paid on amounts withheld pursuant to the Purchase Plan from a
participating employee's compensation. On the last day of the Offering Period,
the entire account balance of a participating employee is applied to purchase
the maximum number of shares of Common Stock. The shares
45
<PAGE> 47
are purchased at a price equal to 85% of the lesser of (i) the fair market value
of the Common Stock on the date of purchase (the last business day of the
Offering Period) or (ii) the fair market value of the Common Stock on the first
day of the Offering Period.
At any time prior to the expiration of any Offering Period, an employee may
cancel his or her participation in such Offering Period, and participation ends
automatically on termination of employment with the Company. Under the Purchase
Plan, rights of any employee to purchase Common Stock may not accrue at a rate
that exceeds $25,000 in fair market value per calender year.
401(k) Profit Share Plan
The Company sponsors a voluntary contribution plan qualified under Section
401(k) of the Code (the "401(k) Plan"). The 401(k) Plan allows eligible
employees to make contributions up to 15% of their compensation. Under the
401(k) Plan, the Company may contribute to the 401(k) Plan an amount of matching
contributions which is determined at its discretion.
46
<PAGE> 48
CERTAIN TRANSACTIONS
The business of Applied Systems is currently conducted by three affiliated
entities: ASI, Asktom and TAM UK (together, the "Reorganized Entities"). The
Company and the stockholders of each of the Reorganized Entities will enter into
a Contribution and Merger Agreement which provides for all of the equity
interests in ASI and Asktom to be contributed to the Company and for the
stockholders of TAM UK (each of which is a corporation) to be merged with and
into the Company, in all cases immediately prior to the consummation of this
Offering. In exchange for such transfers, Robert R. Eustace, the founder and
majority stockholder of the Reorganized Entities, will receive, together with
his spouse, Elsa M. Eustace, shares of Common Stock of the Company, James
P. Kellner, Chairman, Chief Executive Officer and President of the Company, will
receive shares of Common Stock, Glen R. Eustace, an officer and
director of the Company, will receive shares of Common Stock and Dawn
M. Eustace, an executive officer of ASI, will receive shares of Common
Stock. Following the Reorganization, the Company will be a holding company with
ASI, Asktom and TAM UK as its wholly-owned subsidiaries.
ASI currently leases its principal facility, which consists of
approximately 160,000 square feet of office and training space, from Applied
Properties L.L.C. ("Applied Properties"). Robert R. Eustace and James P. Kellner
together hold substantially all of the ownership interests in Applied
Properties. The lease payments (net of utilities, insurance and taxes) in fiscal
years 1995, 1996 and 1997 were approximately $18,000, $436,544 and $1,607,024,
respectively. The current lease payments are approximately $2.1 million per year
and increase at a rate of 2% per annum. The lease is scheduled to expire in
August 2018. The Company believes that the lease contains terms that are no less
favorable to the Company than those which would be charged by an unrelated
third-party under similar circumstances. See "Business -- Facilities."
In October 1995, Applied Properties secured a one-year construction loan
from First Midwest Bank allowing for maximum borrowings of $9,600,000. Applied
Properties used the proceeds of such loan to finance a portion of the
construction of ASI's principal facility. The loan was collateralized by ASI's
principal facility and two other buildings owned by ASI. As of December 31,
1997, the construction loan had been converted to a mortgage note. The mortgage
note bears interest at 8.0% and is similarly secured. The mortgage note is fully
guaranteed by ASI and Robert R. and Elsa M. Eustace. As of June 30, 1998, the
mortgage note balance was $9,279,859. The mortgage is payable in monthly
installments of $116,474, and a balloon payment is due in December 2002.
Since August 1995, ASI has paid amounts to third parties on behalf of
Applied Properties, which amounts, together with the proceeds of the
construction loan described above, have been used to finance the construction of
ASI's principal facility. These payments resulted in amounts due to ASI from
Applied Properties of $2,083,528 and $1,825,542 as of December 31, 1996 and
December 31, 1997, respectively. None of these receivables have been repaid to
date and the aggregate amount outstanding is currently approximately $6.1
million. It is Applied Properties' intention to refinance its existing mortgage
note in an amount sufficient to repay these receivables prior to the end of
1998.
ASI leases a property in Florida from Applied Properties on a
month-to-month basis. This property is used for business meetings and to house
ASI employees. Monthly rental expense is determined by the management of Applied
Properties and is approximately $6,000. Upon consummation of the Offering, the
lease agreement will be terminated.
The Company, ASI and the current ASI stockholders will enter into a Tax
Allocation and Indemnification Agreement relating to their respective income tax
liabilities for periods (or portions thereof) ending on or prior to the close
of, and beginning after, the Termination Date. The Tax Allocation and
Indemnification Agreement generally provides that the current ASI stockholders
will be severally liable for, and indemnify, the Company and ASI against, any
taxes based upon net income imposed on ASI by a federal, state or local taxing
jurisdiction with respect to a taxable year or period ending on or prior to the
Termination Date (or in the case of a taxable year or period beginning before
and ending after the Termination Date, the portion of the taxable year or period
ending at the close of the Termination Date) (the "Pre-Termination Period")
that, with respect to such jurisdiction, ASI filed tax returns on the basis that
it was entitled to be taxed as, or in a manner similar to, an "S Corporation"
within the meaning of Section 1361 of the Code. Because ASI will be fully
subject to corporate income taxation on and after the Termination Date, the
reallocation of income and deductions between the Pre-Termination Period and
taxable periods (or portions thereof) beginning on and
47
<PAGE> 49
after the Termination Date may increase the taxable income of one party while
decreasing that of another party. Accordingly, the Tax Allocation and
Indemnification Agreement generally provides that if, as a result of any action,
suit, investigation, audit, claim, assessment or amended tax return, there is
any change after the Termination Date in an item of income, gain, loss,
deduction, credit or amount of tax that results in an increase in (i) taxes for
which the current ASI stockholders shall be liable pursuant to the Tax
Indemnification and Allocation Agreement or (ii) any tax liability of any ASI
stockholders, and such change results in a potential decrease (the "ASI Decrease
Amount") in the tax liability of ASI or the Company for any taxable year or
period (or portion thereof) beginning after the Termination Date, then the
current ASI stockholders shall be entitled to the full amount of such ASI
Decrease Amount. The Tax Allocation and Indemnification Agreement further
provides that, if, as a result of any action, suit, investigation, audit, claim,
assessment or amended tax return, there is any change after the Termination Date
in an item of income, gain, loss, deduction, credit or amount of tax that
results in an increase in a tax liability of ASI or the Company, and such change
results in a potential decrease (the "ASI Stockholder Decrease Amount") in (i)
taxes for which the current ASI stockholders are liable pursuant to the Tax
Allocation and Indemnification Agreement or (ii) the tax liability of any
current ASI stockholder for any taxable year or period (or portion thereof)
ending on or prior to the Termination Date, then the Company or ASI shall be
entitled to the full amount of such ASI Stockholder Decrease Amount. Any payment
of (i) the ASI Decrease Amount to the current ASI stockholders or (ii) the ASI
Stockholder Decrease Amount by the current ASI stockholders shall be made or
paid, as the case may be, on a pro rata basis according to the percentage of
stock of ASI held by each of the current ASI stockholders as of the beginning of
the date of the Reorganization. The ASI Decrease Amount and the ASI Stockholder
Decrease Amount, as the case may be, shall be determined based upon certain
assumptions specified in the Tax Allocation and Indemnification Agreement. The
Tax Allocation and Indemnification Agreement also provides that ASI shall pay,
and shall indemnify the current ASI stockholders against, any real property
transfer or gains tax, sales tax, use tax, stamp tax, stock transfer tax, or
other similar tax imposed on the transactions contemplated by the Contribution
and Merger Agreement. The Tax Allocation and Indemnification Agreement further
provides that the current ASI stockholders shall have certain rights to control
tax contests relating to tax returns including taxes for which the current ASI
stockholders are liable pursuant to the Tax Allocation and Indemnification
Agreement and income or franchise taxes of ASI imposed by certain jurisdictions
for the Pre-Termination Period. See "Reorganization and S Corporation
Distribution."
Mr. Huff, a director of the Company, and the law firm of Huff & Kennedy, of
which Mr. Huff is a partner, have performed legal services on behalf of the
Company. The legal fees paid to Huff & Kennedy were approximately $4,400 during
1997, which amount did not exceed 5% of Huff & Kennedy's gross revenues during
the firm's last full fiscal year. The Company expects such services to continue
in the future.
In January 1992, ASI entered into a Stock Purchase Agreement with the
Estate of Thomas A. Eustace, Robert R. Eustace's brother, pursuant to which ASI
agreed to purchase for an aggregate purchase price of $3,200,000, in the form of
$500,000 in cash and a promissory note in the amount of $2,700,000, an aggregate
of 200 shares of common stock of ASI and 200 shares of common stock of Asktom,
each of which represented 20% of the outstanding shares of common stock of each
corporation at such time. The $500,000 in cash was paid at the time of purchase
and the promissory note was payable in sixty equal consecutive monthly
installments and bore interest at a floating rate equal to the prime rate. Erica
Eustace, Robert R. Eustace's niece, and Victoria Eustace, Robert R. Eustace's
sister-in-law, received aggregate payments pursuant to the Stock Purchase
Agreement of $337,500, $337,500, and $28,125 for the years ended December 31,
1995, December 31, 1996 and December 31, 1997, respectively. There are no
further amounts payable under this agreement.
ASI's $7,000,000 line of credit with First Midwest Bank is personally
guaranteed up to the full amount by Robert R. and Elsa M. Eustace. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
Any future transactions between the Company and its executive officers,
directors and affiliates will be on terms no less favorable to the Company than
can be obtained from unaffiliated third parties, and any material transactions
with any such persons will be approved by a majority of the members of the
Company's Board of Directors and by a majority of the disinterested members of
the Company's Board of Directors.
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<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1998, before and after
giving effect to the sale of the shares of Common Stock offered hereby and after
giving effect to the Reorganization, by (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each of the Named Executives,
(iv) each Selling Stockholder and (v) all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK NUMBER OF OF COMMON STOCK
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING
--------------------- BEING ---------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
--------------------------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Robert R. Eustace(2)................... % %
Glen R. Eustace(3).....................
Dawn M. Eustace(4).....................
James P. Kellner.......................
Steven A. Dye(5).......................
Michael T. Eustace(5)..................
Nicholas E. Eustace(5).................
All executive officers and directors as
a group (8 persons).................. % %
</TABLE>
- -------------------------
* Less than 1%.
(1) The mailing address of each of these individuals is c/o the Company, 200
Applied Parkway, University Park, IL 60466.
(2) Consists of shares owned by Robert R. Eustace and Elsa M. Eustace, his wife,
as joint tenants with right of survivorship.
(3) Son of Robert R. Eustace and Elsa M. Eustace.
(4) Daughter of Robert R. Eustace and Elsa M. Eustace.
(5) Nephew of Robert R. Eustace and Elsa M. Eustace, cousin of Glen R. Eustace
and Dawn M. Eustace and an employee of the Company whose employment will
cease upon consummation of the Offering.
49
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The Restated Certificate of Incorporation (the "Charter") to be adopted by
the Company provides that the authorized capital stock of the Company consists
of 45,000,000 shares of Common Stock, par value $.01 per share, and 2,000,000
shares of preferred stock, $.01 par value per share (the "Preferred Stock").
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. 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. 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 and subject to the prior rights of holders of any outstanding
Preferred Stock. Holders of 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 the Offering will be, when issued and paid
for, fully paid and nonassessable.
PREFERRED STOCK
The Charter provides that the Board of Directors is authorized, subject to
certain limitations, without further stockholder approval, to issue from time to
time up to an aggregate of 2,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. 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. The Company has no current plans
to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless (i) the interested stockholder attained such status with the
approval of the Board of Directors, (ii) the business combination is approved in
a prescribed manner or (iii) the interested stockholder owns at least 85% of the
outstanding voting stock as a result of the transaction in which it became an
interested stockholder. However, Section 203's restrictions do not apply if the
business combination is with an interested stockholder who became an interested
stockholder at a time when the restrictions did not apply. The restrictions
contained in Section 203 did not apply when Robert R. Eustace became an
interested stockholder because the voting stock of the Company was not listed on
a national securities exchange or authorized for quotation on The Nasdaq
National Market or held of record by more than 2,000 stockholders. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder which is not shared pro rata
with the other stockholders of the Company. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within the past three years did own, 15% or more of the
corporation's voting stock.
50
<PAGE> 52
The Charter provides for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms. See
"Management -- Board of Directors." Any director may be removed only with cause
and then only by the vote of at least 75% of the outstanding voting power.
The Charter empowers the Board of Directors, when considering a tender
offer or merger or acquisition proposal, to take into account factors in
addition to potential economic benefits to stockholders. Such factors may
include: (i) the effects upon the employees, suppliers, customers, creditors and
others who have similar relations with the Company, upon the communities in
which the Company conducts its business or on such other constituencies of the
Company as the Board of Directors considers relevant under the circumstances;
(ii) the consideration being offered in relation to the then current market
price for the Company's outstanding shares, and the Board of Directors' estimate
of the future value of the Company as an independent going concern and the
current value of the Company in a freely negotiated transaction; (iii) the
purpose of the Company, and any of its subsidiaries, to provide quality products
and services on a long-term basis; (iv) whether the proposed transaction might
violate federal or state laws; and (v) the long-term as well as short-term
interests of the Company and its stockholders, including the possibility that
such interests may be best served by the continued independence of the Company.
The Charter provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at a duly called annual or
special meeting of the stockholders. The Company's Charter provides that special
meetings may be called only by the Chief Executive Officer or a majority of the
Board of Directors of the Company. These provisions could have the effect of
delaying until the next annual stockholders meeting stockholder actions which
are favored by the holders of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Company's Common Stock, because such person or entity, even
if it acquired all or a majority of the outstanding voting securities of the
Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation, unless a corporation's certificate of
incorporation requires a greater percentage. The Charter does not require a
greater percentage. The By-Laws may be amended or repealed by a majority vote of
the Board of Directors or by the affirmative vote of the holders of a majority
of the voting power of all of the outstanding stock entitled to vote.
The By-Laws provide that for nominations for the Board of Directors or for
other business to be properly brought by a stockholder before an annual meeting
of stockholders, the stockholder must first have given timely notice thereof in
writing to the Secretary of the Company. To be timely, a stockholder's notice
generally must be delivered not less than 75 nor more than 100 days in advance
of the anniversary date of the release of the Company's proxy statement to
stockholders in connection with the prior year's annual meeting of stockholders.
The notice must contain, among other things, certain information about the
stockholder delivering the notice and, as applicable, background information
about each nominee or a description of the proposed business to be brought
before the meeting. Business transacted at a special meeting is limited to the
purposes for which the meeting is called.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company.
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors, officers and employees. These provisions
eliminate a director's liability for monetary damages for a breach of fiduciary
duty, except in certain circumstances involving certain wrongful acts, such as
the breach of a duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Charter and By-Laws also contain
provisions indemnifying the directors, officers and employees of the Company to
the fullest extent permitted by the DGCL. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
The Company will also enter into indemnity agreements with each of its
directors and executive officers that require the Company to indemnify a
director or executive officer for certain losses arising out of the fact
51
<PAGE> 53
that such director or executive officer was or had agreed to serve as a
director, officer, employee, trustee, agent or fiduciary of the Company. The
indemnity agreements permit the Company to advance expenses to each such
director or executive officer in the event that a claim is brought against such
director with respect to an action for which the Company is obligated to provide
indemnification under the Company's Charter and By-Laws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be LaSalle
National Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares
of Common Stock outstanding. Of these shares, the shares sold in the Offering
will be freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), generally may be sold only in compliance with the limitations of
Rule 144 described below.
The remaining shares of Common Stock are deemed
"Restricted Shares" under Rule 144 because they were originally issued by the
Company in a private transaction in reliance upon an exemption from the
Securities Act. Under Rule 144, substantially all of these remaining Restricted
Shares will become eligible for resale 90 days after the date the Company
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (i.e., 90 days after the consummation of
the Offering), and may be resold in the public market prior to such date only in
compliance with the registration requirements of the Securities Act or pursuant
to a valid exemption therefrom; and approximately of such
shares are subject to Lock-up Agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year is entitled to sell within any
three-month period a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
shares immediately after the Offering) or (ii) the average weekly
trading volume in the Common Stock in the over-the-counter market during the
four calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one
and two-year holding periods described above, a holder of Restricted Shares can
include the holding periods of a prior owner who was not an Affiliate.
LOCK-UP AGREEMENTS
All existing stockholders of the Company, who after the Offering will hold
in the aggregate approximately shares of Common Stock and options to
purchase shares of Common Stock, have agreed, pursuant to
Lock-up Agreements, that they will not, without the prior written consent of
William Blair & Company, L.L.C. of the Underwriters, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock beneficially owned by
them for a period of 180 days after the date of this Prospectus, except pursuant
to bona fide gifts to persons who agree in writing to be bound by the provisions
of the Lock-up Agreements.
STOCK OPTIONS
In connection with the Offering, the Company will grant certain employees
options to acquire up to an aggregate shares of Common Stock
at the initial public offering price. An additional shares
of Common Stock are available for future grants under the Company's Stock Option
Plan. See "Management -- Stock Plans".
52
<PAGE> 54
The Company intends to file one or more registration statements on Form S-8
under the Act to register all shares of Common Stock issuable pursuant to the
Company's Stock Option Plan and Purchase Plan. The Company expects to file these
registration statements prior to the expiration of the Lock-up Agreements and
such registration statements are expected to become effective upon filing.
Shares covered by these registration statements will thereupon be eligible for
sale in the public markets, subject to the Lock-up Agreements, to the extent
applicable.
UNDERWRITING
The several Underwriters named below (the "Underwriters"), for which
William Blair & Company, L.L.C. and NationsBanc Montgomery Securities LLC are
acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement by
and among the Company, the Selling Stockholders and the Underwriters (the
"Underwriting Agreement"), to purchase from the Company and the Selling
Stockholders, and the Company and the Selling Stockholders have agreed to sell
to each of the Underwriters, the respective number of shares of Common Stock set
forth opposite each Underwriter's name in the table below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
William Blair & Company, L.L.C. ............................
NationsBanc Montgomery Securities LLC.......................
--------
Total
========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Common Stock
being sold pursuant to the Underwriting Agreement if any of the Common Stock
being sold pursuant to the Underwriting Agreement (excluding shares covered by
the over-allotment option granted therein) is purchased. In the event of a
default by any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the non-defaulting Underwriters shall
be increased or the Underwriting Agreement may be terminated.
The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock to the public initially at the public offering price
set forth on the cover page of this Prospectus and to selected dealers at such
price less a concession of not more than $ per share. The Underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to certain other dealers. After commencement of the initial public
offering, the public offering price, and other selling terms may be changed by
the Representatives.
The Selling Stockholders have granted to the Underwriters an option,
exercisable within 30 days after the date of this Prospectus, to purchase up to
an aggregate of additional shares of Common Stock to cover
over-allotments, at the same price per share to be paid by the Underwriters for
the other shares offered hereby. If the Underwriters purchase any such
additional shares pursuant to this option, each of the Underwriters will be
committed to purchase such additional shares in approximately the same
proportion as set forth in the table above. If less than all of such additional
shares are purchased, the Underwriters will purchase such shares from the
Selling Stockholders pro rata. The Underwriters may exercise the option only for
the purpose of covering over-allotments, if any, made in connection with the
distribution of the shares of Common Stock offered hereby.
All existing stockholders of the Company who hold in the aggregate
shares of Common Stock and the Company, have agreed, for a
period of 180 days after the date of this Prospectus, without the prior written
consent of William Blair & Company, L.L.C., they will not, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase, or
otherwise dispose of or transfer any Common Stock or securities convertible or
exchangeable into, or exercisable for, Common Stock. In considering a request
for its consent to a sale or transfer within the 180-day period, William Blair &
Company, L.L.C. will take into account various factors, including, but not
limited to, the number of shares requested to be sold, the
53
<PAGE> 55
anticipated manner and timing of sale, the potential impact of the sale on the
market for the Common Stock, and market conditions generally. The Company may
grant options and issue Common Stock under the Stock Option Plan and issue
unregistered shares in connection with any acquisition during the lock-up
period.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
At the request of the Company, approximately of Common
Stock offered hereby are being reserved for sale to certain persons, including
the Company's employees and others who have a business relationship with the
Company.
The Representatives have informed the Company that the Underwriters will
not confirm, without client authorization, sales to their client accounts as to
which they have discretionary authority.
Prior to this offering, there was no public market for the Common Stock of
the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations among the Company and the
Representatives. Among the factors which will be considered in such negotiations
are the prevailing market conditions, the results of the operations of the
Company in recent periods, the market capitalizations and stages of development,
and recent market prices of securities of other companies which the Company and
the Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development, the general condition of the securities markets at the time of the
Offering, and other factors which are deemed relevant. There can be no assurance
that an active trading market will develop for the Common Stock or that the
Common Stock will trade in the public market subsequent to the Offering at or
above the initial public offering price.
During and after the Offering, the Underwriters may purchase and sell the
Common Stock in the open market in order to facilitate the Offering.
Specifically, the Underwriters may over-allot or otherwise create a short
position in the Common Stock for their own account by selling more shares of
Common Stock than have been sold to them by the Company and the Selling
Stockholders pursuant to the Underwriting Agreement. The Underwriters may elect
to cover any such short position by purchasing shares of Common Stock in the
open market or by exercising the over-allotment option granted to them by the
Company and the Selling Stockholders. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of shares of Common Stock sold in this offering for
their account may be reclaimed by the syndicate if such shares are repurchased
by the syndicate in stabilizing or covering transactions.
The activities described above may stabilize, maintain, or otherwise affect
the market price of the Common Stock and make such price higher than it might
otherwise be in the open market. The imposition of a penalty bid may also affect
the price of the Common Stock to the extent that it discourages resales thereof.
These activities, if commenced, may be discontinued at any time without notice
and may be effected on The Nasdaq National Market or otherwise. Neither the
Company nor any of the Underwriters makes any representation or prediction as to
whether the Underwriters will engage in such transactions or choose to
discontinue any transactions engaged in or the direction or magnitude of any
effect that such transactions may have on the price of the Common Stock.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sidley & Austin, Chicago, Illinois. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Latham & Watkins, Chicago, Illinois.
EXPERTS
The combined financial statements of the Company as of December 31, 1996
and 1997 and the financial statements of Applied Systems Group as of June 30,
1998 and for the period from June 25, 1998 (date of
54
<PAGE> 56
inception) through June 30, 1998 and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act with respect to
the Common Stock 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 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 Room 204, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549; Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661; and Seven World Trade Center, New York, New
York 10048; and copies of all or any part thereof may be obtained from such
office upon payment of the prescribed fees. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission.
Upon completion of the Offering, the Company will be subject to the
information requirements of the Exchange Act of 1934, and, in accordance
therewith, will file reports, proxy statements and other information with the
Commission. Such reports, proxy material and other information concerning the
Company will be available for inspection and copying at prescribed rates at the
public reference facilities maintained by the Commission at the addresses set
forth above and will be available on the Commission's Web site
(http://www.sec.gov).
55
<PAGE> 57
APPLIED SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants of Applied Systems
Group..................................................... F-2
Combined Balance Sheets of Applied Systems Group as of
December 31, 1996 and 1997 and June 30, 1998 (unaudited)
and June 30, 1998 (unaudited pro forma)................... F-3
Combined Statements of Operations of Applied Systems Group
for the years ended December 31, 1995, 1996 and 1997 and
for the six months ended June 30, 1997 (unaudited) and
1998 (unaudited).......................................... F-4
Combined Statements of Stockholders' Equity (Deficit) of
Applied Systems Group for the years ended December 31,
1995, 1996 and 1997 and for the six months ended June 30,
1998 (unaudited).......................................... F-5
Combined Statements of Cash Flows of Applied Systems Group
for the years ended December 31, 1995, 1996 and 1997 and
for the six months ended June 30, 1997 (unaudited) and
1998 (unaudited).......................................... F-6
Notes to Combined Financial Statements of Applied Systems
Group..................................................... F-7
Report of Independent Public Accountants of Applied Systems,
Inc. ..................................................... F-21
Balance Sheet of Applied Systems, Inc. as of June 30,
1998...................................................... F-22
Statement of Operations of Applied Systems, Inc. for the
Period from June 25, 1998 (Date of Inception) through June
30, 1998.................................................. F-23
Statement of Stockholder's Equity of Applied Systems, Inc.
for the Period from June 25, 1998 (Date of Inception)
through June 30, 1998..................................... F-24
Statement of Cash Flows of Applied Systems, Inc. for the
Period from June 25, 1998 (Date of Inception) through June
30, 1998.................................................. F-25
Notes to Financial Statements of Applied Systems, Inc. ..... F-26
</TABLE>
F-1
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Applied Systems Group:
We have audited the accompanying combined balance sheets of APPLIED SYSTEMS
GROUP as of December 31, 1996 and 1997, and the related combined statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. 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 Applied Systems Group as of
December 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 17, 1998
F-2
<PAGE> 59
APPLIED SYSTEMS GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- JUNE 30, JUNE 30, 1998
1996 1997 1998 (NOTE 2)
----------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,779,915 $ 4,379,041 $6,977,048 $ 977,048
Accounts receivable --
Customers, net of allowance for doubtful accounts of
$301,079, $307,671 and $655,954 (unaudited) in 1996,
1997 and 1998, respectively........................... 6,563,688 11,678,685 8,567,512 8,567,512
Stockholders............................................ 99,395 184,074 -- --
Employees............................................... 171,025 134,446 110,414 110,414
Harbor Software litigation and related items............ -- 4,275,261 2,775,261 2,775,261
Costs on contracts in progress............................ 567,242 545,984 218,977 218,977
Inventory................................................. 1,910,980 2,164,541 1,623,556 1,623,556
Prepaid expenses and other assets......................... 979,906 887,425 695,457 695,457
Assets held for sale...................................... 612,363 -- -- --
Deferred tax asset........................................ -- -- -- 2,600,000
----------- ----------- ----------- -----------
Total current assets................................ 12,684,514 24,249,457 20,968,225 17,568,225
----------- ----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 154,679 228,382 226,839 226,839
Building and improvements................................. 2,931,447 2,919,141 3,018,568 3,018,568
Computer and office equipment............................. 3,394,364 4,246,806 4,596,874 4,596,874
Transportation equipment.................................. 694,769 785,664 665,306 665,306
Furniture and fixtures.................................... 1,903,681 2,301,737 2,672,847 2,672,847
----------- ----------- ----------- -----------
9,078,940 10,481,730 11,180,434 11,180,434
Less -- Accumulated depreciation and amortization......... (4,595,687) (5,404,032) (5,890,528) (5,890,528)
----------- ----------- ----------- -----------
Property, plant and equipment, net.................. 4,483,253 5,077,698 5,289,906 5,289,906
----------- ----------- ----------- -----------
RELATED-PARTY RECEIVABLE.................................... 2,083,528 1,825,542 5,078,825 5,078,825
----------- ----------- ----------- -----------
ASSET HELD FOR SALE......................................... 1,424,613 1,424,613 1,424,613 1,424,613
----------- ----------- ----------- -----------
Total assets........................................ $20,675,908 $32,577,310 $32,761,569 $29,361,569
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 548,285 $ 491,390 223,909 223,909
Accounts payable.......................................... 3,067,516 4,270,271 3,344,498 3,344,498
Accrued expenses --
Harbor Software litigation and related items............ 5,589,000 5,589,000 5,589,000 5,589,000
Other................................................... 3,653,920 4,326,196 4,871,252 4,871,252
Customer deposits......................................... 1,565,149 1,666,920 1,614,585 1,614,585
Unearned support and services............................. 11,640,792 16,153,228 16,802,803 16,802,803
----------- ----------- ----------- -----------
Total current liabilities........................... 26,064,662 32,497,005 32,446,047 32,446,047
----------- ----------- ----------- -----------
NOTE PAYABLE TO STOCKHOLDERS................................ -- -- -- 5,000,000
----------- ----------- ----------- -----------
LONG-TERM DEBT, less current maturities..................... 490,875 44,754 25,022 25,022
----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK..................................... -- 82,479 114,375 --
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock.............................................. 415,517 317,892 317,892 322,892
Additional paid-in capital................................ 2,626,935 2,642,081 2,610,185 (10,767,677)
Cumulative translation adjustment......................... 118,673 65,032 55,285 55,285
Retained earnings (deficit) and members' equity........... (8,720,754) (2,751,933) (2,487,237) 2,600,000
Less -- Treasury stock.................................... (320,000) (320,000) (320,000) (320,000)
----------- ----------- ----------- -----------
Total stockholders' equity (deficit)................ (5,879,629) (46,928) 176,125 (8,109,500)
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity.......... $20,675,908 $32,577,310 $32,761,569 $29,361,569
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 60
APPLIED SYSTEMS GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
License................................ $13,835,675 $15,434,757 $20,290,811 $ 8,759,284 $11,737,610
Service................................ 25,860,663 29,125,072 34,793,617 16,613,728 21,760,659
Third-party equipment and software..... 23,537,580 20,396,000 20,983,992 9,524,717 11,836,217
----------- ----------- ----------- ----------- -----------
Total revenue.................. 63,233,918 64,955,829 76,068,420 34,897,729 45,334,486
----------- ----------- ----------- ----------- -----------
COST OF REVENUE:
License................................ 243,503 585,563 994,417 517,508 852,523
Service................................ 17,829,887 20,231,631 22,545,650 11,016,252 12,739,782
Third-party equipment and software..... 15,696,270 14,310,844 15,839,634 7,164,471 9,317,039
----------- ----------- ----------- ----------- -----------
Total cost of revenue.......... 33,769,660 35,128,038 39,379,701 18,698,231 22,909,344
----------- ----------- ----------- ----------- -----------
Gross profit................... 29,464,258 29,827,791 36,688,719 16,199,498 22,425,142
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and development............... 7,727,950 7,875,594 9,737,922 4,415,364 5,967,633
Sales and marketing.................... 9,066,647 8,224,424 10,181,878 4,812,818 5,883,297
General and administrative............. 9,654,468 10,409,508 11,563,423 5,471,252 6,462,804
Harbor Software litigation and related
items (see Note 12)................. 137,000 6,237,000 (3,508,000) 251,000 --
----------- ----------- ----------- ----------- -----------
Total operating expenses....... 26,586,065 32,746,526 27,975,223 14,950,434 18,313,734
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS).................. 2,878,193 (2,918,735) 8,713,496 1,249,064 4,111,408
----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................ 120,806 123,298 135,304 33,340 154,441
Interest expense....................... (281,079) (160,962) (69,203) (41,492) (16,195)
----------- ----------- ----------- ----------- -----------
Total other income (expense)... (160,273) (37,664) 66,101 (8,152) 138,246
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes........................ 2,717,920 (2,956,399) 8,779,597 1,240,912 4,249,654
PROVISION FOR INCOME TAXES............... 226,269 331,651 292,701 152,582 192,273
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)........................ 2,491,651 (3,288,050) 8,486,896 1,088,330 $ 4,057,381
ACCRETION TO REDEMPTION VALUE OF COMMON
STOCK.................................. -- -- 77,479 -- 31,896
----------- ----------- ----------- ----------- -----------
Net income (loss) available to
common stockholders.......... $ 2,491,651 $(3,288,050) $ 8,409,417 $ 1,088,330 $ 4,025,485
=========== =========== =========== =========== ===========
PRO FORMA BASIC AND DILUTED NET INCOME
PER SHARE (UNAUDITED):
Pro forma income data --
Net income (loss) available to
common stockholders............... $ 2,491,651 $(3,288,050) $ 8,409,417 $ 1,088,330 $ 4,025,485
Elimination of accretion resulting
from the elimination of redemption
feature........................... -- -- (77,479) -- (31,896)
Pro forma adjustment to recognize C
corporation provision for income
taxes............................. 833,720 (1,484,647) 3,131,342 331,374 1,465,092
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)......... $ 1,657,931 $(1,803,403) $ 5,355,554 $ 756,956 $ 2,592,289
=========== =========== =========== =========== ===========
Pro forma basic and diluted net income
per share........................... $ .41 $ .20
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 61
APPLIED SYSTEMS GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON STOCK (DEFICIT)
---------------------- ADDITIONAL AND CUMULATIVE
SHARES PAID-IN MEMBERS' TRANSLATION TREASURY
OUTSTANDING COST CAPITAL EQUITY ADJUSTMENT STOCK TOTAL
----------- -------- ---------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995........... 250,800 $415,517 $2,626,935 $(2,231,289) $ 72,848 $(320,000) $ 564,011
Net income....................... -- -- -- 2,491,651 -- -- 2,491,651
Foreign currency translation
adjustment..................... -- -- -- -- 12,263 -- 12,263
Transfer to redeemable common
stock.......................... (2,000) -- -- -- -- -- --
Distributions to stockholders.... -- -- -- (4,098,301) -- -- (4,098,301)
------- -------- ---------- ----------- -------- --------- -----------
BALANCE, December 31, 1995......... 248,800 415,517 2,626,935 (3,837,939) 85,111 (320,000) (1,030,376)
Net loss......................... -- -- -- (3,288,050) -- -- (3,288,050)
Foreign currency translation
adjustment..................... -- -- -- -- 33,562 -- 33,562
Capital contribution............. -- -- -- 169,331 -- -- 169,331
Transfer to redeemable common
stock.......................... (10,500) -- -- -- -- -- --
Distributions to stockholders.... -- -- -- (1,764,096) -- -- (1,764,096)
------- -------- ---------- ----------- -------- --------- -----------
BALANCE, December 31, 1996......... 238,300 415,517 2,626,935 (8,720,754) 118,673 (320,000) (5,879,629)
Net income....................... -- -- -- 8,486,896 -- -- 8,486,896
Foreign currency translation
adjustment..................... -- -- -- -- (53,641) -- (53,641)
Change in par value.............. -- (97,500) 97,500 -- -- -- --
Accretion to redemption value of
common stock................... -- (125) (82,354) -- -- -- (82,479)
Capital contribution............. -- -- -- 772,500 -- -- 772,500
Distributions to stockholders.... -- -- -- (3,290,575) -- -- (3,290,575)
------- -------- ---------- ----------- -------- --------- -----------
BALANCE, December 31, 1997......... 238,300 317,892 2,642,081 (2,751,933) 65,032 (320,000) (46,928)
Net income (unaudited)........... -- -- -- 4,057,381 -- -- 4,057,381
Foreign currency translation
adjustment (unaudited)......... -- -- -- -- (9,747) -- (9,747)
Accretion to redemption value of
common stock (unaudited)....... -- -- (31,896) -- -- -- (31,896)
Distributions to stockholders
(unaudited).................... -- -- -- (4,197,652) -- -- (4,197,652)
Capital contribution
(unaudited).................... -- -- -- 404,967 -- -- 404,967
------- -------- ---------- ----------- -------- --------- -----------
BALANCE, June 30, 1998
(unaudited)...................... 238,300 $317,892 $2,610,185 $(2,487,237) $ 55,285 $(320,000) $ 176,125
======= ======== ========== =========== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 62
APPLIED SYSTEMS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 2,491,651 $(3,288,050) $ 8,486,896 $1,088,330 $ 4,057,381
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization.................... 1,053,184 1,138,320 1,303,182 648,070 750,326
(Gain) loss on sale of fixed assets.............. 142,051 112,660 (83,616) -- (17,458)
Changes in assets and liabilities --
Accounts receivable, net....................... 240,166 (914,888) (5,199,735) (648,652) 3,313,876
Costs on contracts in progress................. (341,262) (108,034) 21,258 110,561 327,007
Inventory...................................... (141,502) 1,022,907 (253,561) 49,921 540,985
Prepaid expenses and other assets.............. 188,427 (130,754) 92,481 274,194 191,968
Accounts payable and accrued expenses.......... (938,669) 436,076 1,875,031 217,698 (380,717)
Harbor Software litigation and related items... -- 5,589,000 (4,275,261) -- 1,500,000
Customer deposits.............................. 456,415 327,744 101,771 (183,117) (52,335)
Unearned support and services.................. 1,193,408 1,751,390 4,512,436 1,206,315 649,575
----------- ----------- ----------- ---------- -----------
Net cash provided by operating activities... 4,343,869 5,936,371 6,580,882 2,763,320 10,880,608
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net........... (1,534,932) (1,468,288) (2,021,302) (993,978) (1,051,626)
Proceeds (purchase) of asset held for sale......... -- (612,363) 612,363 612,363 --
Proceeds from sale of fixed assets................. 295,000 -- 207,291 -- 106,550
Change in related-party receivable................. (2,422,461) 375,189 257,986 297,417 (3,253,283)
----------- ----------- ----------- ---------- -----------
Net cash (used in) provided by investing
activities................................ (3,662,393) (1,705,462) (943,662) (84,198) (4,198,359)
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) on bank line of credit,
net.............................................. 1,571,809 (1,994,809) -- -- --
Principal repayments on long-term debt............. (1,137,163) (897,801) (556,016) (285,400) (287,213)
Proceeds from issuance of long-term debt........... -- 60,000 53,000 -- --
Distributions to stockholders...................... (1,358,963) (1,764,096) (3,290,575) (1,758,570) (4,197,652)
Capital contribution............................... -- -- 772,500 397,500 404,967
----------- ----------- ----------- ---------- -----------
Net cash used in financing activities....... (924,317) (4,596,706) (3,021,091) (1,646,470) (4,079,898)
----------- ----------- ----------- ---------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............. 2,088 1,470 (17,003) 894 (4,344)
----------- ----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (240,753) (364,327) 2,599,126 1,033,546 2,598,007
CASH AND CASH EQUIVALENTS, beginning of period....... 2,384,995 2,144,242 1,779,915 1,779,915 4,379,041
----------- ----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period............. $ 2,144,242 $ 1,779,915 $ 4,379,041 2,813,461 6,977,048
=========== =========== =========== ========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid...................................... $ 222,136 $ 135,580 $ 65,291 $ 37,051 $ 17,189
Income taxes paid.................................. 95,701 416,888 343,186 265,052 94,374
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of related party note payable to
members' equity.................................. -- 169,331 -- -- --
Property distributed to stockholders............... 2,739,338 -- -- -- --
</TABLE>
F-6
<PAGE> 63
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998, IS UNAUDITED.)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Applied Systems, Inc. ("ASI"), an Illinois S corporation, markets
internally developed software and third party personal computer hardware and
software to independent insurance agents, insurance brokers and insurance
companies operating in the property and casualty insurance industry, and
provides customer support and maintenance services, as well as other
implementation and consulting services such as training, data conversion and
installation. Asktom, Ltd. ("Asktom"), an Ontario corporation, and The Agency
Manager Limited ("TAM UK"), a United Kingdom unlimited liability company, have
operations similar to ASI. All entities are under common ownership and control
and are collectively referred to as the "Company" or "Applied Systems Group."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The accompanying combined financial statements include the accounts of ASI,
Asktom and TAM UK, which are all under common ownership and control. All
intercompany balances and transactions have been eliminated in the combination.
b. Interim Financial Information
The unaudited combined balance sheet as of June 30, 1998, the unaudited
combined statement of stockholders' equity for the six months ended June 30,
1998, and the unaudited combined statements of operations and cash flows for the
six months ended June 30, 1997 and 1998, include, in the opinion of management,
all adjustments (consisting of normal and recurring adjustments) necessary to
present fairly the Company's financial position, results of operations and cash
flows. Operating results for the six months ended June 30, 1998, are not
necessarily indicative of the results which may be expected for the year ending
December 31, 1998. The information included in these notes to financial
statements relating to the six months ended June 30, 1997 and 1998, is
unaudited.
c. Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments (with
original maturities of three months or less), principally U.S. Government
securities, which are stated at cost, and approximate fair value.
F-7
<PAGE> 64
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
d. Customer Accounts Receivable
The following summarizes the trade accounts receivable allowance activity
for the years ending 1995, 1996 and 1997 and the six-month period ended June 30,
1998:
<TABLE>
<S> <C>
December 31, 1994....................................... $ 172,986
Increase to operating expense......................... 45,829
Charge to allowance................................... (156,929)
---------
December 31, 1995....................................... 61,886
Increase to operating expense......................... 302,514
Charge to allowance................................... (63,321)
---------
December 31, 1996....................................... 301,079
Increase to operating expense......................... 177,514
Charge to allowance................................... (170,922)
---------
December 31, 1997....................................... 307,671
Increase to operating expense......................... 375,105
Charge to allowance................................... (26,822)
---------
June 30, 1998 (unaudited)............................... $ 655,954
=========
</TABLE>
The sales return allowance is $740,643, $1,079,538 and $874,289 (unaudited)
at December 31, 1996 and 1997, and June 30, 1998, respectively.
e. Inventories
Inventories, which consist of personal computers and component parts, are
stated at the lower of cost or market. Cost is determined using the average cost
method.
f. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line and double-declining balance methods at rates adequate
to depreciate the cost of applicable assets over their expected useful lives.
Repairs and maintenance are charged to expense as incurred. Gains or losses
resulting from sales or retirements are recorded as incurred, at which time
related costs and accumulated depreciation are removed from the accounts. The
estimated useful lives are as follows:
<TABLE>
<CAPTION>
ASSET DESCRIPTION LIFE
- ----------------- ----
<S> <C>
Building and improvements.............................. 15-39 years
Computer and office equipment.......................... 5-7 years
Transportation equipment............................... 5 years
Furniture and fixtures................................. 7 years
</TABLE>
g. Software Development Costs
The Company does not capitalize software development costs since the
development costs incurred during the period between achieving technological
feasibility and general release of the product to customers have not been
material.
h. Research and Development Expenditures
Expenditures for research and development are charged to expense as
incurred.
F-8
<PAGE> 65
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
i. Assets Held for Sale
At December 31, 1996 and 1997, and June 30, 1998, ASI had an unoccupied
building in Matteson, Illinois that was held for sale. The book value of this
building was $1,424,613 (unaudited) at December 31, 1996 and 1997, and June 30,
1998. This asset has been classified as an asset held for sale in the
accompanying combined financial statements and it is expected to be disposed of
sometime during 1999. No impairment loss has been recorded on this asset held
for sale as, in management's opinion, the fair value less cost to sell is in
excess of book value.
At December 31, 1996, ASI had approximately $600,000 of furniture and
fixtures which were subsequently sold and leased back from an unrelated entity.
As such, these assets were classified as current and reflected as assets held
for sale in the accompanying combined financial statements at December 31, 1996.
No gain or loss was recorded for this transaction.
j. Deferred Offering Costs
As of June 30, 1998, the Company had incurred approximately $45,000
(unaudited) in costs related to the Company's proposed Offering. These costs
have been capitalized and are included in prepaid expenses and other assets in
the accompanying unaudited combined balance sheet at June 30, 1998. Upon
completion of the Company's proposed Offering, the deferred Offering costs will
be reclassified to additional paid-in capital as a reduction of the proceeds
from the Offering and will be charged to income if the Offering is not
successful.
k. 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.
l. Financial Instruments and Vulnerability Due to Certain Concentrations
The carrying value for current assets and current liabilities reasonably
approximates fair value due to the short maturity of these items. Since the
Company's long-term debt is not publicly quoted, fair value estimates are based
on each obligation's characteristics, including remaining maturities, interest
rate, credit rating, collateral, amortization schedule and liquidity. The
carrying amount for long-term debt approximates fair value.
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash investments and trade receivables.
The Company has cash investment policies that limit cash investments to
short-term low-risk investments. The Company has a customer base, consisting
primarily of insurance agents and insurance companies, which potentially
subjects it to a concentration of credit risk. However, this risk exposure is
limited due to the large number of customers comprising the Company's customer
base and its dispersion across many different geographic areas. Accounts
receivable from sales and services provided to customers are unsecured.
Additionally, the Company establishes accounts receivable allowances based upon
factors relating to the credit risk of specific customers, historical trends and
other information.
The Company's software products are designed primarily to operate with
Microsoft technologies, and the Company's strategy requires that its products
and technology be compatible with new developments in Microsoft technology. If
businesses do not use Microsoft technologies or migrate from older technologies
or do not adopt the Microsoft technologies with which the Company's products are
compatible, the Company's business, operating results and financial condition
could be materially and adversely affected.
F-9
<PAGE> 66
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
m. Foreign Currency Translation
The balance sheets of Asktom and TAM UK have been translated at the
exchange rates in effect as of December 31, 1996 and 1997, and June 30, 1998.
Income and expense accounts have been translated at the average rate in effect
during the periods. Gains and losses resulting from the translation are deferred
and classified as a separate component of stockholders' equity.
Certain sales to affiliated companies have been denominated in foreign
currencies. Foreign currency transactions gains and losses are recognized based
on the difference between the foreign exchange rates on the sales date and on
the payment date. The net foreign exchange gain and loss is reflected in the
accompanying combined statements of operations.
n. Distributions
The Company makes periodic distributions of income to its stockholders,
which are reflected in the accompanying combined statement of stockholders'
equity.
o. Revenue Recognition
The Company recognizes license fees from The Agency Manager ("TAM"), TAM
Advantage and FirstRate products upon delivery as the Company has no obligation
under these licensing agreements other than delivery and installation services
and collectibility is probable. Revenue from the Company's Diamond product is
recognized using the percentage-of-completion method of accounting based on
modules (states and lines of business) completed as a percentage of total
modules. Anticipated losses are recognized when they become known. Revisions in
estimated profits are made in the month in which the circumstances requiring the
revision become known. Training, data conversion and installation services are
recognized as revenue when the services are performed. Maintenance and support
service includes toll free telephone support, technical support and periodic
enhancements and updates. Revenue for maintenance and support service is
recognized over the term of the support agreement. Revenue from third-party
equipment and software is derived from the resale and licensing of third-party
hardware and software products in connection with sales of TAM licenses and is
generally recognized upon delivery together with the TAM license revenue.
Unearned support and services includes training and other services which are
recognized as revenues when the related services are performed. Allowances for
product returns are estimated based on previous experience and are recorded as a
reduction of revenue at the time sales are recognized.
p. Income Taxes
ASI has elected to be treated as an S corporation for income tax purposes.
Accordingly, ASI has not recorded a tax provision for federal income taxes.
Income tax expense in the accompanying combined statements of operations
primarily represents applicable state income taxes of those states that do not
recognize Subchapter S corporations or states which impose taxes on S
corporation income and Canadian income taxes. Earnings and losses of ASI are
reported on the personal income tax returns of the stockholders. Asktom and TAM
UK account for income taxes in accordance with their respective foreign taxing
authority.
TAM UK is treated as an unlimited liability company for UK tax purposes and
a partnership for U.S. income tax purposes. TAM UK has experienced losses to
date. As such, no UK taxes were incurred. For U.S. income tax purposes, the
losses are reported on the personal income tax returns of the TAM UK
stockholders subject to certain limitations.
Generally, undistributed earnings of foreign subsidiaries will not be
subject to U.S. tax until distributed as dividends. Since the earnings have been
or are intended to be indefinitely reinvested in foreign operations, no
provision has been made for any U.S. taxes on Asktom's portion of undistributed
earnings. Furthermore, any taxes paid to foreign governments on those earnings
may be used, in whole or in part, as credits against the
F-10
<PAGE> 67
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. tax on any dividends distributed from such earnings. As of June 30, 1998,
there were approximately $346,000 (unaudited) of undistributed earnings from
Asktom and no undistributed earnings from TAM UK.
Upon termination of the S corporation status, net deferred income tax
assets and an income tax benefit will be recorded for taxable temporary
differences existing at the time of change in tax status. If the termination of
the S corporation status had been June 30, 1998, net deferred income tax assets
and an income tax benefit of approximately $2,600,000 (unaudited) would have
been recorded. The estimated net deferred income tax asset will be revised based
upon the results of operations and financial condition of ASI between June 30,
1998, and the date the S corporation status is terminated. Deferred income taxes
will be recorded under the asset and liability method of accounting for income
taxes which requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statements
carrying amounts and the tax basis of existing assets and liabilities. As of
June 30, 1998, net deferred income tax assets would have consisted of the
following (unaudited):
<TABLE>
<S> <C>
Harbor Software litigation and related items............. $1,100,000
Allowances for trade accounts receivable................. 575,000
Accrued expenses and other reserves...................... 925,000
----------
Total net deferred income tax assets........... $2,600,000
==========
</TABLE>
Additional paid-in capital and retained earnings will be adjusted to
reflect the capitalization of retained earnings to additional paid-in capital
upon the conversion of ASI to a C corporation.
ASI and the current ASI stockholders have entered into a Tax
Indemnification Agreement relating to their respective income tax liabilities
for periods (or portions thereof) ending on or prior to the close of, and
beginning after, the date that ASI terminates its S corporation status
("Termination Date"). The Tax Indemnification Agreement generally provides that,
subject to certain exceptions, the current stockholders will be responsible for
any federal and state income taxes imposed upon ASI for all taxable periods (or
portions thereof) ending on or prior to the Termination Date (other than state
income taxes in states where the Company has not elected S corporation status or
S Corporation status is not respected) and ASI will be responsible for all
federal and state income taxes of ASI for taxable periods (or portions thereof)
beginning after the Termination Date. Because ASI will be fully subject to
corporate income taxation on and after the Termination Date, the reallocation of
income and deductions between the period during which ASI was treated as an S
corporation (the "Pre-Termination Period") and the period during which ASI will
be subject to corporate income taxation (the "Post-Termination Period") may
increase the taxable income of one party while decreasing that of another party.
Accordingly, subject to certain limitations, the Tax Indemnification Agreement
generally provides that the current ASI stockholders will be indemnified by ASI
with respect to federal and state income taxes shifted from a Post-Termination
Period to a Pre-Termination Period, and ASI will be indemnified by the current
stockholders with respect to federal and state income taxes shifted from a
Pre-Termination Period to a Post-Termination Period.
q. Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) per share is computed based upon the pro forma
net income (loss) as described below and the estimated number of shares that
will be outstanding effective upon the completion of the
Reorganization -- 13,200,000 shares (see Note 14).
r. Pro Forma Balance Sheet and Statements of Operations
The pro forma net income and net income per share includes a provision for
federal and state income taxes as if ASI had been a C corporation. The effective
income tax rate of 39% (when adding together (i) the
F-11
<PAGE> 68
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
actual tax provision recorded and (ii) the pro forma adjustment to recognize C
Corporation provision for incomes taxes) reflects the combined federal and state
income taxes. Further, pro forma net income has been adjusted to eliminate the
effect of accretion since management anticipates the stockholder agreements will
be terminated upon consummation of the Offering (see Note 8).
ASI will convert to a C corporation in connection with the completion of
the Offering resulting in the recording of approximately $2,600,000 (unaudited)
in net deferred income tax assets, as discussed in Note 2p. On or before the day
preceding the day of the Offering, ASI intends to declare a distribution to its
existing stockholders of ASI's undistributed S corporation earnings (tax basis)
through the closing of the Offering (the "Distribution"). ASI currently
estimates the Distribution will be $11,000,000. Retained earnings of ASI, after
recording the distribution, will be reclassified to additional paid-in capital
in connection with the termination of ASI's S corporation election. The
redeemable common stock will be reclassified to equity due to the elimination of
the redemption feature on certain shares of ASI effective upon consummation of
the Offering. The unaudited pro forma combined balance sheet gives effect to
these items. No other contemplated transactions in connection with the Offering
are included in the unaudited pro forma combined balance sheet information.
s. New Accounting Pronouncement
In June, 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement introduces an approach to defining the Company's segments for
financial reporting purposes on a basis consistent with how the Company's
management evaluates the operations of the business. This statement is effective
for the Company's year ended December 31, 1998. All periods presented must
comply with the required disclosures. The Company does not believe that this
standard will have any impact on its financial statement disclosures.
3. SEASONALITY
The Company has experienced, and expects to continue to experience,
significant fluctuations in quarterly operating results. The Company's future
operating results will depend upon a number of factors including the demand for
the Company's products, the size and timing of specific sales and product
shipments, the delay or deferral of customer implementations, the level of
product and price competition that it encounters, the length of its sales
cycles, the timing of new product introductions and product enhancements by the
Company and its competitors, the mix of products and services sold, the timing
of new hires, its ability to develop and market new products and control costs
and general economic conditions. Historically, the Company's revenues have been
significantly higher in December and January than in other months.
4. BANK LINE OF CREDIT
As of December 31, 1996 and 1997, and June 30, 1998, ASI had a $7,000,000
bank line of credit which expires on July 1, 1999. Borrowings under the line of
credit bear interest at the prevailing prime rate of interest (8.25% and 8.5% at
December 31, 1996 and 1997, respectively, and 8.5% June 30, 1998), are secured
by all of ASI's assets (including accounts receivable, inventories, equipment
and buildings) and are personally guaranteed by certain stockholders. Further,
any borrowings are payable on demand. ASI had no borrowings under this agreement
at December 31, 1996 and 1997, and June 30, 1998. Available borrowings are
reduced by letters of credit (see Note 10). The bank has an assignment of a
$5,000,000 life insurance policy on the majority stockholder of the Company.
The line-of-credit agreement contains various financial and nonfinancial
covenants. The financial covenants include, among other things, a minimum
retained earnings balance and a minimum debt service ratio. At December 31,
1997, ASI was in compliance with or had obtained waivers for all such covenants.
At June 30, 1998, ASI was in compliance with all such covenants.
F-12
<PAGE> 69
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is negotiating a new line of credit in an effort to obtain more
favorable terms.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage note, secured by the related property,
bearing interest at 8.15% at December 31, 1996,
and 7.94% at December 31, 1997, and June 30,
1998, principal and interest payable in monthly
installments of $18,835 through October 1,
1998............................................ $ 383,684 $ 181,467 $ 74,026
Mortgage note, secured by the related property,
bearing interest at 8.15% at December 31, 1996,
and 7.94% at December 31, 1997, and June 30,
1998, principal and interest payable in monthly
installments of $28,295 through October 1,
1998............................................ 576,404 272,615 111,208
Notes payable for purchase of treasury shares,
payable in monthly installments of $28,125 plus
accrued interest at the prime rate through
January 1, 1997................................. 28,125 -- --
Other obligations................................. 50,947 82,062 63,697
--------- --------- ---------
1,039,160 536,144 248,931
Less -- Current maturities........................ (548,285) (491,390) (223,909)
--------- --------- ---------
$ 490,875 $ 44,754 $ 25,022
========= ========= =========
</TABLE>
Maturities of long-term debt at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998...................................................... $491,390
1999...................................................... 28,822
2001...................................................... 15,932
--------
$536,144
========
</TABLE>
Certain stockholders of the Company personally guarantee the mortgage notes
payable.
6. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan (the "Plan") covering all qualified employees
of ASI. Under terms of the Plan, ASI will match up to 25% of the first $2,000
contributed to the Plan by eligible employees. Matching contributions aggregated
$138,000, $145,000, $158,000, $75,000 (unaudited) and $81,000 (unaudited) for
the years ended December 31, 1995, 1996 and 1997, and the six months ended June
30, 1997 and 1998, respectively.
A Voluntary Employees' Beneficiary Association ("VEBA") is maintained to
fund employee health benefits for ASI. During the years ended 1995, 1996 and
1997, and the six months ended June 30, 1997 and 1998, the Company contributed
approximately $743,000, $717,000, $680,000, $335,000 (unaudited) and $310,000
(unaudited), respectively, to this VEBA.
F-13
<PAGE> 70
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY
During 1997, the par value of ASI's common stock was changed from no par
value to par value of $.01 per share.
During 1996, a stockholder of TAM UK converted his stockholder loan to
members' equity.
During 1995, ASI completed a 250-for-1 stock split increasing the number of
authorized, issued and outstanding shares from 1,000 shares to 250,000 shares.
Asktom has 1,000 shares of no par value common stock authorized with 800 shares
issued and outstanding. During 1995, TAM UK was reorganized from a limited
liability company to an unlimited liability company. As a result, TAM UK is
treated similar to a partnership and has no common stock. TAM UK's members'
equity is included with retained earnings on the accompanying combined financial
statements.
Stockholders' equity is composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
--------------------- --------------------- ---------------------
SHARES SHARES SHARES
ISSUED COST ISSUED COST ISSUED COST
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Common Stock
ASI-$.01 Par Value, 250,000 shares
authorized...................... 237,500 $ 100,000 237,500 $ 2,375 237,500 $ 2,375
Asktom-No par value, 1,000 shares
authorized...................... 800 315,517 800 315,517 800 315,517
Tam UK............................ -- -- -- -- -- --
------- ----------- ------- ----------- ------- -----------
Total Common Stock......... 238,300 $ 415,517 238,300 $ 317,892 238,300 $ 317,892
======= =========== ======= =========== ======= ===========
Additional paid-in-capital
ASI............................... -- $ 2,626,935 -- $ 2,642,081 -- $ 2,610,185
Asktom............................ -- -- -- -- -- --
Tam UK............................ -- -- -- -- -- --
----------- ----------- -----------
Total Additional
paid-in-capital.......... -- $ 2,626,935 -- $ 2,642,081 -- $ 2,610,185
=========== =========== ===========
Retained Earnings (deficit)
ASI............................... -- $(7,352,342) -- $(1,077,356) -- $ (439,437)
Asktom............................ -- 407,367 -- 557,546 -- 346,060
Tam UK............................ -- (1,775,779) -- (2,232,123) -- (2,393,860)
----------- ----------- -----------
Total Retained Earnings
(deficit)................ -- $(8,720,754) -- $(2,751,933) -- $(2,487,237)
=========== =========== ===========
Treasury Stock
ASI............................... -- -- -- -- -- --
Asktom............................ 50,000 $ (320,000) 50,000 $ (320,000) 50,000 $ (320,000)
Tam UK............................ -- -- -- -- -- --
------- ----------- ------- ----------- ------- -----------
Total Treasury Stock....... 50,000 $ (320,000) 50,000 $ (320,000) 50,000 $ (320,000)
======= =========== ======= =========== ======= ===========
Cumulative translation adjustment
ASI............................... -- -- -- -- -- --
Asktom............................ -- $ 107,578 -- $ 45,981 -- $ 45,370
Tam UK............................ -- 11,095 -- 19,051 -- 9,915
----------- ----------- -----------
Total Cumulative
translation adjustment... -- $ 118,673 -- $ 65,032 -- $ 55,285
=========== =========== ===========
</TABLE>
F-14
<PAGE> 71
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, ASI distributed certain property and related improvements to
the stockholders of the Company. The value of this distribution approximated the
cost of the property and was $2,739,338. The stockholders then contributed this
property to Applied Properties LLC (see Note 11).
8. REDEEMABLE COMMON STOCK
ASI is a party to stockholder agreements with certain stockholders
(covering 18,750 shares). These agreements stipulate that, in the event of the
death of the stockholder, the stockholder's estate is required to sell and ASI
is required to purchase the stock at book value (as defined). Further, in the
event that the stockholder wishes to sell his stock, he must first offer it to
ASI and ASI has the option to purchase the stock at book value. Should ASI
decide not to exercise its option to purchase the stock, the stockholder \must
then offer it to other stockholders. ASI is the beneficiary of an $8,500,000
life insurance policy on one stockholder.
Upon consummation of the Offering, management anticipates these stockholder
agreements will be terminated.
9. GEOGRAPHIC INFORMATION
Transactions between geographic segments are accounted for at transfer
prices determined by management based on amounts that would be charged to an
unaffiliated company. The transfer prices used for book purposes are consistent
with those used for tax purposes. Transfers between segments include
eliminations of intercompany sales between geographic regions. Segment operating
profit (loss) includes all costs and expenses directly related to the segment
involved and no allocation of expenses.
<TABLE>
<CAPTION>
TRANSFERS
UNITED UNITED BETWEEN
STATES CANADA KINGDOM SEGMENTS TOTAL
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1995 --
Net sales..................... $56,842,636 $8,349,237 $ 817,471 $(2,775,426) $63,233,918
Depreciation and
amortization............... 916,058 79,890 57,236 -- 1,053,184
Research and development...... 7,368,045 262,113 97,792 -- 7,727,950
Operating income (loss)....... 2,528,953 1,042,555 (675,894) (17,421) 2,878,193
Capital expenditures.......... 1,325,821 124,836 84,275 -- 1,534,932
Identifiable assets........... 19,845,533 3,038,034 169,555 (2,630,231) 20,422,891
Identifiable liabilities...... 19,861,612 2,813,343 1,347,099 (2,568,786) 21,453,268
December 31, 1996 --
Net sales..................... 57,243,881 8,585,664 1,035,821 (1,909,537) 64,955,829
Depreciation and
amortization............... 987,913 93,124 57,283 -- 1,138,320
Research and development...... 7,410,832 328,870 135,892 -- 7,875,594
Operating income (loss)....... (3,440,176) 1,219,457 (684,464) (13,552) (2,918,735)
Capital expenditures.......... 1,278,569 114,225 75,494 -- 1,468,288
Identifiable assets........... 20,144,883 3,143,184 409,984 (3,022,143) 20,675,908
Identifiable liabilities...... 24,770,332 2,632,723 2,271,818 (3,119,336) 26,555,537
December 31, 1997 --
Net sales..................... 68,638,817 7,803,741 818,901 (1,193,039) 76,068,420
Depreciation and
amortization............... 1,161,823 95,901 45,458 -- 1,303,182
Research and development...... 9,164,528 387,660 185,734 -- 9,737,922
Operating income (loss)....... 8,936,533 745,995 (957,730) (11,302) 8,713,496
Capital expenditures.......... 1,843,442 137,042 40,818 -- 2,021,302
Identifiable assets........... 31,951,633 3,636,442 485,910 (3,496,676) 32,577,309
Identifiable liabilities...... 30,384,591 3,002,262 2,676,076 (3,438,691) 32,624,238
</TABLE>
F-15
<PAGE> 72
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TRANSFERS
UNITED UNITED BETWEEN
STATES CANADA KINGDOM SEGMENTS TOTAL
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
June 30, 1997 (unaudited) --
Net sales..................... $31,433,547 $3,682,560 $ 306,955 $ (525,333) $34,897,729
Depreciation and
amortization............... 585,503 40,624 21,943 -- 648,070
Research and development...... 4,201,700 136,239 77,425 -- 4,415,364
Operating income (loss)....... 1,251,908 475,659 (472,985) (5,518) 1,249,064
Capital expenditures.......... 932,283 49,614 12,081 -- 993,978
Identifiable assets........... 21,142,382 2,708,631 335,381 (2,824,459) 21,361,935
Identifiable liabilities...... 25,968,471 2,249,564 2,265,935 (2,972,936) 27,511,034
June 30, 1998 (unaudited) --
Net sales..................... 40,953,843 4,425,643 660,209 (705,209) 45,334,486
Depreciation and
amortization............... 676,493 62,061 11,772 -- 750,326
Research and development...... 5,549,151 291,010 127,472 -- 5,967,633
Operating income (loss)....... 4,510,348 76,317 (475,752) 495 4,111,408
Capital expenditures.......... 885,594 152,831 13,201 -- 1,051,626
Identifiable assets........... 32,773,599 3,320,341 462,232 (3,794,603) 32,761,569
Identifiable liabilities...... 30,645,000 3,057,622 2,840,779 (3,913,432) 32,585,444
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain office space and equipment under noncancelable
operating leases that expire at various dates through 2018. Rent expense under
such leases totaled approximately $1,480,000, $2,131,000, $3,556,000, $1,748,000
(unaudited) and $1,736,000 (unaudited) for the years ended December 31, 1995,
1996 and 1997, and the six months ended June 30, 1997 and 1998, respectively.
Minimum annual rental commitments under noncancelable operating leases
(excluding related-party leases) for periods subsequent to December 31, 1997,
are as follows:
<TABLE>
<S> <C>
1998..................................................... $1,755,618
1999..................................................... 1,212,349
2000..................................................... 110,212
2001..................................................... 2,271
2002..................................................... --
----------
$3,080,450
==========
</TABLE>
Minimum annual rental commitments under noncancelable related-party
operating leases for the periods subsequent to December 31, 1997, are as
follows:
<TABLE>
<S> <C>
1998.................................................... $ 1,738,623
1999.................................................... 2,114,000
2000.................................................... 2,156,280
2001.................................................... 2,199,405
2002.................................................... 2,243,394
2003 and thereafter..................................... 41,611,397
-----------
$52,063,099
===========
</TABLE>
Letters of credit outstanding, which reduce ASI's available borrowings on
the line of credit, totaled $4,767,508, $4,737,508 and $4,737,508 (unaudited) at
December 31, 1996 and 1997, and at June 30, 1998,
F-16
<PAGE> 73
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Accordingly, available borrowings under the line-of-credit
agreement are $2,232,492, $2,262,492 and $2,262,492 (unaudited) at December 31,
1996 and 1997, and at June 30, 1998, respectively.
The Company is obligated to pay software royalties on certain product sales
at rates ranging from .24% to 3%.
ASI is self-insured for certain health benefits up to $50,000 per
occurrence per individual with an aggregate maximum self-insurance exposure of
approximately $1,200,000 per year. Employees of Asktom and TAM UK are covered
under the national health care plan of their respective country and a
supplemental policy with a private insurance company.
The Company does not maintain a separate product liability insurance
policy. Although the Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential claims
as well as any liabilities arising from such claims, such provisions may not
effectively protect the Company against such claims and the liability and costs
associated therewith.
11. RELATED-PARTY TRANSACTIONS
Beginning in October, 1995, ASI occupied a distribution center owned by
Applied Properties LLC, a company owned by certain stockholders of the Company.
In October 1996, ASI moved its headquarters into a new building also owned by
Applied Properties LLC. ASI made lease payments to Applied Properties LLC in the
amount of $18,000, $436,544, $1,535,024, $763,694 (unaudited) and $778,967
(unaudited) for the years ended December 31, 1995, 1996 and 1997, and the six
months ended June 30, 1997 and 1998, respectively. Management of Applied
Properties LLC determines the lease payment. ASI is responsible for all property
taxes and maintenance on the building.
In October, 1995, Applied Properties LLC secured a one-year construction
loan agreement allowing for maximum borrowings of $9,600,000, bearing interest
at prime. The maturity date was extended for six months, to April 16, 1997. The
loan was guaranteed by ASI and two stockholders. It was collateralized by the
principal facility and two other buildings owned by ASI. Applied Properties LLC
had borrowings under this construction loan agreement of $6,094,400 and $0 as of
December 31, 1996 and 1997, respectively. As of December 31, 1997, the
construction loan had been converted to a mortgage note in the principal amount
of $9,600,000. The mortgage note bears interest at 8.0% and is secured by the
principal facility and two buildings owned by ASI. The mortgage note is
guaranteed by ASI and two stockholders. As of December 31, 1997, and June 30,
1998, the mortgage note balance was $9,600,000 and $9,279,859 (unaudited),
respectively. The mortgage is payable in monthly installments of $116,474
(including interest), and a balloon payment is due in December, 2002.
In connection with the construction of the Company's principal facility,
ASI loaned funds to Applied Properties. These loans resulted in amounts due to
ASI of $2,083,528, $1,825,542 and $5,078,825 (unaudited) as of December 31, 1996
and 1997, and June 30, 1998, respectively. Subsequent to June 30, 1998, ASI
loaned Applied Properties LLC an additional $1.0 million (unaudited).
ASI leased a property in Florida from Applied Properties on a
month-to-month basis. This property is used for business meetings and to house
ASI employees. Monthly rent expense is approximately $6,000. Upon consummation
of the Offering, management anticipates the lease agreement will be terminated.
Management of Applied Properties determines the lease payment.
ASI's accounting personnel spend approximately six hours a month preparing
financial information for Applied Properties LLC. The estimated cost of such
services is approximately $2,000 a year, however, no management fee is charged
to Applied Properties LLC.
The Company incurred approximately $990, $3,520, $4,437, $0 (unaudited) and
$5,060 (unaudited) for the years ended December 31, 1995, 1996 and 1997 and for
the six months ended June 30, 1997 and 1998, respectively, in fees to a law firm
having a partner who is a director of the Company.
F-17
<PAGE> 74
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. LITIGATION
In November 1992, Harbor Software Inc. ("Harbor or Plaintiff") filed suit
against ASI arguing copyright infringement, misappropriation of trade secrets,
and other claims. The other claims were ultimately withdrawn or dismissed.
Following a jury trial on October 3, 1996, the jury returned a verdict in favor
of ASI on the copyright infringement claim, but in favor of Harbor on the trade
secret claim, awarding the Plaintiff $5,000,000 in compensatory and punitive
damages. Following post-trial motions, the court awarded Plaintiff an additional
$339,000 in attorney fees. ASI recorded the $5,339,000 judgement and an
additional $250,000 of estimated expenses related to the judgement during the
year ended December 31, 1996. A $2,500,000 letter of credit, a $2,500,000
personal guarantee by ASI's principal stockholders, and the assets of ASI were
pledged as security to stay execution of the judgement during the appeals
process. Both ASI and Harbor filed an appeal and oral arguments were heard on
March 5, 1998. In July 1998, the Harbor suit was settled for $5,000,000. ASI did
not admit liability and Harbor and its principal stockholder have agreed not to
assert specified additional claims against ASI and its products. ASI paid the
$5,000,000 settlement on July 17, 1998. As a result, the letter of credit and
personal guarantees were cancelled and the lien on assets was released.
In December 1997, ASI completed negotiations of the key terms of a
settlement agreement with Northern Insurance Company of New York ("Northern"),
one of ASI 's insurance carriers, for recovery of defense costs and partial
indemnity of the Harbor judgement. The Settlement Agreement and Partial Release
was signed in January 1998. The Agreement specified the following: (i) Northern
would reimburse ASI for legal fees and other defense costs incurred from April
6, 1994 through the completion of the appellate proceedings, (ii) upon mutual
agreement between ASI and Northern on the amount of any judgement or settlement,
any payment would be shared equally by Northern and ASI, and (iii) if ASI
receives any payment from Northbrook Property and Casualty Insurance Company
("Northbrook"), another of ASI's insurance carriers, for claims relating to
Harbor, and such payment was specified as defense costs, it would be remitted to
Northern; however if the payment was specified as indemnity, it would be split
equally between ASI and Northern. If Northbrook does not specify the nature of
the payment, it will be considered split evenly between defense and indemnity
and remitted as described above. In December 1997, ASI recorded a receivable
from Northern of $4,275,261 which was comprised of one-half of the estimated
judgement of $5,339,000 plus estimated reimbursable legal fees and defense costs
of approximately $1.6 million. Northern paid ASI $1,5000,000 in February 1998
and $2,500,000 in July 1998. Approximately $106,000 remains due from Northern.
During the third quarter of 1998, ASI will record a decrease in the
estimated Harbor receivable of $169,500 and a decrease in the estimated Harbor
accrued expenses of $589,000 resulting in a corresponding decrease in operating
expenses of $419,500.
Northbrook filed a declaratory judgement action against ASI to determine
its obligation to defend and indemnify ASI for expenses and liability relating
to Harbor claims. On January 23, 1998, the court granted Northbrook's motion for
summary judgement. ASI filed an appeal.
ASI recorded legal fees and other defense costs associated with the Harbor
suit in the period the related services were performed. The judgement,
settlement with Northern and legal fees and other defense costs are reflected in
the caption "Harbor Software litigation and related items" in the accompanying
combined statements of operations.
In March, 1996, Newberg/Perini filed a suit against ASI and Applied
Properties LLC for enforcement of a mechanic's lien. The action sought
$2,187,500. ASI and Applied Properties LLC filed a counterclaim of approximately
$700,000 for damages related to breach of warranty and poor workmanship. A
letter of credit in the amount of $2,187,500 was issued to the TICOR Title
Insurance Company and was canceled in July, 1998. In June, 1998, ASI, Applied
Properties LLC and Newberg/Perini entered into a Settlement Agreement and
F-18
<PAGE> 75
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Release which resulted in a settlement requiring ASI and Applied Properties LLC
to pay Newberg/Perini $909,500. ASI paid the settlement and recorded a
corresponding receivable from Applied Properties LLC.
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business activities. For the years ended
December 31, 1995, 1996 and 1997, and for the six months ended June 30, 1997 and
1998, various actions were settled totaling $535,000, $19,000, $7,000, $0
(unaudited) and $165,000 (unaudited), respectively. Management believes that the
ultimate liability, if any, resulting from them will not materially affect the
Company's financial position.
13. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distributions to
owners, in a financial statement for the period in which they are recognized.
The Company has chosen to disclose comprehensive income, which encompasses net
income and foreign currency translation adjustments, in the notes to financial
statements for interim periods.
The components of comprehensive income for the periods presented are as
follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1997 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $1,088,330 $4,057,381
Foreign currency translation adjustment..................... 3,271 (9,747)
Accretion to redemption value of common stock............... -- (31,896)
---------- ----------
Comprehensive income...................................... $1,091,601 $4,015,738
========== ==========
</TABLE>
14. SUBSEQUENT EVENTS
ASI will convert to a C corporation at the close of the day prior to the
day of the Reorganization (as defined below) resulting in the recording of
approximately $2,600,000 (unaudited) in net deferred income tax assets as
discussed in Note 2p. The estimated net deferred income tax asset will be
revised based upon the results of operations and financial condition of ASI
between June 30, 1998, and the date the S corporation status is terminated. On
or before the day preceding the day of the Reorganization (as defined below),
ASI intends to declare a distribution to its existing stockholders of ASI's
undistributed S corporation tax earnings through the close of the day prior to
the day of the Reorganization. This estimated distribution of approximately
$11,000,000 will consist of $6,000,000 in cash and $5,000,000 in promissory
notes payable on or before five years from the date of issuance and bearing
interest at a rate of 7.25%.
Applied Systems, Inc., a newly formed Delaware corporation, and the
stockholders of ASI, Asktom and TAM UK will enter into a Contribution and Merger
Agreement which provides for all of the equity interests in ASI and Asktom to be
contributed to Applied Systems, Inc., the newly formed Delaware company, and for
the merger of the stockholders (each of which is a corporation) of TAM UK into
the new corporation immediately prior to the consummation of the Offering. In
exchange for such transfers, the stockholders of these companies will receive
shares of common stock of Applied Systems, Inc., the newly formed Delaware
company (the "Reorganization"). Following the Reorganization, Applied Systems,
Inc., the newly formed Delaware company, will be a holding company with ASI,
Asktom and TAM UK as its wholly owned subsidiaries.
In July, 1998, the Company established the Stock Option Plan. The Company
currently utilizes Accounting Principles Board Opinion No. 25 in its accounting
for stock options. The Company has adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation ("SFAS No. 123"). One million five hundred thousand shares of
common stock
F-19
<PAGE> 76
APPLIED SYSTEMS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
are reserved for issuance under the Stock Option Plan. Options will be issued to
certain employees in connection with the Offering with an exercise price equal
to the Offering price. The options vest over 1 to 10 years. The Stock Option
Plan provides for the grant of incentive stock options and nonqualified stock
options.
In connection with the Offering, the Board of Directors adopted an Employee
Stock Purchase Plan (the "Purchase Plan"). A total of 350,000 common shares have
been reserved for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase stock at a discount through automatic payroll
deductions. Eligible employees acquire stock under the Purchase Plan by electing
to have an amount up to 8% of their earnings withheld. The amount withheld is
used to purchase shares on one or more specified purchase dates during any
six-month period ("Offering Period"). Offering Periods commence on each June 1
and December 1; the initial Offering Period will commence December 1, 1998, and
expire on May 31, 1999. The shares are purchased at a price equal to 85% of the
lesser of (a) the fair market value of the stock on the date of purchase or (b)
the fair market value of the stock on the first date of the Offering Period.
F-20
<PAGE> 77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
Applied Systems, Inc.:
We have audited the accompanying balance sheet of APPLIED SYSTEMS, INC. (a
Delaware corporation) as of June 30, 1998, and the related statements of
operations, stockholder's equity and cash flows for the period from June 25,
1998 (date of inception) through June 30, 1998. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Applied Systems, Inc. as of
June 30, 1998, and the results of its operations and its cash flows for the
period from June 25, 1998 (date of inception), to June 30, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 17, 1998
F-21
<PAGE> 78
APPLIED SYSTEMS, INC.
BALANCE SHEET
JUNE 30, 1998
ASSETS
<TABLE>
<S> <C>
Total assets...................................... $ --
=======
STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 100 shares authorized, 77
shares issued and outstanding.......................... $ --
Additional paid-in capital................................ 1,000
Deficit................................................... (1,000)
-------
Total stockholder's equity........................ $ --
=======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-22
<PAGE> 79
APPLIED SYSTEMS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 25, 1998 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
<TABLE>
<S> <C>
OPERATING EXPENSES -- general and administrative............ $ 1,000
-------
OPERATING LOSS.............................................. (1,000)
-------
NET LOSS.................................................... $(1,000)
=======
</TABLE>
The accompanying notes are an integral part of this statement.
F-23
<PAGE> 80
APPLIED SYSTEMS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM JUNE 25, 1998 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 25, 1998....................... -- $-- $ -- $ -- $ --
Stock issued............................... 77 -- 1,000 -- 1,000
Net loss................................... -- -- -- (1,000) (1,000)
-- -- ------ ------- -------
BALANCE, June 30, 1998....................... 77 $-- $1,000 $(1,000) $ --
== == ====== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-24
<PAGE> 81
APPLIED SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 25, 1998 (DATE OF INCEPTION)
THROUGH JUNE 30, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period................................... $(1,000)
Noncash compensation expense........................... 1,000
-------
Net cash provided by operating activities......... --
NET INCREASE IN CASH........................................ --
CASH, beginning of period................................... --
-------
CASH, end of period......................................... $ --
=======
NONCASH FINANCING ACTIVITY -- issuance of common stock in
exchange for services rendered............................ $ 1,000
=======
</TABLE>
The accompanying notes are an integral part of this statement.
F-25
<PAGE> 82
APPLIED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Applied Systems, Inc. ("the Company"), a Delaware corporation, is a holding
company that was formed on June 25, 1998 and has a fiscal year ending December
31. Immediately prior to the consummation of the initial public offering (the
"Offering"), the Company and the stockholders of Applied Systems, Inc. ("ASI"),
an Illinois S corporation, Asktom, Ltd. ("Asktom"), an Ontario corporation, and
The Agency Manager Limited ("TAM UK"), a United Kingdom unlimited liability
company, will enter into a Contribution and Merger Agreement which provides for
all of the equity interests in ASI and Asktom to be contributed to the Company
and for the stockholders of TAM UK to be merged with and into the Company. In
exchange for such transfers, the stockholders of these companies will receive
shares of common stock of the Company.
2. OFFERING REGISTRATION
In July, 1998, the sole stockholder of the Company authorized management of
the Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell common stock to the public.
3. COMMON STOCK
In exchange for administrative services performed, the Company issued 77
shares of common stock to Robert Eustace which the Company valued at $1,000.
4. SUBSEQUENT EVENTS
Subsequent to year end, the board of directors approved an increase in the
number of authorized common shares to 45 million.
F-26
<PAGE> 83
[THE INSIDE BACK COVER INCLUDES PICTURES OF
REPRESENTATIVE COMPUTER SCREENS DEPICTING THE AGENCY MANAGER,
AS WELL AS PICTURES AND DIAGRAMS OF INSURANCE INDUSTRY DOCUMENTS
AND INFORMATION THAT CAN BE PRODUCED FROM THE SYSTEM, SUCH AS
AN INSURANCE POLICY AND AN AUTOMOBILE IDENTIFICATION CARD.]
<PAGE> 84
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF ANY OFFER TO BUY COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN 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 THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 14
Dividend Policy....................... 14
Reorganization and S Corporation
Distribution........................ 14
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 30
Glossary of Terms..................... 39
Management............................ 41
Certain Transactions.................. 47
Principal and Selling Stockholders.... 49
Description of Capital Stock.......... 50
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Legal Matters......................... 54
Experts............................... 54
Additional Information................ 55
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
APPLIED SYSTEMS, INC.
APPLIED SYSTEMS, INC.
COMMON STOCK
------------------------
PROSPECTUS
, 1998
------------------------
WILLIAM BLAIR & COMPANY
NATIONSBANC MONTGOMERY SECURITIES LLC
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discount and expenses) payable by the
Company in connection with the sale of the Common Stock offered hereby
(including the Common Stock which may be issued pursuant to an over-allotment
option) are set forth in the following table. All amounts are estimates except
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC registration fee........................................ $ 12,213
NASD filing fee............................................. 4,640
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 120,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 250,000
Blue Sky fees and expenses (including legal fees and
expenses)................................................. 2,000
Transfer agent and registrar fees and expenses.............. 10,000
Miscellaneous............................................... 4,147
--------
Total.................................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Company's Restated Certificate
of Incorporation ("Charter") and By-Laws provide for indemnification of the
Company's directors and officers for liabilities and expenses that they may
incur in such capacities. In general, directors and officers are indemnified
with respect to actions taken in good faith in a manner reasonably believed to
be in, or not opposed to, the best interests of the Company, and with respect to
any criminal action or proceeding, actions that the indemnitee had no reasonable
cause to believe were unlawful. Reference is made to the Company's Charter and
By-Laws filed as Exhibits 3.1 and 3.2 hereto, respectively.
The Company will enter into indemnity agreements with each of its directors
that will require the Company to advance expenses to each such director in the
event that a claim brought against such director with respect to an action for
which the Company is obligated to provide indemnification under the Company's
Charter and By-Laws.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). Reference is made
to the form of Underwriting Agreement filed as Exhibit 1 hereto.
The Company is purchasing directors' and officers' liability insurance,
which would provide coverage against certain liabilities, including liabilities
under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
As compensation for services, the Company issued to James P. Kellner 1,250
shares of its common stock on each of January 1, 1995, January 1, 1996 and
January 1, 1997, representing an aggregate of 1.5% of the outstanding shares of
ASI at the time of grant. Such securities were issued without registration under
the Securities Act, in reliance upon Section 4(2) of the Securities Act.
II-1
<PAGE> 86
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
1.1* -- Form of Underwriting Agreement
2.1* -- Agreement of Merger and Contribution
3.1 -- Form of Restated Certificate of Incorporation of the Company
3.2 -- Form of Restated By-Laws of the Company
4.1* -- Form of S Corporation Note
5.1 -- Form of Opinion of Sidley & Austin**
10.1 -- Stock Option Plan
10.2 -- Employee Stock Purchase Plan
10.3 -- Lease between the Company and Applied Properties, L.L.C.
relating to the Company's corporate headquarters
10.4 -- Employment Agreement between the Company and Timothy J.
McIntyre
10.6* -- Tax Indemnification Agreement
10.7 -- Form of Indemnification Agreement between the Company and
each of its directors
10.8* -- Credit Agreement between the Company and LaSalle National
Bank
11* -- Statement re: computation of per share earnings
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Sidley & Austin (included in Exhibit 5.1)
24.1 -- Powers of Attorney (included on signature page)
</TABLE>
- -------------------------
* To be filed by amendment.
** Executed opinion to be filed by amendment
(b) Financial Statement Schedules:
None of the schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are required
under the related instructions or are inapplicable, and therefore have been
omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities 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
Securities 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 Securities
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 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 Securities Act, the information omitted
from the form of prospectus filed as part of a
II-2
<PAGE> 87
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 Securities 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 Securities 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.
II-3
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Chicago, Illinois on September 11,
1998.
APPLIED SYSTEMS, INC.
By: *
------------------------------------
James P. Kellner
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on September , 1998 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES(S)
--------- ---------
<C> <S>
* Chairman of the Board, President and Chief
- --------------------------------------------------- Executive Officer
James P. Kellner
/s/ TIMOTHY J. MCINTYRE Executive Vice President and Chief Financial
- --------------------------------------------------- Officer (Principal Financial and Accounting
Timothy J. McIntyre Officer)
/s/ GLEN R. EUSTACE Executive Vice President -- Business
- --------------------------------------------------- Development and Director
Glen R. Eustace
* Director
- ---------------------------------------------------
William A. Huff
*By: /s/ TIMOTHY J. MCINTYRE
---------------------------------------------
Attorney-in-fact
</TABLE>
II-4
<PAGE> 1
EXHIBIT 3.1
FORM OF
CERTIFICATE OF RESTATED
CERTIFICATE OF INCORPORATION
OF
APPLIED SYSTEMS GROUP, INC.
---------------------------------
James P. Kellner and Glen R. Eustace, being the duly elected
Chairman, President and Chief Executive Officer and Secretary, respectively, of
Applied Systems Group, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), do hereby certify as follows:
1. That the Corporation filed its original Certificate
of Incorporation with the Delaware Secretary of State on June 25, 1998 (the
"Certificate").
2. That the board of directors of the Corporation
adopted resolutions authorizing the Corporation to amend, integrate and restate
the Corporation's Certificate in its entirety to read as set forth in Exhibit A
attached hereto and made a part hereof (the "Restated Certificate").
3. That the stockholders of the Corporation entitled to
vote thereon, pursuant to written consent, unanimously approved and adopted the
Restated Certificate in accordance with Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
4. The Effective Time of the Restated Certificate shall
be on ___________, 1998 at 9:00 a.m., Delaware time.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned, being the Chairman,
President and Chief Executive Officer and Secretary, respectively, hereinabove
named, for the purpose of amending and restating the Certificate of
Incorporation of the Corporation pursuant to the General Corporation Law of the
State of Delaware, under penalties of perjury do each hereby declare and
certify that this is the act and deed of the Corporation and the facts stated
herein are true, and accordingly have hereunto signed this Certificate of
Restated Certificate of Incorporation this ___ day of __________, 1998.
------------------------------
James P. Kellner, Chairman,
President and Chief Executive
Officer
Attest:
- --------------------------
Glen R. Eustace, Secretary
-2-
<PAGE> 3
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
APPLIED SYSTEMS GROUP, INC.
ARTICLE ONE
The name of the Corporation is Applied Systems, Inc.
ARTICLE TWO
The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, City of Wilmington, County of New
Castle. The name of the registered agent of the Corporation at such address is
The Corporation Trust Company.
ARTICLE THREE
The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware
("DGCL").
ARTICLE FOUR
4.1 Capital Stock. The total number of shares of stock which
the Corporation has authority to issue is 47,000,000 shares, consisting of
2,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"), and 45,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"). The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors (the
"Voting Stock"), voting together as a single class, without a separate vote of
the holders of the Preferred Stock, or any series thereof, unless a vote of any
such holders is required pursuant to the certificate or certificates
establishing the series of Preferred Stock or by the DGCL.
<PAGE> 4
4.2 Preferred Stock. The Board of Directors is expressly
authorized to provide for the issuance of all or any shares of the Preferred
Stock in one or more classes or series, and to fix for each such class or
series such voting powers, full or limited, or no voting powers, and such
distinctive designations, preferences and relative, participating, optional or
other special rights and such qualifications, limitations or restrictions
thereof, as shall be stated and expressed in the resolution or resolutions
adopted by the Board of Directors providing for the issuance of such class or
series and as may be permitted by the DGCL, including, without limitation, the
authority to provide that any such class or series may be (i) subject to
redemption at such time or times and at such price or prices; (ii) entitled to
receive dividends (which may be cumulative or non-cumulative) at such rates, on
such conditions, at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any
other series of the same or any other class or classes of stock, or other
securities or property, of the Corporation at such price or prices or at such
rates of exchange and with such adjustments; all as may be stated in such
resolution or resolutions.
4.3 Common Stock. Except as otherwise provided by the
DGCL, by this Restated Certificate of Incorporation or any amendments hereto
and subject to the rights of holders of Preferred Stock, all of the voting
power of the stockholders of the Corporations shall be vested in the holders of
the Common Stock, and each holder of Common Stock shall have one vote for each
share of Common Stock held by such holder on all matters voted upon by the
stockholders.
ARTICLE FIVE
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors of the Corporation is expressly authorized
to adopt, amend or repeal the By-Laws of the Corporation. The stockholders
shall also have power to adopt, amend or repeal the By-Laws of the Corporation;
provided, however, that, in addition to any vote of the holders of any class or
series of stock of the Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of a majority of the voting
power of all of the outstanding Voting Stock shall be required in order for the
stockholders to adopt, amend or repeal any provision of the By-Laws of the
Corporation.
-2-
<PAGE> 5
ARTICLE SIX
Meetings of stockholders may be held within or without the
State of Delaware, as the By-laws of the Corporation may provide. The books of
the Corporation may be kept outside the State of Delaware at such place or
places as may be designated from time to time by the Board of Directors or in
the By-Laws of the Corporation.
ARTICLE SEVEN
7.1 Number of Directors. Subject to any rights of the
holders of the Preferred Stock or any series thereof to elect additional
directors under specified circumstances, the number of directors which shall
constitute the whole Board of Directors of the Corporation shall be such number
as shall from time to time be fixed by resolution adopted by affirmative vote
of a majority of the whole board of Directors. The Board of Directors shall be
divided into three classes, as nearly equal in number as possible, with the
term of office of the first class to expire at the 1999 annual meeting of
stockholders, the term of office of the second class to expire at the 2000
annual meeting of stockholders and the term of office of the third class to
expire at the 2001 annual meeting of stockholders. At each annual meeting of
stockholders beginning with the 1999 annual meeting of stockholders, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election. The foregoing notwithstanding, each director shall serve
until his successor shall have been duly elected and qualified, unless he shall
resign, die, become disqualified or be removed. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible.
In no case will a decrease in the number of directors shorten the term of any
incumbent director.
7.2 Vacancies and Newly Created Directorships. Subject
to any rights of the holders of the Preferred Stock or any series thereof to
fill such newly created directorships or vacancies, any newly created
directorships resulting from any increase in the authorized number of directors
and any vacancies in the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall, unless otherwise provided by
law, be filled only by a resolution adopted by the affirmative vote of a
majority of the directors then in office, even if less than a quorum, and any
directors so chosen shall hold office until the next election of the class for
which such director shall have been
-3-
<PAGE> 6
chosen, and until his successor shall have been duly elected and qualified,
unless he shall resign, die, become disqualified or be removed.
Notwithstanding the foregoing, in the event that at the time of the existence
of an unfilled newly created directorship or any such vacancy there are
unfilled newly created directorships and/or vacancies constituting a majority
of the whole Board of Directors, a majority of the directors then serving on
the Board of Directors shall have the authority to fill enough of such
unfilled newly created directorships and/or vacancies so that, after giving
effect thereto, there will be the minimum number of directors serving on the
Board of Directors necessary to constitute a majority of the whole Board of
Directors.
7.3 Powers, Qualifications and Removal. The business of
the Corporation shall be managed by or under the direction of the Board of
Directors. Any director may tender his resignation at any time. Subject to
any rights of the holders of the Preferred Stock or any series thereof, any
director of the entire Board of Directors may be removed at any time, but only
for cause and by the affirmative vote of the holders of the least 75% of the
voting power of the outstanding Voting Stock, voting together as a single
class.
7.4 Ballots Not Required. Election of directors need not
be by written ballot unless the By-laws of the Corporation so provide.
7.5 Definition. For purposes of this Article Seven,
"whole Board of Directors" means the total number of directors which the
Corporation would have on the Board of Directors if there were no vacancies.
ARTICLE EIGHT
8.1 Special Meetings of Stockholders. Special meetings
of stockholders of the Corporation may be called only by the Chief Executive
Officer or the Board of Directors pursuant to a resolution approved by a
majority of the whole Board of Directors. Business transacted at any special
meeting of stockholders shall be limited to matters relating to the purpose or
purposes stated in the notice of meeting.
8.2 No Stockholder Action by Consent. No action required
to be taken or which may be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting.
-4-
<PAGE> 7
8.3 Advance Notice of Stockholder Nominations. Advance
notice of stockholder nominations of persons for election to the Board of
Directors of the Corporation and of business to be brought before any meeting
of the stockholders by the stockholders of the Corporation shall be given in
the manner provided in the By-Laws of the Corporation.
8.4 Definition. For purposes of this Article Eight,
"whole Board of Directors" means the total number of directors which the
Corporation would have on the Board of Directors if there were no vacancies.
ARTICLE NINE
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the DGCL is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended. Any repeal or modification of this
Article Nine by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the time
of such repeal or modification.
ARTICLE TEN
10.1 Indemnification of Officers, Directors and Employees.
The Corporation shall indemnify to the fullest extent permitted under and in
accordance with the DGCL any person who was or is a party to (or witness in) or
is threatened to be made a party to (or witness in) any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he or she is or was or has agreed to become a
director, officer or employee of the Corporation, or is or was serving (or who
has agreed to serve) at the request of the Corporation as a director, officer
or employee of or in any other capacity with respect to another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her
-5-
<PAGE> 8
in connection with such action, suit or proceeding if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
10.2 Expenses. Expenses (including attorneys' fees)
incurred in defending a civil, criminal, administrative or investigative
action, suit or proceeding (1) in the case of any action, suit or proceeding
against a director of the Corporation shall or (2) in the case of any action,
suit or proceeding against an officer, employee or agent of the Corporation
may, as authorized by the Board of Directors, be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the indemnified person to repay
such amount if it shall ultimately be determined that he or she is not entitled
to be indemnified by the Corporation as authorized in this Article Ten.
10.3 Indemnification of Agents. The Corporation may, to
the extent authorized from time to time by the Board of Directors, grant rights
to indemnification and to the advancement of expenses to any agent of the
Corporation to the fullest extent of the provisions of this Article Ten with
respect to the indemnification and advancement of expenses of directors,
officers and employees of the Corporation.
10.4 Not Exclusive. The indemnification and other rights
set forth in this Article Ten shall not be exclusive of any provisions with
respect thereto in the By-laws of the Corporation or any other contract or
agreement between the Corporation and any officer, director, employee or agent
of the Corporation.
10.5 No Reduction. Neither the amendment nor repeal of
Section 10.1, 10.2, 10.3 or 10.4 of this Article Ten nor the adoption of any
provision of this Restated Certificate of Incorporation inconsistent with
Section 10.1, 10.2, 10.3 or 10.4 of this Article Ten shall eliminate or reduce
the effect of Sections 10.1, 10.2, 10.3 or 10.4 of this Article Ten in respect
of any matter occurring prior to such amendment, repeal or adoption of an
inconsistent provision or in respect of any cause of action, suit or claim
relating to any such matter which would have given rise to a right of
indemnification or right to receive expenses pursuant to Section 10.1, 10.2,
10.3 or 10.4 of this Article Ten if such provision had not been so amended or
repealed or if a provision inconsistent therewith had not been so adopted.
-6-
<PAGE> 9
ARTICLE ELEVEN
The Board of Directors of the Corporation, when evaluating any
offer of another party to (a) make a tender or exchange offer for any equity
security of the Corporation; (b) merge or consolidate the Corporation with
another Corporation; or (c) purchase or otherwise acquire all or substantially
all of the properties and assets of the Corporation may, in connection with the
exercise of its judgment in determining what is in the best interests of the
Corporation and its stockholders, give due consideration to all factors the
directors deem relevant, including, without limitation: (i) the effects upon
the employees, suppliers, customers, creditors and others having similar
relations with the Corporation, upon the communities in which the Corporation
conducts its business or on such other constituencies of the Corporation as the
Board of Directors considers relevant under the circumstances; (ii) not only
the consideration being offered (after taking into account taxes) in relation
to the then current market price for the Corporation's outstanding shares of
capital stock, but also the Board of Directors' estimate of the (A) future
value of the Corporation (including the unrealized value of its properties and
assets) as an independent going concern and (B) the current value of the
Corporation in a freely negotiated transaction; (iii) the purpose of the
Corporation, and any of its subsidiaries, to provide quality products and
services on a long-term basis; (iv) whether the proposed transaction might
violate federal or state laws; and (v) the long-term as well as short-term
interests of the Corporation and its stockholders, including the possibility
that such interests may be best served by the continued independence of the
Corporation. If, on the basis of such factors, the Board of Directors so
determines that a proposal or offer to acquire or merge the Corporation, or to
sell its assets, is not in the best interests of the Corporation, it may reject
the proposal or offer. If the Board of Directors determines to reject any such
proposal or sale, the Board of Directors shall have no obligation to
facilitate, to remove any barriers to, or to refrain from impeding the proposal
or offer except as may be required by applicable law. Except to the extent
required by applicable law, the consideration of any or all of such factors
shall not be a violation of the business judgment rule or of any duty of the
directors to the stockholders or a group of stockholders, even if the directors
reasonably determine that any such factor or factors outweigh the financial or
other benefits to the Corporation or a stockholder or group of stockholders.
ARTICLE TWELVE
The Corporation is to have perpetual existence.
-7-
<PAGE> 10
ARTICLE THIRTEEN
The Corporation has elected to be governed by Section 203 of
the DGCL.
ARTICLE FOURTEEN
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation,
in the manner now or thereafter prescribed herein or by the laws of the State
of Delaware, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
-8-
<PAGE> 1
EXHIBIT 3.2
FORM OF
RESTATED BY-LAWS
OF
APPLIED SYSTEMS, INC.
ARTICLE I
STOCKHOLDERS MEETINGS
SECTION 1.1 ANNUAL MEETINGS.
An annual meeting of stockholders shall be held for the
election of directors at such date, time and place as may be fixed by
resolution of the Board of Directors from time to time.
SECTION 1.2 SPECIAL MEETINGS. Special meetings of
stockholders of the Corporation may be called only by the Chief Executive
Officer or the Board of Directors pursuant to a resolution approved by a
majority of the whole Board of Directors. Business transacted at any special
meeting of stockholders shall be limited to matters relating to the purpose or
purposes stated in the notice of meeting.
SECTION 1.3 NOTICE OF MEETINGS. A written notice of each
annual or special meeting of stockholders shall be given stating the place,
date and time of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. Unless otherwise provided
in the Certificate of Incorporation or these By-laws, as such may be amended or
restated from time to time, or by law, such notice of meeting shall be given
not less than ten nor more than 60 days before the date of the meeting to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at such stockholder's address as it appears on the
records of the Corporation.
SECTION 1.4 ADJOURNMENTS. Any annual or special meeting of
stockholders may be adjourned from time to time to reconvene at the same or
some other place, and notice need not be given of any such adjourned meeting if
the date, time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting any business may be transacted
which might have been transacted at the original meeting. If the adjournment
is for more than 30 days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of
<PAGE> 2
record entitled to vote at the adjourned meeting in accordance with Section
1.3.
SECTION 1.5 QUORUM. Except as otherwise provided in the
Certificate of Incorporation or these By-laws, as such may be amended or
restated from time to time, or by law, the presence in person or by proxy of
the holders of stock having a majority of the votes which could be cast by the
holders of all outstanding stock entitled to vote at the meeting shall
constitute a quorum at each meeting of stockholders. In the absence of a
quorum, the stockholders so present may, by the affirmative vote of the holders
of stock having a majority of the votes which could be cast by all such
holders, adjourn the meeting from time to time in the manner provided in
Section 1.4 of these By-laws until a quorum is present. If a quorum is present
when a meeting is convened, the subsequent withdrawal of stockholders, even
though less than a quorum remains, shall not affect the ability of the
remaining stockholders lawfully to transact business.
SECTION 1.6 ORGANIZATION. Meetings of stockholders shall be
presided over by the Chairman of the Board, if any, or if there is none or in
his or her absence, by the President, or in his or her absence, by a chairman
designated by the Board of Directors, or in the absence of such designation by
a chairman chosen at the meeting. The Secretary shall act as secretary of the
meeting, but in his or her absence the chairman of the meeting may appoint any
person to act as secretary of the meeting.
SECTION 1.7 VOTING.
(a) Except as otherwise provided by the Certificate of
Incorporation, as such may be amended or restated from time to time, each
stockholder entitled to vote at any meeting of stockholders shall be entitled
to one vote for each share of stock held by such stockholder which has voting
power on the matter in question.
(b) Voting at meetings of stockholders need not be by
written ballot and need not be conducted by inspectors of election unless so
required by Section 1.9 of these By-laws or so determined by the holders of
stock having a majority of the votes which could be cast by the holders of all
outstanding stock entitled to vote which are present in person or by proxy at
such meeting. Unless otherwise provided in the Certificate of Incorporation,
as such may be amended or restated from time to time, directors shall be
elected by a plurality of the votes cast in the election of directors. Each
other question shall, unless otherwise provided in the Certificate of
Incorporation or these By-laws, as such may be amended or restated from time to
time, or by law, be decided by the vote of the holders of stock representing a
majority of the votes which could be cast by the
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holders of all stock entitled to vote on such question which are present in
person or by proxy at the meeting.
(c) Stock of the Corporation standing in the name of
another corporation and entitled to vote may be voted by such officer, agent or
proxy as the by-laws or other internal regulations of such other corporation
may prescribe or, in the absence of such provision, as the board of directors
or comparable body of such other corporation may determine.
(d) Stock of the Corporation standing in the name of a
deceased person, a minor, an incompetent or a debtor in a case under Title 11,
United States Code, and entitled to vote may be voted by an administrator,
executor, guardian, conservator, debtor-in-possession or trustee, as the case
may be, either in person or by proxy, without transfer of such shares into the
name of the official or other person so voting.
(e) A stockholder whose voting stock of the Corporation
is pledged shall be entitled to vote such stock unless on the transfer records
of the Corporation the pledgor has expressly empowered the pledgee to vote such
shares, in which case only the pledgee, or such pledgee's proxy, may represent
such shares and vote thereon.
(f) If voting stock is held of record in the names of two
or more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety or otherwise, or if two or more
persons have the same fiduciary relationship respecting the same shares,
unless the Secretary is given written notice to the contrary and is furnished
with a copy of the instrument or order appointing them or creating the
relationship wherein it is so provided, their acts with respect to voting shall
have the following effect: (i) if only one votes, such act binds all; (ii) if
more than one vote, the act of the majority so voting binds all; and (iii) if
more than one vote, but the vote is evenly split on any particular matter, each
faction may vote such stock proportionally, or any person voting the shares, or
a beneficiary, if any, may apply to the Court of Chancery of the State of
Delaware or such other court as may have jurisdiction to appoint an additional
person to act with the persons so voting the stock, which shall then be voted
as determined by a majority of such persons and the person appointed by the
Court. If the instrument so filed shows that any such tenancy is held in
unequal interests, a majority or even split for the purpose of this subsection
shall be a majority or even split in interest.
(g) Stock of the Corporation belonging to the
Corporation, or to another corporation a majority of the shares entitled to
vote in the election of directors of which are held by the Corporation, shall
not be voted at any meeting of stockholders and shall not be counted in the
total number of
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outstanding shares for the purpose of determining whether a quorum is present.
Nothing in the Section 1.7 shall limit the right of the Corporation to vote
shares of stock of the Corporation held by it in a fiduciary capacity.
SECTION 1.8 PROXIES.
(a) Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for such
stockholder by proxy filed with the Secretary before or at the time of the
meeting. No such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing with the Secretary
an instrument in writing revoking the proxy or another duly executed proxy
bearing a later date.
(b) A stockholder may authorize another person or persons
to act for such stockholder as proxy (i) by executing a writing authorizing
such person or persons to act as such, which execution may be accomplished by
such stockholder or such stockholder's authorized officer, director, partner,
employee or agent (or, if the stock is held in a trust or estate, by a trustee,
executor or administrator thereof) signing such writing or causing his or her
signature to be affixed to such writing by any reasonable means, including, but
not limited to, facsimile signature, or (ii) by transmitting or authorizing the
transmission of a telegram, cablegram or other means of electronic transmission
(a "Transmission") to the person who will be the holder of the proxy or to a
proxy solicitation firm, proxy support service organization or like agent duly
authorized by the person who will be the holder of the proxy to receive such
Transmission; provided, however, that any such Transmission must either set
forth or be submitted with information from which it can be determined that
such Transmission was authorized by such stockholder.
(c) Any inspector or inspectors appointed pursuant to
Section 1.9 of these By-Laws shall examine Transmissions to determine if they
are valid. If no inspector or inspectors are so appointed, the Secretary or
such other person or persons as shall be appointed from time to time by the
Board of Directors shall examine Transmissions to determine if they are valid.
If it is determined a Transmission is valid, the person or persons making that
determination shall specify the information upon which such person or persons
relied. Any copy, facsimile telecommunication or other reliable reproduction
of such a writing or Transmission may be substituted or used in lieu of the
original writing or Transmission for any and all purposes for which the
original writing or Transmission could be used;
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provided, however, that such copy, facsimile telecommunication or other
reproduction shall be a complete reproduction of the entire original writing or
Transmission.
SECTION 1.9 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
(a) If the Corporation has a class of voting stock that
is (i) listed on a national securities exchange, (ii) authorized for quotation
on an interdealer quotation system of a registered national securities
association or (iii) held of record by more than 2,000 stockholders, the Board
of Directors shall, in advance of any meeting of stockholders, appoint one or
more inspectors (individually an "Inspector," and collectively the
"Inspectors") to act at such meeting and make a written report thereof. The
Board of Directors may designate one or more persons as alternate Inspectors to
replace any Inspector who shall fail to act. If no Inspector or alternate is
able to act at a meeting of stockholders, the chairman of the meeting shall
appoint one or more other persons to act as Inspectors at the meeting. Each
Inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of Inspector with strict
impartiality and according to the best of his or her ability.
(b) The Inspectors shall (i) ascertain the number of
shares of stock of the Corporation outstanding and the voting power of each,
(ii) determine the number of shares of stock of the Corporation represented at
a meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the Inspectors, and
(v) certify their determination of the number of such shares represented at
such meeting and their count of all votes and ballots. The Inspectors may
appoint or retain other persons or entities to assist them in the performance
of their duties.
(c) The date and time of the opening and the closing of
the polls for each matter upon which the stockholders will vote at a meeting
shall be announced at such meeting. No ballots, proxies or votes, nor any
revocations thereof or changes thereto, shall be accepted by the Inspectors
after the closing of the polls unless the Court of Chancery of the State of
Delaware upon application by any stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies
and ballots, the Inspectors shall be limited to an examination of the proxies,
any envelopes submitted with such proxies, any information referred to in
paragraphs (b) and (c) of Section 1.8 of these By-laws, ballots and the regular
books and records of the Corporation, except that the Inspectors may consider
other reliable information for the limited purpose of
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reconciling proxies and ballots submitted by or on behalf of banks, brokers,
their nominees or similar persons which represent more votes than the holder of
a proxy is authorized by a stockholder of record to cast or more votes than
such stockholder holds of record. If the Inspectors consider other reliable
information for the limited purpose permitted herein, the Inspectors, at the
time they make their certification pursuant to paragraph (b) of this Section
1.9, shall specify the precise information considered by them, including the
person or persons from whom such information was obtained, when and the means
by which such information was obtained and the basis for the Inspectors' belief
that such information is accurate and reliable.
SECTION 1.10 FIXING DATE OF DETERMINATION OF STOCKHOLDERS OF
RECORD.
(a) In order that the Corporation may determine the
stockholders entitled (i) to notice of or to vote at any meeting of
stockholders or any adjournment thereof, (ii) to receive payment of any
dividend or other distribution or allotment of any rights, (iii) to exercise
any rights in respect of any change, conversion or exchange of stock or (iv) to
take, receive or participate in any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which (1) in the case of a determination of stockholders entitled to notice of
or to vote at any meeting of stockholders or adjournment thereof, shall, unless
otherwise required by law, be not more than 60 nor less than ten days before
the date of such meeting; and (2) in the case of any other action, shall be not
more than 60 days prior to such action.
(b) If no record date is fixed, (i) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; and (ii) the
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
(c) A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however that the Board of Directors may
fix a new record date for the adjourned meeting.
SECTION 1.11 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The
Secretary shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the
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stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of meeting, or, if not so specified, at the place where the meeting is
to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof and may be inspected by any
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the corporation, or to vote in person or by proxy
at any meeting of stockholders.
SECTION 1.12 STOCKHOLDER PROPOSALS AND BOARD NOMINATIONS.
(a) At any annual meeting of the Corporation's
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (ii) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (iii) otherwise properly brought before the meeting by a
stockholder in accordance with these By-laws. Business may be properly brought
before an annual meeting by a stockholder only if written notice of the
stockholder's intent to propose such business has been delivered, either by
personal delivery, United States mail, first class postage prepaid, or other
similar means, to the Secretary of the Corporation not less than 75 nor more
than 100 calendar days in advance of the anniversary date of the release of the
Corporation's proxy statement to stockholders in connection with the preceding
year's annual meeting of stockholders, except that if no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than 30 calendar days from the anniversary of the annual meeting date
stated in the previous year's proxy statement, a stockholder proposal shall be
received by the Corporation a reasonable time before the solicitation is made.
(b) Each notice of new business must set forth: (i) the name
and address of the stockholder who intends to raise the new business; (ii) the
business desired to be brought forth at the meeting and the reasons for
conducting such business at the meeting; (iii) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
with respect to such business and intends to appear in person or by proxy at
the meeting to move the consideration of such business; (iv) such stockholder's
total beneficial ownership of the
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Corporation's voting stock; and (v) such stockholder's interest in such
business. The chairman of the meeting may refuse to acknowledge a motion to
consider any business that he determines was not made in compliance with the
foregoing procedures.
(c) An adjourned meeting, if notice of the adjourned meeting
is not required to be given to stockholders, shall be regarded as a
continuation of the original meeting, and any notice of new business must have
met the foregoing requirements as of the date of the original meeting. In the
event of an adjourned meeting where notice of the adjourned meeting is required
to be given to stockholders, any notice of new business made by a stockholder
with respect to the adjourned meeting must meet the foregoing requirements
based upon the date on which notice of the date of the adjourned meeting was
given.
(d) Nominations for the election of directors may be made by
the Board of Directors or a committee appointed by the Board of Directors or by
any stockholder entitled to vote in the election of directors generally.
However, any stockholder entitled to vote in the election of directors may
nominate one or more persons for election as director(s) at a meeting only if
written notice of such stockholder's intent to make such nomination or
nominations has been delivered, either by personal delivery, United States
mail, first class postage prepaid, or other similar means, to the Secretary of
the Corporation not later than (i) with respect to an election to be held at an
annual meeting of stockholders, not less than 75 nor more than 100 days in
advance of the anniversary date of the release of the Corporation's proxy
statement to stockholders in connection with the preceding year's annual
meeting of stockholders, except that if no annual meeting was held in the
previous year or the date of the annual meeting has been changed by more than
30 calendar days from the anniversary of the annual meeting date stated in the
previous year's proxy statement, a nominee proposal shall be received by the
Corporation a reasonable time before the solicitation is made, and (ii) with
respect to an election to be held at a special meeting of stockholders for the
election of directors, the close of business on the 10th day following the date
on which notice of such meeting is first given to stockholders.
(e) Each such notice shall set forth: (i) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (ii) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (iii) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (iv) such other
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information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (v) the consent of
each nominee to serve as a director of the Corporation if so elected.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 NUMBER. Subject to any rights of the holders of
the Preferred Stock or any series thereof to elect additional directors under
specified circumstances, the number of directors which shall constitute the
whole Board of Directors of the Corporation shall be such number as shall from
time to time be fixed by resolution adopted by affirmative vote of a majority
of the whole board of Directors.
SECTION 2.2 ELECTION; RESIGNATION; VACANCIES; REMOVAL.
(a) Any director may resign at any time by giving written
notice to the Board of Directors, the Chairman of the Board, or the Secretary.
Unless otherwise stated in a notice of resignation, it shall take effect at any
time of receipt thereof or at any later time specified therein, and, unless
expressly required, acceptance of such resignation shall not be necessary to
make it effective.
(b) Subject to any rights of the holders of the Preferred
stock or any series thereof to fill such newly created directorships or
vacancies, any newly created directorships resulting from any increase in the
authorized number of directors and any vacancies in the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall, unless otherwise provided by law, be filled only by a resolution adopted
by the affirmative vote of a majority of the directors then in office, even if
less than a quorum, and any directors so chosen shall hold office until the
next election of the class for which such director shall have been chosen, and
until his successor shall have been duly elected and qualified, unless he shall
resign, die, become disqualified or be removed. Notwithstanding the foregoing,
in the event that at the time of the existence of an unfilled newly created
directorship or any such vacancy there are unfilled newly created directorships
and/or vacancies constituting a majority of the whole Board of Directors, a
majority of the directors then serving on the Board of Directors shall have the
authority to fill enough of such unfilled newly created directorships and/or
vacancies so that, after giving effect thereto, there will be the minimum
number of
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directors serving on the Board of Directors necessary to constitute a majority
of the whole Board of Directors.
(c) Any director may tender his resignation at any time.
(d) For purposes of this Article II, "whole Board of
Directors" means the total number of directors which the Corporation would have
on the Board of Directors if there were no vacancies.
SECTION 2.3 REGULAR MEETINGS. A regular annual meeting of
the Board of Directors shall be held, without call or notice, immediately after
and at the same place as the annual meeting of stockholders, for the purpose of
organizing the Board of Directors, electing officers and transacting any other
business that may properly come before such meeting. Additional regular
meetings of the Board of Directors may be held without call or notice at such
times as shall be fixed by resolution of the Board of Directors.
SECTION 2.4 SPECIAL MEETINGS. Special meetings of the Board
of Directors may be called by the Chairman of the Board, the Secretary, or by a
majority of the Board of Directors. Notice of a special meeting of the Board
of Directors shall be given by the person or persons calling the meeting at
least twenty-four hours before the special meeting. The purpose or purposes of
a special meeting need not be stated in the call or notice.
SECTION 2.5 ORGANIZATION. Meetings of the Board of Directors
shall be presided over by the Chairman of the Board, or if there is none or in
his or her absence, by the President, or in his or her absence by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting,
but in his or her absence the chairman of the meeting may appoint any person to
act as secretary of the meeting. A majority of the directors present at a
meeting, whether or not they constitute a quorum, may adjourn such meeting to
any other date, time or place without notice other than announcement at the
meeting.
SECTION 2.6 QUORUM; VOTE REQUIRED FOR ACTION. At all
meetings of the Board of Directors a majority of the whole Board of Directors
shall constitute a quorum for the transaction of business. Unless the
Certificate of Incorporation or these By-laws, as such may be amended or
restated from time to time, otherwise provide, the vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. If at any meeting a quorum is not present, a majority
of the directors present may adjourn the meeting to any other date, time or
place without notice other than announcement at the meeting until a quorum is
present.
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SECTION 2.7 COMPENSATION COMMITTEE. Two or more directors of
the Corporation shall be appointed by the Board of Directors to act as a
Compensation Committee[, each of whom shall be a director who is not an
employee of the Corporation or any subsidiary thereof]. The Compensation
Committee shall have the power and authority to set the compensation of the
officers and other employees and agents of the Company and shall possess the
power and authority to act with respect to the compensation, option and other
benefit plans of the Corporation.
SECTION 2.8 AUDIT COMMITTEE. Two or more directors of the
Corporation shall be appointed by the Board of Directors to act as an Audit
Committee[, each of whom shall be a director who is not an employee of the
Corporation or any subsidiary thereof]. The Audit Committee shall have general
oversight responsibility with respect to the Corporation's financial reporting.
In performing its oversight responsibility, the Audit Committee shall make
recommendations to the Board of Directors as to the selection, retention, or
change in the independent accountants of the Corporation, review with the
independent accountants the scope of their examination and other matters
(relating to both audit and non-audit activities), and review generally the
internal auditing procedures of the Corporation. In undertaking the foregoing
responsibilities, the Audit Committee shall have unrestricted access, if
necessary, to the Corporation's personnel and documents and shall be provided
with the resources and assistance necessary to discharge its responsibilities,
including periodic reports from management assessing the impact of regulation,
accounting, and reporting of other significant matters that may affect the
Corporation. The Audit Committee shall review the financial reporting and
adequacy of internal controls of the Corporation, consult with the internal
auditors and certified public accountants, and from time to time, but not less
than annually, report to the Board of Directors.
SECTION 2.9 OTHER COMMITTEES. The Board of Directors may
from time to time, in its discretion, by resolution adopted by a majority of
the Board of Directors, designate other committees of the Board of Directors
consisting of such number of directors as the Board of Directors shall
determine, which shall have and may exercise such lawfully delegable powers and
duties of the Board of Directors as shall be conferred or authorized by such
resolution. The Board of Directors shall have the power to change at any time
the members of any such committee, to fill vacancies and to dissolve any such
committee.
SECTION 2.10 ALTERNATES. The Board of Directors may from
time to time designate from among the directors alternates to serve on any
committee of the Board of Directors to replace any absent or disqualified
member at any meeting of such committee. Whenever a quorum cannot be secured
for any meeting of any committee from among the regular members thereof and
designated alternates, the member or members of such committee
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present at such meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another director to act at such
meeting in place of any absent or disqualified member.
SECTION 2.11 QUORUM AND MANNER OF ACTING WITH RESPECT TO
COMMITTEES. A majority of the members of any committee of the Board of
Directors shall constitute a quorum for the transaction of business at any
meeting of such committee, and the act of a majority of the members present at
any meeting at which a quorum is present shall be the act of such committee.
SECTION 2.12 COMMITTEE CHAIRMAN, BOOKS AND RECORDS, ETC.
The chairman of each committee of the Board of Directors shall be selected from
among the members of such committee by the Board of Directors or, if authorized
by the Board of Directors , by such committee.
Each committee shall keep a record of its acts and
proceedings, and all actions of each committee shall be reported to the Board
of Directors when required.
Each committee shall fix its own rules of procedure not
inconsistent with these By-laws or the resolution of the Board of Directors
designating such committee and shall meet at such times and places and upon
such call or notice as shall be provided by such rules.
SECTION 2.13 TELEPHONIC MEETINGS. Directors, or any
committee of directors designated by the Board of Directors, may participate in
a meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 2.13 shall constitute presence in person at
such meeting.
SECTION 2.14 INFORMAL ACTION BY DIRECTORS. Unless otherwise
restricted by the Certificate of Incorporation or these By-laws, as such may be
amended or restated from time to time, any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the Board of Directors or such
committee, as the case may be, consent thereto in writing (which may be in
counterparts), and the written consent or consents are filed with the minutes
of proceedings of the Board of Directors or such committee.
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SECTION 2.15 RELIANCE UPON RECORDS. Every director, and
every member of any committee of the Board of Directors, shall, in the
performance of his or her duties, be fully protected in relying in good faith
upon the records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors, or by any other person as
to matters the director or member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation, including, but not limited
to, such records, information, opinions, reports or statements as to the value
and amount of the assets, liabilities and/or net profits of the Corporation, or
any other facts pertinent to the existence and amount of surplus or other funds
from which dividends might properly be declared and paid, or with which the
Corporation's capital stock might properly be purchased or redeemed.
SECTION 2.16 INTERESTED DIRECTORS. A director who is
directly or indirectly a party to a contract or transaction with the
Corporation, or is a director or officer of or has a financial interest in any
other corporation, partnership, association or other organization which is a
party to a contract or transaction with the Corporation, may be counted in
determining whether a quorum is present at any meeting of the Board of
Directors or a committee thereof at which such contract or transaction is
considered or authorized, and such director may participate in such meeting and
vote on such authorization to the extent permitted by applicable law, including
Section 144 of the General Corporation Law of the State of Delaware.
SECTION 2.17 COMPENSATION. Unless otherwise restricted by
the Certificate of Incorporation, as such may be amended or restated from time
to time, the Board of Directors shall have the authority to fix the
compensation of directors. The directors shall be paid their reasonable
expenses, if any, of attendance at each meeting of the Board of Directors or a
committee thereof and may be paid a fixed sum for attendance at each such
meeting and an annual retainer or salary for services as a director or
committee member. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
SECTION 2.18 PRESUMPTION OF ASSENT. Unless otherwise
provided by the laws of the State of Delaware, a director who is present at a
meeting of the Board of Directors or a committee thereof at which action is
taken on any matter shall be presumed to have assented to the action taken
unless his or her dissent shall be entered in the minutes of such meeting or
unless he or she shall file his or her written dissent to such action with the
person acting as secretary of such meeting before the adjournment thereof or
shall forward such dissent by registered mail to the Secretary immediately
after the adjournment of such meeting.
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Such right to dissent shall not apply to a director who voted in favor of such
action.
ARTICLE III
OFFICERS
SECTION 3.1 NUMBER AND DESIGNATION. The officers of the
Corporation shall be a Chairman of the Board, a President, one or more Vice
Presidents, a Secretary and a Treasurer, and such Assistant Secretaries,
Assistant Treasurers or other officers or agents as may be elected or appointed
by the Board of Directors. Any two or more offices may be held by the same
person unless the Certificate of Incorporation or these By-laws, as such may be
amended or restated from time to time, provide otherwise.
SECTION 3.2 ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected annually by the Board of Directors at the first
meeting of the Board of Directors held after the election of directors. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as may be convenient. Vacancies may be filled or new
offices created and filled at any meeting of the Board of Directors. Each
officer shall hold office until his or her successor shall have been duly
elected and shall have qualified or until his or her earlier death, resignation
or removal.
SECTION 3.3 REMOVAL AND RESIGNATION. Any officer or agent
elected or appointed by the Board of Directors may be removed by the Board of
Directors whenever in its judgment the best interests of the Corporation would
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed (and the removal of the Chairman of
the Board shall not constitute a removal as director of the individual holding
the position of Chairman of the Board). Any officer or agent may resign at any
time by giving written notice to the Board of Directors, the Chairman of the
Board to the Secretary. Any such resignation shall take effect at the time of
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective.
SECTION 3.4 VACANCIES. A vacancy in any office because of
death, resignation, removal, disqualification or otherwise may be filled by the
Board of Directors for the unexpired portion of the term.
SECTION 3.5 CHAIRMAN OF THE BOARD. The Chairman of the Board
shall be the chief executive officer of the Corporation
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and shall in general supervise and control all of the business and affairs of
the Corporation. The Chairman of the Board may execute, alone or with the
Secretary or any other officer of the Corporation authorized by the Board of
Directors, any deeds, mortgages, bonds, contracts or other instruments which
the Board of Directors or a committee thereof has authorized to be executed,
except in cases where the execution thereof shall be expressly delegated by the
Board of Directors or a committee thereof or by these By-laws to some other
officer or agent of the Corporation, or shall be required by law to be
otherwise executed, and in general he or she shall perform all duties incident
to the office of Chairman of the Board and such other duties as from time to
time may be prescribed by the Board of Directors or a committee thereof. When
present, he or she shall preside at all meetings of the stockholders and of the
Board of Directors.
SECTION 3.6 PRESIDENT. The President shall (if different
from the Chairman of the Board) be the chief operating officer of the
Corporation, second only to the Chairman of the Board. In the absence of the
Chairman of the Board or in the event of his or her inability to act as
Chairman of the Board, the President shall perform the duties of the Chairman
of the Board and, when so acting, shall have all the powers of, and be subject
to all the restrictions placed upon the Chairman of the Board. He or she may
execute, alone or with the Secretary or any other officer of the Corporation
authorized by the Board of Directors, any deeds, mortgages, bonds, contracts or
other instruments which the Board of Directors or a committee thereof has
authorized to be executed, except in cases where the execution thereof shall be
expressly delegated by the Board of Directors or a committee thereof or by
these By-laws to some other officer or agent of the Corporation, or shall be
required by law to be otherwise executed, and in general he or she shall
perform all duties incident to the office of President and such other duties as
from time to time may be prescribed by the Chairman of the Board, the Board of
Directors or a committee thereof.
SECTION 3.7 THE VICE PRESIDENTS. In the absence of the
President or in the event of his or her inability to act, the Vice President
(or in the event there shall be more than one Vice President, the Vice
Presidents in the order determined by the Board of Directors or, if there shall
have been no such determination, then in the order of their election) shall
perform the duties of the President and, when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The Board
of Directors may also designate certain Vice Presidents as being in charge of
designated divisions, plants or functions of the Corporation's business and add
appropriate descriptions to their titles. In addition, any Vice President
shall perform such duties as from time to time may be
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assigned to him or her by the Chairman of the Board, the President or the Board
of Directors.
SECTION 3.8 THE SECRETARY. The Secretary shall: (a) keep the
minutes of proceedings of the stockholders, the Board of Directors and any
committee of the Board of Directors in one or more books provided for that
purpose; (b) see that all notices are duly given in accordance with the
provisions of these By-laws or as required by law; (c) be custodian of the
corporate records and of the seal of the Corporation; (d) affix the seal of the
Corporation or a facsimile thereof, or cause it to be affixed, and, when so
affixed, attest the seal by his or her signature, to all certificates for
shares of capital stock of the Corporation prior to the issue thereof and to
all other documents the execution of which on behalf of the Corporation under
its seal is duly authorized by the Board of Directors or otherwise in
accordance with the provisions of these By-laws; (e) keep a register of the
post office address of each stockholder, director or committee member, which
shall be furnished to the Secretary by such stockholder, director or member;
(f) have general charge of the stock transfer books of the Corporation; and (g)
in general perform all duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him or her by the Chairman
of the Board, the President or the Board of Directors.
SECTION 3.9 THE TREASURER. [The Treasurer shall have charge
and custody of and be responsible for all funds and securities of the
Corporation, receive and give receipts for moneys due and payable to the
Corporation from any source whatsoever, deposit all such moneys in the name of
the Corporation in such banks, trust companies or other depositories as shall
be selected in accordance with the provisions of Article IV of these By-laws,
disburse the funds of the Corporation as ordered by the Board of Directors or
the Chairman of the Board or as otherwise required in the conduct of the
business of the Corporation and render to the Chairman of the Board or the
Board of Directors, upon request, an accounting of all his or her transactions
as Treasurer and a report on the financial condition of the Corporation. The
Treasurer shall in general perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him or
her by the Chairman of the Board, President or the Board of Directors.]
SECTION 3.10 ASSISTANT TREASURERS AND SECRETARIES. In the
absence of the Secretary or the Treasurer, as the case may be, or in the event
of his or her inability to act, the Assistant Secretaries and the Assistant
Treasurers, respectively, in the order determined by the Board of Directors (or
if there shall have been no such determination, then in the order of their
election), shall perform the duties and exercise the powers of the Secretary or
the Treasurer, as the case may be. In addition, the Assistant Secretaries and
the Assistant Treasurers shall, in
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general, perform such duties as may be assigned to them by the Chairman of the
Board, the President, the Secretary, the Treasurer or the Board of Directors.
SECTION 3.11 SALARIES. The salaries of the officers of the
Corporation shall be fixed from time to time by the Board of Directors or by
such officer as it shall designate for such purpose. No officer shall be
prevented from receiving such salary by reason of the fact that he or she is
also a director of the Corporation.
SECTION 3.12 APPOINTMENTS. In addition to the elected
officers described above, the Chairman of the Board may from time to time
designate persons to be appointed Vice Presidents or bear such other title or
titles as the Chairman of the Board shall specify. The powers and duties of
each such appointed person shall be as prescribed by the Chairman of the Board
from time to time. Such appointed persons shall not be deemed elected or
executive officers of the Corporation. Each such appointed person shall serve
until the successor thereof is appointed or until the earlier resignation or
removal of such appointed person.
ARTICLE IV
STOCK CERTIFICATES AND TRANSFERS
SECTION 4.1 CERTIFICATE. Every holder of stock shall be
entitled to have a certificate signed by or in the name of the Corporation by
the Chairman of the Board, the President or a Vice President, and by the
Secretary or an Assistant Secretary, of the Corporation, certifying the number
of shares owned by such stockholder in the Corporation. Any of or all the
signatures on the certificate may be facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such officer, transfer agent or
registrar continued to be such at the date of issue.
SECTION 4.2 LOST, STOLEN OR DESTROYED CERTIFICATES; ISSUANCE
OF NEW CERTIFICATES. The Corporation may issue a new certificate for stock in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the Corporation may require the owner of the
lost, stolen or destroyed certificate, or such stockholder's legal
representative, to give the Corporation a bond sufficient to indemnify it
against any claim that may be made against it on
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account of the alleged loss, theft or destruction of any such certificate or
the issuance of such new certificate.
SECTION 4.3 TRANSFERS OF STOCK. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for stock
of the Corporation duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer or, if the relevant stock
certificate is claimed to have been lost, stolen or destroyed, upon compliance
with the provisions of Section 4.2 of these By-laws, and upon payment of
applicable taxes with respect to such transfer, and in compliance with any
restrictions on transfer applicable to such stock certificate or the shares
represented thereby of which the Corporation shall have notice and subject to
such rules and regulations as the Board of Directors may from time to time deem
advisable concerning the transfer and registration of stock certificates, the
Corporation shall issue a new certificate or certificates for such stock to the
person entitled thereto, cancel the old certificate and record the transaction
upon its books. Transfers of stock shall be made only on the books of the
Corporation by the registered holder thereof or by such holder's attorney or
successor duly authorized as evidenced by documents filed with the Secretary or
transfer agent of the Corporation. Whenever any transfer of stock shall be
made for collateral security, and not absolutely, it shall be so expressed in
the entry of transfer if, when the certificate or certificates representing
such stock are presented to the Corporation for transfer, both the transferor
and transferee request the Corporation to do so.
SECTION 4.4 STOCKHOLDERS OF RECORD. The Corporation shall be
entitled to treat the holder of record of any stock of the Corporation as the
holder thereof and shall not be bound to recognize any equitable or other claim
to or interest in such stock on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise required by the
laws of the State of Delaware.
ARTICLE V
NOTICES
SECTION 5.1 MANNER OF NOTICE. Except as otherwise provided
by the Certificate of Incorporation or these By-laws, as such may be amended or
restated from time to time, or by law, whenever notice is required to be given
to any stockholder, director or member of any committee of the Board of
Directors, such notice may be given by personal delivery or by depositing it,
in a sealed envelope, in the United States mails, first class, postage prepaid,
addressed, or by transmitting it via
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telecopier, to such stockholder, director or member, either at the address of
such stockholder, director or member as it appears on the records of the
Corporation or, in the case of such a director or member, at his or her
business address; and such notice shall be deemed to be given at the time when
it is thus personally delivered, deposited or transmitted, as the case may be.
Such requirement for notice shall also be deemed satisfied, except in the case
of stockholder meetings, if actual notice is received orally or by other
writing by the person entitled thereto as far in advance of the event with
respect to which notice is being given as the minimum notice period required by
law or these By-laws.
SECTION 5.2 DISPENSATION WITH NOTICE.
(a) Whenever notice is required to be given by the
Certificate of Incorporation or these By-laws, as such may be amended or
restated from time to time, or by law, to any stockholder to whom (i) notice of
two consecutive annual meetings of stockholders during the period between such
two consecutive annual meetings, or (ii) all, and at least two, payments (if
sent by first class mail) of dividends or interest on securities of the
Corporation during a 12-month period, have been mailed addressed to such
stockholder at the address of such stockholder as shown on the records of the
Corporation and have been returned undeliverable, the giving of such notice to
such stockholder shall not be required. Any action or meeting which shall be
taken or held without notice to such stockholder shall have the same force and
effect as if such notice had been duly given. If any such stockholder shall
deliver to the Corporation a written notice setting forth the then current
address of such stockholder, the requirement that notice be given to such
stockholder shall be reinstated.
(b) Whenever notice is required to be given by the
Certificate of Incorporation or these By-laws or by law, as such may be amended
or restated from time to time, to any person with whom communication is
unlawful, the giving of such notice to such person shall not be required, and
there shall be no duty to apply to any governmental authority or agency for a
license or permit to give such notice to such person. Any action or meeting
which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such
notice had been duly given.
SECTION 5.3 WAIVERS OF NOTICE. Any written waiver of notice,
signed by the person entitled to notice, whether before or after the time
stated therein, shall be deemed equivalent to notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business
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to be transacted at, nor the purpose of any regular special meeting of the
stockholders, directors, or members of a committee or directors need be
specified in any written waiver of notice.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 RIGHT TO INDEMNIFICATION.
(a) The Corporation shall indemnify to the fullest extent
permitted under and in accordance with the General Corporation Law of the State
of Delaware, any person who was or is a party to (or witness in) or is
threatened to be made a party to (or witness in) any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he or she is or was or has agreed to become a
director, officer, employee or agent of the Corporation, or is or was serving
(or who has agreed to serve) at the request of the Corporation as a director,
officer, trustee, employee or agent of or in any other capacity with respect to
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
SECTION 6.2 EXPENSES. Expenses (including attorneys' fees)
incurred in defending a civil, criminal, administrative or investigative
action, suit or proceeding (1) in the case of any action, suit or proceeding
against a director of the Corporation shall or (2) in the case of any action,
suit or proceeding against an officer, employee or agent of the Corporation
may, as authorized by the Board of Directors, be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the indemnified person to repay
such amount if it shall ultimately be determined that he or she is not entitled
to be indemnified by the Corporation as authorized in this Article VI.
SECTION 6.3 CLAIMS. If a claim for indemnification or
payment of expenses under this Article VI is not paid in full within 30 days
after a written claim therefor has been received by the Corporation, the
claimant may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting
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such claim. In any such action the Corporation shall have the burden of
proving that the claimant was not entitled to the requested indemnification or
payment of expenses under applicable law.
SECTION 6.4 INSURANCE. The Corporation may purchase and
maintain insurance on its own behalf and on behalf of any person who is or was
a director, officer or employee of the Corporation or was serving at the
request of the Corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise (including
service with respect to any employee benefit plan) against any liability
asserted against him and incurred by him in any such capacity, whether or not
the Corporation would have the power to indemnify such person against such
liability under this Article VI.
SECTION 6.5 INDEMNIFICATION OF AGENTS. The Corporation may,
to the extent authorized from time to time by the Board of Directors, grant
rights to indemnification and to the advancement of expenses to any agent of
the Corporation to the fullest extent of the provisions of this Article VI with
respect to the indemnification and advancement of expenses of directors,
officers and employees of the Corporation.
ARTICLE VII
GENERAL
SECTION 7.1 FISCAL YEAR. The fiscal year of the Corporation
shall be determined by resolution of the Board of Directors. Absent such
determination, the fiscal year of the Corporation shall end on December 31 of
each year.
SECTION 7.2 SEAL. The corporate seal shall have the name of
the Corporation inscribed thereon and shall be in such form as may be approved
from time to time by the Board of Directors.
SECTION 7.3 FORM OF RECORDS. Any records maintained by the
Corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs, or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
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SECTION 7.4 AMENDMENT OF BY-LAWS BY THE BOARD OF DIRECTORS.
These By-Laws may be altered, amended or repealed, or new By-Laws may be
adopted, by the affirmative vote of a majority of the directors present at any
regular or special meeting of the Board of Directors at which a quorum is
present.
SECTION 7.5 AMENDMENT OF THE BY-LAWS BY THE STOCKHOLDERS.
These By-laws may be altered, amended or repealed, or new By-Laws may be
adopted, by the affirmative vote of the holders of a majority of the shares of
the capital stock of the Corporation issued and outstanding and entitled to
vote at any regular meeting of the stockholders or at any special meeting of
the stockholders.
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EXHIBIT 10.1
APPLIED SYSTEMS, INC.
STOCK OPTION PLAN
I. INTRODUCTION
1.1 Purposes. The purposes of the Applied Systems Group,
Inc. Stock Option Plan (the "Plan") are to align the interests of the
stockholders of Applied Systems Group, Inc., a Delaware corporation (the
"Company"), and its Subsidiary Companies (as defined below) and the recipients
of options under the Plan by increasing the proprietary interest of such
recipients in the Company's growth and success and to advance the interests of
the Company by attracting and retaining officers and other employees and
well-qualified persons who are not officers or employees of the Company or any
of its Subsidiary Companies for service as directors of the Company. For
purposes of the Plan, the term "Subsidiary Companies" shall mean all
corporations which are subsidiary corporations (within the meaning of Section
424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), and of
which the Company is the common parent. The Company and its Subsidiary
Companies are sometimes hereinafter called collectively the "Participating
Companies."
1.2 Administration. The Plan shall be administered by a
committee (the "Committee") appointed by the Board of Directors of the Company
(the "Board") consisting of two or more members of the Board, each of whom
shall be (a) a "non-employee director" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (b)
an "outside director" within the meaning of Section 162(m) of the Code.
Notwithstanding the foregoing sentence, if not required by Rule 16b-3 and/or if
not required for the compensation paid in connection with options granted under
the Plan to constitute "qualified performance-based compensation" under
regulations promulgated under Section 162(m) of the Code, the Committee need
not consist wholly of "non-employee directors" or "outside directors".
The Committee shall, subject to the terms of the Plan and in
its sole discretion, select eligible officers and other employees for
participation in the Plan and shall determine the number of shares of Common
Stock subject to each option granted hereunder, the exercise price of such
option, the time and conditions of exercise of such option and all other terms
and conditions of such option, including, without limitation, the form of the
option agreement. In addition to the power to amend or terminate the Plan
pursuant to Section 4.2, the Committee shall have the full power and authority
to: (i) interpret and administer the Plan and any instrument or agreement
entered into under the Plan; (ii) establish such rules and regulations and
appoint such agents as it shall deem appropriate for the proper
<PAGE> 2
administration of the Plan; (iii) make any other determination and take any
other action that the Committee deems necessary or desirable for administration
of the Plan; and (iv) impose, incidental to the grant of an option, conditions
with respect to the grant, such as limiting competitive employment or other
activities. All interpretations, rules, regulations, conditions and decisions
of the Committee shall be final, conclusive and binding upon all persons,
including the Participating Companies, any participant, and any other employee
of the Participating Companies. Each option hereunder shall be evidenced by a
written agreement (an "Agreement") between the Company and the optionee setting
forth the terms and conditions applicable to such option.
The Committee may delegate some or all of its power and
authority hereunder to the Chief Executive Officer or other executive officer
of the Company as the Committee deems appropriate; provided, however, that,
unless the last sentence of the first paragraph of this Section 1.2 applies,
the Committee may not delegate its power and authority with regard to (i) the
grant of an option to any person who is a "covered employee" within the meaning
of Section 162(m) of the Code or who, in the Committee's judgment, is likely to
be a covered employee at any time during the period an option hereunder to such
employee would be outstanding or (ii) the selection for participation in the
Plan of an officer or other person subject to Section 16 of the Exchange Act or
decisions concerning the timing, pricing or amount of an option grant to such
an officer or other person.
No member of the Board or Committee, and neither the Chief
Executive Officer nor other executive officer to whom the Committee delegates
any of its power and authority hereunder, shall be liable for any act,
omission, interpretation, construction or determination made in connection with
the Plan in good faith, and the members of the Board and the Committee and the
Chief Executive Officer or other executive officer shall be entitled to
indemnification and reimbursement by the Participating Companies in respect of
any claim, loss, damage or expense (including attorneys' fees) arising
therefrom to the full extent permitted by law and under any directors' and
officers' liability insurance that may be in effect from time to time.
A majority of members of the Committee may determine its
actions and fix the time and place of its meetings.
1.3. Eligibility. Participants in the Plan shall consist of
(i) such officers and other employees of the Participating Companies as the
Committee in its sole discretion may select from time to time and (ii) each
Independent Director (as such term is defined in Section 3.1) of the Company
who shall be eligible to participate in the Plan in accordance with Section
III. With respect to persons referred to in clause (i), the Committee's
selection of any such person to participate in the
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Plan at any time shall not require the Committee to select such person to
participate in the Plan at any other time.
II. STOCK OPTIONS
2.1. Grants of Stock Options. The Committee may, in its
discretion, grant options to purchase shares of common stock, $.01 par value,
of the Company ("Common Stock") to such eligible persons as may be selected by
the Committee. Each option, or portion thereof, that is not an incentive stock
option, shall be a non-qualified stock option. An incentive stock option shall
mean an option to purchase shares of Common Stock that meets the requirements
of Section 422 of the Code, or any successor provision, which is intended by
the Committee to constitute an incentive stock option. An incentive stock
option may not be granted to any person who is not an employee of the
Participating Companies. Each incentive stock option shall be granted within
ten years of the earlier of the date the Plan is adopted or the date the Plan
is approved by the stockholders of the Company, as described in Section 4.1.
To the extent that the aggregate Fair Market Value (as hereinafter defined),
determined as of the date of grant, of shares of Common Stock with respect to
which options designated as incentive stock options are exercisable for the
first time by a participant during any calendar year (under the Plan or any
other plan of the Participating Companies) exceeds the amount (currently
$100,000) established by the Code, such options shall constitute non-qualified
stock options. For purposes of the Plan, the fair market value of a share of
Common Stock on a given day shall be the last sale price of a share of Common
Stock as reported on the Nasdaq Stock Market on the date as of which such value
is being determined, or, if the Common Stock is listed on a national securities
exchange, the last sale price of a share of Common Stock on the principal
national stock exchange on which the Common Stock is traded on the date as of
which such value is being determined, or, if there shall be no reported
transactions on such date, on the next preceding date for which transactions
were reported ("Fair Market Value"); provided, however, that for dates on or
before the date of the closing of the initial public offering of the Common
Stock, Fair Market Value shall mean the initial public offering price of the
Common Stock; and provided further that, if Fair Market Value for any date
cannot be determined as above provided, Fair Market Value shall be determined
by the Committee by whatever means or method as the Committee, in the good
faith exercise of its discretion, shall at such time deem appropriate.
2.2. Terms of Stock Options. Options shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee shall
deem advisable:
(a) Number of Shares and Purchase Price. The number of
shares of Common Stock subject to an option and the purchase
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price per share of Common Stock purchasable upon exercise of the option shall
be determined by the Committee; provided, however, that the purchase price per
share of Common Stock purchasable upon exercise of an incentive stock option
shall not be less than 100% of the Fair Market Value of a share of Common Stock
on the date of grant of such option; and provided further that, if an incentive
stock option shall be granted to any person who, at the time such option is
granted, owns capital stock possessing more than ten percent of the total
combined voting power of all classes of capital stock of the Participating
Companies (a "Ten Percent Holder"), the purchase price per share of Common
Stock shall be the price (currently 110% of Fair Market Value) required by the
Code in order to constitute an incentive stock option.
(b) Option Period and Exercisability. The period during
which an option may be exercisable shall be determined by the Committee;
provided, however, that no incentive stock option shall be exercisable later
than ten years after its date of grant; and provided further that, if an
incentive stock option shall be granted to a Ten Percent Holder, such option
shall not be exercisable later than five years after its date of grant. The
Committee may, in its discretion, establish other conditions which shall be
satisfied or met as a condition to the grant of an option or to the
exercisability of all or a portion of an option. The Committee shall determine
whether an option shall become exercisable in cumulative or non-cumulative
installments and in part or in full at any time. An exercisable option, or
portion thereof, may be exercised only with respect to whole shares of Common
Stock.
(c) Method of Exercise. An option may be exercised (i) by
giving written notice to the Company specifying the number of whole shares of
Common Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (A) in
cash, (B) by delivery of previously owned whole shares of Common Stock (which
the optionee has held for at least six months prior to the delivery of such
shares or which the optionee purchased on the open market and for which the
optionee has good title, free and clear of all liens and encumbrances) having a
Fair Market Value, determined as of the date of exercise, equal to the
aggregate purchase price payable by reason of such exercise, (C) by authorizing
the Company to withhold whole shares of Common Stock which would otherwise be
delivered upon exercise of the option having a Fair Market Value, determined as
of the date of exercise, equal to the aggregate purchase price payable by
reason of such exercise, (D) in cash by a broker- dealer acceptable to the
Company to whom the optionee has submitted an irrevocable notice of exercise or
(E) a combination of (A), (B) and (C), in each case to the extent set forth in
the Agreement relating to the option and (ii) by executing such documents as
the Company may reasonably request. The Committee shall have sole discretion
to disapprove of an election pursuant to any of clauses (B)-(E). Any fraction
of a share of Common Stock which would be required
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to pay such purchase price shall be disregarded and the remaining amount due
shall be paid in cash by the optionee. No certificate representing Common
Stock shall be delivered until the full purchase price therefor has been paid
(or arrangement made for such payment to the Company's satisfaction).
2.3. Termination of Employment. (a) Nonqualified Stock
Options. Subject to Section 4.8 and unless otherwise specified in the
Agreement relating to a nonqualified stock option, if the employment with the
Participating Companies of a holder of a nonqualified stock option terminates
by reason of retirement on or after age 65 and after such optionee has
completed at least five years of employment with the Participating Companies,
Disability (as defined below) or death, each nonqualified stock option held by
such optionee shall become fully exercisable and may thereafter be exercised by
such optionee (or such optionee's legal representative or similar person) until
and including the earlier to occur of (i) the date which is one year (or such
other period as set forth in the Agreement relating to such option) after the
effective date of such optionee's termination of employment and (ii) the
expiration date of the term of such option. For purposes of the Plan,
"Disability" shall mean the inability of an optionee substantially to perform
such optionee's duties and responsibilities for a continuous period of at least
six months.
Subject to Section 4.8 and unless otherwise specified in the
Agreement relating to a nonqualified stock option, if the employment with the
Participating Companies of a holder of a nonqualified stock option terminates
for any reason other than retirement on or after age 65 after completion of at
least five years of employment with the Participating Companies, Disability or
death, each nonqualified stock option held by such optionee shall be
exercisable only to the extent that such option is exercisable on the effective
date of such optionee's termination of employment and may thereafter be
exercised by such optionee (or such optionee's legal representative or similar
person) until and including the earlier to occur of (i) the date which is three
months (or such other period as set forth in the Agreement relating to such
option) after the effective date of such optionee's termination of employment
and (ii) the expiration date of the term of such option; provided, however,
that if such optionee's employment is terminated for Cause (as defined below),
all nonqualified stock options held by such optionee shall terminate
automatically on the effective date of such optionee's termination of
employment. For purposes of the Plan, "Cause" shall mean any act of
dishonesty, commission of a felony, significant activities harmful to the
reputation of the Participating Companies, refusal to perform, or substantial
disregard of, duties properly assigned or significant violation of any
statutory or common law duty of loyalty to the Participating Companies.
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Subject to Section 4.8 and unless otherwise specified in the
Agreement relating to a nonqualified stock option, if the holder of a
nonqualified stock option dies during the one year period following termination
of employment by reason of either retirement on or after age 65 after
completion of at least five years of employment with the Participating
Companies, or Disability or if the holder of a nonqualified stock option dies
during the three month period following termination of employment for any other
reason other than Cause, retirement on or after age 65 after completion of at
least five years of employment with the Participating Companies or Disability
(or, in each case, such other period as the Committee may specify in the
Agreement relating to an option), each nonqualified stock option held by such
optionee shall be exercisable only to the extent that such option is
exercisable on the date of such optionee's death and may thereafter be
exercised by such optionee's executor, administrator, legal representative,
beneficiary or similar person, as the case may be, until and including the
earlier to occur of (i) the date which is one year (or such other period as set
forth in the Agreement relating to such option) after the date of death and
(ii) the expiration date of the term of such option.
(b) Incentive Stock Options. Subject to Section 4.8 and
unless otherwise specified in the Agreement relating to an incentive stock
option, if the employment with the Participating Companies of a holder of an
incentive stock option terminates by reason of Permanent and Total Disability
(as defined in Section 22(e)(3) of the Code), each incentive stock option held
by such optionee shall become fully exercisable and may thereafter be exercised
by such optionee (or such optionee's legal representative or similar person)
until and including the earlier to occur of (i) the date which is one year (or
such shorter period as set forth in the Agreement relating to such option)
after the effective date of such optionee's termination of employment by reason
of Permanent and Total Disability and (ii) the expiration date of the term of
such option.
Subject to Section 4.8 and unless otherwise specified in the
Agreement relating to an incentive stock option, if the employment with the
Participating Companies of a holder of an incentive stock option terminates by
reason of death, each incentive stock option held by such optionee shall become
fully exercisable and may thereafter be exercised by such optionee's executor,
administrator, legal representative, beneficiary or similar person until and
including the earlier to occur of (i) the date which is one year (or such
shorter period as set forth in the Agreement relating to such option) after the
date of death and (ii) the expiration date of the term of such option.
Subject to Section 4.8 and unless otherwise specified in the
Agreement relating to an incentive stock option, if the employment with the
Participating Companies of a holder of an incentive stock option terminates for
any reason other than
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Permanent and Total Disability or death, each incentive stock option held by
such optionee shall be exercisable only to the extent such option is
exercisable on the effective date of such optionee's termination of employment,
and may thereafter be exercised by such optionee (or such optionee's legal
representative or similar person) until and including the earlier to occur of
(i) the date which is three months after the effective date of such optionee's
termination of employment and (ii) the expiration date of the term of such
option; provided, however, that if such optionee's employment is terminated for
Cause, all incentive stock options held by such optionee shall terminate
automatically on the effective date of such optionee's termination of
employment.
Subject to Section 4.8 and unless otherwise specified in the
Agreement relating to an incentive stock option, if the holder of an incentive
stock option dies during the one-year period following termination of
employment by reason of Permanent and Total Disability (or such shorter period
as set forth in the Agreement relating to such option), or if the holder of an
incentive stock option dies during the three-month period following termination
of employment for any reason other than Cause, Permanent and Total Disability
or death, each incentive stock option held by such optionee shall be
exercisable only to the extent such option is exercisable on the date of the
optionee's death and may thereafter be exercised by the optionee's executor,
administrator, legal representative, beneficiary or similar person until and
including the earlier to occur of (i) the date which is one year (or such
shorter period as set forth in the Agreement relating to such option) after the
date of death and (ii) the expiration date of the term of such option.
III. PROVISIONS RELATING TO INDEPENDENT DIRECTORS
3.1 Eligibility. Each member of the Board who is not an
employee, either full-time or part-time, of any of the Participating Companies
(an "Independent Director") shall be granted options to purchase shares of
Common Stock in accordance with this Section III.
3.2 Grants of Stock Options. Each Independent Director shall
be granted non-qualified stock options as follows:
(a) Time of Grant. Each person who is an Independent
Director on the date of the closing of the initial public offering of the
Common Stock (the "IPO") shall, not later than 60 days after the date of
closing of the IPO, be granted an option to purchase 5,000 shares of Common
Stock at a purchase price per share equal to the Fair Market Value of the
Common Stock on the date of grant of such option. Each person who begins to
serve as an Independent Director following the date of the closing of the
initial public offering of the Common Stock shall be granted an
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<PAGE> 8
option to purchase 5,000 shares of Common Stock on the date such service
commences at a purchase price per share equal to the Fair Market Value of the
Common Stock on the date of grant of such option, provided, however, that such
grant shall not be made to a person who becomes an Independent Director by
reason of termination of employment with the Participating Companies. On the
last day of each full calendar quarter following the closing of the initial
public offering of the Common Stock, each person who is an Independent Director
for not less than 45 days of such calendar quarter shall be granted an option
to purchase 500 shares of Common Stock at a purchase price per share equal to
the Fair Market Value of the Common Stock on the date of grant of such option.
(b) Option Period and Exercisability. Each option granted
under this Article III shall be fully exercisable on and after its date of
grant. Each option granted under this Article III shall expire ten years after
its date of grant. An exercisable option, or portion thereof, may be exercised
in whole or in part only with respect to whole shares of Common Stock. Options
granted under this Article III shall be exercisable in accordance with Section
2.2(c).
(c) Termination of Directorship. If the holder of an option
granted under this Article III shall cease to be a member of the Board for any
reason, each such option held by such optionee may thereafter be exercised by
such optionee (or such optionee's legal representative or similar person) until
and including the earlier to occur of (i) the date which is one year after the
date such optionee ceased to be a member of the Board and (ii) the expiration
date of the term of such option.
(d) Death Following Termination of Directorship. If the
holder of an option granted under this Article III dies during the one year
period following the date on which such optionee ceased to be a member of the
Board, each such option may thereafter be exercised by the optionee's executor,
administrator, legal representative, beneficiary or similar person, as the case
may be, until and including the earlier to occur of (i) the date which is one
year after the date of death and (ii) the expiration date of the term of such
option.
IV. GENERAL
4.1 Effective Date and Term of Plan. The Plan shall be
submitted to the stockholders of the Company for approval and, if approved by
the affirmative vote of a majority of the shares of Common Stock outstanding,
shall become effective on the date of such approval. In the event that the
Plan is not so approved, the Plan and any options granted hereunder shall be
null and void and of no force or effect. The Plan shall terminate ten years
after its effective date, unless terminated earlier by the Board.
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Termination of the Plan shall not affect the terms or conditions of any option
granted prior to termination.
Options may be granted hereunder at any time prior to the
termination of the Plan; provided, however, that no option may be granted later
than ten years after the effective date of the Plan; and provided further, that
no incentive stock option may be granted later than ten years after the earlier
of the date the Plan was adopted and the effective date of the Plan.
4.2 Amendments. The Board or the Committee may amend the
Plan or any outstanding option from time to time as it shall deem advisable,
subject to any requirement of stockholder approval required by applicable law,
rule or regulation including Section 422 of the Code and Section 162(m) of the
Code; provided, however, that no such amendment shall be made without
stockholder approval if such amendment would (i) increase the maximum number of
shares of Common Stock available under the Plan (subject to Section 4.7), (ii)
effect any change inconsistent with Section 422 of the Code or (iii) extend the
term of the Plan. Furthermore, no amendment to the Plan or any outstanding
option may impair the rights of a holder of an outstanding option without the
consent of such holder.
4.3 Agreement. Each option under the Plan shall be evidenced
by an Agreement setting forth the terms and conditions applicable to such
option. No option shall be valid until an Agreement is executed by the Company
and the optionee and, upon execution by the Company and the optionee and
delivery of the Agreement to the Company, such option shall be effective as of
the effective date set forth in the Agreement.
4.4 Non-Transferability. Options acquired under the Plan are
not transferable other than by will or the laws of descent and distribution or
pursuant to beneficiary designation procedures approved by the Company or the
Committee. Except to the extent permitted by the foregoing sentence or the
Agreement relating to an option, each option may be exercised during the
optionee's lifetime only by the optionee or the optionee's legal representative
or similar person. Except as permitted by the second preceding sentence, no
option hereunder shall be sold, transferred, assigned, pledged, hypothecated,
encumbered or otherwise disposed of (whether by operation of law or otherwise)
or be subject to execution, attachment or similar process. Upon any attempt to
so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose
of any option hereunder, such option and all rights thereunder shall
immediately become null and void.
4.5 Tax Withholding. The Company shall have the right to
require, prior to the issuance or delivery of any shares of Common Stock,
payment by the optionee of any Federal, state, local or other taxes which may
be required to be withheld or paid in connection with an option hereunder. An
Agreement may provide
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<PAGE> 10
that (i) the Company shall withhold whole shares of Common Stock which would
otherwise be delivered upon exercise of the option having an aggregate Fair
Market Value determined as of the date the obligation to withhold or pay taxes
arises in connection with the option (the "Tax Date") in the amount necessary
to satisfy any such obligation or (ii) the optionee may satisfy any such
obligation by any of the following means: (A) a cash payment to the Company,
(B) delivery to the Company of previously owned whole shares of Common Stock
(which the optionee has held for at least six months prior to the delivery of
such shares or which the optionee purchased on the open market and for which
the optionee has good title, free and clear of all liens and encumbrances)
having an aggregate Fair Market Value determined as of the Tax Date, equal to
the amount necessary to satisfy any such obligation, (C) authorizing the
Company to withhold whole shares of Common Stock which would otherwise be
delivered upon exercise of the option having an aggregate Fair Market Value
determined as of the Tax Date, (D) a cash payment by a broker-dealer acceptable
to the Company to whom the optionee has submitted an irrevocable notice of
exercise or (E) any combination of (A), (B) and (C), in each case to the extent
set forth in the Agreement relating to the option; provided, however, that the
Committee shall have sole discretion to disapprove of an election pursuant to
any of clauses (B)-(E). An Agreement may provide for shares of Common Stock to
be delivered or withheld having a Fair Market Value in excess of the minimum
amount required to be withheld, but not in excess of the amount determined by
applying the optionee's maximum marginal tax rate. Any fraction of a share of
Common Stock which would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash by the optionee.
4.6 Restrictions on Shares. Each option hereunder shall be
subject to the requirement that if at any time the Company determines that the
listing, registration or qualification of the shares of Common Stock subject to
such option upon any securities exchange or under any law, or the consent or
approval of any governmental body, or the taking of any other action is
necessary or desirable as a condition of, or in connection with, the delivery
of shares thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company.
The Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any option hereunder bear a legend indicating that the
sale, transfer or other disposition thereof by the holder is prohibited except
in compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
4.7 Maximum Number of Shares. The maximum number of shares
of the Common Stock which may be granted under the Plan is 1,500,000, subject
to adjustment as herein set forth and reduced by the sum of the aggregate
number of shares of Common Stock
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<PAGE> 11
which become subject to outstanding options. To the extent that shares of
Common Stock subject to an outstanding option are not issued or delivered by
reason of the expiration, termination, cancellation or forfeiture of such
option or by reason of the delivery or withholding of shares of Common Stock to
pay all or a portion of the exercise price of such option, or to satisfy all or
a portion of the tax withholding obligations relating to such option, then such
shares of Common Stock shall again be available under the Plan.
Common Stock delivered hereunder may be purchased for
optionees in the open market (on an exchange or in negotiated transactions) or
may be previously acquired treasury shares, authorized and unissued shares, or
any combination of shares purchased in the open market, previously acquired
treasury shares or authorized and unissued shares.
To the extent required by Section 162(m) of the Code and the
rules and regulations thereunder, the maximum number of shares of Common Stock
with respect to which options may be granted during any fiscal year of the
Company to any person shall be 500,000, subject to adjustment as herein set
forth.
If the Company shall, at any time after the effective date of
the Plan, change its issued Common Stock into an increased or reduced number of
shares, with or without par value, through any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the maximum number of shares and class of shares which thereafter may
be granted under the Plan, the number and class of shares subject to each
outstanding option, the purchase price per share, and the number of shares
subject to each option to be granted to Independent Directors pursuant to
Article III shall be appropriately adjusted by the Committee, such adjustments
to be made in the case of outstanding options without any change in the
aggregate purchase price. The decision of the Committee regarding any such
adjustment shall be final, binding and conclusive. If any adjustment would
result in a fractional share being (i) available under the Plan, such
fractional share shall be disregarded, or (ii) subject to an option under the
Plan, the Company shall pay the optionee, in connection with the first exercise
of the option in whole or in part, occurring after such adjustment, an amount
in cash determined by multiplying (A) the fraction of such share (rounded to
the nearest hundredth) by (B) the excess, if any, of (x) the Fair Market Value
on the exercise date over (y) the exercise price of the option.
4.8 Change in Control. (a) Notwithstanding any provision in
the Plan or any Agreement, in order to maintain the participants' rights in the
event of any Change in Control of the
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<PAGE> 12
Company, as hereinafter defined, upon such Change in Control, all outstanding
options shall immediately be exercisable in full. (b) For purposes of this
Section 4.8, "Change in Control" shall mean:
(1) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated
under the Exchange Act, of both (x) 25% or more of the combined voting power of
the then outstanding securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities") and (y)
combined voting power of the Outstanding Company Voting Securities equal to or
in excess of the combined voting power of the Outstanding Company Voting
Securities held by the Eustace Family (as hereinafter defined); provided,
however, that the following acquisitions shall not constitute a Change in
Control: (A) any acquisition directly from the Company (excluding any
acquisition resulting from the exercise of a conversion or exchange privilege
in respect of outstanding convertible or exchangeable securities unless such
outstanding convertible or exchangeable securities were acquired directly from
the Company), (B) any acquisition by the Company, (C) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, (D) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation involving the
Company, if, immediately after such reorganization, merger or consolidation,
each of the conditions described in clauses (i), (ii) and (iii) of subsection
(3) of this Section 4.8(b) shall be satisfied or (E) any acquisition by any
member of the Eustace Family; and provided further that, for purposes of clause
(B), if any Person (other than the Company or any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company or any member of the Eustace Family) shall, by reason
of an acquisition of Outstanding Company Voting Securities by the Company,
become the beneficial owner of (x) 25% or more of the Outstanding Company
Voting Securities and (y) combined voting power of the Outstanding Company
Voting Securities equal to or in excess of the combined voting power of the
Outstanding Company Voting Securities held by the Eustace Family, and such
Person shall, after such acquisition of Outstanding Company Voting Securities
by the Company, become the beneficial owner of any additional Outstanding
Company Voting Securities and such beneficial ownership is publicly announced,
such additional beneficial ownership shall constitute a Change in Control;
(2) individuals who, as of the date of the closing of
the Company's initial public offering of Common Stock, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of such Board; provided, however,
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<PAGE> 13
that any individual who becomes a director of the Company subsequent to such
date whose election, or nomination for election by the Company's stockholders,
was approved by the vote of at least a majority of the directors then
comprising the Incumbent Board shall be deemed to have been a member of the
Incumbent Board; and provided further, that no individual who was initially
elected as a director of the Company as a result of an actual or threatened
election contest, as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act, or any other actual or threatened
solicitation of proxies or consents by or on behalf of any Person other than
the Board shall other than the Board be deemed to have been a member of the
Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation or of the issuance of shares of Common
Stock in connection therewith unless, in any such case, immediately after such
reorganization, merger or consolidation, (i) more than 50% of the combined
voting power of the then outstanding securities of the corporation resulting
from such reorganization, merger or consolidation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly,
by all or substantially all of the individuals or entities who were the
beneficial owners, respectively, of the Outstanding Company Voting Securities
immediately prior to such reorganization, merger or consolidation and in
substantially the same proportions relative to each other as their ownership,
immediately prior to such reorganization, merger or consolidation, of the
Outstanding Company Voting Securities, (ii) no Person (other than the Company,
any employee benefit plan (or related trust) sponsored or maintained by the
Company or the corporation resulting from such reorganization, merger or
consolidation (or any corporation controlled by the Company) and any Person
which beneficially owned, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 25% or more of the Outstanding Company
Voting Securities) beneficially owns, directly or indirectly, (x) 25% or more
of the combined voting power of the then outstanding securities of such
corporation entitled to vote generally in the election of directors and (y)
combined voting power of the then outstanding securities of such corporation
equal to or in excess of the combined voting power of the then outstanding
securities of such corporation held by the Eustace Family and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were members of the Incumbent
Board at the time of the execution of the initial agreement or action of the
Board providing for such reorganization, merger or consolidation or issuance of
shares of Common Stock; or
(4) approval by the stockholders of the Company of (i)
a plan of complete liquidation or dissolution of the Company or (ii) the sale
or other disposition of all or substantially all of the assets of the Company
other than to a corporation with
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respect to which, immediately after such sale or other disposition, (A) more
than 50% of the combined voting power of the then outstanding securities
thereof entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Voting Securities immediately prior to such sale or other
disposition and in substantially the same proportions relative to each other as
their ownership, immediately prior to such sale or other disposition, of the
Outstanding Company Voting Securities, (B) no Person (other than the Company,
any employee benefit plan (or related trust) sponsored or maintained by the
Company or such corporation (or any corporation controlled by the Company) and
any Person which beneficially owned, immediately prior to such sale or other
disposition, directly or indirectly, 25% or more of the Outstanding Company
Voting Securities) beneficially owns, directly or indirectly, (x) 25% or more
of the combined voting power of the then outstanding securities thereof
entitled to vote generally in the election of directors and (y) combined voting
power of the then outstanding securities thereof equal to or in excess of the
combined voting power of the then outstanding securities thereof held by the
Eustace Family and (C) at least a majority of the members of the board of
directors thereof were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board providing for such
sale or other disposition.
(c) For purposes of this Section 4.8, "Eustace Family" means Robert
R. Eustace, Elsa M. Eustace, any descendant of Robert R. Eustace and Elsa M.
Eustace or the spouse of any such descendant (collectively, the "Eustace Family
Group"), any trust, partnership or other entity for the benefit of any member
of the Eustace Family Group, any partnership in which any member of the Eustace
Family Group is a partner, the estate of any member of the Eustace Family Group
or any charitable organization established by any member of the Eustace Family
Group or by any ancestor of Robert R. Eustace or Elsa M. Eustace.
4.9 No Right of Participation or Employment. No person shall
have any right to participate in the Plan. Neither the Plan nor any option
granted hereunder shall confer upon any person any right to continued
employment by the Participating Companies or affect in any manner the right of
the Participating Companies to terminate the employment of any person at any
time without liability hereunder.
4.10 Stockholder's Rights. No person shall by reason of the
Plan have any rights of a stockholder of the Company until he or she shall
acquire Common Stock as herein provided.
4.11 Designation of Beneficiary. Each optionee may file with
the Committee a written designation of one or more persons as such optionee's
beneficiary or beneficiaries (both
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<PAGE> 15
primary and contingent) in the event of the optionee's death. To the extent an
outstanding option granted hereunder is exercisable, such beneficiary or
beneficiaries shall be entitled to exercise such option.
Each beneficiary designation shall become effective only when
filed in writing with the Committee during the optionee's lifetime on a form
prescribed by the Committee. The spouse of a married optionee domiciled in a
community property jurisdiction shall join in any designation of a beneficiary
other than such spouse. The filing with the Committee of a new beneficiary
designation shall cancel all previously filed beneficiary designations.
If an optionee fails to designate a beneficiary, or if all
designated beneficiaries of an optionee predecease the optionee, then each
outstanding option hereunder held by such optionee, to the extent exercisable,
may be exercised by such optionee's executor, administrator, legal
representative or similar person.
4.12 Governing Law. The Plan, each option hereunder and the
related Agreement, and all determinations made and actions taken pursuant
thereto, to the extent not otherwise governed by the Code or the laws of the
United States, shall be governed by the laws of the State of Delaware and
construed in accordance therewith without giving effect to principles of
conflicts of laws.
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<PAGE> 1
EXHIBIT 10.2
APPLIED SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Applied Systems, Inc.
Employee Stock Purchase Plan (the "Plan") is to provide employees of Applied
Systems, Inc., a Delaware corporation (the "Company"), and its Subsidiary
Companies (as defined below) added incentive to remain employed by such
companies and to encourage increased efforts to promote the best interests of
such companies by permitting eligible employees to purchase shares of common
stock, par value $.01 per share, of the Company ("Common Stock") at
below-market prices. The Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). For purposes of the Plan, the term "Subsidiary
Companies" shall mean all corporations which are subsidiary corporations
(within the meaning of Section 424(f) of the Code) and of which the Company is
the common parent. The Company and its Subsidiary Companies that, from time to
time, adopt the Plan are sometimes hereinafter called collectively the
"Participating Companies."
2. Eligibility. Participation in the Plan shall be open to
each employee of the Participating Companies who satisfies all of the following
conditions (an "Eligible Employee"):
(a) such employee's customary employment is for more than
20 hours per week;
(b) such employee's customary employment is for more than
5 months per calendar year; and
(c) such employee has been continuously employed by the
Participating Companies for at least one year.
No right to purchase Common Stock hereunder shall accrue under the Plan in
favor of any person who is not an Eligible Employee as of the first day of a
Purchase Period (as defined in Section 3). For purposes of the Plan, the term
"employee" shall not include any individual who performs services for any of
the Participating Companies, pursuant to an agreement (written or oral) that
classifies such individual's relationship with the Participating Company as
other than a common law employee of the Participating Company, regardless of
whether such individual is at any time determined to be a common law employee
of the Participating Company. Notwithstanding anything contained in the Plan
to the contrary, no Eligible Employee shall acquire a right to purchase Common
Stock hereunder to the extent that (i) immediately after receiving such right,
such employee would own 5% or more of the total combined voting power or value
of all
<PAGE> 2
classes of stock of the Company or any Subsidiary Company (including any stock
attributable to such employee under section 424(d) of the Code), or (ii) for
any calendar year such right would permit such employee to purchase Common
Stock under any employee stock purchase plan, which qualifies under section 423
of the Code, of the Company and its Subsidiary Companies which, when
aggregated, would have a fair market value (as determined on the first day of
the Purchase Period (as hereinafter defined)) in excess of $25,000 or such
other amount as may be specified under section 423 of the Code. Further
notwithstanding anything contained in the Plan to the contrary, the maximum
number of shares that may be bought by any Eligible Employee during any
Purchase Period shall not exceed 1,000, subject to adjustment in the same
manner described in Section 12, in the case of the occurrence of any of the
events described in Section 12.
3. Effective Date of Plan; Purchase Periods. The Plan shall
become effective on December 1, 1998 or on such later date as may be specified
by the Board of Directors (the "Board") of the Company or the Committee (as
defined in Section 11). The Plan shall cease to be effective unless, within 12
months before or after the date of its adoption by the Board, it has been
adopted by the shareholders of the Company at a duly-called meeting of such
shareholders.
A "Purchase Period" shall consist of the six month period,
beginning on each December 1 and June 1, each commencing on or after the
effective date and prior to termination of the Plan.
4. Basis of Participation. (a) Payroll Deduction. Subject
to compliance with applicable rules prescribed by the Committee, each Eligible
Employee shall be entitled to enroll in the Plan as of the first day of any
Purchase Period which begins on or after such employee has become an Eligible
Employee.
To enroll in the Plan, an Eligible Employee shall make a
request to the Company or its designated agent, at the time and in the manner
prescribed by the Committee, specifying the amount of payroll deduction to be
applied to the compensation paid to the employee by the employee's employer
while the employee is a participant in the Plan. The amount of each payroll
deduction specified in such request for each such payroll period shall be a
whole percentage of a participant's compensation, unless otherwise determined
by the Committee to be a whole dollar amount, in either case not to exceed 8%,
or such lesser percentage as may be determined by the Committee, of the
participant's compensation (before withholding or other deductions) paid to him
or her during the Purchase Period by any of the Participating Companies.
Subject to compliance with applicable rules prescribed by the Committee, the
request shall become effective on the first day of the Purchase Period
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<PAGE> 3
following the day the Company or its designated agent receives such request.
Payroll deductions (and any other amount paid under the Plan)
shall be made for each participant in accordance with such participant's
request until such participant's participation in the Plan terminates, such
participant makes a new request which changes the amount of payroll deductions,
the Participant elects to suspend his or her participation in the Plan or the
Plan terminates, all as hereinafter provided.
A participant may change the amount of his or her payroll
deduction effective as of the first day of any Purchase Period by so directing
the Company or its designated agent at the time and in the manner specified by
the Committee. A participant may not change the amount of his or her payroll
deduction effective as of any date other than the first day of a Purchase
Period, except that a participant may elect to suspend his or her participation
in the Plan as provided in Section 7.
Payroll deductions for each participant shall be credited to a
purchase account established on behalf of the participant on the books of the
participant's employer or such employer's designated agent (a "Purchase
Account"). At the end of each Purchase Period, the amount in each
participant's Purchase Account will be applied to the purchase of the number of
shares of Common Stock determined by dividing such amount by the Purchase Price
(as defined in Section 5) for such Purchase Period. No interest shall accrue
at any time for any amount credited to a Purchase Account of a participant.
(b) Other Methods of Participation. The Committee may, in
its discretion, establish additional procedures whereby Eligible Employees may
participate in the Plan by means other than payroll deduction, including, but
not limited to, delivery of funds by participants in a lump sum or automatic
charges to participants' bank accounts. Such other methods of participating
shall be subject to such rules and conditions as the Committee may establish.
The Committee may at any time amend, suspend or terminate any participation
procedures established pursuant to this paragraph without prior notice to any
participant or Eligible Employee.
5. Purchase Price. The purchase price (the "Purchase Price")
per share of Common Stock hereunder for any Purchase Period shall be the lesser
of 85% of the fair market value of a share of Common Stock on the first day of
such Purchase Period and 85% of the fair market value of a share of Common
Stock on the last day of such Purchase Period. If such sum results in a
fraction of one tenth of one cent, the Purchase Price shall be increased to the
next higher tenth of one cent. For purposes of the Plan, the fair market value
of a share of Common Stock on a given day shall be the last sale price of a
share of Common Stock
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<PAGE> 4
as reported on the Nasdaq Stock Market on the date as of which such value is
being determined, or, if the Common Stock is listed on a national securities
exchange, the last sale price of a share of Common Stock on the principal
national stock exchange on which the Common Stock is traded on the date as of
which such value is being determined, or if there shall be no reported
transactions for such date, on the next preceding date for which transactions
are reported. In no event, however, shall the Purchase Price be less than the
par value of a share of Common Stock.
6. Purchase Accounts and Certificates. The Common Stock
purchased by each participant shall be posted to such participant's Purchase
Account as soon as practicable after, and credited to such participant's
Purchase Account as of, the last day of each Purchase Period. Except as
provided in Section 7 and Section 8, a participant will be issued his or her
shares when his or her participation in the Plan is terminated, the Plan is
terminated or upon request, but, in the last case, only in denominations of at
least 25 shares.
After the close of each Purchase Period, information will be
made available to each participant regarding the entries made to such
participant's Purchase Account, the number of shares of Common Stock purchased
and the applicable Purchase Price. In the event that the maximum number of
shares of Common Stock are purchased by the participant for the Purchase Period
and cash remains credited to the participant's Purchase Account, such cash
shall be delivered as soon as practicable to such participant. For purposes of
the preceding sentence, the maximum number of shares of Common Stock that may
be purchased by a participant for a Purchase Period shall be determined under
Section 2.
7. Suspension or Termination of Participation. A participant
may elect at any time, in the manner prescribed by the Committee, to suspend
his or her participation in the Plan, provided such election is received by the
Company or its designated agent prior to the date specified by the Committee
for suspension of participation during the Purchase Period for which such
suspension is to be effective.
Upon any suspension of participation, the participant's
payroll deductions shall cease and, if the participant elects, the cash
credited to such participant's Purchase Account on the date of such suspension
shall be delivered as soon as practicable to such participant. If the
participant does not elect to receive such cash, such cash shall be applied to
the purchase of Common Stock, as described in Section 4(a) hereof. A
participant who elects to suspend participation in the Plan shall be permitted
to resume participation in the Plan by making a new request at the time and in
the manner described in Section 4 hereof.
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<PAGE> 5
If the participant dies, terminates employment with the
Participating Companies for any reason, or otherwise ceases to be an Eligible
Employee, such participant's participation in the Plan shall immediately
terminate. Upon such terminating event, the cash credited to such
participant's Purchase Account on the date of such termination shall be
delivered as soon as practicable to such participant or his or her legal
representative, as the case may be and certificates for the number of full
shares of Common Stock and the cash equivalent for any fractional share held
for such participant's benefit shall be issued to him or her. The cash
equivalent for any fractional share held for the benefit of a participant shall
be determined by multiplying the fractional share by the fair market value of a
share of Common Stock on the day immediately preceding such election to receive
such shares determined as provided in Section 5.
8. Termination or Amendment of the Plan. The Company, by
action of the Board or the Committee, may terminate the Plan at any time, in
which case notice of such termination shall be given to all participants, but
any failure to give such notice shall not impair the effectiveness of the
termination.
Without any action being required, the Plan shall terminate in
any event when the maximum number of shares of Common Stock to be sold under
the Plan (as provided in Section 12) has been purchased. Such termination
shall not impair any rights which under the Plan shall have vested on or prior
to the date of such termination. If at any time the number of shares of Common
Stock remaining available for purchase under the Plan are not sufficient to
satisfy all then-outstanding purchase rights, the Board or Committee may
determine an equitable basis of apportioning available Common Stock among all
participants.
The Board or the Committee may amend the Plan from time to
time in any respect for any reason; provided, however, no such amendment shall
(a) materially adversely affect any purchase rights outstanding under the Plan
during the Purchase Period in which such amendment is to be effected, (b)
increase the maximum number of shares of Common Stock which may be purchased
under the Plan, (c) decrease the Purchase Price of the Common Stock for any
Purchase Period below the lesser of 85% of the fair market value thereof on the
first day of such Purchase Period and 85% of such fair market value on the last
day of such Purchase Period or (d) adversely affect the qualification of the
Plan under section 423 of the Code.
Upon termination of the Plan, the number of full shares of
Common Stock held for each participant's benefit shall be issued as soon as
practicable to such participant and the cash equivalent of any fractional share
so held determined as provided in Section 7, and, except as otherwise provided
in Section 14,
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<PAGE> 6
the cash, if any, credited to such participant's Purchase Account, shall be
distributed as soon as practicable to such participant.
9. Non-Transferability. Rights acquired under the Plan are
not transferable and may be exercised only by a participant.
10. Shareholder's Rights. No Eligible Employee or
participant shall by reason of the Plan have any rights of a shareholder of the
Company until he or she shall acquire Common Stock as herein provided.
11. Administration of the Plan. The Plan shall be
administered by a committee appointed by the Board consisting of two or more
members of the Board (the "Committee"). In addition to the power to amend or
terminate the Plan pursuant to Section 8, the Committee shall have full power
and authority to: (i) interpret and administer the Plan and any instrument or
agreement entered into under the Plan; (ii) establish such rules and
regulations and appoint such agents as it shall deem appropriate for the proper
administration of the Plan; and (iii) make any other determination and take any
other action that the Committee deems necessary or desirable for administration
of the Plan. Decisions of the Committee shall be final, conclusive and binding
upon all persons, including the Company, any participant and any other employee
of the Company. A majority of the members of the Committee may determine its
actions and fix the time and place of its meetings.
The Plan shall be administered so as to ensure that all
participants have the same rights and privileges as are provided by section
423(b)(5) of the Code.
12. Maximum Number of Shares. The maximum number of shares
of Common Stock which may be purchased under the Plan is 350,000, subject to
adjustment as hereinafter set forth. Common Stock sold hereunder may be
purchased for participants in the open market (on an exchange or in negotiated
transactions) or may be previously acquired treasury shares, authorized and
unissued shares, or any combination of shares purchased in the open market,
previously acquired treasury shares or authorized and unissued shares. If the
Company shall, at any time after the effective date of the Plan, change its
issued Common Stock into an increased number of shares, with or without par
value, through a stock dividend or a stock split, or into a decreased number of
shares, with or without par value, through a combination of shares, then,
effective with the record date for such change, the maximum number of shares of
Common Stock which thereafter may be purchased under the Plan and the maximum
number of shares which thereafter may be purchased during any Purchase Period
shall be the maximum number of shares which, immediately prior to such record
date, remained available for purchase under the Plan and
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<PAGE> 7
under any Purchase Period proportionately increased, in case of such stock
dividend or stock split, or proportionately decreased in case of such
combination of shares.
13. Miscellaneous. Except as otherwise expressly provided
herein, (i) any request, election or notice under the Plan from an Eligible
Employee or participant shall be transmitted or delivered to the Company or its
designated agent and, subject to any limitations specified in the Plan, shall
be effective when received by the Company or its designated agent and (ii) any
request, notice or other communication from the Company or its designated agent
that is transmitted or delivered to Eligible Employees or participants shall be
effective when so transmitted or delivered. The Plan, and the Company's
obligation to sell and deliver Common Stock hereunder, shall be subject to all
applicable federal and state laws, rules and regulations, and to such approval
by any regulatory or governmental agency as may, in the opinion of counsel for
the Company, be required.
14. Change in Control. In order to maintain the
participants' rights in the event of any Change in Control of the Company, as
hereinafter defined, upon such Change in Control the then current Purchase
Period shall thereupon end, and the cash credited to all participants' Purchase
Accounts shall be applied to purchase shares pursuant to Sections 5 and 6, and
the Plan shall immediately thereafter terminate. For purposes of this Section
14, "Change in Control" shall mean:
(1) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act, of beneficial ownership within the meaning of
Rule 13d- 3 promulgated under the Exchange Act, of 20% or more of either (i)
the then outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then
outstanding securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities"); provided
that the following acquisitions shall not constitute a Change in Control: (A)
any acquisition directly from the Company (excluding any acquisition resulting
from the exercise of a conversion or exchange privilege in respect of
outstanding convertible or exchangeable securities), (B) any acquisition by the
Company, (C) any acquisition by Robert Eustace, James P. Kellner or any members
of their immediate families, an "Exempt Person," (D) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (E) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation involving the
Company, if, immediately after such reorganization, merger or consolidation,
each of the conditions described in clauses (i), (ii) and (iii) of subsection
(3) of this Section 14 shall be satisfied; provided further, that for purposes
of clause (B), if any Person (other than the
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<PAGE> 8
Company, an Exempt Person or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company) shall become the beneficial owner of 20% or more of the Outstanding
Company Common Stock or 20% or more of the Outstanding Company Voting
Securities by reason of an acquisition by the Company, and such Person shall,
after such acquisition by the Company, become the beneficial owner of any
additional shares of the outstanding Company Common Stock or any additional
Outstanding Company Voting Securities and such beneficial ownership is publicly
announced, such additional beneficial ownership shall constitute a Change in
Control;
(2) individuals who, as of the date hereof, constitute
the Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least two-thirds of such Board; provided that any individual who
becomes a director of the Company subsequent to the date hereof whose election,
or nomination for election by the Company's stockholders, was approved by the
vote of at least two-thirds of the directors then comprising the Incumbent
Board shall be deemed to have been a member of the Incumbent Board; and
provided further, that no individual who was initially elected as a director of
the Company as a result of an actual or threatened election contest, as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act, or any other actual or threatened solicitation of proxies or consents by
or on behalf of any Person other than the Board shall be deemed to have been a
member of the Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation unless, in any such case, immediately
after such reorganization, merger or consolidation, (i) more than 60% of the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and more than 60% of the combined
voting power of the then outstanding securities of such corporation entitled to
vote generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals or
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and the Outstanding Company Voting Securities immediately
prior to such reorganization, merger or consolidation and in substantially the
same proportions relative to each other as their ownership, immediately prior
to such reorganization merger or consolidation, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities, as the case may be,
(ii) no Person (other than the Company, an Exempt Person, any employee benefit
plan (or related trust) sponsored or maintained by the Company or the
corporation resulting from such reorganization, merger or consolidation (or any
corporation controlled by the Company) and any person which beneficially owned,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 20% or more of the Outstanding Company Common Stock or the
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<PAGE> 9
Outstanding Company Voting Securities, as the case may be) beneficially owns,
directly or indirectly, 20% or more of the then outstanding shares of common
stock of such corporation or 20% or more of the combined voting power of the
then outstanding securities of such corporation entitled to vote generally in
the election of directors and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such reorganization,
merger or consolidation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board of Directors
providing for such reorganization, merger or consolidation; or
(4) approval by the stockholders of the Company of (i) a
plan of complete liquidation or dissolution of the Company or (ii) the sale or
other disposition of all or substantially all of the assets of the Company
other than to a corporation with respect to which, immediately after such sale
or other disposition, (A) more than 60% of the then outstanding shares of
common stock thereof and more than 60% of the combined voting power of the then
outstanding securities thereof entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such sale or other
disposition and in substantially the same proportions relative to each other as
their ownership, immediately prior to such sale or other disposition, of the
Outstanding Company Common Stock and the Outstanding Company Voting Securities,
as the case may be, (B) no Person (other than the Company, an Exempt Person,
any employee benefit plan (or related trust) sponsored or maintained by the
Company or such corporation (or any corporation controlled by the Company) and
any Person which beneficially owned, immediately prior to such sale or other
disposition, directly or indirectly, 20% or more of the Outstanding Company
Common Stock or the Outstanding Company Voting Securities, as the case may be)
beneficially owns, directly or indirectly, 20% or more of the then outstanding
shares of common stock thereof or 20% or more of the combined voting power of
the then outstanding securities thereof entitled to vote generally in the
election of directors and (C) at least a majority of the members of the board
of directors thereof were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board providing for such
sale or other disposition.
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<PAGE> 1
EXHIBIT 10.3
LEASE FOR UNIVERSITY PARK OFFICE BUILDING
STUENKEL ROAD AND CICERO AVENUE
UNIVERSITY PARK, ILLINOIS
TENANT: APPLIED SYSTEMS, INC.
PREMISES: 160,723 RENTABLE SQUARE FEET (ENTIRE BUILDING)
DATE: SEPTEMBER 1, 1998
<PAGE> 2
TABLE OF CONTENTS
1. Term 3
2. Possession 3
3. Base Rent 4
4. Use and Occupancy 4
5. Additional Rent 4
6. Condition of Premises 6
7. Landlord's Obligation to Provide Services 6
8. Interruption of Services 7
9. Maintenance and Repairs 8
10. Additions and Alterations 8
11. Completion of Premises and Delivery of Possession 9
12. Ownership of Improvements 9
13. Covenants against Liens 9
14. Insurance 10
15. Fire or Casualty 11
16. Waiver of Claims - Indemnifications 12
17. Nonwaiver 13
18. Eminent Domain 13
19. Assignment and Subletting 15
20. Right of First Refusal 16
21. Surrender of Possession 16
22. Holding Over 17
23. Estoppel Certificate 17
24. Landlord's Right to Subordinate Lease 17
25. Certain Rights Reserved by Landlord 18
26. Landlord's Remedies 19
27. Expense of Enforcement 20
28. Covenant of Quiet Enjoyment 21
29. Tenant Parking Spaces 21
30. Landlord's Representations and Warranties 21
31. Miscellaneous 22
32. Notices 24
Exhibit A - Site Plan
Exhibit B - Estoppel Certificate
2
<PAGE> 3
LEASE
STUENKEL ROAD AND CICERO AVENUE
UNIVERSITY PARK, ILLINOIS
AGREEMENT OF LEASE made as of this 1st day of September, 1998, (hereinafter
referred to as the "Lease") between APPLIED PROPERTIES, L.L.C., (hereinafter
referred to as "Landlord"), and APPLIED SYSTEMS, INC., an Illinois corporation
(hereinafter referred to as "Tenant").
WITNESSETH:
Landlord hereby leases to Tenant, and Tenant hereby accepts, the premises
(hereinafter referred to as the "Premises") commonly described as 160,723
rentable square feet, which is the entire building constructed, hereinafter
described, to be known as the 200 Applied Parkway and 2400 University Parkway
office buildings (hereinafter referred to as the "Building") on land at Stuenkel
Road and Cicero Avenue, University Park, Illinois (hereinafter referred to,
together with all present and future easements, additions, improvements and
other rights appurtenant thereto, as the "Land"), subject to the covenants,
terms, provisions and conditions of this Lease. The Building, the Land and the
Premises are sometimes collectively referred to as the "Property".
In consideration thereof, Landlord and Tenant covenant and agree as follows:
1. TERM:
The initial term of this Lease (hereinafter referred to as "Term") shall be for
twenty (20) Years, commencing on the 1st day of September, 1998 (hereinafter
referred to as the "Commencement Date"), and ending on the 31st day of August,
2018 (hereinafter referred to as the "Termination Date"), unless sooner
terminated as provided herein.
2. POSSESSION:
A. If possession of the Premises as required in the Lease is not
delivered to Tenant on or before September 1, 1998, or such extended date
thereafter that possession delivery is delayed by acts of God, material
shortages, strikes or other matters beyond Landlord's reasonable controls then
Tenant shall have the right thereafter to terminate the Lease upon thirty (30)
days advance written notice given to the Landlord by Tenant.
B. If Tenant takes possession of the Premises before the Commencement
Date, the obligation to pay rent shall commence on a prorated basis and the
terms and
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<PAGE> 4
conditions of the Lease shall apply on the date of such possession. It is
agreed, however, that the Tenant shall be allowed access to the Premises
(without charge and without affecting the Commencement Date of the Lease) for
the limited purpose of installing furniture and other Tenant improvements. In no
event shall Tenant take possession of the Premises, or any portion thereof,
unless it has satisfied the insurance coverage requirements in Paragraph 14
below.
3. BASE RENT:
A. The Tenant shall pay to the Landlord during the first year of the
initial term of this lease the annual base rent of two million one hundred
thousand Dollars ($2,100,000.00) in monthly installments of one hundred seventy
five thousand Dollars ($175,000.00). During the second year of the initial term
of this lease, and for each subsequent year thereafter, the Tenant shall pay to
Landlord the prior year's annual base rent, increased by two percent (2%), in
equal monthly installments.
B. All rent payments shall be made at such location as may be
designated from time to time by Landlord, which until further notice shall be
the address set forth below.
4. USE AND OCCUPANCY:
Tenant may use and occupy the Premises during the Term for general office use
and for any other use not inconsistent with the character of the Building.
Tenant shall not do, permit, or suffer any act or thing to be done which is
injurious to the Property or the Premises, which is a nuisance, contrary to law
or in violation of the Certificate of Occupancy issued for the Building.
5. ADDITIONAL RENT:
A. In addition to paying the Base Rent during the Term specified in
Paragraph 3 hereof, Tenant shall pay as "Additional Rent" the amounts determined
as hereinafter set forth. The Base Rent and the Additional Rent are sometimes
herein collectively referred to as the "Rent". All amounts due under this
document as Additional Rent shall be payable for the same periods and in the
same manner, time and place as the Base Rent. Without limitation on other
obligations of Tenant which shall survive the expiration of the Term, the
obligations of Tenant to pay the Additional Rent provided for in this document
for periods prior to the termination of this Lease shall survive expiration of
the Term. For any partial Calendar Year, Tenant shall be obligated to pay only a
pro rata share of the
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<PAGE> 5
Additional Rent, based on the number of days of the Term falling within such
Calendar Year.
B. Definitions: As used in this Paragraph, the terms:
(i) "Calendar Year" shall mean each calendar year in which any part of
the term falls, through and including the year in which the Term
expires;
(ii) "Tenant's Rentable Area" shall mean 160,723 square feet; as
defined by Landlord's architect;
(iii) "Taxes" shall mean all real estate taxes and assessments, special
or otherwise, levied or assessed upon or with respect to the Land
and/or-Building and ad valorem taxes for any personal property used in
connection therewith. Should the State of Illinois, or any County or
other political subdivision thereof, or any other governmental
authority having jurisdiction over the Land and/or the Building, (a)
impose a tax, assessment, charge or fee, or increase a then existing
tax, assessment charge or fee, which Landlord shall be required to pay
either by way of substitution for such real estate taxes and ad valorem
personal property taxes, or in addition to such real estate taxes and
ad valorem personal property taxes, or (b) impose an income or
franchise tax or a tax on rent in substitution for or as a supplement
of a tax levied against the Land and/or the Building and/or the
personal property used in connection with the Land or Building, all
such taxes, assessments, fees or charges (hereinafter defined as "in
lieu taxes") shall be deemed to constitute Taxes hereunder. Taxes shall
also include all reasonable fees and costs incurred by Landlord in
seeking to obtain a reduction of, or a limit on the increase in, any
Taxes, regardless of whether any reduction or limitation is obtained.
Except as herein above provided with regard to in lieu taxes, Taxes
shall not include any inheritance, estate, succession, transfer, gift,
franchise, net income or capital stock tax; and
(iv) "Operating Expenses" shall mean all expenses, costs and
disbursements (other than Taxes) of every kind and nature for the
applicable Calendar Year on an accrual basis paid or incurred by
Landlord or Landlord's beneficiaries in connection with the ownership,
management, operation and repair of the Land and Building, except the
following:
(1) Interest or amortization payments of any mortgage or any other
debt for borrowed money;
(2) Any expense for which Landlord receives or is entitled to
receive reimbursement from a tenant or another third party
including, but not limited to a warranty or an insurance policy;
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<PAGE> 6
(3) Penalties or interest for late payment on any of the costs
described in (a) or (b) above; and
(4) Any depreciation or amortization on the Property.
6. CONDITION OF PREMISES:
The Tenant's taking possession of any portion of the Building and Premises shall
be conclusive evidence that such portion of the Premises was in good order and
satisfactory condition when the Tenant took possession, except as to latent
defects, excluding items of damage caused by Tenant, or its agents, independent
contractors or suppliers. No promise of the Landlord to alter, remodel or
improve the Building and no representation by Landlord, or its agents,
respecting the condition of the Premises or the Building have been made to
Tenant or relied upon by Tenant other than as may be contained in the Lease or
in any written amendment hereto assigned by Landlord and Tenant.
7. LANDLORD'S OBLIGATION TO PROVIDE SERVICES:
A. List of Services.
Landlord shall provide the following services at Tenant's expense on all days
during the Term, unless otherwise stated:
(i) Heating and air conditioning as determined by Tenant when necessary
for normal comfort in the Premises;
(ii) Adequate wiring and facilities for standard building lighting fixtures
provided by Landlord and for Tenant's incidental uses. Tenant shall bear
the cost of replacement bulbs and ballasts for lighting fixtures within the
Premises. In respect to such incidental uses, adequate electrical wiring
and facilities will be furnished in the Premises by Landlord, provided that
(a) the connected electrical load of the incidental use equipment and
lights does not exceed an average of one (1) watt per square foot of the
Premises, (b) the electricity so furnished for incidental uses will be at a
nominal 120 volts and no electrical circuit for the use will have a current
capacity exceeding. 15 amperes; and (c) such electricity be used only for
equipment and accessories normal to office usage. If Tenant's requirements
for electricity for incidental uses are in excess of those set forth in the
preceding sentence, the Landlord reserves the right to require Tenant to
install the conduit, wiring and other equipment necessary to supply
electricity for such excess incidents use requirements at the Tenant's
expense by arrangement with Commonwealth Edison or another approved local
utility;
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<PAGE> 7
(iii) Village water from the regular Building outlets for drinking,
lavatory and toilet purposes;
(iv) Janitor services Monday through Friday in and about the Premises; and
(v) Adequate operatorless passenger elevator service at all times.
B. Billing for Electricity.
(i) Separate Metering. Tenant shall pay for the use of all electrical
service to the Building and Premises. Provided that Landlord can make
arrangements satisfactory to Landlord and Tenant with the utility company
supplying electricity to the Premises, Tenant shall be billed directly by
such utility and Tenant agrees to pay each bill promptly in accordance with
its terms. In the event that for any reason Tenant cannot be billed
directly, Landlord shall forward each bill with respect to the Premises and
Tenant shall pay it promptly in accordance with its terms. It is understood
that Tenant will be separately metered for electrical usage of plugs and
lights within the Premises.
(ii) Lack of Separate Metering. If Tenant cannot be separately metered for
any reason, Tenant shall pay Landlord as Additional Rent, in monthly
installments at the time prescribed for monthly installments of Rent, an
annual amount as estimated by Landlord from time to time which Tenant would
pay for such electricity if the same were separately metered to the
Premises by the local electricity company and billed to Tenant at such
utility company's current rates.
8. INTERRUPTION OF SERVICES:
Tenant agrees that Landlord shall not be liable in damages, whether by abatement
of Rent or otherwise for failure to furnish or delay in furnishing any service,
or for any diminution in the quality or quantity thereof, when such failure or
delay or diminution is occasioned, in whole or in part, by repairs by Landlord
or caused to be undertaken by Landlord, by any strike, lockout or other labor
trouble, by inability to secure electricity, gas, water, or other fuel at the
Building after reasonable effort so to do, by any accident or casualty
whatsoever not caused by Landlord, by the act or default of Tenant or other
parties, or by any other cause beyond Landlord's reasonable control. Landlord
shall exercise due diligence in its efforts to cure such failure or diminution.
9. MAINTENANCE AND REPAIRS:
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<PAGE> 8
A. Tenant shall keep, repair and maintain and not misuse the Premises
so that they may be returned to the Landlord in as good order and condition as
when delivered to Tenant, excepting ordinary wear and tear, structural repairs
and replacement, damage by fire, vandalism, the elements and any other insurable
casualty, and damage due to or occasioned by the negligence or acts of Landlord.
Notwithstanding anything contained in the Lease to the contrary, Tenant will not
be required to pay for any repairs to the Premises or the Building to the extent
Landlord is reimbursed therefor by insurance proceeds. Except as otherwise
provided in the Lease, during the term hereof, Tenant shall keep the Premises
and every part thereof in good repair and condition at its sole cost and
expense. At the expiration of the term (or the earlier termination of the
Lease), Tenant shall surrender the Premises in substantially the same condition
and repair as existed at the time Tenant took Possession, reasonable wear and
tear and damage by fire or other insurable casualty excepted.
B. In addition to any other obligations contained herein, Tenant shall,
at Tenant's expense, maintain, repair and replace as necessary the plumbing,
heating, ventilating and air conditioning equipment, lighting and other
electrical and mechanical equipment, sprinkler system and glass (unless broken
or damaged due to the negligence or acts of landlord or covered by insurance)
within the Property. Tenant shall also maintain and repair, at Tenant's expense,
driveways, sidewalks, parking areas, lighting (exterior and interior)
landscaping and fencing located on the Land and serving the Building. Tenant
shall, at Tenant's expense, repair and replace as necessary the exterior of the
Building, including exterior walls, drains, eaves, troughs, downspouts, gutters,
shall provide lateral support and make all structural repairs to the Building to
include replacement of the roof, replacement of sewer lines, utility lines and
resurfacing of parking areas.
10. ADDITIONS AND ALTERATIONS:
Tenant shall not, without the prior written consent of Landlord, make any
alterations, improvements or additions to the Premises. Landlord's refusal to
give said consent shall be conclusive, but shall not be unreasonable. If
Landlord consents to said alterations, improvements or additions, it may impose
such reasonable conditions with respect thereto as Landlord deems appropriate,
including without limitation, requiring Tenant to furnish Landlord with evidence
of payment of all costs to be incurred in connection with such work, insurance
against liabilities which may arise out of such work, and plans and
specifications plus permits necessary for such work. The work necessary to make
any alterations, improvements or additions to the Premises shall be done at
Tenant's expense. Tenant shall promptly pay to the Tenant's contractors, when
due, the cost of all such work and of all decorating required by reason thereof.
Upon completion of such work, Tenant shall deliver to Landlord, if payment is
made directly to contractors, evidence of payment, contractors' affidavits and
full and final waivers of all liens for labor, services or materials. Tenant
shall defend and hold Landlord and the Land and Building harmless from all
costs, damages, liens and expenses related to such work. All work done by
Tenant, or its contractors, shall be done in a first-class workmanlike manner,
using only good grades of
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materials and shall comply with all insurance requirements and all applicable
laws and ordinances and rules and regulations of governmental departments or
agencies.
11. COMPLETION OF PREMISES AND DELIVERY OF POSSESSION:
Possession of the Premises shall be deemed delivered to Tenant on the
date when Landlord has obtained a final Certificate of Occupancy (or equivalent
form of governmental approval) from the appropriate municipality or governmental
agency which will permit the Premises to be occupied for the use intended under
the Lease.
12. OWNERSHIP OF IMPROVEMENTS:
All trade fixtures, movable partitions, and similar installations, alterations,
additions, and improvements installed in the Premises by either Tenant or
Landlord on Tenant's behalf, the cost of which is or has been borne by Tenant,
shall be and remain the property of Tenant and may be removed by Tenant, at its
own option and expense. Upon removal of such trade fixtures and similar
installations, together with Tenant's office furniture and equipment, Tenant
shall immediately, and its own expense, repair and restore the Premises to the
condition existing prior to installation (subject to ordinary wear and tear and
damage by fire or other insurable casualty) and repair any damage to the
Premises or the Building due to such removal. All property that was permitted to
be removed by Tenant at the end of the Term, but which remains in the Premises
for sixty (60) days after Tenant vacates the Premises shall be deemed abandoned
and may, at the election of Landlord, either be retained as Landlord's property
or may be removed from the Premises by Landlord, provided, however, if Tenant is
delayed or hindered in the removal of the Property permitted under this
Paragraph for reasons beyond Tenant's control, then Tenant's removal of its
property shall be extended for the period of the delay.
13. COVENANT AGAINST LIENS:
A. Tenant has no authority or power to cause or permit any lien or
encumbrance of any kind whatsoever, whether created by act of Tenant, operation
of law or otherwise, to attach to or be placed upon Landlord's title or interest
in the Land, Building or Premises, and any and all liens and encumbrances
created by Tenant shall attach to Tenant's interest only. Tenant covenants and
agrees not to suffer or permit any lien of mechanics or materialmen or others to
be placed against the Land, Building or the Premises with respect to work or
services claimed to have been performed for or materials claimed to have been
furnished to Tenant or the Premises, and in case of any such lien attaching,
Tenant covenants and agrees to cause it to be immediately released and removed
of record or bonded in a manner satisfactory to Landlord.
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B. In the event that such lien is not immediately released and removed,
Landlord, at its sole option, may take all action necessary to release and
remove such lien, but must investigate the validity thereof, and Tenant shall
promptly upon notice reimburse Landlord for all sums, costs and expenses
(including reasonable attorneys' fees) incurred by Landlord in connection with
such lien.
14. INSURANCE:
A. Waiver of Subrogation. Landlord and Tenant each hereby waive any and
every claim for recovery from the other for any and all loss of or damage to the
Building or Premises or to the contents thereof, which loss or damage is covered
by valid and collectible fire and extended coverage insurance policies, to the
extent that such loss or damage is recoverable under said insurance policies.
Inasmuch as this mutual waiver will preclude the assignment of any such claim by
subrogation (or otherwise) to an insurance company (or any other person),
Landlord and Tenant each agree to give to each insurance company which has
issued, or in the future may issue, to it policies of fire and extended coverage
insurance, written notice of the terms of this mutual waiver, and to have said
insurance policies properly endorsed, if necessary, to prevent the invalidation
of said insurance coverage by reason of said waiver.
B. Coverage. Tenant shall pay for and maintain insurance during the
entire Term, insuring Tenant and Landlord as their interests may appear, with
terms, coverage and in companies satisfactory to Landlord, and with such
increases in limits as from time to time reasonably request, but initially
maintain the following coverage in the following amounts:
(i) In case of personal injury to or the death of any person or
persons, not less than $1,000,000.00 on death to a person and
$1,000,000.00 for each incident involving personal injury or death to
persons, and, in case of property damage, not less than $1,000,000.00
for any one occurrence; and
(ii) In case of fire, sprinkler leakage, malicious mischief, vandalism
and other extended coverage perils, for the full insurable replacement
value of all additions, improvements and alterations to the Premises
which are beyond the building standard Tenant improvements provided by
Landlord and of all office furniture, trade fixtures, office equipment,
merchandise and all other items of Tenant's property on the Premises.
C. Tenant shall obtain and maintain during the Term of the Lease, All
Risk Property Insurance for the Building upon a full replacement cost basis,
with no co-insurance requirement; Comprehensive General Liability Insurance,
including Blanket Contractual Liability-coverage, with limits of not less than
TWO MILLION AND 00/100 DOLLARS ($2,000,000.00) Combined Single Limit for
Personal Injury and Property
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Damage; Comprehensive Automobile Liability Insurance covering all owned,
non-owned and hired vehicles with limits of not less than ONE MILLION AND 00/100
DOLLARS ($1,000,000.00) Combined Single Limit for Personal Injury and Property
Damage; and Statutory Worker's Compensation and Employer's Liability coverage
with limits of not less than TWO HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS
($250,000.00).
D. Landlord and Tenant shall, prior to the commencement of the Term,
furnish the other party with certificates evidencing such coverage, which
certificates shall state that such insurance may not be changed or canceled
without at least ten (10) days prior written notice to Landlord or Tenant.
E. Avoid Action Increasing Rates. Tenant shall comply with all
applicable laws and ordinances, all Orders and decrees of court and all
requirements of other governmental authorities, and shall not, directly or
indirectly, make any use of the Premises which may thereby be prohibited or be
dangerous to any person or property or which may jeopardize any insurance
coverage or may increase the cost of insurance or require additional insurance
coverage. If by reason of the failure of Tenant to comply with this Paragraph,
any insurance coverage is jeopardized or insurance premiums are increased,
Landlord shall require Tenant to make immediate payment of the increased
insurance premium.
15. FIRE OR CASUALTY:
A. Paragraph 9 hereof notwithstanding, if the Premises or the Building
(including machinery or equipment used in its operation) shall be damaged by
fire or other casualty, and if such damage does not render all or a substantial
portion of the Premises or Building untenantable, and such damage is a casualty
covered under Tenant's insurance pursuant to Paragraph 14 above, then Tenant
shall repair and restore the same with reasonable promptness, subject to
reasonable delays for insurance adjustments and delays caused by matters beyond
Tenant's reasonable control. If any such damage renders all or a substantial
portion of the Premises or Building untenantable, either Tenant or Landlord
shall have the right to terminate this Lease as of the date of such damage (with
appropriate prorations of Rent being made for Tenant's possession subsequent to
the date of such damage of those tenantable portions of the Premises) upon
giving written notice to the other at any time within sixty (60) days after the
date of such damage. Unless this Lease is terminated as provided in the two (2)
proceeding sentences and such damage is a casualty covered under Tenant's
insurance pursuant to Paragraph 14C above, Tenant shall proceed with reasonable
promptness to repair and restore the Premises subject to reasonable delays for
insurance adjustments and delays caused by matters beyond Tenant's reasonable
control.
B. In the event the Building is damaged by fire or other casualty
resulting from Tenant's fault or neglect and the Building is to be repaired and
restored because such damage does not render all or a substantial portion of the
Premises or Building
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untenantable, Tenant shall not be released from any of its obligations to pay
Rent hereunder.
C. Notwithstanding anything to the contrary herein set forth, Landlord
shall have no duty pursuant to this Paragraph to repair or restore any portion
of the alterations, additions, improvements and decorations made by Tenant to
the Premises, except to the extent that such alterations, additions,
improvements and decorations were provided by Landlord, at Landlord's cost, at
the beginning of the Term. If Tenant wants any other or additional repairs or
restorations, and if Landlord consents thereto, the same shall be done at
Tenant's expense.
16. WAIVER OF CLAIMS - INDEMNIFICATIONS:
To the extent not prohibited by law, Landlord, and its officers, agents,
servants and employees, shall not be liable for any damage either to person or
Property or resulting from the loss of use thereof sustained by Tenant or by
other parsons due to the Building or any part thereof or any appurtenances
thereof becoming out of repair, or due to the happening of any accident or event
in or about the Building, or due to any act or neglect of any tenant or occupant
of the Building or of any other person, except to the extent due to the
negligence of the Landlord, its agents, officers, servants or employees. This
provision shall apply particularly (but not exclusively) to damage caused by
gas, electricity, snow, frost, rain, steam, sewage, sewer gas or odors, fire,
water or by the bursting or leaking of pipes, faucets, sprinklers, plumbing
fixtures, and windows, and shall apply without distinction as to the person
whose act or neglect was responsible for the damage, whether the damage was due
to any of the causes specifically enumerated above or to some other cause of an
entirely different kind unless due to the negligence of the Landlord. Tenant
further agrees that all personal property upon the Premises, or upon loading
docks, receiving and holding areas, or freight elevators of the Building, shall
be at the risk of Tenant only, and that Landlord sha11 not be liable for any
loss or damage thereto or theft thereof except to the extent of Landlord's
negligence. Without limitation of any other provisions hereof, Tenant and
Landlord agree to defend, protect, indemnify and save harmless each other from
and against all liability to third parties arising out of the acts of Tenant or
Landlord, and its servants, agents, employees, contractors, suppliers, workmen
and invitees except to the extent that such liability arises out of the
negligence of such indemnified party.
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17. NONWAIVER:
No waiver or any provision of this Lease shall be implied by any failure
of either party to enforce any remedy on account of the violation of such
provision, even if such violation be continued or repeated subsequently, and no
express waiver shall affect any provision other than the one specified in such
waiver and that one only for the time and in the manner specifically stated. No
receipt of monies by either party from the other after the termination of this
Lease shall in any way alter the length of the Term or of the Tenant's right to
possession hereunder or after the giving of any notice shall reinstate, continue
or extend the Term or affect any notice given Tenant prior to the receipt of
such monies, it being agreed that after the service of notice or the
commencement of a suit or after final judgment for possession of the Premises,
Landlord may receive and collect any Rent due, and the payment of said Rent
shall not waive or affect said notice, suit or judgment.
18. EMINENT DOMAIN:
A. Total Taking. If the whole of the Premises is taken by any public
authority under the power of eminent domain, then the Lease shall terminate on
the date possession of the Premises is delivered to such public authority. Base
Rent and Additional Rent shall be paid to that date and prorated accordingly.
B. Responsibility to Repair. If part of the Premises is taken by any public
authority under the power of eminent domain, then, on the date possession is
required by such public authority, the Lease shall terminate as to the portion
taken and the Rent due hereunder shall be reduced in proportion to the amount
taken. Except as otherwise provided in this Paragraph, Landlord shall
immediately commence and diligently pursue the restoration of the remaining
Premises to the extent necessary to permit the continued use of the Premises,
and shall use Landlord's Condemnation Award as described in this Paragraph
therefor. During the period of making such repairs, Rent shall abate as to that
portion of the remaining Premises which is untenantable, provided, however, that
if Tenant uses any part of such untenantable portion for storage during the
period of repair, Landlord may assess a reasonable charge therefor against
Tenant.
C. Landlord shall, if reasonably possible, restore the Premises to
substantially the same condition as before the taking. In no event shall
Landlord be required to repair or replace: (i) Tenant's personal property such
as wall coverings, carpeting, and window treatments (except to the extent: (a)
such personal property was originally provided by Landlord at Landlord's cost
under the terms of the Lease; or (b) Landlord's Condemnation Award contains an
amount allocated for reimbursement for such personal property); or (ii) Tenant's
furnishings, operating equipment, trade fixtures, or merchandise.
D. Taking of Other Portions of Property. If part of the Land other than
the Premises is taken by any public authority under the power of eminent domain,
Landlord
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shall immediately commence and diligently pursue the restoration of the
remaining Land to the extent necessary to permit the continued use of the
Premises, Land and Building and to the extent Landlord has received an Award
sufficient to cover the cost of restoration required.
E. Landlord's Option to Terminate. Notwithstanding anything to the
contrary contained in the Lease, if part of the Land is taken by any public
authority under the power of eminent domain, Landlord shall have the right to
terminate the Lease upon written notice to Tenant if: (i) more than fifty
percent (50%) of the Building is taken; or (ii) the taking (i.e., the date
possession is required by the public authority) occurs within the last six (6)
months of the initial Term of the Lease or any extension of such Term; provided,
however, that the Lease may not be terminated under this Paragraph if Tenant's
option, if any, to further extend the Term of the Lease is exercised within
thirty (30) days after Tenant receives such written notice from Landlord. Such
written notice shall be given to Tenant not later than sixty (60) days after
commencement of condemnation proceedings against the Land and/or Building or, if
such proceedings are not commenced, not later than fourteen (14) days before
Landlord delivers possession of the part so taken by such public authority.
F. Termination of the Lease pursuant to this Paragraph shall be effective
as of the later of the date possession is required by the public authority or
sixty (60) days after Tenant receives the termination notice described above.
G. Tenant's Option to Terminate. Notwithstanding anything to the contrary
contained in the Lease, if more than a minor part of the Land is taken by any
public authority under the power of eminent domain, Tenant shall have the right
to terminate the Lease, but only upon the occurrence of any of the following and
upon written notice given to Landlord not later than sixty (60) days after
commencement of condemnation proceedings against the Land and/or Building (or,
if such proceedings are not commenced, not later than thirty (30) days after
possession of the part taken is required by the public authority):
(i) If the taking of part of the Premises significantly and adversely
affects Tenant's use of the Premises; or
(ii) If the taking of part of the Building or Land significantly and
adversely affects Tenant's use of the Premises, whether or not
part of the Premises are taken; or
(iii) If restoration of the remainder of the Premises and/or the
Building or Land cannot in Tenant's opinion be completed within
one hundred eighty (180) days after the date
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possession is required by the public authority and either item
numbers (i) or (ii) above apply;
(iv) If the taking (i.e., the date possession is required by the
Public authority occurs within the last twelve (12) months of
the initial Term of the Lease or any extension of such Term,
termination of the Lease pursuant to this Paragraph shall be
effective as of the later of the date possession is required by
the public authority or sixty (60) days after Landlord receives
the termination notice described above.
H. Rights to Condemnation Award. Except as otherwise provided in this
Paragraph, all damages awarded for such taking shall belong to and be the
property of the Landlord. The amount received by Landlord which is allocable to
the Premises shall be "Landlord's Condemnation Award". However, Tenant shall be
entitled to any award for diminution in value to the leasehold (so long as this
Lease is not terminated), removal and relocation expenses, Tenant's loss of
business, and fixtures paid for by Tenant. Landlord and Tenant shall each seek
their own award and pay their own expenses in connection therewith.
19. ASSIGNMENT AND SUBLETTING:
A. Tenant may not without the prior written consent of Landlord (which
consent shall not be unreasonably withheld, conditioned or delayed), (i) assign,
convey, or mortgage this Lease or any interest hereunder; (ii) suffer to occur
or permit to exist any assignment of this Lease, or any lien upon Tenant's
interest, involuntarily or by operation of law; (iii) sublet the Premises or any
part hereof, and (iv) permit the use of the Premises by any parties other than
Tenant and its employees. Landlord's consent to any assignment, subletting or
transfer or Landlord's election to accept any assignee, subtenant or transferee
as the tenant hereunder and to collect rent from such assignee, subtenant or
transferee shall not release the original Tenant from any covenant or obligation
under this Lease. Landlord's consent, to any assignment, subletting or transfer
shall not constitute a waiver of Landlord's right to withhold its consent to any
future assignment, subletting or transfer.
B. Except as provided below in this Paragraph, Landlord shall have the
right to terminate this Lease as to that portion of the Premises which Tenant
seeks to assign or sublet, whether by requesting Landlord's consent thereof or
otherwise. Landlord may exercise such right to terminate by giving written
consent to such assignment or sublease. In the event that Landlord exercises
such right to terminate, Landlord shall be entitled to recover possession of
such part of the Premises on the latter of: (i) the proposed date for possession
by such assignee or subtenant; or (ii) ninety (90) days after the date of
Landlord's notice of termination to Tenant. Landlord hereby acknowledges and
agrees that the foregoing right to terminate is not applicable in the event of
an assignment permitted without Landlord's consent as set forth in subparagraph
A above.
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C. In the event that Landlord fails to exercise its termination right as
set forth in the preceding paragraph, and in the event that Landlord consents to
any assignment or sublease of any portion of the premises, as a condition of
Landlord's consent, if Landlord so elects to consent, Tenant shall pay to
Landlord one-half the profit derived by Tenant from such assignment or sublease.
Tenant shall furnish Landlord with a sworn statement, certified by an
independent certified public accountant, setting forth in detail the computation
of profit (which computation shall be based upon generally accepted accounting
principles), and Landlord, or its representatives, shall have access to the
books, records, and papers of Tenant in relation thereto, and to make copies
thereof. Any rent in excess of that paid by Tenant hereunder realized by reason
of such assignment, shall be deemed an item of such profit. If a part of the
consideration for such assignment shall be payable other than in cash, the
payment to Landlord shall be payable in accordance with the foregoing percentage
of the cash and other noncash considerations in such form as is satisfactory to
Landlord. Such percentage of Tenant's profit shall be paid to Landlord promptly
by Tenant upon Tenant's receipt from time to time or periodic payments from such
assignee or subtenant or at such other time as Tenant shall realize its profits
from such assignment or sublease.
20. RIGHT OF FIRST REFUSAL:
In consideration of the execution of this lease, Landlord grants to Tenant the
right of first refusal to purchase the Building. If during the term of this
lease and any renewals thereof, Landlord should receive an offer to purchase the
said Building, in writing, which Landlord desires to accept, Landlord shall
first deliver copy of such offer to Tenant, who shall have thirty (30) days
thereafter within which to notify Landlord, in writing, that it elects to
purchase the said Building on the same terms and conditions as specified in the
offer. In the event Tenant does not elect to purchase said Building with the
time provided, Landlord shall be free to accept the offer and consummate the
sale in accordance with the specific terms and conditions. In the event the
Landlord does not accept the offer and consummate the sale, Landlord shall be
required to submit and different offers and all future offers to Tenant pursuant
to its right of first refusal.
21. SURRENDER OF POSSESSION:
Upon the expiration of the Term or upon the termination of Tenant's right of
possession, whether by lapse of time or at the option of Landlord as herein
provided, Tenant shall forthwith surrender the Premises to Landlord in good
order, repair and condition, ordinary wear and loss or damage by fire or
insurable casualty excepted. At the termination of the Term or of Tenant's right
of possession, Tenant agrees to remove the following items of Tenant's property:
office furniture, trade fixtures, office equipment and all other items of
Tenant's property on Premises. At Tenant's option, Tenant shall repair any loss
or damage by fire or insurable casualty damages to Landlord's satisfaction, or
Tenant shall pay to Landlord upon demand, the cost of repairing any damage to
the Premises and to
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the Building caused by any such removal. If Tenant shall fail or refuse to
remove any such property from the Premises, pursuant to the terms of Paragraph
12 hereof, Tenant shall be conclusively presumed to have abandoned the same, and
title thereto shall thereupon pass to Landlord without any cost either by
set-off, credit, allowance or otherwise, and Landlord-may, at its option, accept
the title to such property or at Tenant's expense may: (i) remove the same or
any part in any manner that Landlord shall choose, repairing any damage to the
Premises caused by such removal; and (ii) store, destroy or otherwise dispose of
the same without incurring liability to Tenant or any other person.
22. HOLDING OVER:
A. Tenant shall pay to Landlord an amount as Rent equal to one hundred
fifty percent (150%) of the Rent herein provided during each month or portion
thereof for which Tenant shall retain possession of the Premises or any part
thereof, after the termination of the Term or of Tenant's right of possession,
whether by lapse of time or otherwise and also shall pay all damages sustained
by Landlord, whether direct or consequential, on account thereof. The provisions
of this Paragraph shall not be deemed to limit or constitute a waiver of any
other rights or remedies of Landlord provided herein or at law.
B. Tenant shall be deemed to have retained possession of the Premises if
it fails to remove its property from the Premises as required in Paragraph 21
such that Landlord is prevented from delivering possession of all or any part of
the Premises to a subsequent tenant.
23. ESTOPPEL CERTIFICATE:
Tenant agrees that, from time to time, upon not less than fourteen (14) days
prior request by Landlord, Tenant, or Tenant's duly-authorized representative
having knowledge of this Lease, shall deliver to Landlord an executed and
completed estoppel certificate in the form attached hereto as Exhibit "B" and
made a part hereof, it being intended that any such certificate may be relied
upon by any prospective mortgagees thereof, or any prospective assignee of any
mortgagee thereof. Tenant shall execute and deliver to Landlord said executed
and completed certificate within fourteen (14) days following a request and
delivery of such estoppel certificate from Landlord. In the event Tenant fails
so to do within said fourteen (14) days, Tenant shall be considered in default
under this Lease.
24. LANDLORD'S RIGHT TO SUBORDINATE LEASE:
A. Landlord may subject and subordinate the Lease, at all times, to
the lien of any mortgage or mortgages now or hereafter placed upon the Property
on which the Premises are located, provided that, if and when any such mortgage
is placed, Landlord shall, have the mortgagee agree for itself and for every
subsequent holder or owner of the mortgage in the event of foreclosure. Tenant's
quiet possession of the Premises will not be disturbed on account of said
mortgage or by reason of anything done thereunder so long
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as Tenant pays the Rent and keeps the other covenants as its part to be
performed. In such event, Landlord shall use reasonable efforts to provide
tenant with a Subordination, Non-Disturbance and Attornment Agreement executed
by Landlord, the mortgagee, and any other persons claiming benefits under such
Agreement, which shall provide: (i) that the lease is subordinate to the lien of
any mortgage or mortgages upon the Property; (ii) that the Tenant's right of
possession will not be disturbed by the mortgagee in connection with any
mortgage foreclosure proceedings so long as Tenant performs its obligations set
forth in the Lease; and (iii) that the Tenant shall attorn to the foreclosing
mortgagee or purchaser at the foreclosure sale. Tenant agrees to execute such
Subordinate, Non-Disturbance and Attornment Agreement.
B. Landlord agrees that, in the event a mortgage is placed on the Property
and a Collateral Assignment of Rents or Leases is given as security for the
loan, Tenant will be furnished with a copy of such Collateral Assignment.
25. CERTAIN RIGHTS RESERVED BY LANDLORD:
Landlord shall have the following rights, each of which Landlord may
exercise upon ten (10) days advance written notice to Tenant, except as provided
below and without liability to Tenant for damage or injury to Property, person
or business on account of the exercise thereof, and the reasonable exercise of
any such rights shall not be deemed to constitute an eviction or disturbance of
Tenant's use or possession of the Premises and shall not give rise to any claim
for set-off or abatement of Rent and any other claim.
A. To change the Building's name or street address.
B. To install, affix and maintain any and all signs on the exterior and in
the interior of the Building.
C. To decorate or to make repairs, alterations, additions, or
improvements, whether structural or otherwise, in and about the Building, or any
part thereof, and for such purposes to enter upon the Premises, and, during the
continuance of any said work, to temporarily close doors, entryway, public space
and corridors in and about the Building and to interrupt or temporarily suspend
services or use of facilities, all without affecting any of Tenant's obligations
hereunder, so long as the Premises are reasonably accessible and usable.
D. To furnish door keys for doors in the Premises at the commencement of
the Lease. To retain, at all times, and to use in appropriate instance, keys to
all doors within and into the Premises. Tenant agrees to purchase only from
Landlord additional duplicate keys as required, to change no locks, and not to
affix locks on doors without the prior written consent of Landlord.
Notwithstanding the provisions for Landlord's access to Premises, Tenant
relieves and releases the Landlord of all responsibility arising out of theft,
robbery and pilferage, except if caused by the negligence of Landlord. Upon the
expiration of the Term or of Tenant's right to possession, Tenant shall return
all keys to
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Landlord and shall disclose to Landlord the combination of any safes, cabinets
or vaults left in the Premises.
E. To designate that window treatments shall be building standard venetian
blinds or curtains and to designate and approve, prior to installation, all
types of additional window shades, blinds or draperies.
F. To approve the weight, size and location of safes, vaults and other
heavy equipment and articles in aid about the Premises and the Building (so as
not to exceed the legal live load per square foot designated by the structural
engineers for the Building) and to require all such items and furniture and
similar items to be moved into or out of the Building and the Premises only at
such times and in such manner as Landlord shall direct in writing. Tenant shall
not install or operate machinery or any mechanical devices of a nature not
directly related to Tenant's ordinary use of the Premises without the prior
written consent of the Landlord. Movements of Tenant's property into or out of
the Building and within the Building are entirely at the risk and responsibility
of Tenant.
G. To show the Premises to prospective tenants at reasonable hours during
the last twelve (12) months of the Term, and if vacated or abandoned, to show
the Premises at any time and to prepare the Premises for re-occupancy.
H. To erect, use and maintain pipes, ducts, wiring and conduits, and
appurtenances thereto, in and through the Premises at reasonable locations.
I. To enter the Premises during Tenant's normal business hours on
reasonable notice to inspect the Premises.
26. LANDLORD'S REMEDIES:
If default shall be made in payment of the Rent or any installment thereof or in
the payment of any other sum required to be paid by Tenant under this Lease or
under the terms of any other agreement between Landlord and Tenant and such
default shall continue for ten (10) days after written notice to Tenant, or if
default shall be made in the observance or performance of any other covenants or
conditions in this Lease which Tenant is required to observe and such default
shall continue for thirty (30) days after written notice to Tenant, provided
that if such default cannot reasonably be cured within thirty (30) days the
period of grace shall be extended for so long as Tenant in good faith is
diligently prosecuting a cure, but in no event shall such cure period extend
beyond ninety (90) days or if a default involves a hazardous condition and is
not cured or action commenced to cure by Tenant immediately upon written notice
to Tenant, or if the interest of Tenant in this Lease shall be levied upon or
under execution or other legal process, or if any voluntary petition in
bankruptcy or for corporate reorganization or any similar relief shall be filed
by Tenant, or if any involuntary petition in bankruptcy shall be filed against
Tenant under any federal or state bankruptcy or insolvency act and shall not
have been dismissed within thirty (30) days from the filing thereof, or if a
receiver shall be
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<PAGE> 20
appointed for Tenant or any of the property of Tenant by any court and such
receiver shall not have been dismissed within thirty (30) days from the date of
his appointment, or if Tenant shall make an assignment for the benefit of
creditors, or if Tenant shall admit in writing Tenant's inability to meet
Tenant's debts as they mature, or if Tenant shall abandon and cease paying rent
for the Premises during the Term, then Landlord may treat the occurrence of any
one or more of the foregoing events as a breach of this Lease, and thereupon, at
its option may, with notice to Tenant or demand of any kind to Tenant or any
other person, have any one or more of the following described remedies in
addition to all other rights and remedies provided at law or in equity or
elsewhere herein:
A. Landlord may terminate this Lease and the Term created hereby, in which
event Landlord may forthwith repossess the Premises and be entitled to recover
forthwith, any other sums or damages for which Tenant may be liable to Landlord
and may also collect expenses of said period. Should the fair market value of
the Premises, after deduction of all for reletting for the balance of the Term,
exceed the value of the Rent provided to be paid by Tenant for the balance of
the Term, Landlord shall have no obligation to pay to Tenant the excess or any
part thereof against any other sums or damages for which Tenant may be liable to
Landlord.
B. Landlord may terminate Tenant's right of possession and may repossess
the Premises by taking peaceful possession or otherwise, in which event Landlord
shall take reasonable efforts to relet the same for the account of Tenant, for
such rent and upon such terms as shall be satisfactory to Landlord. For the
purpose of such reletting, Landlord is authorized to decorate, repair, remodel
or alter the Premises. If the Premises are relet and a sufficient sum shall not
be realized from such reletting after paying all of the reasonable costs and
expenses of all decoration, repairs, remodeling, alterations and additions, and
the expenses of such reletting and of the collection of the Rent accruing
therefrom to satisfy the Rent provided for in this Lease, Tenant shall satisfy
and pay the same upon demand therefor from time to time.
C. Tenant agrees that Landlord may file suit to recover any sums falling
due under the terms of this Paragraph from time to time, and that no suit or
recovery of any portion due Landlord hereunder shall be any defense to any
subsequent action brought for any amount not theretofore reduced to judgement in
favor of Landlord.
27. EXPENSE OF ENFORCEMENT:
In the event that either party shall bring action against the other party to
enforce any of the terms, covenant or conditions contained in this Lease, the
non-prevailing party in such action shall pay upon demand all of the prevailing
parties reasonable costs, charges and expenses, including the fees and
out-of-pocket expenses of counsel, agents and others retained by the prevailing
party in connection with such action. In the event that Landlord is involved in
any litigation, negotiation or transaction in which the Tenant causes the
Landlord, without the Landlord's fault, to become involved or concerned, the
Tenant shall
20
<PAGE> 21
pay upon demand all Landlord's reasonable costs, charges and expenses, including
the fees and out-of-pocket expense of counsel, agents and others retained by
Landlord in connection with such matter. In the event that the Tenant is
involved in any litigation, negotiation or transaction in which the Landlord
causes the Tenant, without the Tenant's fault, to become involved or concerned,
the Landlord shall pay upon demand all Tenant's reasonable costs, charges and
expenses, including the fees and out-of-pocket expense of counsel, agents and
others retained by Tenant in connection with such matter.
28. COVENANT OF QUIET ENJOYMENT:
The Landlord covenants that the Tenant, on paying the Rent, charges for services
and other payments herein reserved and on keeping, observing and performing all
other terms, covenants, conditions, provisions and agreements herein contained
on the part of the Tenant to be kept, observed and performed, shall during the
Term, peaceably and quietly have, hold and enjoy the Premises subject to the
terms, covenants, conditions, provisions, and agreements hereof.
29. TENANT PARKING SPACES:
Tenant shall be entitled to the use of all of the available parking spaces
within the parking lot (see the Exhibit "A" Site Plan) on the Land serving the
Building.
30. LANDLORD'S REPRESENTATIONS AND WARRANTIES:
A. Landlord represents and warrants that, both on the date the Lease is
executed and on the Commencement Date: (i) the Premises may be used for the
purposes for which it is leased; (ii) to the best of Landlord's knowledge the
Property is in compliance and will remain in compliance with all applicable
federal, state and local environmental laws, regulations, and ordinances; (iii)
the Premises are free and clear from all tenancies, occupancies, claims, or
rights to possession of persons other than the rights of Landlord and Tenant
under the Lease; (iv) the Property is subject to no orders, notices, violations,
and materialmen's and mechanic's liens, filed or entered by any public or
quasi-public authority; and (v) the Property is free from complaints or reports
of violations, noted or existing in or filed with any federal, state, county, or
local authority.
B. Landlord represents and warrants that it shall maintain the Property in
accordance with: (i) all Landlord's representations and warranties herein; and
(ii) all laws, regulations, rules, and ordinances, including those pertaining to
the environment, now in existence or subsequently enacted or promulgated during
the Term. Landlord further represents and warrants that any and all costs for
such maintenance of the Property shall, unless otherwise provided for in the
Lease, be borne solely by Tenant.
21
<PAGE> 22
C. Landlord represents and warrants that it will indemnify and hold Tenant
harmless from and against any damage, liability, fines, penalties, costs, or
losses (hereinafter collectively "Claims") to which Tenant may be subjected as a
result of Landlord's breach of any of its representations or warranties.
D. Landlord agrees to manage and operate the Property in accordance with
generally accepted standards for managing and operating-similar properties in
the vicinity.
31. MISCELLANEOUS:
A. Rights Cumulative. All rights and remedies of Landlord and
Tenant under this Lease shall be cumulative and none shall exclude any other
rights and remedies allowed by law.
B. Late Payment Charges. Tenant hereby acknowledges that late payment by
Tenant to Landlord of Rent will cause Landlord to incur costs not contemplated
by this Lease, the exact amount of which is difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, attorneys'
fees and late charges which will be imposed upon Landlord by the terms of the
mortgage covering the Premises. Accordingly, if any sum due from Tenant for Rent
shall not be received by Landlord, or Landlord's designee, on or before the
first day of each month that said Rent is due as provided for herein, then, and
in that event, Tenant shall pay to Landlord a late charge equal to five percent
(5%) of such overdue amount for each month, or part thereof, that said payment
is overdue. Said late charge amount shall be due notwithstanding any cure
periods Tenant may have under Paragraph 26 above. The parties hereby agree that
such late charges represent a fair and reasonable estimate of the cost that
Landlord will incur by reason of the late payment by Tenant. Acceptance of such
late charges by Landlord shall in no event constitute a waiver of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted hereunder.
C. Terms. The necessary grammatical changes required to make the
provisions hereof or partnerships or individuals, men or women, as the case may
require, shall in all cases be assumed as though in each case fully expressed.
Further, Landlord and Tenant acknowledge and agree that when the word "Term" is
used herein, it shall also mean and refer to any additional renewed terms that
Tenant shall exercise.
D. Binding Effect. Each of the provisions of this Lease shall extend to
and shall, as the case may require, bind or inure to the benefit not only of the
Landlord and of Tenant, but also of their respective successors or assigns,
provided this Paragraph shall not permit any assignment by Tenant contrary to
the provisions of this Paragraph hereof.
E. Lease Contains All Terms. All of the representations and obligations
of Landlord and Tenant are contained herein and in the Exhibits attached hereto,
and no
22
<PAGE> 23
modification, waiver or amendment of this Lease or of its conditions or
provisions shall be binding the Landlord unless in writing signed by Landlord or
by a duly authorized agent of the Landlord empowered by a written authority
signed by Landlord.
F. Delivery for Examination. Submission of the form of the Lease for
examination shall not bind Landlord or Tenant in any manner, and no Lease or
obligations of the Landlord or Tenant shall rise until this instrument is signed
by both Landlord and Tenant and delivery is made to each.
G. No Air Rights. No rights to any view or to light or air over any
property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease.
H. Modifications of Lease. If any lender requires, as a condition to its
lending funds, the repayment of which is to be secured by a mortgage or trust
deed on the Land and Building or either, that certain modifications be made,
which modification will not require Tenant to pay any additional amounts or
otherwise change materially the rights or obligations of Tenant hereunder,
Tenant shall, upon Landlord's request, execute appropriate instruments effecting
such modification(s).
I. Transfer of Landlord's Interest. Tenant acknowledges that Landlord has
the right to transfer its interest in the Land and Building and in this Lease,
and Tenant agrees that in the event of any such transfer and the assumption in
writing by the transferee of Landlord's obligations hereunder, Landlord shall
thereupon be released from all liabilities under this Lease without the
requirement of any notice to or acknowledgment or consent by Tenant, and Tenant
agrees to look solely to such transferee for the performance of Landlord's
obligations hereunder. Tenant further acknowledges that Landlord may assign its
interest in this Lease to a mortgage lender as additional security and agrees
that such an assignment shall not release Landlord from its obligations
hereunder and that Tenant shall continue to look to the Landlord for the
performance of its obligations hereunder.
J. Landlord's Title. Landlord's title to the Land is and always shall be
paramount to the interest of Tenant under this Lease. Nothing herein contained
shall empower Tenant to do any act which can, shall or may encumber the title of
Landlord.
K. Prohibition Against Recording. Neither this Lease nor any memorandum,
affidavit or other writing with respect thereto, shall be recorded by the Tenant
or by any one acting through, under or on behalf of the Tenant, and the
recording thereof in violation of this provision shall make this Lease null and
void at Landlord's election.
L. Caption. The captions of Paragraphs and subparagraphs are for
convenience only and shall not be deemed to limit, construe, affect or alter the
meaning of such Sections or subsections.
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<PAGE> 24
M. Covenants and Conditions. All of the covenants of Tenant and Landlord
hereunder shall be deemed and construed to be "conditions" as well as
"covenants" as though the words specifically expressing or importing covenants
and conditions were used in each separate instance.
N. Only Landlord/Tenant Relationships. Nothing contained in this Lease
shall be deemed or construed by the parties hereto or by any third party to
create the relationship of principal and agent, partnership, joint venture or
any association between Landlord and Tenant, it being expressly understood and
agreed that neither the method of computation of Rent nor any act of the parties
hereto shall be deemed to create any relationship between Landlord and Tenant
other than the relationship of Landlord and Tenant.
O. Application of Payments. Landlord shall have the right to apply
payments received from Tenant pursuant to this Lease (regardless of Tenant's
designation of such payments) to satisfy any obligations of Tenant hereunder, in
such order and amounts as Landlord in its sole discretion may elect.
P. Definition of "Landlord". All indemnities, covenants and agreements of
Tenant contained herein which inure to the benefit of Landlord shall be
construed to also inure to the benefit of the Landlord's beneficiaries and all
partners therein.
32. NOTICES:
All notices, demands or requests to be given under this Lease shall be in
writing and delivered either: (i) personally; or (ii) deposited in the United
States mail, certified or registered mail with return receipt requested, postage
prepaid; or (iii) by nationally recognized overnight delivery service; addressed
as follows:
A. IF TO LANDLORD: Mr. Robert R. Eustace
Applied Properties, L.L.C.
1185 Doubloon Drive
Stuart, Florida 34996
B. IF TO TENANT: Mr. James P. Kellner
Applied Systems, Inc.
200 Applied Parkway
University Park, Illinois 60466
or to such other person or such other address which any party entitled to
receive notice hereunder designates to the other in writing. Notice shall be
deemed given when received in the case of personal delivery or overnight
delivery service as aforesaid and notices sent
24
<PAGE> 25
by mail shall be deemed to have been delivered when deposited in the United
States mail as aforesaid.
IN WITNESS WHEREOF, Landlord and Tenant have hereunto executed this Lease as of
the day and year first above written.
TENANT: LANDLORD:
APPLIED SYSTEMS, INC., APPLIED PROPERTIES, L.L.C.,
an Illinois corporation an Illinois limited liability company
By:
--------------------------- -------------------------------------
CEO/President Member
Attest:
-----------------------------
Secretary
25
<PAGE> 26
EXHIBIT "A"
TO
LEASE FOR STUENKEL ROAD & CICERO AVENUE OFFICE BUILDING
UNIVERSITY PARK, ILLINOIS
APPLIED PROPERTIES, L.L.C. AS LANDLORD, AND
APPLIED SYSTEMS, INC., AS TENANT,
DATED SEPTEMBER 1, 1998
SITE PLAN
26
<PAGE> 27
EXHIBIT "B"
TO
LEASE FOR STUENKEL ROAD & CICERO AVENUE OFFICE BUILDING
UNIVERSITY PARK, ILLINOIS
APPLIED PROPERTIES, L.L.C., AS LANDLORD, AND
APPLIED SYSTEMS, INC., AS TENANT,
DATED SEPTEMBER 1, 1998
ESTOPPEL CERTIFICATE
Re: Lease Dated: September 1, 1998
Landlord: Applied Properties, L.L.C.
Tenant: Applied Systems, Inc.
Premises: Stuenkel Road and Cicero Avenue University Park,
Illinois 60466 160,723 Rentable Square Feet
The undersigned, as Tenant under the Lease aforesaid, hereby acknowledges for
the benefit of _______________________________which has or is about to make a
loan to the Landlord aforesaid, part of the security for which will by a
mortgage covering the Premises aforesaid and an assignment of Landlord's
interest in said Lease, the truth and accuracy of the following statements
pertaining to said Lease.
1. Tenant has accepted and is in full possession of the Premises.
2. The term of the Lease commenced on ___________________ and the
Lease is in full force and effect.
3. Landlord has satisfactorily complied with all of the requirements
and conditions precedent to the commencement of the term of the Lease as
specified in the Lease.
4. All improvements, additions and alterations required to be made
by the Landlord with respect to the Premises have been fully completed by
Landlord and are acceptable to Tenant, except for______________________________
________________________________________________________________________.
5. Tenant is paying the full Rent stipulated in the Lease and there
are no known offsets, defenses or claims on the part of Tenant with respect
thereto.
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<PAGE> 28
6. The fixed annual Rent under the Lease is $___________ and no
monies have been paid to Landlord in advance of the due date set forth in the
Lease, except ________________________________________________________________.
A true and complete copy of the Lease (together with all amendments if any
aforementioned) is attached hereto and hereby made a part hereof.
7. Tenant acknowledges that ____________________________assumed no
liability for its security deposits, if any, or for sums escrowed with the
Landlord for taxes in the event that ___________________________________acquires
the building in which the Premises are located by foreclosure or by transfer of
title in lieu of foreclosure.
8. Tenant acknowledges that there are no known defaults of any terms
of the lease by the Landlord, except ___________________________________________
________________________________________________________________________________
___________________________________________________________________________.
9. The amount of security deposit currently held by Landlord is
$__________________, and Tenant knows of no claims against such security
deposits, except _______________________________________________________________
________________________________________________________________________________
_________________________________________________________________________.
Dated:
------------------
TENANT:
APPLIED SYSTEMS, INC.,
an Illinois corporation
By:
----------------------
(Title)
Address to which notices are to be sent if other than the Premises:
28
<PAGE> 1
EXHIBIT 10.4
AGREEMENT
Employment Agreement, between Applied Systems, Inc. (the "Company") and Timothy
McIntyre (the "Employee").
1. For good and sufficient consideration, the Company employs the
Employee on the following terms and conditions.
2. Term of Employment. Subject to the provisions for the termination set
forth below, the initial term of this agreement will begin on May 4, 1998.
The initial term of this agreement shall terminate on May 4, 2000,
unless sooner terminated.
The term of employment shall be renewed automatically for successive
periods of one (1) year each (a "Renewal Term") at an Annual Salary at least
equal to the Annual Salary in the preceding year, after the expiration of the
initial term and any subsequent Renewal Term, unless the Board of Directors
provides the Employee, or Employee provides the Board of Directors with written
notice to the contrary at least sixty (60) days prior to the end of the initial
term or of any Renewal Term.
3. Salary. The Company shall pay Employee a salary of $11,250.00 per
month, for the services of the Employee, payable at regular payroll periods.
In addition, Employee shall be eligible for an annual discretionary bonus and
participation in any other compensation plans as the Company may create from
time to time.
4. Duties and Position. The Company hires the Employee in the capacity
of Chief Financial Officer. The Employee's duties may be reasonably modified
at the Company's discretion from time to time.
5. Employee to Devote Full Time to Company. The Employee will devote
full time, attention, and energies to the business of the Company, and, during
this employment, will not engage in any other business activity, regardless of
whether such activity is pursued for profit, gain, or other pecuniary advantage.
Employee is not prohibited from making personal investments in any other
businesses provided those investments do not require active involvement in the
day to day operation of said companies.
6. Confidentiality or Proprietary Information. Employee agrees, during
and for two (2) years after the term of his employment, not to reveal
confidential information, or trade secrets as defined in the Illinois Trade
Secrets Act, 765 ILCS section 1065, et seq., to any person, firm, corporation,
or entity. Should Employee reveal or threaten to reveal this information, the
Company shall be entitled to an injunction restraining the Employee from
disclosing same, or from rendering any services to any entity to whom said
information has been or is threatened to be disclosed by employee. The right to
secure an injunction is not exclusive, and the Company may pursue any other
remedies it has against the Employee for a breach or threatened breach of this
condition, including the recovery of damages from the Employee.
1
<PAGE> 2
7. Reimbursement of Expenses. The Employee may incur reasonable
expenses for furthering the Company's business, including expenses for
entertainment, travel, and similar items. The Company shall reimburse Employee
for all business expenses after the Employee presents an itemized account of
expenditures, pursuant to Company policy.
8. Vacation. The Employee shall be entitled to a yearly vacation. For
1998, Employee shall be entitled to two weeks paid vacation. For 1999 and
future years, vacation shall accrue monthly at a rate of 3 weeks per year.
9. Termination of Agreement. With cause, the Company may, without
notice, terminate this agreement at any time. The Company shall be liable to
the Employee only to the date of such termination.
For purposes of this Agreement "cause" shall exclusively consist of the
following:
(i) Employee shall have breached any of his material obligations or
duties under this Agreement or the fiduciary duty of loyalty
owed to Company and which breach in not cured within thirty
(30) days after written notice from Company;
(ii) Employee shall have refused to, or willfully failed to, perform
his material duties hereunder;
(iii) Employee shall have committed intentional acts that materially
impair the goodwill or business of the Company or cause
material damage to its property, goodwill or business; or
(iv) Employee shall have been convicted of any felony or act of
fraud, theft, misappropriation or embezzlement.
Without cause, the Company may terminate this agreement at any time upon
one day written notice to the Employee. If the Company requests, the Employee
will continue to perform his duties and may be paid his regular salary up to the
date of termination. In addition, the Company will pay the Employee on the date
of the termination a severance allowance in the amount of 6 months of salary
less taxes and social security required to be withheld and employee shall
receive 6 months of health insurance coverage at the Company's expense. Without
cause, the Employee may terminate employment upon 30 days' written notice to the
Company. Employee may be required to perform his or her duties and will be paid
the regular salary to date of termination but shall not receive severance
allowance if termination is by Employee.
Notwithstanding anything to the contrary contained in this agreement,
Employee may terminate the Employee's employment, upon 30 days' notice to the
Company, should any of the following events occur.
a) The sale of substantially all of the Company's assets to a
single purchaser or group of associated purchasers;
<PAGE> 3
b) The sale, exchange, or other disposition, in one transaction
of the majority of the Company's outstanding corporate
shares;
c) The Company's decision to terminate its business and
liquidate its assets;
d) The merger or consolidation of the Company with another
company.
e) Bankruptcy or chapter 11 reorganization.
f) A material diminution in Employee's duties and
responsibilities.
Under the above circumstances, the Company will pay the Employee
on the date of the termination a severance allowance in the
amount of 6 months of salary less taxes and social security
required to be withheld and employee shall receive 6 months of
health insurance coverage at the Company's expense.
The compensation under this Agreement shall be the Employee's
exclusive remedy.
10. Death Benefit. Should Employee die during the term of
employment, the Company shall pay to Employee's estate any compensation
due through the end of the month in which death occurred.
11. Restriction on Post Employment Competition. For a period of two
(2) years after the end of employment, the Employee shall not control,
consult to or be employed in any capacity by any direct competitor
(insurance automation and specific automation produced by the Company) of
the Company, either by soliciting any of its accounts or by operating
within Employer's general trading area.
12. Assistance in Litigation. Employee shall, upon reasonable
notice, furnish such information and proper assistance to the Company as
it may reasonably require in connection with any litigation in which it
is, or may become, a party either during or after employment.
13. Limited Effect of Waiver by Company. Should either party waive
breach of any provision of this agreement, that waiver will not operate or
be construed as a waiver of further breach.
14. Severability. If, for any reason, any provision of this
agreement is held invalid, all other provisions of this agreement shall
remain in effect. If this agreement is held invalid or cannot be
enforced, then to the fullest extent permitted by law, any prior agreement
between the Company (or any predecessor thereof) and the Employee shall be
deemed reinstated as if this agreement had not been executed.
15. Assumption of Agreement by Company's Successors and Assignees.
The Company's rights and obligations under this agreement will inure to the
benefit and be binding upon the Company's successors and assignees.
3
<PAGE> 4
16. Oral Modifications not Binding. This instrument is the entire
agreement of the Company and the Employee. Oral changes have no effect.
It may be altered only by a written agreement signed by the party against
whom enforcement of any waiver, change, modification, extension, or
discharge is sought. This Agreement adopts and incorporates by reference,
Applied Systems Employee Handbook, to the extent the Employee Handbook
does not specify conflict with the terms contains herein.
17. Applicable Law. This Agreement shall be governed by the laws of
the State of Illinois.
18. Arbitration. Except for the Company's right to seek an
injunction pursuant to paragraph 6 above, all other matters relating to
interpretation, performance or breach of the Agreement shall be the
subject of single arbitration binding arbitrators in Will County,
Illinois, under the auspices and pursuant to the Rules of the American
Arbitration Association. The prevailing party in such arbitration shall
be entitled to recover reasonable costs and reasonable attorneys fees.
Signed this 17th day of April 1998
APPLIED SYSTEMS, INC.
/s/ JAMES P. KELLNER /s/ TIMOTHY J. MCINTYRE
President/CEO Timothy McIntyre
4
<PAGE> 1
EXHIBIT 10.7
FORM OF
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT made this ___ day of ____, 1998
(this "Agreement"), between Applied Systems, Inc., a Delaware corporation
(the "Company"), and ___________________ (the "Indemnitee").
WHEREAS, it is essential to the Company and its stockholders
to attract and retain qualified and capable directors, officers, employees,
agents and fiduciaries;
WHEREAS, the Restated Certificate of Incorporation of the
Company (the "Certificate of Incorporation") and Restated By-Laws (the
"By-Laws") requires the Company to indemnify, and permits the Company to
advance expenses to, its directors, officers and employees to the extent not
prohibited by law;
WHEREAS, in recognition of Indemnitee's need for protection
against personal liability in order to induce Indemnitee to serve or continue
to serve the Company in an effective manner, and, in the case of directors and
officers, to supplement or replace the Company's directors' and officers'
liability insurance coverage, and in part to provide Indemnitee with specific
contractual assurance that the protection promised by the Certificate of
Incorporation and By-Laws will be available to Indemnitee (regardless of, among
other things, any amendment to or revocation of the Certificate of
Incorporation or By-Laws or any change in the composition of the Company's
Board of Directors or any acquisition transaction relating to the Company), the
Company, with the prior approval of the Company's stockholders, wishes to
provide the Indemnitee with the benefits contemplated by this Agreement; and
WHEREAS, as a result of the provision of such benefits,
Indemnitee has agreed to serve or to continue to serve the Company;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Definitions. The following terms, as used herein, shall
have the following respective meanings:
(a) A "Change in Control" shall be deemed to have occurred if
any of the following shall have occurred after the date hereof:
(1) the acquisition by any individual, entity or group
(a "Person"), including any"person" within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act
<PAGE> 2
of 1934, as amended (the "Exchange Act"), of beneficial ownership
within the meaning of Rule 13d-3 promulgated under the Exchange Act,
of both (x) 25% or more of the combined voting power of the then
outstanding securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting
Securities") and (y) combined voting power of the Outstanding Company
Voting Securities equal to or in excess of the combined voting power
of the Outstanding Company Voting Securities held by the Eustace
Family (as hereinafter defined); provided, however, that the
following acquisitions shall not constitute a Change in Control: (A)
any acquisition directly from the Company (excluding any acquisition
resulting from the exercise of a conversion or exchange privilege in
respect of outstanding convertible or exchangeable securities unless
such outstanding convertible or exchangeable securities were acquired
directly from the Company), (B) any acquisition by the Company, (C)
any acquisition by an employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled
by the Company, (D) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation involving the Company, if,
immediately after such reorganization, merger or consolidation, each
of the conditions described in clauses (i), (ii) and (iii) of
subsection (3) of this Section 1(a)(1) shall be satisfied or (E) any
acquisition by any member of the Eustace Family; and provided further
that, for purposes of clause (B), if any Person (other than the
Company or any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company or any member of the Eustace Family) shall, by reason of an
acquisition of Outstanding Company Voting Securities by the Company,
become the beneficial owner of (x) 25% or more of the Outstanding
Company Voting Securities and (y) combined voting power of the
Outstanding Company Voting Securities equal to or in excess of the
combined voting power of the Outstanding Company Voting Securities
held by the Eustace Family, and such Person shall, after such
acquisition of Outstanding Company Voting Securities by the Company,
become the beneficial owner of any additional Outstanding Company
Voting Securities and such beneficial ownership is publicly
announced, such additional beneficial ownership shall constitute a
Change in Control;
(2) individuals who, as of the date of the closing of
the Company's initial public offering of Common Stock, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of such Board; provided, however, that any
individual who becomes a director of the Company subsequent to such
date whose election, or nomination for election by the Company's
<PAGE> 3
stockholders, was approved by the vote of at least a majority of the
directors then comprising the Incumbent Board shall be deemed to have
been a member of the Incumbent Board; and provided further, that no
individual who was initially elected as a director of the Company as
a result of an actual or threatened election contest, as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act, or any other actual or threatened solicitation of
proxies or consents by or on behalf of any Person other than the
Board shall be deemed to have been a member of the Incumbent Board;
(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation or of the issuance of shares
of Common Stock of the Company in connection therewith unless, in any
such case, immediately after such reorganization, merger or
consolidation, (i) more than 50% of the combined voting power of the
then outstanding securities of the corporation resulting from such
reorganization, merger or consolidation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals or
entities who were the beneficial owners, respectively, of the
Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation and in substantially the same
proportions relative to each other as their ownership, immediately
prior to such reorganization, merger or consolidation, of the
Outstanding Company Voting Securities, (ii) no Person (other than the
Company, any employee benefit plan (or related trust) sponsored or
maintained by the Company or the corporation resulting from such
reorganization, merger or consolidation (or any corporation
controlled by the Company) and any Person which beneficially owned,
immediately prior to such reorganization, merger or consolidation,
directly or indirectly, 25% or more of the Outstanding Company Voting
Securities) beneficially owns, directly or indirectly, (x) 25% or
more of the combined voting power of the then outstanding securities
of such corporation entitled to vote generally in the election of
directors and (y) combined voting power of the then outstanding
securities of such corporation equal to or in excess of the combined
voting power of the then outstanding securities of such corporation
held by the Eustace Family and (iii) at least a majority of the
members of the board of directors of the corporation resulting from
such reorganization, merger or consolidation were members of the
Incumbent Board at the time of the execution of the initial agreement
or action of the Board providing for such reorganization, merger or
consolidation or issuance of shares of Common Stock; or
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<PAGE> 4
(4) approval by the stockholders of the Company of (i)
a plan of complete liquidation or dissolution of the Company or (ii)
the sale or other disposition of all or substantially all of the
assets of the Company other than to a corporation with respect to
which, immediately after such sale or other disposition, (A) more
than 50% of the combined voting power of the then outstanding
securities thereof entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Voting
Securities immediately prior to such sale or other disposition and in
substantially the same proportions relative to each other as their
ownership, immediately prior to such sale or other disposition, of
the Outstanding Company Voting Securities, (B) no Person (other than
the Company, any employee benefit plan (or related trust) sponsored
or maintained by the Company or such corporation (or any corporation
controlled by the Company) and any Person which beneficially owned,
immediately prior to such sale or other disposition, directly or
indirectly, 25% or more of the Outstanding Company Voting Securities)
beneficially owns, directly or indirectly, (x) 25% or more of the
combined voting power of the then outstanding securities thereof
entitled to vote generally in the election of directors and (y)
combined voting power of the then outstanding securities thereof
equal to or in excess of the combined voting power of the then
outstanding securities thereof held by the Eustace Family and (C) at
least a majority of the members of the board of directors thereof
were members of the Incumbent Board at the time of the execution of
the initial agreement or action of the Board providing for such sale
or other disposition.
(b) "Claim" means any threatened, pending or completed
action, suit, arbitration or proceeding, whether brought by the Company or in
right of the Company, whether civil, criminal, administrative, investigative or
other, or any appeal therefrom, or any inquiry or investigation, that
Indemnitee in good faith believes might lead to the institution of any such
action, suit, arbitration or proceeding.
(c) "Equity Security" has the meaning given to such term
under Rule 3a11-1 of the General Rules and Regulations under the Exchange Act
as in effect on the date hereof.
(d) "Exchange Act" means the Securities and Exchange Act
of 1934, as amended.
(e) "Determination" means a determination, and Determined
means a matter which has been determined based on the facts known at the time,
by: (i) a majority vote of a quorum of
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<PAGE> 5
disinterested directors, or (ii) if such a quorum is not obtainable, or even if
obtainable, if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or, in the event there has been a Change in
Control, by the Special Independent Counsel (in a written opinion) selected by
Indemnitee as set forth in Section 6, or (iii) a majority of the disinterested
stockholders of the Company, or (iv) a final adjudication by a court of
competent jurisdiction.
(f) "D&O Insurance" means any valid directors' and officers'
liability insurance policy maintained by the Company for the benefit of the
Indemnitee, if any.
(g) "Eustace Family" means Robert R. Eustace, Elsa M.
Eustace, any descendant of Robert R. Eustace and Elsa M. Eustace or the spouse
of any such descendant (collectively, the "Eustace Family Group"), any trust or
other entity for the benefit of any member of the Eustace Family Group, any
partnership in which any member of the Eustace Family Group is a partner, the
estate of any member of the Eustace Family Group or any charitable organization
established by any member of the Eustace Family Group or by any ancestor of
Robert R. Eustace or Elsa M. Eustace.
(h) "Excluded Losses and Expenses" means (i) any Losses
or Expenses the payment of which by the Company under this Agreement is not
permitted under applicable law and (ii) any Losses or Expenses in connection
with any Claim (w) based upon or attributable to Indemnitee gaining in fact any
personal profit or advantage to which Indemnitee is not entitled, (x) for the
return by Indemnitee of any remuneration paid to Indemnitee without the
previous approval of the stockholders of the Company which is illegal, (y) for
an accounting of profits in fact made from the purchase or sale by Indemnitee
of securities of the Company within the meaning of Section 16 of the Exchange
Act or similar provisions of any state law, or (z) resulting in fact from
Indemnitee's knowingly fraudulent, dishonest or willful misconduct.
(i) "Expenses" means any reasonable expenses incurred by
Indemnitee as a result of a Claim or Claims made against Indemnitee for
Indemnifiable Events including, without limitation, attorneys' fees and all
other costs, expenses and obligations paid or incurred in connection with
investigating, defending, being a witness in or participating in (including,
without limitation, on appeal), or preparing to defend, be a witness in or
participate in any Claim relating to any Indemnifiable Event.
(j) "Fines" means any fine, penalty or, with respect to an
employee benefit plan, any excise tax or penalty assessed with respect thereto.
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<PAGE> 6
(k) "Indemnifiable Event" means any event or occurrence,
occurring prior to or after the date of this Agreement, related to the fact
that Indemnitee is, was or has agreed to serve as, a director, officer,
employee, trustee, agent or fiduciary of the Company, or is or was serving at
the request of the Company as a director, officer, employee, trustee, agent or
fiduciary of another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise, or by reason of anything done or not done by
Indemnitee, including, but not limited to, any breach of duty, neglect, error,
misstatement, misleading statement, omission, or other act done or wrongfully
attempted by Indemnitee, or any of the foregoing alleged by any claimant, in
any such capacity.
(l) "Losses" means any amounts or sums which Indemnitee is
legally obligated to pay as a result of a Claim or Claims made against
Indemnitee for Indemnifiable Events, including, without limitation, damages,
judgments and sums or amounts paid in settlement of a Claim or Claims, and
Fines.
(m) "Person" means any individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority or other
entity of whatever nature.
(n) A "Potential Change in Control" shall be deemed to have
occurred if (A) the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change in Control, (B) any Person
(including, without limitation, the Company) publicly announces an intention to
take or to consider taking actions which if consummated would constitute a
Change in Control, or (C) the Board of Directors adopts a resolution to the
effect that, for purposes of this Agreement, a Potential Change in Control has
occurred.
(o) "Relative" means a Person's spouse, parents, children,
siblings, mother- and father-in-law, sons- and daughters-in-law, and brothers-
and sisters-in-law.
(p) "Reviewing Party" means any appropriate person or body
consisting of a member or members of the Company's Board of Directors or any
other person or body appointed by such Board of Directors (including, without
limitation, the Special Independent Counsel referred to in Section 6) who is
not a party to the particular Claim for which Indemnitee is seeking
indemnification.
(q) "Subsidiary" means any corporation of which a majority of
any class of Equity Security is owned, directly or indirectly, by the Company.
(r) "Trust" means the trust established pursuant to Section 7
hereof.
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<PAGE> 7
(s) "Voting Shares" means any issued and outstanding shares
of capital stock of the Company entitled to vote generally in the election of
directors.
2. Basic Indemnification Agreement. In consideration of, and
as an inducement to, the Indemnitee rendering valuable services to the Company,
the Company agrees that in the event Indemnitee is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim by reason of (or arising in part out
of) an Indemnifiable Event, the Company will indemnify Indemnitee to the
fullest extent authorized by law, against any and all Losses and Expenses
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Losses and Expenses) of such Claim,
whether or not such Claim proceeds to judgment or is settled or otherwise is
brought to a final disposition, subject in each case, to the further provisions
of this Agreement.
3. Limitations on Indemnification. Notwithstanding the
provisions of Section 2, Indemnitee shall not be indemnified and held harmless
pursuant to this Agreement from any Losses or Expenses (a) which have been
Determined, as provided herein, to constitute Excluded Losses and Expenses, (b)
to the extent Indemnitee is indemnified by the Company and has actually
received payment pursuant to the Certificate of Incorporation, By-Laws, D&O
Insurance or otherwise, or (c) other than pursuant to the last sentence of
Section 4(d) or Section 15, in connection with any claim initiated by
Indemnitee, unless the Company has joined in or the Board of Directors has
authorized such claim.
4. Indemnification Procedures.
(a) Promptly after receipt by Indemnitee of notice of any
Claim, Indemnitee shall, if indemnification with respect thereto may be sought
from the Company under this Agreement, notify the Company of the commencement
thereof; provided, however, that the failure to give such notice promptly shall
not affect or limit the Company's obligations with respect to the matters
described in the notice of such Claim, except to the extent that the Company is
prejudiced thereby. Indemnitee agrees further not to make any admission or
effect any settlement with respect to such Claim without the consent of the
Company, except any Claim with respect to which the Indemnitee has undertaken
the defense in accordance with the second to last sentence of Section 4(d).
(b) If, at the time of the receipt of such notice, the
Company has D&O Insurance in effect, the Company shall give prompt notice of
the commencement of Claim to the insurers in accordance with the procedures set
forth in the respective policies. The Company shall thereafter take all
necessary or
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<PAGE> 8
desirable action to cause such insurers to pay, on behalf of Indemnitee, all
Losses and Expenses payable as a result of such Claim.
(c) To the extent the Company does not, at the time of the
Claim have applicable D&O Insurance, or if a Determination is made that any
Expenses arising out of such Claim will not be payable under the D&O Insurance
then in effect, the Company shall be obligated to pay the Expenses of any Claim
in advance of the final disposition thereof and the Company, if appropriate,
shall be entitled to assume the defense of such Claim, with counsel
satisfactory to Indemnitee, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, the Company will not
be liable to Indemnitee under this Agreement for any Expenses subsequently
incurred by Indemnitee in connection with such defense other than reasonable
Expenses of investigation; provided, however, that Indemnitee shall have the
right to employ its counsel with respect to such Claim but the fees and
expenses of such counsel incurred after delivery of notice from the Company of
its assumption of such defense shall be at the Indemnitee's expense; provided
further, that if (i) the employment of counsel by Indemnitee has been
previously authorized by the Company, (ii) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (iii) the Company shall not,
in fact, have employed counsel to assume the defense of such action, the
reasonable fees and expenses of counsel shall be at the expense of the Company.
(d) All payments on account of the Company's indemnification
obligations under this Agreement shall be made within 60 days of Indemnitee's
written request therefor unless a Determination is made that the Losses and
Expenses for which indemnification is sought constitute Excluded Loss and
Expenses or are otherwise not subject to Indemnification under this Agreement;
provided, however, that all payments on account of the Company's obligation to
pay Expenses under Section 4(c) of this Agreement prior to the final
disposition of any Claim shall be made within 20 days of Indemnitee's written
request therefor and such obligation shall not be subject to any such
Determination but shall be subject to Section 4(e) of this Agreement. In the
event the Company takes the position that Indemnitee is not entitled to
indemnification in connection with the proposed settlement of any Claim,
Indemnitee shall have the right at his own expense to undertake defense of any
such Claim, insofar as such proceeding involves Claims against the Indemnitee,
by written notice given to the Company within 10 days after the Company has
notified Indemnitee in writing of its taking such position; provided, however,
that the failure to give such notice within such 10-day period shall not affect
or limit the Company's obligations with respect to any such Claim if it is
subsequently determined that the associated Losses and Expenses do not
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<PAGE> 9
constitute Excluded Losses and Expenses or it is otherwise not subject to
indemnification under this Agreement, except to the extent that the Company is
prejudiced thereby. If it is subsequently determined in connection with such
proceeding that the Losses and Expenses are not Excluded Losses and Expenses
and that Indemnitee, therefor, is entitled to be indemnified under the
provisions of Section 2 hereof, the Company shall promptly indemnify
Indemnitee.
(e) Indemnitee hereby expressly undertakes and agrees to
reimburse the Company for all Losses and Expenses paid by the Company in
connection with any Claim against Indemnitee in the event and only to the
extent that a Determination shall have been made by a court of competent
jurisdiction in a decision from which there is no further right to appeal that
Indemnitee is not entitled to be indemnified by the Company for such Losses and
Expenses because such Losses and Expenses constitute Excluded Losses and
Expenses or because Indemnitee is otherwise not entitled to payment under this
Agreement.
(f) In connection with any Determination as to whether
Indemnitee is entitled to be indemnified hereunder, the burden of proof shall
be on the Company to establish that Indemnitee is not so entitled.
5. Settlement. The Company shall have no obligation to
indemnify Indemnitee under this Agreement for any amounts paid in settlement of
any Claim effected without the Company's prior written consent. The Company
shall not settle any Claim in which it takes the position that Indemnitee is
not entitled to indemnification in connection with such settlement without the
consent of Indemnitee, nor shall the Company settle any Claim in any manner
which would impose any Fine or any obligation on Indemnitee, without
Indemnitee's written consent. Neither the Company nor Indemnitee shall
unreasonably withhold its or his consent to any proposed settlement.
6. Change in Control; Extraordinary Transactions. The
Company and Indemnitee agree that if there is a Change in Control (other than a
Change in Control which has been approved by a majority of the Company's Board
of Directors who were directors immediately prior to such Change in Control),
then all Determinations thereafter with respect to the rights of Indemnitee to
be paid Losses and Expenses under this Agreement shall be made only by a
special independent counsel (the "Special Independent Counsel") selected by
Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld) or by a court of competent jurisdiction. The Company
shall pay the reasonable fees of such Special Independent Counsel and shall
indemnify such Special Independent Counsel against any and all reasonable
expenses (including reasonable attorneys' fees),
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<PAGE> 10
claims, liabilities and damages arising out of or relating to this Agreement or
its engagement pursuant hereto.
The Company covenants and agrees that, in the event of a
Change in Control which is a Corporate Transaction (as defined in clause (3) of
Section 1(a)), the Company will use its best efforts (a) to have the
obligations of the Company under this Agreement (including, without limitation,
those under Section 7) expressly assumed by the surviving, purchasing or
succeeding entity, or (b) otherwise adequately to provide for the satisfaction
of the Company's obligations under this Agreement, in a manner reasonably
acceptable to the Indemnitee.
7. Establishment of Trust. In the event of a Potential
Change in Control, the Company shall, upon written request by Indemnitee,
create a trust (the "Trust") for the benefit of Indemnitee and from time to
time upon written request of Indemnitee shall fund the Trust in an amount
sufficient to satisfy any and all Losses and Expenses which are actually paid
or which Indemnitee reasonably determines from time to time may be payable by
the Company under this Agreement. The amount or amounts to be deposited in the
Trust pursuant to the foregoing funding obligation shall be determined by the
Reviewing Party. The terms of the Trust shall provide that upon a Change in
Control: (i) the Trust shall not be revoked or the principal thereof invaded
without the written consent of Indemnitee; (ii) the trustee of the Trust shall
advance, within 20 days of a request by Indemnitee, any and all Expenses to
Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the
circumstances under which Indemnitee would be required to reimburse the Company
under Section 4(e) of this Agreement); (iii) the Company shall continue to fund
the Trust from time to time in accordance with the funding obligations set
forth above; (iv) the trustee of the Trust shall promptly pay to Indemnitee all
Losses and Expenses for which Indemnitee shall be entitled to indemnification
pursuant to this Agreement; and (v) all unexpended funds in the Trust shall
revert to the Company upon a final determination by a court of competent
jurisdiction in a final decision from which there is no further right of appeal
that Indemnitee has been fully indemnified under the terms of this Agreement.
The trustee of the Trust shall be chosen by Indemnitee.
8. No Presumption. For purposes of this Agreement, the
termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law.
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9. Non-exclusivity, Etc. The rights of Indemnitee hereunder
shall be in addition to any other rights Indemnitee may have under the
Certificate of Incorporation, the Company's By-Laws, the Delaware General
Corporation Law or otherwise, both as to action in Indemnitee's official
capacity and as to action in any other capacity by holding such office, and
shall continue after Indemnitee ceases to serve the Company as a director,
officer, employee, agent or fiduciary, for so long as Indemnitee shall be
subject to any Claim by reason of (or arising in part out of) an Indemnifiable
Event.
10. Liability Insurance; Notice Regarding Insurance.
(a) To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee, if an officer or director of the Company, shall be covered by such
policy or policies, in accordance with its or their terms, to the maximum
extent of the coverage available for any director or officer of the Company.
(b) The Company shall provide notice to the Indemnitee in
the event that (i) the Company's then current D&O Insurance will not be renewed
or will lapse and the Company will not obtain new D&O Insurance in an amount
not materially less than, and with a scope of coverage not materially less
than, that of the terminating D&O Insurance or (ii) the Company's then current
D&O Insurance will be reduced to a material extent in amount or scope. Such
notice shall be provided at least 30 days prior to such expiration or reduction
in amount or scope, as the case may be.
11. Subrogation. In the event of payment under this
Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of Indemnitee, who shall execute all papers required
and shall do everything that may be necessary to secure such rights, including
the execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
12. Partial Indemnity, Etc. If Indemnitee is entitled under
any provision of this Agreement to indemnification by the Company for some or a
portion of the Losses and Expenses of a Claim but not for all of the total
amount thereof, the Company shall nevertheless indemnify Indemnitee for the
portion thereof to which Indemnitee is entitled.
13. Contribution. If the indemnification or reimbursement
provided for hereunder is finally judicially determined by a court of competent
jurisdiction to be unavailable to Indemnitee in respect of any Losses or
Expenses (other than for any reason specified in Section 3 hereof), then the
Company agrees, to the extent permitted by applicable law, in lieu of
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indemnifying Indemnitee, to contribute to the amount paid or payable by
Indemnitee as a result of such Losses or Expenses in such proportion as is
appropriate to reflect the relative benefits accruing to the Company and
Indemnitee with respect to the events giving rise to such Losses or Expenses.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law, then the Company agrees to contribute to the
amount paid or payable by Indemnitee as a result of such Losses or Expenses in
such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company and of Indemnitee with respect to
the events giving rise to such Losses or Expenses. For purposes of this
Section 13, (i) the relative benefits accruing to the Company shall be deemed
to be the benefits accruing to it and to all of its directors, officers,
employees and agents (other than Indemnitee), as a group and treated as one
person (the "Company Group"), and the relative benefits accruing to Indemnitee
shall be deemed to be an amount not greater than Indemnitee's compensation from
the Company during the first year in which the events giving rise to such
Losses or Expenses are alleged to have occurred, and (ii) the relative fault of
the Company shall be deemed to be the fault of the Company Group, and the
relative fault of the Company and Indemnitee shall be determined by reference
to the relative intent, knowledge and access to information of the Company
Group and Indemnitee and their relative opportunity to have altered or
prevented the events giving rise to such Losses or Expenses.
14. Liability of Company. Indemnitee agrees that neither the
stockholders nor the directors nor any officer, employee, representative or
agent of the Company shall be personally liable for the satisfaction of the
Company's obligations under this Agreement and Indemnitee shall look solely to
the assets of the Company for satisfaction of any claims hereunder.
15. Enforcement.
(a) Indemnitee's right to indemnification and other rights
under this Agreement shall be specifically enforceable by Indemnitee only in
the state or Federal courts of the States of Delaware or Illinois and shall be
enforceable notwithstanding any adverse Determination by the Company's Board of
Directors, independent legal counsel, the Special Independent Counsel or the
Company's stockholders and no such Determination shall create a presumption
that Indemnitee is not entitled to be indemnified hereunder. In any such
action the Company shall have the burden of proving that indemnification is not
required under this Agreement.
(b) In the event that any action is instituted by Indemnitee
under this Agreement, or to enforce or interpret any
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of the terms of this Agreement, Indemnitee shall be entitled to be paid all
court costs and reasonable expenses, including reasonable counsel fees,
incurred by Indemnitee with respect to such action, unless the court determines
that each of the material assertions made by Indemnitee as a basis for such
action was not made in good faith or was frivolous.
16. Severability. In the event that any provision of this
Agreement is determined by a court to require the Company to do or to fail to
do an act which is in violation of applicable law, such provision (including
any provision within a single section, paragraph or sentence) shall be limited
or modified in its application to the minimum extent necessary to avoid a
violation of law, and, as so limited or modified, such provision and the
balance of this Agreement shall be enforceable in accordance with their terms
to the fullest extent permitted by law.
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such State.
18. Consent to Jurisdiction. The Company and Indemnitee each
hereby irrevocably consents to the jurisdiction of the courts of the States of
Delaware and Illinois for all purposes in connection with any action or
proceeding which arises out of or relates to this Agreement and agrees that any
action instituted under this Agreement shall be brought only in the state and
Federal courts of the States of Delaware and Illinois.
19. Notices. All notices or other communications required or
permitted hereunder shall be sufficiently given for all purposes if in writing
and personally delivered, sent by facsimile transmission or sent by registered
or certified mail, return receipt requested, with postage prepaid addressed as
follows, or by overnight mail service, or to such other address as the parties
shall have given notice of pursuant hereto:
(a) If to the Company, to:
Applied Systems, Inc.
200 Applied Parkway
University Park, Illinois 60466
Telephone: (708) 534-5575
Attention: President
Facsimile: (708) 534-6280
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(b) If to Indemnitee, to:
------------------------
c/o Applied Systems, Inc.
200 Applied Parkway
University Park, Illinois 60466
Telephone: (708) 534-5575
Facsimile: (708) 534-6280
20. Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
21. Successors and Assigns. The rights and obligations of
the parties to this Agreement are not transferrable except as provided herein.
This Agreement shall be binding upon all successors and assigns of the Company,
including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business and/or assets of the
Company. In the event of Indemnitee's death, the rights and obligations of the
Indemnitee shall be binding upon and inure to the benefit of the Indemnitee's
executor, administrator, legal representative or similar person.
22. Amendment; Waiver. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless made in
a writing signed by each of the parties hereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver.
IN WITNESS WHEREOF, the undersigned have duly executed this
Agreement as of the day and year first above written.
APPLIED SYSTEMS, INC.
By:
-------------------------
Name:
Title:
----------------------------
-------------------------
(Indemnitee)
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated July 17, 1998 (and to all references to our Firm) included in or
made a part of this Registration Statement (No. 333-59457).
ARTHUR ANDERSEN LLP
Chicago, Illinois
September 10, 1998
