<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EXCHANGE APPLICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7373 04-3338916
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBERS) IDENTIFICATION NO.)
</TABLE>
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
(617) 737-2244
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ANDREW J. FRAWLEY
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
EXCHANGE APPLICATIONS, INC.
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
(617) 737-2244
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
with copies to:
<TABLE>
<S> <C>
NEIL W. TOWNSEND, ESQ. DAVID C. CHAPIN, ESQ.
BINGHAM DANA LLP ROPES & GRAY
150 FEDERAL STREET ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02110
(617) 951-8000 (617) 951-7000
FACSIMILE NO. (617) 951-8736 FACSIMILE NO. (617) 951-7050
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value
per share...................... 3,450,000 $16.00 $55,200,000 $16,284
=================================================================================================================================
</TABLE>
(1) Includes 450,000 shares subject to the Underwriters' over-allotment option.
See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended.
------------------------
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<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 JULY 22, 1998
3,000,000 SHARES
[EXCHANGE APPLICATION LOGO]
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
----------------------
Of the 3,000,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by the Company and 1,000,000 shares 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 the shares being sold by the
Selling Stockholders.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price per share will be between $14.00 and $16.00. For factors considered in
determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" COMMENCING ON PAGE 4 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Company intends to apply for quotation and trading of the Common Stock
on the Nasdaq National Market under the symbol "EXAP".
----------------------
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>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<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.
(2) Before deducting estimated expenses of $1,000,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 450,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting".
----------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
, 1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
HAMBRECHT & QUIST
----------------------
The date of this Prospectus is , 1998.
<PAGE> 3
CONTINUOUS CUSTOMER MANAGEMENT
OPTIMIZING CUSTOMER VALUE THROUGH PROCESS,
APPLICATIONS & TECHNOLOGY
[ART WORK]
[This graphic is a series of diagrams showing the VALEX architecture interfacing
with customer databases and customer touchpoints surrounded by figures depicting
the functional benefits of VALEX.]
Continuous Customer Management (CCM) is Exchange Applications' enterprise-wide
offering for customer optimization. The CCM solution, including the Company's
VALEX software and related consulting and integration services, enables
businesses to:
- analyze enterprise-wide databases of customer information
- conduct customer planning to prioritize for opportunity identification
investment
- execute targeted, real-time and event-triggered customer communication
- select the most effective methods of customer interaction
- perform measurement and analysis to continuously evaluate and refine
marketing campaigns and their impact on customer profitability
Exchange Applications, VALEX, Continuous Customer Management, CCM, Value
Exchange Optimization, Metrics Repository and the Exchange Applications logo are
trademarks of the Company. All other trademarks or tradenames referred to in
this Prospectus are the property of their respective owners.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements examined by its independent auditors.
CERTAIN PERSONS PARTICIPATING IN THE 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 SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
<PAGE> 4
OPTIMIZING CUSTOMER VALUE MANAGING CUSTOMER RELATIONSHIPS OVER TIME
THROUGH CONTINUOUS CUSTOMER
MANAGEMENT Exchange Applications' Continuous Customer
Management solution enables businesses to
maximize the profitability of their customer
relationships. Full potential is achieved by
allocating marketing investments to most
effectively aquire new customers, expand the
[ART WORK] profitability of existing customers and retain
[This graphic is a customers longer.
representation of the three
aspects of the Company's
Continuous Customer Management [ART WORK]
offering. The graphic is a
dramatization of the use of
VALEX to acquire new customers,
expand purchasing of existing
customers and retain customers Businesses use VALEX to run campaigns that
longer thereby optimizing maximize profitability by focusing on key
customer value.] elements of a customer relationship. In
the "ACQUIRE" cycle, a prospect is contacted
via direct mail, resulting in the acquisition
of a new customer. In the "EXPAND" cycle,
VALEX identifies high potential cross-
selling opportunities to expand customer
relationships with additional product sales.
In the "RETAIN" cycle, VALEX automatically
executes a statistical model, notifying a
customer-care organization that the
customer is at risk of leaving, and enabling
that customer to be contacted and encouraged
to stay. Customer optimization is achieved by
simultaneously executing hundreds of these
campaigns and continuously monitoring customers
to maximize their profitability across the
enterprise.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. Except as
otherwise noted, all information in this Prospectus, including share and per
share information, assumes: (i) the mandatory conversion into Common Stock of
all outstanding shares of Series B Redeemable Convertible Preferred Stock and
Series C Convertible Preferred Stock (the "Convertible Preferred Stock") upon
the consummation of the Offering; (ii) the cancellation of all outstanding
shares of Series A Redeemable Preferred Stock (the "Series A Preferred Stock")
upon consummation of the Offering; (iii) no exercise of stock options after June
30, 1998; (iv) no exercise of the Underwriters' over-allotment option; and (v)
the amendment and restatement of the Company's Certificate of Incorporation and
By-laws immediately prior to the consummation of the Offering. See "Description
of Capital Stock" and "Underwriting".
THE COMPANY
Exchange Applications, Inc. (the "Company") is a leading provider of
customer optimization software and solutions that enable businesses to maximize
profitability and revenue growth from new and existing customers through
marketing automation and enterprise-wide customer management. The Company's
Continuous Customer Management ("CCM") solution, including its VALEX software
and related consulting and integration services, enables businesses to
profitably retain and expand existing customer relationships and acquire new
customers by: (i) analyzing enterprise-wide databases of customer information to
identify profitable growth opportunities; (ii) planning and prioritizing
investments in high potential customers; (iii) creating targeted, real-time and
event-triggered marketing campaigns and other customer communications; (iv)
selecting the most effective channels for customer communications, such as
direct mail, call centers, sales forces and the Internet; and (v) continuously
evaluating the impact of these marketing campaigns and other communications on
profitability. CCM allows businesses to measure the value of these campaigns
against their associated costs, and to use this information to make investment
decisions that maximize customer profitability. The Company has deployed CCM and
VALEX across multiple industries, with installations in over 40 businesses in
North America and Europe. Its customers include Federal Express, Fleet Bank,
NatWest Bank (U.K.) and US West. The Company's products and services are
distributed through its direct sales force, through re-seller relationships with
IBM, NCR and others, and through co-marketing arrangements with companies such
as Compaq, Ernst & Young, KPMG Peat Marwick, PricewaterhouseCoopers, SAS
Institute and Sun Microsystems.
While enterprise resource planning ("ERP"), supply chain management and
other software applications aimed at reducing costs have generally been
successful, businesses have begun to invest in a new class of applications
designed to increase profitability through revenue growth. Many of these new
applications are aimed at enabling businesses to increase revenue by acquiring
new customers and retaining and expanding relationships with existing customers.
These applications facilitate cross-selling and the marketing of bundled
products, new service offerings and differentiated service relationships. The
success of these efforts depends on the ability of businesses to allocate
resources based not only on functional area and product profitability, but also
on current and potential customer profitability. The Company believes there are
significant opportunities in many industries for solutions that realign
businesses' existing marketing and customer management capabilities with new
technologies and processes that utilize complete economic profiles of customers
to optimize customer relationships across the enterprise.
The Company believes that CCM and VALEX represent a fundamentally new
approach to customer optimization. VALEX enables businesses to maximize
profitability by: (i) providing a complete view of the relationship between a
business and its customers; (ii) leveraging a range of data mining, reporting
and modeling products to identify high-value customers; (iii) providing powerful
marketing automation and campaign management software that lets end users define
and
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<PAGE> 6
execute targeted customer communication streams; and (iv) integrating with
customer interaction software ("CIS") and data warehouses to perform
enterprise-wide customer management. Through its consulting and integration
services, the Company provides assistance in adopting the CCM solution across
business functions and in rapidly implementing the core VALEX modules. The
Company also provides Metrics Repository, a custom software application that
leverages VALEX to track the success or failure of marketing campaigns across
customer segments and across the enterprise.
The Company's objective is to be the leading provider of customer
optimization software and solutions globally. Key elements of the Company's
strategy include extending VALEX, developing additional customer optimization
solutions, expanding vertical industry focus, broadening distribution channels
and building alliances, and increasing direct sales globally.
The Company commenced operations in November 1994 and was incorporated in
Delaware in November 1996. Unless the context otherwise requires, references in
this Prospectus to the Company refer to Exchange Applications, Inc. and its
subsidiaries. The Company's principal executive offices are located at 89 South
Street, Boston, Massachusetts 02111, and its telephone number is (617) 737-2244.
THE OFFERING
Common Stock offered by the
Company............................ 2,000,000 shares
Common Stock offered by the Selling
Stockholders..................... 1,000,000 shares
Common Stock outstanding after the
Offering(1)...................... 9,716,740 shares
Proposed Nasdaq National Market
symbol............................. "EXAP"
Use of Proceeds.................... For general corporate purposes, including
working capital, possible reduction of
indebtedness and potential acquisitions.
- ---------------
(1) Excludes 2,085,408 shares of Common Stock issuable upon exercise of options
outstanding at July 15, 1998 with exercise prices ranging from $0.65 to
$14.50 per share and with a weighted average exercise price of $3.10 per
share. See "Management -- 1996 Stock Incentive Plan" and Note 13 of Notes to
Consolidated Financial Statements.
2
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995(1) 1996(1) 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................ $1,693 $ 6,034 $12,669 $ 4,822 $10,418
Gross profit.............................. 681 1,939 5,735 1,662 6,987
Loss from operations...................... (507) (1,411) (2,624) (1,450) (1,108)
Net loss.................................. (554) (1,606) (2,599) (1,460) (1,079)
Net loss applicable to common
stockholders............................ (554) (1,606) (3,283) (2,025) (1,199)
Pro forma basic and diluted net loss per
share(2)(3)............................. $(0.19) $ (0.55) $ (0.48) $ (0.31) $ (0.15)
Pro forma basic and diluted weighted
average common shares
outstanding(2)(3)....................... 2,925 2,930 5,391 4,683 7,377
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------------------
PRO FORMA
PRO AS ADJUSTED
ACTUAL FORMA(3) (3)(4)
------ -------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and marketable securities...... $ 4,182 $ 4,182 $31,082
Working capital........................................ 3,515 3,515 30,415
Total assets........................................... 12,134 12,134 39,034
Long-term debt, net of current portion................. 128 128 128
Redeemable preferred stock............................. 7,208 -- --
Stockholders' equity (deficit)......................... (1,836) 5,372 32,272
</TABLE>
- ---------------
(1) The Consolidated Statement of Operations Data for the years ended December
31, 1995 and 1996 include the operations of the Company on a carve-out basis
prior to November 15, 1996. During this period, the Company operated as a
separate and substantially independent division of Grant & Partners, Inc.
and Grant & Partners Limited Partnership, and focused on developing VALEX
and providing integration and consulting services. See Note 1 of Notes to
Consolidated Financial Statements.
(2) Computed on the basis described in Note 2(c) of the Notes to Consolidated
Financial Statements.
(3) Reflects the reclassification of the Series A Preferred Stock to $3,209,000
of additional paid-in capital, the conversion of all outstanding shares of
the Series B Convertible Preferred Stock, at a redemption value of
$3,999,000, into 2,555,556 shares of Common Stock and the conversion of all
outstanding shares of Series C Convertible Preferred Stock, at $0.001 par
value per share, to 1,223,954 shares of Common Stock upon the closing of
this Offering.
(4) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by
the Company at an assumed initial public offering price of $15.00 per share,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
3
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock offered hereby should carefully consider the
following factors in evaluating the Company and its business.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company began operations in 1994, was incorporated in 1996 and has
never achieved profitability. The Company began commercial shipment of its
initial VALEX product in July 1996 and, since such time, has transitioned its
primary business focus from providing services to selling software products. As
a result, the Company and its operations are subject to all of the risks
inherent in the establishment of a new business enterprise. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly in new and rapidly evolving markets. To address these risks, the
Company must, among other things, respond to competitive developments, continue
to upgrade its products and continue to attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks, that the Company's revenues will continue to grow, that
the Company will achieve profitability or, if it does, that the Company will be
able to maintain such profitability on a quarterly or annual basis. See
"-- Dependence Upon Key Personnel", "-- Rapid Technological Change and New
Products" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Because purchase of the Company's products and
services generally involves a significant commitment of capital (ranging from
approximately $100,000 to $3,000,000 in 1997), the length of the sales cycle is
unpredictable and subject to a number of factors over which the Company has
little or no control, including customers' budgetary constraints, timing of
budget cycles and concerns about the introduction of new products by the Company
or its competitors. As a result of these and other factors, the timing of
significant orders may be delayed. A substantial portion of the Company's
revenues in any quarter are typically derived from a limited number of
non-recurring license sales and, like many software companies, the Company tends
to record a significant portion of its software license fee revenues in the last
month of a quarter. In addition, the amount of revenues associated with a
particular license can vary significantly based upon the size of the customer
databases and other factors, including the number of users of the software. The
Company may experience from time to time large, individual license sales which
can cause substantial variations in quarterly license revenues. Moreover, small
delays in customer orders can cause significant variability in the Company's
license revenues and results of operations for any particular period. The
Company establishes its expenditure levels for product development, sales and
marketing and other operating activities based, in large part, on its expected
future revenues. As a result, if revenues fall below expectations, operating
results are likely to be adversely and disproportionately affected because only
a small portion of the Company's expenses vary with its revenues.
Quarterly fluctuations also result from factors such as increased
competition, the timing of new releases of the Company's software products and
market acceptance of such releases, changes in pricing policies of the Company
or its competitors, changes in operating expenses, foreign currency exchange
rate fluctuations and general economic factors. Based upon these and all of the
factors described above, the Company believes that its quarterly revenues,
expenses and operating results are likely to vary significantly in the future,
that period-to-period comparisons of its results of operations are not
necessarily meaningful and that, as a result, such comparisons should not be
relied upon as indications of future performance. Moreover, although the
Company's revenues have increased in recent periods, there can be no assurance
that revenues will continue to grow at past
4
<PAGE> 9
rates, if at all, or that the Company will achieve and sustain profitability on
a quarterly or annual basis. As a result, the Company's operating results may
fall below market analysts' expectations in some future quarters, which would
have a material adverse effect on the market price of the Common Stock. See
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
PRODUCT CONCENTRATION; DEPENDENCE ON EMERGING MARKET FOR CUSTOMER OPTIMIZATION
SOFTWARE AND SERVICES
The Company currently derives all of its revenues from VALEX licenses and
services related to its Continuous Customer Management ("CCM") solution. The
Company expects that VALEX-related revenues, including CCM services and
maintenance contracts, will continue to account for substantially all of the
Company's revenues for the foreseeable future. As a result, the Company's future
operating results are dependent upon continued market acceptance of VALEX and
CCM and enhancements thereto. There can be no assurance that VALEX and CCM will
achieve continued market acceptance. A decline in demand or market acceptance as
a result of competition, technological change or other factors would have a
material adverse effect on the Company's business, operating results and
financial condition.
Although demand for VALEX and similar products has grown in recent years,
the market for customer optimization software applications is still emerging and
there can be no assurance that it will continue to grow or that, even if the
market does grow, businesses will continue to adopt VALEX and CCM. The Company
has spent, and intends to continue to spend, considerable resources educating
potential customers about customer optimization software and services in general
and about the features and functions of VALEX and CCM in particular. However,
there can be no assurance that such expenditures will enable VALEX and CCM to
achieve any additional degree of market acceptance. If the market for VALEX and
CCM fails to grow or grows more slowly than the Company currently anticipates,
the Company's business, operating results and financial condition would be
materially adversely affected.
CUSTOMER CONCENTRATION; DEPENDENCE ON CERTAIN INDUSTRIES
In fiscal 1997 and for the six months ended June 30, 1998, the Company's
top five customers accounted for 74.9% and 53.6% of total revenues,
respectively. There can be no assurance that these or other customers of the
Company will continue to purchase the Company's products or services. The
Company's failure to add new customers that make significant purchases of the
Company's products and services would have a material adverse effect on the
Company's business, financial condition and results of operations.
A substantial portion of the Company's revenues have been derived from
sales to large financial institutions and telecommunications companies. There
can be no assurance that the Company will be successful in achieving significant
market acceptance or penetration in additional vertical markets targeted by the
Company. Failure to penetrate additional vertical markets could have a material
adverse effect on the Company's future growth, financial condition and results
of operations.
MANAGEMENT OF GROWTH
The Company's business has grown rapidly, with total revenues increasing
from $1.7 million in 1995 to $6.0 million in 1996 and to $12.7 million in 1997.
The Company's recent expansion has resulted in substantial growth in the number
of its employees (from 47 at December 31, 1996 to 91 at December 31, 1997 and to
129 at June 30, 1998), the scope of its operating and financial systems and the
geographic distribution of its operations and customers. This recent rapid
growth has placed, and if sustained will continue to place, a significant strain
on the Company's management and operations. Accordingly, the Company's future
operating results will depend on the ability of its
5
<PAGE> 10
officers and other key employees to continue to implement and improve its
operational, customer support and financial control systems, and to expand,
train and manage its employee base. There can be no assurance that the Company
will be able to manage any future expansion successfully, and any inability to
do so would have a material adverse effect on the Company's business, operating
results and financial condition.
DEPENDENCE UPON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued services of a relatively small number of key technical and senior
management personnel, including Andrew Frawley, its Chairman, President and
Chief Executive Officer, David McFarlane, its Executive Vice President,
Worldwide Sales and Services, and Michael McGonagle, its Vice President, Product
Development, none of whom is bound by an employment agreement. The Company's
future success also depends on its continuing ability to attract and retain
other highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and the Company has at times in the past
experienced difficulty in recruiting qualified personnel. There can be no
assurance that the Company will retain its key technical, sales and managerial
employees or that it will be successful in attracting, assimilating and
retaining other highly qualified technical, sales and managerial personnel in
the future. The loss of any member of the Company's key technical, sales and
senior management personnel or the inability to attract and retain additional
qualified personnel could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business -- Employees"
and "Management".
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's software products is characterized by rapid
technological advances, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. The Company's future success will depend upon
its ability to continue to enhance its current product line and to develop and
introduce new products that keep pace with technological developments, satisfy
increasingly sophisticated customer requirements and achieve market acceptance.
There can be no assurance that the Company will be successful in developing and
marketing, on a timely and cost-effective basis, fully functional product
enhancements or new products that respond to technological advances by others,
or that its new products will achieve market acceptance. Failure to successfully
develop and market product enhancements or new products could have a material
adverse effect on the Company's business, operating results and financial
condition.
As a result of the complexities inherent in client/server computing
environments and the broad functionality and performance demanded by customers
for customer optimization software products, major new products and product
enhancements can require long development and testing periods. The Company has
on occasion experienced delays in the scheduled introduction of new and enhanced
products. In addition, software programs as complex as those offered by the
Company may contain undetected errors or "bugs" when first introduced or as new
versions are released that, despite testing by the Company, are discovered only
after a product has been installed and used by customers. To date the Company's
business has not been materially adversely affected by delays or the release of
products containing errors. There can be no assurance, however, that errors will
not be found in future releases of the Company's software, or that any such
errors will not impair the market acceptance of these products and adversely
affect the Company's business, operating results and financial condition.
While the Company generally takes steps to avoid the interruptions of sales
often associated with the pending availability of new products, customers may
delay their purchasing decisions in anticipation of the general availability of
new or enhanced VALEX products, which could have a material adverse effect on
the Company's business and operating results. Moreover, significant delays in
the general availability of such new releases, significant problems in the
installation or
6
<PAGE> 11
implementation of such new releases, or customer dissatisfaction with such new
releases, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Products" and
"Product Development".
COMPETITION
The market for customer optimization software and related services is
highly competitive. There can be no assurance that the Company will maintain its
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources. Current and potential competitors fall into the following
categories: (i) database marketing vendors, such as Harte Hanks, Metromail (a
division of Great Universal Stores) and Harland, which provide a combination of
service bureau capabilities and software; (ii) small independent software
companies that are creating or are attempting to create offerings similar to the
VALEX product; (iii) enterprise resource planning ("ERP") and customer
interaction software ("CIS") vendors such as SAP, Baan, Oracle, Siebel and
Vantive, that may broaden their product lines to include applications with
competitive functionality; and (iv) internal corporate technology departments
that attempt to build their own systems. The Company believes that many of these
competitors are focusing significant resources on increasing the functionality
of their products and services. Ultimately, competitors may be able to offer
products and services with functionality comparable or superior to that of
VALEX. Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition, and larger customer bases than the Company. As a
result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements and to devote greater resources to the
promotion and sale of their products and services than the Company. If these
companies were to introduce products and services that effectively competed with
the Company's products and services, they could be in a position to
substantially lower the price of their customer optimization products and
services or to bundle such products and services with their other products and
services, which could give them competitive advantages over the Company. In
order to be successful in the future, the Company must continue to respond
promptly and effectively to the challenges of technological change and
competitors' innovations. There can be no assurance that the Company will be
able to compete successfully with existing or new competitors. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which would materially and adversely affect the Company's
business, operating results and financial condition. See
"Business -- Competition".
INCREASING RELIANCE ON INDIRECT DISTRIBUTION CHANNELS
Although direct sales to date have accounted for a majority of the
Company's software revenues, the Company expects that it will increasingly
distribute its products to end users through various indirect distribution
channels, including re-seller agreements with IBM, NCR and others and
co-marketing arrangements with companies such as Compaq, Ernst & Young, KPMG
Peat Marwick, PricewaterhouseCoopers, SAS Institute and Sun Microsystems. The
Company's relationships with many of these organizations have been established
within the last twelve months, and the Company is unable to predict the extent
to which these channel partners will be successful in distributing the Company's
products. The Company is dependent on the marketing and sales efforts of these
organizations, many of whom also market and sell competitive products or are
able, under the terms of their agreements, to market and sell competitive
products. One of the Company's channel partners accounted for approximately 24%
of the Company's consolidated revenues for the six months ended June 30, 1998.
The loss of one or more of the Company's relationships with these organizations,
without replacement, either to competitive products offered by other companies
or products developed internally by these organizations, could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's future performance will also depend, in part, on its
ability to attract organizations that will be able to market and support the
Company's product effectively, especially in markets in which the Company has
not previously
7
<PAGE> 12
distributed its products. None of the agreements governing the re-seller or
co-marketing relationships with these organizations includes any commitments on
the part of these organizations to effect any minimum number of sales of VALEX,
or otherwise to provide the Company with business. There can be no assurance
that revenues arising from the Company's relationships with these organizations
that accounted for significant revenues in past periods will continue, or if
continued will reach or exceed historical levels. See "Business -- Sales and
Marketing".
INTELLECTUAL PROPERTY RIGHTS; USE OF LICENSED TECHNOLOGY
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. In addition, the Company generally licenses
VALEX to end users in object code (machine-readable) format, and the Company's
license agreements generally allow the use of VALEX solely by the customer for
internal purposes without the right to sublicense or transfer VALEX. The Company
believes that the foregoing measures afford only limited protection. Certain
customers have required the Company to maintain a source code escrow account
with a third-party software escrow agent, and a failure by the Company to
perform its obligations under any of the license and maintenance agreements, or
the insolvency of the Company, could conceivably cause the release of the
Company's source code to such customers. 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
problem. 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 United
States. Furthermore, there can be no assurance that the Company's competitors
will not independently develop technology similar to that of the Company. The
Company may increasingly be subject to claims of intellectual property
infringement as the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlaps. Although the Company is not aware that any of its products infringe
upon the proprietary rights of third parties, there can be no assurance that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claims, with or without merit, could be
time-consuming to address, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, might not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
The Company has in the past and may in the future re-sell certain software
that it licenses from third parties. There can be no assurance that these third
party software licenses will continue to be available to the Company on
commercially reasonable terms. The loss of or inability to maintain or obtain
any of these software licenses could result in delays or reductions in product
shipments until equivalent software could be identified, licensed and
integrated, which could materially adversely affect the Company's business,
operating results and financial condition. See "Business -- Products" and
"-- Proprietary Rights and Licenses".
INTERNATIONAL OPERATIONS
The Company derived approximately 22% of its total revenues from sales
outside the United States in the six months ended June 30, 1998. The Company
opened sales offices in the United Kingdom in July 1997 and in Australia in
January 1998, and believes that continued growth and profitability will require
expansion of its sales in international markets. In order to successfully expand
international sales, the Company must establish additional foreign operations
and hire additional personnel. To the extent that the Company is unable to do so
in a timely and effective manner, any growth in international sales will be
limited, and the Company's business, operating
8
<PAGE> 13
results and financial condition could be materially adversely affected. In
addition, even if international operations are successfully expanded, there can
be no assurance that the Company will be able to maintain or increase
international market demand for its products.
The Company's international operations are subject to the risks inherent in
any international business activities, including, in particular, management of
an organization spread over various countries, longer accounts receivable
payment cycles in certain countries, compliance with a variety of foreign laws
and regulations, unexpected changes in regulatory requirements, overlap of
different tax structures, foreign currency exchange rate fluctuations and
general economic conditions. Other risks associated with international
operations include import and export licensing requirements, trade restrictions
and changes in tariff rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Sales and
Marketing".
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, the current officers, directors and
principal stockholders will beneficially own approximately 69.1% of the
Company's outstanding Common Stock (64.5% if the Underwriters' over-allotment
option is exercised in full). Consequently, such persons, as a group, will be
able to control the outcome of all matters submitted for stockholder action,
including the election of members to the Company's Board of Directors and the
approval of significant change in control transactions, and will effectively
control the management and affairs of the Company, which may have the effect of
delaying or preventing a change in control of the Company. While the Company
intends to increase the size of its Board of Directors from four to six members,
representatives of the existing stockholders will nonetheless constitute three
of the six directors and will therefore have significant influence in directing
the actions of the Board of Directors. See "Management" and "Principal and
Selling Stockholders".
PRODUCT LIABILITY
While the Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective under the laws of certain jurisdictions. Although the
Company has not experienced any product liability claims to date, there can be
no assurance that the Company will not be subject to such claims in the future.
A successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results and
financial condition. Moreover, defending such a suit, regardless of its merits,
could entail substantial expense and require the time and attention of key
management personnel, either of which could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business -- Products -- VALEX" and "-- Product Development".
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists in the
software industry concerning the potential effects associated with the failure
to comply with such requirements. Although all of the products currently offered
by the Company are designed to be Year 2000 compliant, there can be no assurance
that the Company's products contain all necessary date code changes, or that, in
the year 2000, the Company's products will be compatible with third-party
software that may be integrated or used in conjunction with the Company's
products. In addition, there can be no assurance that the Company's current and
potential customers or third-party distributors will not experience Year 2000
problems or that any such problems would not have a material adverse effect
9
<PAGE> 14
on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of Year 2000 Issue".
NO PRIOR MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
upon completion of the Offering or, if it does develop, that such market will be
sustained. The initial public offering price of the Common Stock has been
determined by negotiation among the Company, the Selling Stockholders and the
representatives of the Underwriters, and may not be representative of the price
that will prevail in the open market. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
The market price of the Common Stock after the Offering may be affected
significantly by factors such as quarterly variations in the Company's results
of operations, the announcement of new products or product enhancements by the
Company or its competitors, technological innovation by the Company or its
competitors and general market conditions or market conditions specific to
particular industries. In particular, the stock prices for many companies in the
technology and emerging growth sectors have experienced wide fluctuations which
have often been unrelated to the operating performance of such companies. Such
fluctuations may adversely affect the market price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Charter"), and Amended and Restated By-laws (the "By-laws"), contain certain
provisions that may have the effect of discouraging, delaying or preventing a
change in control of the Company or unsolicited acquisition proposals that a
stockholder might consider favorable. Such provisions include authorizing the
issuance of "blank check" preferred stock; providing for a Board of Directors
with staggered, three-year terms; requiring super-majority voting to effect
certain amendments to the Charter and By-laws; limiting the persons who may call
special meetings of stockholders; prohibiting stockholder action by written
consent; and establishing advance notice requirements for nominations for
election to the Board of Directors or for proposing matters that can be acted
upon at stockholders meetings. Certain provisions of Delaware law and the
Company's 1996 Stock Incentive Plan (the "1996 Plan") and 1998 Stock Incentive
Plan (the "1998 Plan") may also have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals. See "Management -- Stock Incentive Plans" and "Description of Capital
Stock -- Certain Anti-Takeover, Limited Liability and Indemnification
Provisions".
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing
market price of the Common Stock or the ability of the Company to raise capital
through a public offering of its equity securities. Upon completion of the
Offering, the Company will have outstanding 9,716,740 shares of Common Stock
(not including shares issuable upon exercise of outstanding stock options).
Under agreements entered into between the representatives of the Underwriters
and each of the Company's officers, directors, principal stockholders and their
respective affiliates (the "Lock-Up Agreements") who beneficially hold, in the
aggregate, shares of Common Stock (which includes
shares acquired in 1998 upon the exercise of stock options) prior to the
Offering, no shares held by such holders will be eligible for sale in the public
market for a period of 180 days following the date of this Prospectus. The
Company intends to file a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering the sale of Common Stock
reserved for issuance under the 1996 Plan. As of July 15, 1998, there were
options outstanding under the 1996 Plan to purchase an aggregate of 2,085,408
shares and no other options
10
<PAGE> 15
outstanding; all shares acquired upon exercise of the options within 180 days of
the Offering are or will be subject to Lock-Up Agreements as required under the
1996 Plan. Following the expiration of the 180-day term of the Lock-Up
Agreements, 5,651,892 shares, including the 3,000,000 shares offered hereby and
approximately 537,304 shares subject to options that will be exercisable on or
before the end of such term, will be eligible for sale in the public market
subject, in some cases, to the requirements of Rule 144 or Rule 701 under the
Securities Act. Goldman, Sachs & Co. in its sole discretion and at any time
without notice, may release all or any portion of the securities subject to the
Lock-Up Agreements. Any such decision to release securities would likely be
based upon individual stockholder circumstances, prevailing market conditions
and other relevant factors. Any such release could have a material adverse
effect upon the price of the Common Stock. See "Underwriting".
After the Offering, holders of 6,025,310 shares of Common Stock are
currently entitled to certain demand and piggy-back registration rights with
respect to such shares. If the Company were required to register the shares held
by such holders pursuant to the exercise of their demand or piggy-back
registration rights, such sales could have an adverse effect upon the Company's
ability to raise needed capital. See "Shares Eligible for Future Sale".
IMMEDIATE SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the book
value per share of the outstanding Common Stock. As a result, investors
purchasing Common Stock in the Offering will incur immediate substantial
dilution. In addition, the Company has issued options to acquire Common Stock at
prices significantly below the initial public offering price. To the extent such
outstanding options are exercised, there will be further dilution. See
"Dilution" and "Shares Eligible for Future Sale".
USE OF PROCEEDS
Based on an assumed initial public offering price of $15.00 per share, the
Company will receive approximately $26,900,000 from the sale of shares of Common
Stock to be sold by the Company pursuant to the Offering after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The principal purposes of the Offering are to increase the Company's equity
capital, to create a public market for the Common Stock, to facilitate future
access by the Company to public equity markets, to provide liquidity for certain
of the Company's existing stockholders and to provide increased visibility of
the Company in a marketplace where many of its competitors are publicly held
companies.
The Company currently intends to use the net proceeds of the Offering for
working capital and general corporate purposes, including financing accounts
receivable and capital expenditures made in the ordinary course of its business,
and the possible reduction of indebtedness. The Company may also apply a portion
of the net proceeds of the Offering to acquire businesses, products and
technologies that are complementary to those of the Company. Although the
Company has not identified any specific businesses, products or technologies
that it may acquire and as of the date of this Prospectus is not engaged in any
agreements or negotiations with respect to any such transactions, the Company
from time to time evaluates such opportunities. Pending such uses, the net
proceeds will be invested in government securities and other short-term,
investment-grade, interest-bearing instruments. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not intend to pay any cash dividends on its Common Stock in the
foreseeable future. Future dividends, if any, will be determined by the Board of
Directors.
11
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1998, (i) on an actual basis, (ii) on a pro forma basis to reflect the
reclassification of Series A Preferred Stock to $3,209,000 of additional paid-in
capital, and the conversion of all outstanding shares of Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock to a total of 3,779,510
shares of Common Stock upon the closing of this Offering and (iii) on a pro
forma as adjusted basis to give effect to the sale of 2,000,000 shares of Common
Stock offered by the Company at an assumed initial public offering price of
$15.00 per share after deducting the underwriting discount and estimated
offering expenses payable by the Company. This information should be read in
conjunction with the Company's Consolidated Financial Statements and the related
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(1)(2)
------ ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion.............. $ 128 $ 128 $ 128
------- ------- -------
Redeemable Preferred Stock:
Series A Preferred Stock.......................... 3,209 -- --
Series B Convertible Preferred Stock.............. 3,999 -- --
------- ------- -------
Total Redeemable Preferred Stock.......... 7,208 -- --
Stockholders' equity (deficit):
Preferred Stock, $.001 par value; 10,000,000
shares authorized.............................. -- -- --
Series C Convertible Preferred Stock, $.001 par
value; 1,223,954 shares designated, issued and
outstanding, actual; 1,223,954 authorized, none
issued, pro forma and pro forma as adjusted.... 1 -- --
Common Stock, $.001 par value, 30,000,000 shares
authorized, pro forma and pro forma as adjusted
4,298,305 shares issued, actual, 8,077,815
shares issued, pro forma; 10,077,815 shares
issued, pro forma as adjusted(3)............... 4 8 10
Additional paid-in capital.......................... 4,878 12,083 38,981
Accumulated deficit................................. (6,649) (6,649) (6,649)
Due from officer.................................... (125) (125) (125)
Cumulative translation adjustment................... 50 50 50
Unrealized gain on marketable securities............ 5 5 5
Treasury stock, 361,075 shares at cost.............. -- -- --
------- ------- -------
Total stockholders' equity (deficit)...... (1,836) 5,372 32,272
------- ------- -------
Total capitalization...................... $ 5,500 $ 5,500 $32,400
======= ======= =======
</TABLE>
- ---------------
(1) Gives effect to the reclassification of the Series A Preferred Stock to
$3,209,000 of additional paid-in capital, the conversion of all outstanding
shares of Series B Convertible Preferred Stock, at a redemption value of
$3,999,000, into 2,555,556 shares of Common Stock, and the conversion of all
outstanding shares of Series C Convertible Preferred Stock, at $.001 par
value per share, into 1,223,954 shares of Common Stock upon the closing of
the Offering.
(2) Gives effect to the sale of 2,000,000 shares of Common Stock offered by the
Company and the application of the net proceeds therefrom.
(3) Excludes 2,085,408 shares of Common Stock issuable pursuant to stock options
outstanding at July 15, 1998 (of which 324,232 options are exercisable as of
July 15, 1998). See "Management -- Stock Plans" and Note 13 of Notes to
Consolidated Financial Statements.
12
<PAGE> 17
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998
was $5,372,000, or $0.70 per share of Common Stock, after giving effect to the
automatic conversion of all outstanding shares of Convertible Preferred Stock
and the reclassification of the value of Series A Preferred Stock to additional
paid-in capital. Pro forma net tangible book value per share is determined by
dividing the pro forma net tangible book value of the Company (total tangible
assets less total liabilities) by the total pro forma number of shares of Common
Stock outstanding, including shares of Common Stock resulting from the
conversion of the Convertible Preferred Stock. After giving effect to the sale
of the 2,000,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $15.00 per share, and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company (resulting in estimated net proceeds of $26,900,000), the
adjusted pro forma net tangible book value of the Company as of June 30, 1998,
would have been $32,272,000, or $3.32 per share. This represents an immediate
increase in the pro forma net tangible book value of $2.62 per share to existing
stockholders and an immediate dilution of $11.68 per share to new investors. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
Pro forma net tangible book value per share as of June 30,
1998................................................... $0.70
Pro forma increase attributable to new investors.......... 2.62
-----
Pro forma net tangible book value per share after the
Offering.................................................. 3.32
------
Pro forma dilution per share to new investors(1)............ $11.68
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by the existing stockholders and by the new investors (at an assumed
initial public offering price of $15.00 per share before deduction of estimated
underwriting discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)... 7,716,740 79.4% $11,334,000 27.4% $ 1.47
New investors(1).............. 2,000,000 20.6 30,000,000 72.6 15.00
---------- ----- ----------- ----- ------
Total............... 9,716,740 100.0% $41,334,000 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no exercise of stock options outstanding at June 30, 1998. As of
July 15, 1998, the Company had 5,277,283 shares of Common Stock reserved for
issuance under the Company's stock plans of which 2,085,408 shares were
subject to outstanding stock options at a weighted average exercise price of
$3.10 per share. To the extent any outstanding options are exercised, there
will be further dilution to new investors. If all of the outstanding options
were exercised in full, the dilution per share to new investors in this
Offering would be increased by $0.04 per share to a total of $11.72 per
share and the average price per share paid by the Company's existing
shareholders would be $1.82. See "Capitalization", "Management -- Stock
Option Plans" and Notes 12 and 13 of Notes to Consolidated Financial
Statements.
(2) The net effect of sales by the Selling Stockholders in the Offering will be
to reduce the number of shares held by existing stockholders to 6,716,740
shares, or 69.1% of the total number of shares of Common Stock outstanding
after the Offering, and to increase the number of shares held by new
investors to 3,000,000 shares, or 30.9% of the total number of shares of
Common Stock outstanding after the Offering.
13
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data of the
Company is qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
The selected consolidated financial data set forth below for each of the fiscal
years ended December 31, 1995, 1996 and 1997 are derived from consolidated
financial statements of the Company audited by Arthur Andersen LLP, independent
public accountants, which are included elsewhere in this Prospectus. The
selected consolidated financial data for the six months ended June 30, 1997 and
1998 are derived from the unaudited consolidated financial statements of the
Company, which are included elsewhere in this Prospectus. The selected
consolidated financial data for the period from inception (November 1, 1994)
through December 31, 1994 are derived from the unaudited consolidated financial
statements of the Company, which are not included in this Prospectus. The
unaudited consolidated financial statements include all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation. The results of operations for the six months ended June 30,
1998 are not necessarily indicative of results to be expected for any future
period. The data should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and with Management's Discussion and Analysis
of Financial Condition and Results of Operations appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(NOVEMBER 1, YEAR ENDED SIX MONTHS ENDED
1994) THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------------- -----------------
1994(1) 1995(1) 1996(1) 1997 1997 1998
------------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees........................ $ -- $ -- $ 1,500 $ 5,765 $ 1,793 $ 5,816
Services and maintenance..................... -- 1,693 4,534 6,904 3,029 4,602
------ ------ ------- ------- ------- -------
Total revenues........................ -- 1,693 6,034 12,669 4,822 10,418
Cost of revenues:
Software license fees........................ -- -- 890 1,707 863 129
Services and maintenance..................... -- 1,012 3,205 5,227 2,297 3,302
------ ------ ------- ------- ------- -------
Total cost of revenues................ -- 1,012 4,095 6,934 3,160 3,431
------ ------ ------- ------- ------- -------
Gross profit................................... -- 681 1,939 5,735 1,662 6,987
Operating expenses:
Sales and marketing.......................... -- 128 1,007 3,602 1,268 4,163
Research and development..................... -- 708 1,325 2,599 1,031 2,716
General and administrative................... 7 352 1,018 2,158 813 1,216
------ ------ ------- ------- ------- -------
Total operating expenses.............. 7 1,188 3,350 8,359 3,112 8,095
------ ------ ------- ------- ------- -------
Loss from operations........................... (7) (507) (1,411) (2,624) (1,450) (1,108)
Interest income (expense), net................. -- (47) (195) 25 (10) 29
------ ------ ------- ------- ------- -------
Net loss....................................... (7) (554) (1,606) (2,599) (1,460) (1,079)
Accretion of discount and dividends on
preferred stock.............................. -- -- -- (684) (565) (120)
------ ------ ------- ------- ------- -------
Net loss applicable to common stockholders..... $ (7) $ (554) $(1,606) $(3,283) $(2,025) $(1,199)
====== ====== ======= ======= ======= =======
Basic and diluted net loss per share applicable
to common stockholders....................... $(0.01) $(0.46) $ (1.33) $ (1.12) $ (0.82) $ (0.33)
====== ====== ======= ======= ======= =======
Basic and diluted weighted average common
shares outstanding........................... 1,200 1,200 1,205 2,920 2,478 3,598
====== ====== ======= ======= ======= =======
Pro forma basic and diluted net loss per
share(2) (3)................................. $ -- $(0.19) $ (0.55) $ (0.48) $ (0.31) $ (0.15)
====== ====== ======= ======= ======= =======
Pro forma basic and diluted weighted average
common shares outstanding(2) (3)............. 2,925 2,925 2,930 5,391 4,683 7,377
====== ====== ======= ======= ======= =======
</TABLE>
14
<PAGE> 19
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
AS OF DECEMBER 31, ----------------------
------------------------------------- PRO
1994(1) 1995(1) 1996 1997 ACTUAL FORMA(2)
------- ------- ------- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and marketable
securities............................... $ -- $ 500 $ 361 $ 5,475 $ 4,182 $ 4,182
Working capital (deficit).................. (120) (1,224) (853) 5,249 3,515 3,515
Total assets............................... 113 2,514 4,189 11,400 12,134 12,134
Long-term debt, net of current portion..... -- 38 2,368 237 128 128
Redeemable preferred stock................. -- -- -- 7,088 7,208 --
Stockholders' equity (deficit)............. (7) (560) (1,295) (728) (1,836) 5,372
</TABLE>
- ---------------
(1) The Consolidated Balance Sheet Data as of December 31, 1994 and 1995 and
consolidated statement of operations data for the period from inception to
December 31, 1994, and for the years ended December 31, 1995 and 1996
include the operations of the Company on a carve-out basis prior to November
15, 1996. During this period, the Company operated as a separate and
substantially independent division of Grant & Partners, Inc. and Grant &
Partners Limited Partnership, and focused on developing VALEX and providing
integration and consulting services. See Note 1 of Notes to Consolidated
Financial Statements.
(2) Gives effect to the reclassification of Series A Preferred Stock to
$3,209,000 of additional paid-in capital, the conversion of all outstanding
shares of the Series B Convertible Preferred Stock, at a redemption value of
$3,999,000, into 2,555,556 shares of Common Stock, and the conversion of all
outstanding shares of Series C Convertible Preferred Stock, at $.001 par
value per share, into 1,223,954 shares of Common Stock upon the closing of
the Offering.
(3) Computed on the basis described in Note 2(c) of Notes to Consolidated
Financial Statements.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company is a leading provider of customer optimization software and
solutions that enable businesses to maximize profitability and revenue growth
from new and existing customers through marketing automation and enterprise-wide
customer management. The Company's Continuous Customer Management ("CCM")
offering is principally comprised of VALEX, the Company's open enterprise
software application, and the Company's proprietary consulting and integration
services.
The Company was incorporated in November 1996. Prior to incorporation, the
Company operated as a separate division of two entities, Grant & Partners, Inc.
("GPI") and Grant & Partners Limited Partnership ("GPLP"). See Note 1 to Notes
to Consolidated Financial Statements. The Company's activities during its early
stages of operation focused on the development of software solutions to provide
CCM support to businesses. In 1995, the Company began providing professional
services in the areas of marketing program design and execution and data
warehousing. In March 1997, the Company ceased providing marketing program
design services. The Company's development efforts culminated in the
introduction to the market in July 1996 of VALEX, the Company's marketing
automation software product. Since the introduction of VALEX, the Company has
continued to focus significant resources on the development of additional
functionality and features of the VALEX software. The Company also has continued
to expand its marketing activities, build the Exchange Applications identity,
develop the competencies of the professional services group, build international
sales and distribution channels and develop its general and administrative
infrastructure. The Company has shifted its primary business focus from
providing services to selling software products. However, the Company believes
that continuing to provide superior professional services will be critical to
maximizing its opportunities for future revenues.
The financial results of the Company while it operated as a separate
division of GPI and GPLP for the period from inception (November 1, 1994) to
November 14, 1996 have been included on a carve-out basis in the Company's
Consolidated Financial Statements.
The Company generates revenue from software licenses, professional service
arrangements and software maintenance agreements. The Company recognizes
software license fee revenues upon execution of a license agreement and delivery
of the software, provided that the fee is fixed or determinable and deemed
collectible by management. If acceptance of the software by the licensee is
required, revenues are only recognized upon satisfaction of the foregoing
conditions and acceptance of the software. Revenues from professional service
arrangements are recognized on either a time and materials or
percentage-of-completion basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible by
management. Revenues related to software maintenance agreements are recognized
ratably over the term of the maintenance period. Amounts collected or billed
prior to satisfying the above revenue recognition criteria are reflected as
deferred revenue or as customer deposits.
Pricing for a VALEX software license is based on the number of customer
records included in a business' data warehouse and certain other factors,
including the number of users of the software. Professional services are
generally priced on a time and materials or fixed-fee basis. Annual maintenance,
which is typically purchased in conjunction with the licensing of VALEX, is a
separate component that is offered for a fee generally equal to 20% of the
license fee at the time of execution
16
<PAGE> 21
of the maintenance contract and upon each renewal. Maintenance contracts
typically include telephone support and rights to unspecified product updates
and maintenance releases. The Company recommends that its customers enter into
and renew their maintenance contracts and, to date, all customers have done so.
As the Company continues to develop additional features and enhanced
functionality in unspecified future product updates, the Company believes that
most of its customers will continue to renew their maintenance contracts. As the
Company effects more sales of its software products through its re-seller
relationships, the Company plans to have the re-sellers provide certain of the
consulting and maintenance services associated with these sales. By using the
services resources of the re-sellers, the Company plans to allocate its own
professional services resources to direct-sale customers, to the projects that
require unique expertise or familiarity with the VALEX product and to other
profitable opportunities.
Licenses originate principally from the Company's direct sales force. Sales
and marketing personnel from indirect sales channels, including re-sellers and
co-marketers, provide the Company with valuable introductions to potential
customers, work with the Company's sales force to complete sales and, in some
cases, effect sales of the Company's products virtually independently. The
Company expects that a significant portion of its revenues over the next several
quarters will be made with some participation from one or more of the Company's
re-sellers or co-marketers.
Because the Company has only recently begun to sell its products,
period-to-period comparisons of its operating results are not meaningful.
Although the Company has experienced significant revenue growth recently, there
can be no assurance that such growth rates are sustainable and they should not
be relied upon as predictive of future performance. In addition, the timing of
license revenues is difficult to predict because of the length and variability
of the Company's sales cycle. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in the early stage of development, particularly in new and rapidly
evolving markets. There can be no assurance that the Company will be successful
in addressing such risks and difficulties or that it will achieve profitability.
See "Risk Factors -- Limited Operating History; History of Losses".
RECENT ACCOUNTING PRONOUNCEMENT
SOP 97-2, "Software Revenue Recognition", was issued in October 1997 and
supercedes the guidance of SOP 91-1 for recognizing revenue from software
arrangements. The Company adopted the provisions of SOP 97-2 for the year ended
December 31, 1997, and the Company believes its revenue recognition policies and
practices comply with the requirements of SOP 97-2. However, SOP 97-2 includes
restrictive provisions regarding specific terms of software arrangements which,
if present, require deferral of revenue recognition beyond the point of delivery
of the software. Future competitive conditions could necessitate changes in the
Company's business practices and the contract terms of its software
arrangements. Such changes might require deferral of revenue recognition, which
could materially adversely affect periodic operating results.
17
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items from the Company's Consolidated
Statements of Operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ----------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees......................... --% 24.9% 45.5% 37.2% 55.8%
Services and maintenance...................... 100.0 75.1 54.5 62.8 44.2
----- ----- ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software license fees......................... -- 14.8 13.4 17.9 1.2
Services and maintenance...................... 59.8 53.1 41.3 47.6 31.7
----- ----- ----- ----- -----
Total cost of revenues................ 59.8 67.9 54.7 65.5 32.9
----- ----- ----- ----- -----
Gross margin.................................... 40.2 32.1 45.3 34.5 67.1
Operating expenses:
Sales and marketing........................... 7.5 16.7 28.5 26.3 39.9
Research and development...................... 41.8 21.9 20.5 21.4 26.1
General and administrative.................... 20.8 16.9 17.0 16.9 11.7
----- ----- ----- ----- -----
Total operating expenses.............. 70.1 55.5 66.0 64.6 77.7
----- ----- ----- ----- -----
Loss from operations............................ (29.9) (23.4) (20.7) (30.1) (10.6)
Interest income (expense), net.................. (2.8) (3.2) 0.2 (0.2) 0.2
----- ----- ----- ----- -----
Net loss........................................ (32.7)% (26.6)% (20.5)% (30.3)% (10.4)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
REVENUES
The Company's total revenues increased 116% from $4.8 million in the six
months ended June 30, 1997 to $10.4 million in the six months ended June 30,
1998. A number of factors contributed to the increase in total revenues,
including an increase in the Company's sales force, sales resulting from the
establishment of key strategic re-seller and co-marketing relationships in late
1997 and the first six months of 1998, increased international sales resulting
from the opening of a U.K. sales office during July 1997 and the growing
contribution of maintenance revenues from the larger installed base of the
Company's products.
Software license fee revenues increased 224% from $1.8 million, or 37.2% of
total revenues, in the six months ended June 30, 1997 to $5.8 million, or 55.8%
of total revenues, in the six months ended June 30, 1998. The significant
increase in software license fee revenues was attributable primarily to the
growing market awareness and acceptance of the Company's products, particularly
in the telecommunications industry, the expansion of the Company's sales force,
and the establishment of key strategic re-seller and co-marketing relationships
in late 1997 and the first six months of 1998.
Services and maintenance revenues increased 52% from $3.0 million, or 62.8%
of total revenues, in the six months ended June 30, 1997 to $4.6 million, or
44.2% of total revenues, in the six months ended June 30, 1998. The growth of
services and maintenance revenues resulted from professional services
engagements associated with the growing sales of the Company's software
products, increased maintenance revenues from the larger installed base of
software license customers and increased training revenues. The decrease in
services and maintenance revenues as a percentage of total revenues was
primarily attributable to market acceptance of VALEX and
18
<PAGE> 23
increases in sales of VALEX by re-sellers and co-marketers that provided certain
of the related services.
For the six months ended June 30, 1997, the Company's top five customers
accounted for 90.6% of total revenues, while the Company's three largest
customers accounted for 39.7%, 22.2% and 13.7%, respectively, of total revenues
during this same period. This compares to 53.6% for the Company's top five
customers and 24.1%, 9.9% and 7.3% for the Company's three largest customers,
respectively, for the six months ended June 30, 1998. In the six-month period
ended June 30, 1998, revenues from the largest customer were comprised of sales
through a single re-seller to multiple end-user businesses. The Company believes
that the loss of any one of these customers would not have a material adverse
effect upon the Company's business, operating results or financial condition.
All of the Company's revenues for the six months ended June 30, 1997 were
from sales to customers in North America; however, international operations were
significantly expanded in late 1997 and 1998 and represent an increasing source
of the Company's revenues. Revenues from customers outside North America were
$1.6 million for the six months ended June 30, 1998, representing approximately
15.4% of total revenues.
COST OF REVENUES
Total cost of revenues consists of costs associated with software license
fees and costs associated with services and maintenance. Total cost of revenues
as a percentage of total revenues declined from 65.5% in the six months ended
June 30, 1997 to 32.9% in the six months ended June 30, 1998. The decrease in
cost of revenues as a percentage of total revenues in 1998 was primarily a
result of the fact that capitalized software development costs under Statement
of Financial Accounting Standards No. 86 ("SFAS 86") was fully amortized as of
December 1997. The results for the six months ended June 30, 1997 include
approximately $641,000 in SFAS 86 capitalized software amortization.
Cost of software license fees as a percentage of total revenues decreased
from 17.9% to 1.2% for the six months ended June 30, 1997 and 1998,
respectively. Cost of software license fees as a percentage of software license
fee revenues decreased from 48.1% to 2.2% for the six months ended June 30, 1997
and 1998, respectively. Cost of software license fees for the six months ended
June 30, 1997 consisted primarily of amortization of software development
expenses capitalized under SFAS 86 and royalty payments made to a third party
for licensed intellectual property included in the Company's VALEX product. The
entire capitalized software balance was fully amortized as of December 31, 1997.
Cost of software license fees for the six months ended June 30, 1998 consisted
primarily of royalty payments for licensed software and costs associated with
software packaging and distribution. The Company's primary royalty obligation
for licensed intellectual property, which required the Company to pay royalties
to a third party on the first $10 million of revenues from VALEX sales, was
fully paid during the second quarter of 1998. No further royalties will be paid
to this third party and other current royalty obligations are not material to
the Company's financial position. If the effect of the SFAS 86 amortization and
royalties for licensed software were not included, gross margin on software
revenues would have been 96.5% for the six months ended June 30, 1997, versus
99.3% for the six months ended June 30, 1998. As the Company adds additional
components to its software products, the Company may choose to license software
from third parties. The cost of such licenses may increase the cost of software
license fees.
Cost of services and maintenance consists primarily of personnel, facility
and system costs incurred in providing professional consulting services,
training, and customer support services. Cost of services and maintenance
revenues as a percentage of total revenues was 47.6% and 31.7% during the six
months ended June 30, 1997 and 1998, respectively. Cost of services and
maintenance as a percentage of services and maintenance revenues was 75.8% and
71.8% for the six months ended June 30, 1997 and June 30, 1998, respectively.
The decrease was attributable
19
<PAGE> 24
primarily to the increased contribution of higher margin maintenance revenues
from the Company's increased installed base. As the Company effects more sales
of its software products through its re-seller relationships, the Company plans
to have the re-sellers provide certain of the consulting and maintenance
services associated with these sales. By using the services resources of the
re-sellers, the Company plans to allocate its own professional services
resources to direct-sale customers, to the projects that require unique
expertise or familiarity with the VALEX product and to other more profitable
opportunities.
Overall gross margin increased from 34.5% for the six months ended June 30,
1997 to 67.1% for the six months ended June 30, 1998 due primarily to the
completion of SFAS 86 amortization, increased sales of VALEX and the expiration
of the Company's royalty obligations for licensed intellectual property. As
software license fee revenues continue to grow and maintenance revenues increase
as a percentage of total services and maintenance revenues, the Company expects
that overall gross margin will remain constant or increase slightly in future
periods.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries for sales and marketing personnel, commissions, travel and promotional
expenses. Sales and marketing expenses increased from $1.3 million, or 26.3% of
total revenues, for the six months ended June 30, 1997, to $4.2 million, or
39.9% of total revenues, for the six months ended June 30, 1998. This increase
reflects the hiring of additional sales and marketing personnel, increased
promotional programs, and increased sales commissions associated with higher
revenues. While the Company expects sales and marketing expenses to continue to
grow in absolute dollars, the Company expects these expenses to remain
approximately the same as a percentage of total revenues due to increased
contribution from its indirect sales channels.
Research and Development. Research and development expenses consist
primarily of employee salary and benefits, consultant costs, and equipment and
purchased software depreciation costs associated with new product development,
enhancement of existing products and quality assurance activities. Research and
development expenses increased from $1.0 million, or 21.4% of total revenues, in
the six months ended June 30, 1997 to $2.7 million, or 26.1% of total revenues,
in the six months ended June 30, 1998. This increase reflects the hiring of
additional personnel and additional investments in the Company's VALEX product.
Software development costs were expensed as incurred in the six months ended
June 30, 1998, since software development costs were primarily related to
product enhancements and product maintenance. The Company anticipates that
research and development expenses will continue to increase in absolute dollars
but decrease on a percentage basis as the Company continues to commit
substantial resources to enhancing existing product functionality and to
developing new products.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs, outside professional fees, provision
for bad debts, and equipment and software depreciation costs associated with the
finance, legal, human resources, information systems, and administrative
functions of the Company. General and administrative expenses increased from
$813,000, or 16.9% of total revenues, for the six months ended June 30, 1997 to
$1.2 million, or 11.7% of total revenues, for the six months ended June 30,
1998. Expenses increased in absolute dollars as the Company added personnel to
its finance, information systems, and human resource departments and increased
its spending on outside legal services, but declined as a percentage of total
revenues, due primarily to economies of scale. The Company expects general and
administrative expenses to continue to grow in absolute dollars but to decrease
on a percentage basis as the Company implements additional management
information systems, continues its international expansion and incurs costs
incident to being a publicly held company.
20
<PAGE> 25
PROVISION FOR INCOME TAXES
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. The Company has
recorded a full valuation allowance against the deferred tax asset generated as
a result of these net operating loss carryforwards as the Company believes it is
more likely than not that these assets will not be realized.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUES
The Company's total revenues increased 256% from $1.7 million in 1995 to
$6.0 million in 1996, reflecting significant software license fee revenues
related to the commercial introduction of the Company's VALEX product in July
1996. The Company's total revenues increased 110% to $12.7 million in 1997 as
the Company sold its products and services to a greater number of customers and
expanded its business internationally.
Software license fee revenues increased from zero in 1995 to $1.5 million,
or 24.9% of total revenues, in 1996 and grew 284% to $5.8 million, or 45.5% of
total revenues, in 1997. The increase in software license fee revenues, both in
absolute dollars and as a percentage of total revenues, reflected increased
market awareness and acceptance of the Company's VALEX product, the continued
growth of indirect channel revenues, and expansion of international sales
resources.
Services and maintenance revenues increased 168% from $1.7 million, or
100.0% of revenues, in 1995 to $4.5 million, or 75.1% of total revenues in 1996,
and grew 52% to $6.9 million, or 54.5% of total revenues, in 1997 primarily due
to growth in the providing of professional services associated with VALEX and,
to a lesser extent, to an increase in maintenance revenues. The Company expects
services and maintenance revenues to decline as a percentage of total revenues
as the parties with whom the Company has undertaken re-seller and co-marketing
relationships perform more of the professional services associated with the
Company's software licenses sold through these channels. However, the Company
expects services and maintenance revenues to increase in absolute dollars as the
installed base of the Company's products continues to increase.
In 1997, the Company's top five customers accounted for 74.9% of total
revenues, while the Company's three largest customers accounted for 33.0%, 23.1%
and 7.6%, respectively, of the Company's total revenues during this same period.
In 1997, revenues from the largest customer were comprised of sales through a
single re-seller to multiple end-user businesses. During 1996, the Company's top
five customers accounted for 57.7% of total revenues, while the Company's three
largest customers accounted for 20.5%, 10.7% and 10.2%, respectively, of total
revenues. In 1995, the Company's top five customers accounted for 87.8% of total
revenues, while the Company's three largest customers accounted for 37.7%, 17.3%
and 13.0%, respectively, of the Company's total revenues during this same
period. The Company believes that the loss of any one of these customers would
not have a material adverse effect upon the Company's business, operating
results or financial condition. In 1995 and 1996, the Company's revenues
consisted primarily of the sale and delivery of the Company's professional
services in the area of customer optimization and data warehousing.
COST OF REVENUES
Total cost of revenues, as a percentage of total revenues, increased from
59.8% in 1995 to 67.9% in 1996, and then declined to 54.7% in 1997. The increase
in 1996 reflected six months of amortization of software development costs
previously capitalized in accordance with the guidelines of SFAS 86, which
amortization began in July 1996 upon general release of the Company's VALEX
product. The decline in the total cost of revenues as a percentage of total
revenues in 1997 reflected the increasing contribution of higher-margin software
license sales of VALEX, which was first shipped in July 1996.
21
<PAGE> 26
Cost of software license fees as a percentage of total revenues was 14.8%
in 1996 and 13.4% in 1997. There were no revenues derived from software license
fees prior to 1996. The cost of software license fees as a percentage of
software license fee revenues decreased from 59.3% in 1996 to 29.6% in 1997 due
primarily to increased software license sales volume in 1997. This increase
offset the additional six months of amortization of capitalized software
development costs in 1997 versus 1996, as well as royalties paid to a third
party for intellectual property included in VALEX. If the effect of SFAS 86
amortization and royalties for licensed intellectual property were not included,
gross margin on software license fee revenues would have been 95.7% and 99.3%
for 1996 and 1997, respectively. With the balance of capitalized software
development costs fully amortized at the end of 1997 and the primary royalty
obligations for licensed intellectual property fully paid as of the second
quarter of 1998, the cost of software license fee revenues consists principally
of the cost of the software media and other incidental costs.
Cost of services and maintenance as a percentage of total revenues was
59.8%, 53.1% and 41.3% in 1995, 1996 and 1997, respectively. Cost of services
and maintenance as a percentage of services and maintenance revenues was 59.8%,
70.7% and 75.7% in 1995, 1996 and 1997, respectively. The increasing cost was
due to the costs of building a service organization infrastructure and the
increased use, at higher cost, of subcontracted labor on certain engagements.
The Company expects to continue to use subcontractors for the delivery of
professional services from time to time.
Overall gross margin decreased from 40.2% in 1995 to 32.1% in 1996 as a
result of the Company's investments in its services infrastructure in
anticipation of increased VALEX sales and the inclusion of six months of SFAS 86
amortization. In 1997, gross margin increased to 45.3% of total revenues as the
Company's contribution of higher-margin software license fees increased from
24.9% of total revenues in 1996 to 45.5% in 1997. In addition, the Company began
to realize productive returns from the services infrastructure established in
1996.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses were $128,000, $1.0
million, and $3.6 million, representing 7.5%, 16.7% and 28.5% of total revenues,
in 1995, 1996 and 1997, respectively. These increases were due primarily to the
increase in the Company's sales and marketing personnel and overall
infrastructure to support VALEX and expand internationally. The Company's
international expansion included the opening of its first international sales
office in the U.K. in July 1997. The Company expects to continue to expand its
direct sales force and marketing staff, increase its international presence, and
continue to develop its indirect sales channels and increase promotional
activity.
Research and Development. Research and development expenses were $708,000,
$1.3 million, and $2.6 million, representing 41.8%, 21.9%, and 20.5% of total
revenues, in 1995, 1996 and 1997, respectively. The increase in absolute dollars
was attributable primarily to the hiring of additional technical personnel
engaged in software development activities. The decline in research and
development expenses on a percentage basis was due primarily to the greater
growth in revenues.
General and Administrative. General and administrative expenses were
$352,000, $1.0 million and $2.2 million, representing 20.8%, 16.9% and 17.0% of
total revenues, in 1995, 1996 and 1997, respectively. General and administrative
expenses grew in absolute dollars as the Company added personnel to all
administrative areas, but declined on a percentage basis due primarily to
economies of scale.
INTEREST INCOME (EXPENSE), NET
Interest expense, net increased from $47,000 in 1995 to $195,000 in 1996 as
a result of interest charges on the Company's demand note payable to related
parties as well as finance charges
22
<PAGE> 27
related to the Company's capital lease obligations. The Company reported net
interest income of $25,000 in 1997 as a result of the elimination of the related
party demand notes payable concurrent with the March 1997 venture capital
financing transaction, as well as the related interest income generated from the
proceeds of the March 1997 and December 1997 financing transactions.
PROVISION FOR INCOME TAXES
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. The Company has
recorded a full valuation allowance against the deferred tax asset generated as
a result of these net operating loss carryforwards, as the Company currently
believes it is more likely than not that these assets will not be realized.
23
<PAGE> 28
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly consolidated statement of
operations data for each quarter in the six quarters ended June 30, 1998, as
well as such data expressed as a percentage of the Company's total revenues for
the periods indicated. This data has been derived from unaudited consolidated
financial statements that have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a fair
presentation of such information. The Company believes quarter-to-quarter
comparisons of its financial results should not be relied upon as an indication
of future performance, and operating results may fluctuate from quarter to
quarter in the future.
<TABLE>
<CAPTION>
QUARTER 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>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees..................... $ 472 $1,321 $1,616 $2,356 $2,711 $3,105
Services and maintenance.................. 1,657 1,372 1,711 2,164 2,080 2,522
------ ------ ------ ------ ------ ------
Total revenues...................... 2,129 2,693 3,327 4,520 4,791 5,627
Cost of revenues:
Software license fees..................... 430 433 449 395 84 45
Services and maintenance.................. 1,237 1,060 1,257 1,673 1,635 1,667
------ ------ ------ ------ ------ ------
Total cost of revenues.............. 1,667 1,493 1,706 2,068 1,719 1,712
------ ------ ------ ------ ------ ------
Gross profit................................ 462 1,200 1,621 2,452 3,072 3,915
Operating expenses:
Sales and marketing....................... 568 700 871 1,463 1,735 2,428
Research and development.................. 453 578 646 922 1,207 1,509
General and administrative................ 385 428 402 943 537 679
------ ------ ------ ------ ------ ------
Total operating expenses............ 1,406 1,706 1,919 3,328 3,479 4,616
------ ------ ------ ------ ------ ------
Loss from operations........................ (944) (506) (298) (876) (407) (701)
Interest income (expense), net.............. (39) 29 7 28 23 6
------ ------ ------ ------ ------ ------
Net loss.................................... $ (983) $ (477) $ (291) $ (848) $ (384) $ (695)
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Software license fees..................... 22.2% 49.1% 48.6% 52.1% 56.6% 55.2%
Services and maintenance.................. 77.8 50.9 51.4 47.9 43.4 44.8
------ ------ ------ ------ ------ ------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software license fees..................... 20.2 16.1 13.5 8.7 1.8 0.8
Services and maintenance.................. 58.1 39.3 37.8 37.0 34.1 29.6
------ ------ ------ ------ ------ ------
Total cost of revenues.............. 78.3 55.4 51.3 45.7 35.9 30.4
------ ------ ------ ------ ------ ------
Gross margin................................ 21.7 44.6 48.7 54.3 64.1 69.6
Operating expenses:
Sales and marketing....................... 26.7 26.0 26.2 32.4 36.2 43.2
Research and development.................. 21.3 21.5 19.4 20.4 25.2 26.8
General and administrative................ 18.1 15.9 12.1 20.8 11.2 12.1
------ ------ ------ ------ ------ ------
Total operating expenses............ 66.1 63.4 57.7 73.6 72.6 82.1
------ ------ ------ ------ ------ ------
Loss from operations........................ (44.4) (18.8) (9.0) (19.3) (8.5) (12.5)
Interest income (expense), net.............. (1.8) 1.1 0.2 0.6 0.5 0.1
------ ------ ------ ------ ------ ------
Net loss.................................... (46.2)% (17.7)% (8.8)% (18.7)% (8.0)% (12.4)%
====== ====== ====== ====== ====== ======
</TABLE>
The Company's revenues have increased in all quarters presented as a result
of increased market acceptance of the VALEX product, the continued growth of
indirect channel revenues, and expansion of international sales resources. Cost
of revenues on a percentage basis decreased throughout the quarters presented as
a result of an increase in software license fees in the
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<PAGE> 29
Company's revenue mix, the completion of the amortization of capitalized
software development costs in the fourth quarter of 1997 and the completion of
software royalty obligations in the second quarter of 1998. No assurances can be
given that the shift in revenue mix will continue. Gross profit for any quarter
will be affected by the revenue mix in that quarter.
Operating expenses have increased in each of the quarters presented. Sales
and marketing expenses have increased as a result of increased sales and
marketing personnel and increased commissions associated with higher revenues.
Research and development expenses generally have increased as a result of
continued enhancements to the VALEX technology. General and administrative
expenses have increased primarily due to additional personnel, professional fees
and facilities and other infrastructure costs. General and administrative
expenses in the quarter ended December 31, 1997 included one-time charges
associated with the decision to relocate the Company's executive offices, as
well as noncash compensation expense associated with the Company's 1996 Stock
Incentive Plan.
The Company's quarterly and annual operating results have varied
significantly in the past and are expected to do so in the future. Accordingly,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
predictors of future performance. See "Risk Factors -- Potential for Significant
Fluctuations in Quarterly Results".
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the sale of equity securities in private placements and the issuance of
notes payable to related parties. In March 1997, the Company received $3,888,000
in net cash proceeds from the sale of its Series B Preferred Stock; and in
December 1997, the Company received $3,987,000 in net cash proceeds from the
sale of its Series C Preferred Stock. In addition, in December 1997, the Company
entered into a $2,000,000 revolving note agreement with Fleet National Bank. The
note bears interest at the bank's prime rate plus 0.75% per annum, payable
monthly in arrears, and expires on May 31, 1999.
As of June 30, 1998, the Company had $4.2 million of cash, cash equivalents
and short-term investments. The Company believes that the net proceeds of this
Offering, along with its existing balance of cash, cash equivalents and
short-term investments, will be sufficient to meet the Company's working capital
and anticipated capital expenditure needs for at least the next 12 months.
Thereafter, the Company may require additional sources of funds to continue to
support its business. There can be no assurance that such capital, if needed,
will be available or will be available on terms acceptable to the Company.
Cash provided by financing activities of $6.8 million in 1997 consisted
primarily of the proceeds from the issuance of Convertible Preferred Stock and
has been invested in short-term investments. Purchases of computer equipment
used in conducting the Company's business represented the primary component of
cash used in investing activities.
Cash and cash equivalents for the six months ended June 30, 1998 decreased
$1.3 million from the December 31, 1997 ending balance. Net cash used for
operations of approximately $429,000 for the six months ended June 30, 1998
resulted primarily from a net operating loss before depreciation expense of
$851,000 less an approximately $422,000 decrease in working capital. The
decrease in working capital was primarily attributable to an increase in
accounts payable and deferred revenue, partially offset by an increase in
accounts receivable associated with increased license and services revenue in
the second quarter. Net cash used in investing activities for the six months
ended June 30, 1998 was a result of property and equipment purchases related to
the increase in headcount, the move to new operating facilities and the
acquisition of hardware and software for development and internal operating
systems. Net cash used in financing activities of $69,000 consisted of
approximately $110,000 for the repayment of capital lease obligations, offset by
cash inflow of $41,000 from the exercise of stock options under the 1996 Plan.
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<PAGE> 30
The Company had net operating loss carryforwards of approximately $792,000
at December 31, 1997 to reduce future income taxes, if any. These carryforwards
expire through 2013 and are subject to review and possible adjustment by the
Internal Revenue Service. The Tax Reform Act of 1986 contains provisions that
may limit the amount of net operating loss and credit carryforwards that the
Company may utilize in any one year in the event of certain cumulative changes
in ownership over a three-year period in excess of 50% as defined. The Company
believes that it has experienced a change in ownership in excess of 50%. The
Company does not believe that this change will significantly impact the
Company's ability to utilize its net operating loss carryforwards.
The Company currently intends to use the net proceeds of the Offering for
working capital and general corporate purposes, including financing accounts
receivable and capital expenditures made in the ordinary course of business, as
well as for possible reduction of indebtedness and for potential acquisitions of
businesses, products and technologies that are complementary to those of the
Company. Although the Company has not identified any specific businesses,
products or technologies that it may acquire, or entered into any current
agreements or negotiations with respect to any such transactions, the Company
from time to time evaluates such opportunities. Pending such uses, the net
proceeds will be invested in government securities and other short-term,
investment-grade, interest-bearing instruments.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company is in the process of conducting an assessment of its computer
information systems and is beginning to take the necessary steps to determine
the nature and extent of the work required to make its systems Year 2000
compliant, where necessary. These steps may require the Company to modify,
upgrade or replace some of its internal financial and operational systems. The
Company is currently in the process of upgrading its accounting and customer
care software with software warranted to be Year 2000 compliant. The Company
continues to evaluate the estimated cost of bringing all internal systems,
equipment and operations into Year 2000 compliance, but has not yet finished
determining the total cost of these compliance efforts. Although management does
not expect, based on currently available information, that Year 2000 issues will
have a material adverse effect on the Company's business, operating results or
financial condition, there can be no assurance that there will not be
interruptions of operations, other limitations of system or product
functionality or that the Company will not incur significant costs to avoid such
interruptions or limitations.
The Company also intends to determine the extent to which it may be
vulnerable to any failures by its current and potential customers and
distributors to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time, the Company
is unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of current and potential customers or third party
distributors to achieve Year 2000 compliance, although the Company does not
currently anticipate that it will experience any material sales delays from its
major distributors or current and potential customers due to Year 2000 issues.
However, there can be no assurance that these third parties will not experience
Year 2000 problems or that any problems would not have a material effect on the
Company's product distribution channels. Because the cost and timing of Year
2000 compliance by third parties such as customers and distributors is not
within the Company's control, no assurance can be given with respect to the cost
or timing of such efforts or any potential adverse effects on the Company of any
failure by these third parties to achieve Year 2000 compliance.
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<PAGE> 31
BUSINESS
INTRODUCTION
Exchange Applications, Inc. (the "Company") is a leading provider of
customer optimization software and solutions that enable businesses to maximize
profitability and revenue growth from new and existing customers through
marketing automation and enterprise-wide customer management. The Company's
Continuous Customer Management ("CCM") solution, including its VALEX software
and related consulting and integration services, enables businesses to
profitably retain and expand existing customer relationships and acquire new
customers by: (i) analyzing enterprise-wide databases of customer information to
identify profitable growth opportunities; (ii) planning and prioritizing
investments in high potential customers; (iii) creating targeted, real-time and
event-triggered marketing campaigns and other customer communications; (iv)
selecting the most effective channels for customer communications, such as
direct mail, call centers, sales forces and the Internet; and (v) continuously
evaluating the impact of these marketing campaigns and other communications on
profitability. CCM allows businesses to measure the value of marketing campaigns
and other customer communications against their associated costs and to use this
information to make investment decisions that maximize customer profitability.
The principal components of the Company's CCM offering are VALEX, its open
enterprise software application, and the Company's proprietary consulting and
integration services. The Company has deployed CCM and VALEX across multiple
industries, with installations in over 40 businesses in North America and
Europe. Its customers include Federal Express, Fleet Bank, NatWest Bank (U.K.)
and US West. The Company's products and services are distributed through its
direct sales force, through re-seller relationships with IBM, NCR and others,
and through co-marketing arrangements with companies such as Compaq, Ernst &
Young, KPMG Peat Marwick, PricewaterhouseCoopers, SAS Institute and Sun
Microsystems.
BACKGROUND
Today's increasingly competitive business environment has forced many
businesses to reduce costs in order to improve overall profitability. Enterprise
resource planning ("ERP") and supply chain management software and other
technologies have played a key role in helping businesses cut costs through the
automation of business and administrative functions such as accounting,
purchasing and inventory control, and human resources. While applications aimed
at cost reduction have generally been successful, businesses have realized that
these initiatives are only part of the solution to improve profitability and
have begun to invest in a new class of applications designed to increase
profitability through revenue growth. In the face of growing business
challenges, such as the high cost of attracting new customers, the proliferation
of customer purchasing options, increased customer sophistication and decreased
customer loyalty, revenue growth initiatives have become significantly more
difficult and more important to execute successfully.
Many of these new applications are aimed at enabling businesses to grow
revenue by acquiring new customers and retaining and expanding relationships
with existing customers. These applications facilitate cross-selling and the
marketing of bundled products, new service offerings and differentiated service
relationships. To maximize the profitability of these efforts, businesses need
to allocate resources based not only on functional area and product
profitability, but also on current or potential customer profitability. To
enable this focus on customers, businesses need: (i) an investment allocation
methodology to identify profitable customer opportunities; (ii) the ability to
access and analyze large amounts of customer information; (iii) marketing
automation and campaign management applications to design and implement
effective marketing campaigns; (iv) technologies to manage interactions with
customers; and (v) the ability to evaluate the effectiveness of investments on
current and potential customer profitability.
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To this end, businesses have begun over the past several years to realign
existing marketing and customer management capabilities with new technologies
and processes that optimize customer relationships across the enterprise. This
evolution can be summarized in three phases, as follows:
PHASE 1 -- TRADITIONAL APPROACH. With traditional approaches, businesses
develop marketing campaigns that solicit broad customer segments with infrequent
and static offers. To manage these campaigns, businesses typically use
proprietary software provided by third-party commercial service bureaus to
access customer information maintained in large external databases. These
solutions have provided valuable information to businesses, but have had
significant limitations:
- LIMITED ABILITY TO DEVELOP AND REFINE MARKETING CAMPAIGNS. Traditional
approaches are severely limited in the number and complexity of marketing
campaigns that can be supported without manual intervention, increasing
cycle time and cost and forcing businesses to run less targeted and less
timely campaigns.
- INABILITY TO ACCESS THE COMPLETE CUSTOMER RELATIONSHIP. Traditional
approaches use fixed data structures that store only a limited amount of
information about each customer, forcing businesses to make decisions
based on a limited portion of available customer information.
- LIMITED ABILITY TO MEASURE PERFORMANCE. Most traditional solutions use
response rates and other basic metrics which do not provide the necessary
information required to effectively measure campaign performance or to
allocate marketing resources to those campaigns and other communications
with the most positive impact on customer profitability.
- POOR INTEGRATION WITH OTHER APPLICATIONS. Many traditional solutions are
limited by closed architectures and therefore require time-consuming,
manual processes to be integrated with analytical tools, such as online
analytical processing ("OLAP") and data mining tools, or customer
touchpoint applications.
PHASE 2 -- MARKETING AUTOMATION AND CAMPAIGN MANAGEMENT. Recognizing the
competitive value of more active management of customer relationships,
businesses are transitioning from traditional approaches to more automated
marketing environments that enable businesses to target refined customer
segments, implement more customized offers on a timely basis, and measure the
effectiveness of offers with metrics such as return on investment. Central to
this approach are data warehouses which contain a more complete view of the
customer relationship, tools that predict customer behavior and software
applications that automate the design and execution of marketing campaigns.
Through marketing automation and campaign management, businesses benefit from
more timely access to, and robust analysis of, customer information, more
frequent and targeted campaigns, and more comprehensive measurement of the
effectiveness of investments. This results in increased return on investment,
reduced customer acquisition costs and reduced marketing cycle time.
PHASE 3 -- ENTERPRISE-WIDE CUSTOMER MANAGEMENT. Marketing automation and
campaign management solutions alone provide significant value. However, their
lack of integration with customer interaction software ("CIS") products, such as
sales force automation, call center, customer service, help desk and Internet
products, and other customer-related aspects of the business limits the ability
to plan and optimize customer relationships across the enterprise. In addition,
most CIS, marketing automation and campaign management solutions collectively
fail to provide a common customer management methodology. Enterprise-wide
customer management solutions integrate marketing automation and campaign
management software with data warehouses and CIS products in an environment in
which all aspects of the customer relationship are considered. This results in
more consistent messages to customers, greater penetration of potential
high-profit customers and the ability to employ lower cost communication
channels to optimize customer profitability.
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THE CUSTOMER OPTIMIZATION OPPORTUNITY
The Company believes that customer optimization software and solutions
represent a significant opportunity across many industries. Businesses are
adopting these technologies at different rates based on their access to customer
information, their level of database marketing sophistication, the marginal
economic impact of changes in the behavior of their customers and the degree of
competitiveness within their industry. The Company believes that the demand for
these technologies will grow rapidly as additional industries increasingly
recognize enterprise-wide customer management as a competitive requirement.
Significant opportunities exist for solutions that enable businesses to
transition from the traditional service bureau approach to marketing automation
and campaign management solutions and to enterprise-wide customer management
environments. These transitions require highly-automated marketing and campaign
management solutions that integrate people, processes and technology across the
enterprise to insure adherence to a common customer management methodology.
According to an April 1997 Gartner Group report, overall spending on
service bureaus, marketing automation and campaign management, which Gartner
collectively refers to as database marketing, will be $1.3 billion in 1998,
growing at an annual rate of 35% over the next several years. Furthermore, as
evidence of the shift from traditional service bureau applications to marketing
automation and campaign management solutions, Gartner estimates that spending on
campaign management and marketing automation applications will be approximately
$220 million in 1998, increasing at an annual rate of approximately 100% to
nearly $900 million in 2000. Independent research analysts have reported that
marketing automation and campaign management efforts represent a major area of
focus for businesses today and note that many businesses are shifting to such
solutions. An earlier Gartner survey states that "database marketing appeared in
almost every industry as a high-payback, data-intensive application with
potentially significant returns".
Other leading analysts believe that the transition to enterprise-wide
customer management represents an even greater opportunity than the earlier
shift to automated campaign management solutions. For example, Palo Alto
Management Group projects that the market for enterprise-wide customer
management software solutions will be $2.9 billion in 2002.
THE EXCHANGE APPLICATIONS SOLUTION
The Company believes that its Continuous Customer Management solution,
implemented through its VALEX software and proprietary consulting and
integration services, represents a fundamentally new approach to customer
optimization that addresses the opportunities described above. CCM delivers
customer optimization solutions that allow a business to maximize the
profitability and revenue growth from new and existing customers through
marketing automation and campaign management that can evolve to enterprise-wide
customer management.
VALEX enables businesses to optimize customer value by: (i) providing a
complete view of the relationship between a business and its customers; (ii)
leveraging a range of data mining, reporting and modeling products to identify
high-value customers; (iii) providing powerful marketing automation and campaign
management software that lets end-users define and execute targeted customer
communication streams; and (iv) integrating with CIS products and data
warehouses to perform enterprise-wide customer management. VALEX further
enhances the value of information stored in data warehouses by allowing
non-technical marketing professionals to design, execute and continuously
evaluate and refine targeted marketing campaigns.
The Company's consulting and integration services include: (i) development
of processes that allow organizations to adopt the CCM solution across business
functions, including Value Exchange Optimization ("VEO"), a methodology for
allocating marketing investments based on expected return; (ii) Metrics
Repository, a custom software application that allows VALEX to track the success
or failure of marketing campaigns across business segments and across the
enterprise;
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<PAGE> 34
and (iii) VALEX Rapid Implementation, designed to quickly implement the core
VALEX modules, allowing access to data warehouse environments and campaign
execution in a matter of weeks.
Through CCM and VALEX, businesses gain an understanding of the economics of
customer relationships, measure customer value and provide incentives through
campaigns that influence and optimize customer behavior. The Exchange
Applications solution offers the following key benefits:
IMPROVED PROFITABILITY AND REVENUE GROWTH. VALEX and CCM enable businesses
to retain and increase the value of existing customers and acquire new customers
by focusing investment resources on those customers with the greatest current
and potential value. Through the use of the Company's solution, businesses have
achieved increased retention rates, lower acquisition costs, more efficient
cross-selling and better customer satisfaction due to more relevant, less
intrusive communications.
COMPREHENSIVE SOLUTION. The Company's products and services provide a
complete solution for customer optimization. The Company believes that its
combined offering of software, proprietary methodologies and consulting services
help businesses implement marketing automation and campaign management software
and improve customer profitability quickly and with little risk.
ENTERPRISE-WIDE CUSTOMER VIEW. VALEX enables organizations to access and
use all types of information stored in data warehouses. Businesses are therefore
not restricted in the scope or type of information used to design customer
optimization strategies.
INCREASED MARKETING VELOCITY. VALEX creates continuous, fully-automated
marketing campaigns, allowing multiple end users to develop customized
communications triggered by customer characteristics (e.g., age, income, buying
behavior), specific events (e.g., changes in spending patterns, births of
children, changes in economic status) or dates (e.g., birth dates, contract
renewal dates). VALEX allows businesses to reduce dramatically the cycle time
from planning through design, execution and measurement of campaigns, to better
respond to competitive and market pressures and to quickly evaluate new
campaigns.
OPEN, EXTENSIBLE ARCHITECTURE. VALEX is designed to be open, easy-to-use
and scaleable across a wide variety of computing environments. The VALEX
architecture conforms to many current industry standards (OLE, COM, DCOM, CORBA,
ODBC) and can be integrated with existing hardware and software environments
allowing businesses to leverage their investments in CIS products and data
warehouse technologies.
STRATEGY
The Company's objective is to be the leading provider of customer
optimization software and solutions globally. The Company's strategy for
achieving this objective includes:
EXTEND VALEX. The Company has developed unique technical solutions that
enable businesses to optimize customer relationships. The Company is currently
developing product extensions that will enhance the ability of its existing
products and services to directly integrate with data mining products and link
communications to customers with changes in their behavior. Further, the Company
is developing a local campaign management product to enable satellite offices
and remote users to design and execute independent campaigns while coordinating
with the central marketing function. The Company may also acquire businesses or
technologies that would provide the Company with extended product or service
offerings across the various aspects of a CCM implementation and/or specialized
knowledge or tailored software for selected vertical industries.
DEVELOP ADDITIONAL CUSTOMER OPTIMIZATION SOLUTIONS. The Company intends to
develop additional products to provide automation and business intelligence to
improve a business's ability to perform enterprise-wide customer management. The
Company's future products and services will be designed to optimize and control
communications across CIS environments and enhance business planning and
forecasting solutions based on customer and channel economics.
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EXPAND VERTICAL INDUSTRY FOCUS. The Company currently targets the
telecommunications and financial services industries as well as other database
marketing intensive businesses that seek to develop customized marketing
campaigns. The Company intends to expand its focus to other industries as the
demand for its customer optimization solution grows. The Company's experience
has been that the rate of adoption of its solutions is driven by competitiveness
within a given industry, the level of database marketing sophistication, access
to customer information and the marginal economic impact of changes in customer
behavior. The Company is currently considering sales efforts focused on the
retail/catalog, energy/utility and insurance industries.
BROADEN DISTRIBUTION CHANNELS AND BUILD ALLIANCES. The Company will
continue to develop indirect distribution channels. The Company maintains global
re-seller agreements for VALEX with IBM, NCR and others to leverage these
partners' extensive marketing and distribution channels. The Company also has
co-marketing relationships with companies such as Compaq, Ernst & Young, KPMG
Peat Marwick, PricewaterhouseCoopers, SAS Institute and Sun Microsystems,
enabling it to utilize their extensive customer relationships and, in certain
cases, their products and services. The Company plans to leverage the
professional services resources of these re-seller and co-marketing
organizations to provide certain non-proprietary professional services required
in connection with the implementation of CCM and VALEX. This strategy will allow
the Company to provide and expand its professional services offerings to most
effectively complement its CCM methodology and software applications, and will
help increase the efficient implementation of CCM solutions in anticipation of
increased demands on the Company's services resources.
INCREASE DIRECT SALES GLOBALLY. The Company currently maintains and is
aggressively expanding its direct sales forces in North America, the U.K. and
Australia. In the future, the Company plans to expand further in Europe and the
Pacific Rim, with particular attention to territories or industries experiencing
trends advantageous to the adoption of the Company's solution, such as industry
deregulation.
PRODUCTS -- VALEX
The Company's customer optimization software product, VALEX, allows end
users to select targeted customer segments, design time- and event-triggered
customized marketing campaigns and continuously execute and measure the
effectiveness of such marketing campaigns. VALEX may be implemented quickly with
a broad range of processes, databases and CIS environments.
VALEX implementations range in size and complexity. A small implementation
may include data for 400,000 customers in a 50-100 gigabyte data warehouse, with
10 business users accessing the system. The price range for VALEX for this size
configuration is $200,000-$250,000. A large implementation may have 20,000,000
customers, a multi-terabyte data warehouse, and more than 100 users. The price
for VALEX in this configuration is typically more than $800,000.
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<PAGE> 36
The principal VALEX components are listed and described in the following
table:
COMPONENT DESCRIPTION
- --------- -----------
Desktop.............. Allows users to define their core process steps for CCM
and then to organize VALEX components and associated
applications into those process steps.
Segment.............. Allows users to segment the database into groups of
customers for a particular marketing campaign or
analysis.
Profile.............. Allows users to analyze the characteristics of
individual customers within a segment.
Campaign............. Allows users to define and execute targeted campaigns
that run continuously and contain event triggers that
respond to customer behavior or inactivity.
Schedule............. Allows users to schedule VALEX components and to
automate campaign execution and tracking.
Extract.............. Allows users to select information from the data
warehouse and export this information to other
applications and CIS technologies.
Admin................ Allows users to interface VALEX with data warehouses and
provide configuration settings.
Filter............... Allows users to capture and analyze lists and
descriptions of customers and their characteristics in
the data warehouse.
The figure below depicts VALEX and CCM as part of an enterprise-wide
solution.
[A series of diagrams showing the VALEX architecture interfacing with customer
databases and customer touchpoints.]
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<PAGE> 37
A VALEX USER CASE. The following description and diagram illustrate how
VALEX is used to create, evaluate and refine marketing campaigns for
enterprise-wide customer management.
- DESKTOP. A user first selects a "work group", which directs a user to
the database to be accessed and the process steps to be performed. A
simplified marketing process may include identifying and planning
opportunities, and then designing, executing and continuously evaluating
and refining campaigns.
- SEGMENT AND PROFILE. During the opportunity identification stage, a user
employs VALEX Segment to define desired groups of customers to be
targeted in a particular campaign. The VALEX Profile component is then
used to further analyze each segment by other attributes in the database
(such as purchasing patterns, demographics, prior campaign history). In
the example pictured below, three segments are defined. The "Targeted
Prospects" segment comprises a group of prospective customers selected
for a direct mail campaign. The "Cross Sell Opportunities" segment
identifies a group of current customers whose purchase behavior indicates
a likelihood of buying certain additional products. The "Likely to Leave"
segment, derived using a statistical model, identifies customers with a
high probability of attrition based on their behavioral and demographic
characteristics.
[A COMPUTER SCREEN DIAGRAM OF VALEX CAMPAIGN DECISION TREE.]
- CAMPAIGN. Once the user has decided on segments to be targeted for a
particular campaign, he or she moves to the campaign design stage of the
process. In this stage, a user employs VALEX Campaign to define the
structure of the campaign. The user starts by specifying the campaign
universe, and then defining all customers eligible to participate in the
campaign. In this example, the user then creates three contact segments
that branch off from the campaign universe. Groups are created by linking
a query defined in VALEX Segment to
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the database of potential contacts and by specifying rules that determine
whether each customer or prospect meets the campaign selection criteria.
Rules are specified through database queries or data mining routines and
can establish "triggers" that respond to customer behavior. Once a group
of contacts is identified, it can be subdivided into smaller random
groups that receive different communications. Subdivisions allow the user
to test the relative effectiveness of various communication strategies,
comparing different messages, offers and/or channels against a control
group. In the example above, the user further divides the "Cross Sell
Opportunities" contact group in order to test two different
offers -- "Product Upgrade" and "Discounted Enrollment" -- against a
control group which will not receive any offers. The behavior of all
three "splits" of the "Cross Sell Opportunities" contact group will be
evaluated to improve future campaigns.
- EXTRACT AND SCHEDULE. After a campaign has been created, the user links
each element of the campaign to VALEX Extract. The physical destination
of the targeted list of customers and the information content to be
delivered to the customer touchpoint are defined as Extracts. In the
pictured campaign, the "Mail House" extract is formatted for the
generation of personalized direct mail. "Sales Agents", "Call Center" and
"Service Center" extracts directly feed the appropriate system for each
touchpoint. The "Promotional History" extract creates a record for each
customer or prospect included in the campaign with information about that
individual's contact group, offer and channel. This record, stored in a
history table in the data warehouse, is used to measure campaign
effectiveness and drive future communications. Through VALEX Schedule,
campaign execution can be highly automated, reducing or eliminating human
intervention. For instance, VALEX Schedule could automatically generate a
nightly list of the best potential contacts for a cross-sell campaign or
a weekly list of new customers to receive a welcome package through the
mail.
- METRICS REPOSITORY. After executing a campaign, VALEX and Metrics
Repository are used to analyze the campaign and refine it for the next
cycle. Metrics Repository enables users to: (i) define campaign history
tables, which update the data warehouse with information about customers
or prospects selected in the campaign and capture information about each
customer at the time they were contacted; (ii) establish test versus
control groups to verify the incremental performance of a new message or
segmentation technique; (iii) track each iteration of a campaign over
time; (iv) define a "response" to a marketing action (e.g., a purchase of
the offered product within two weeks of the start of the campaign); and
(v) link responses to campaign promotions, providing the information
foundation for measuring marketing effectiveness. Because the measurement
needs of businesses vary widely, Metrics Repository is customized to meet
the requirements of each individual business.
VALEX ARCHITECTURE. VALEX is an open enterprise software solution that can
operate on a variety of platforms in a multi-tiered environment, thereby
providing businesses maximum flexibility in the deployment of the software. For
some smaller installations, both the database and the application server can be
installed on one server with input from a separate client console. Larger
installations may require a three-tiered environment, with separate client,
data-warehouse and application servers. The software has been developed in
Visual C++ and Java and is object oriented. Parallel operation of VALEX enables
it to exploit database and hardware capabilities to operate in large database
environments. VALEX supports many of the common relational databases in use
today, and has been designed to generate structured query languages ("SQL") that
leverage the unique capabilities of the relational database systems ("RDBMS")
platforms. The following diagram represents an overview of VALEX and the
platforms it supports.
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[The graphic depicts a series of diagrams showing the VALEX architecture
interfacing with customer databases and the platforms that VALEX supports.]
Designed to be flexible and scaleable, VALEX uses industry standard
capabilities and interfaces, such as SQL, ODBC, COM, DCOM, MFC and CORBA, to
integrate closely with data warehouse and CIS environments. The Company is also
developing external interfaces to VALEX that will allow consultants, partners or
customers to quickly and easily add their own functional extensions to the
software while maintaining compatibility with future VALEX releases. The Company
believes that VALEX represents the most comprehensive combination of
functionality, scalability and openness in the marketplace today.
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SERVICES
The Company maintains its own integration services consulting group. The
group delivers capabilities to VALEX customers that include data warehouse
design and infrastructure development, business process design capabilities and
all aspects of the CCM implementation. Key service offerings include:
CONSULTING
PROCESS DESIGN. A central part of the CCM solution is the design and
customization of processes for customer optimization. This includes process
templates in planning, campaign execution, measurement and continuous learning.
The Company's Value Exchange Optimization ("VEO") methodology describes a
process for businesses to allocate marketing investments based on the likely
return of a particular marketing campaign or customer communication. Through
VEO, businesses can make investments based on current and potential customer
profitability and allocate resources to customers with high profit potential
through more frequent and better targeted campaigns and differentiated service
offerings. VEO utilizes the data generated by VALEX to track overall campaign
performance as well as individual customer responses to campaigns. This allows a
business to discern more readily which customers are most likely to respond to
particular campaigns.
VEO identifies gaps between the current and potential profitability of
customers. Companies can then employ VALEX to execute strategies to reduce those
gaps. Through VALEX and VEO, companies gain an understanding of the economics of
customer relationships, measure customer value and provide incentives through
campaigns that influence and optimize customer behavior.
METRICS REPOSITORY. The Company's Metrics Repository offering is a custom
application development project that enables a business to measure and visualize
the impact of its investments across customers and campaigns. Measurement is
accomplished through the CCM process steps, which require businesses to
establish a consistent measurement baseline and adopt a process-driven view for
managing and optimizing the value of its customer relationships. The Metrics
Repository is typically implemented through integration of OLAP tools with the
data warehouse and VALEX.
VALEX RAPID IMPLEMENTATION. With VALEX Rapid Implementation, the Company
implements the core VALEX components and integrates them with existing data
warehouse environments within a matter of weeks through a structured,
tightly-managed methodology. Rapid Implementation includes advising on campaign
structures and customer management strategies, training the first series of
users on VALEX and supporting and guiding users through the initial days of
operation.
CUSTOMER SUPPORT AND SERVICE
The Company believes that superior customer support and service are
critical to successful implementation of CCM and VALEX. The Company is committed
to providing high-quality customer support and to maintaining a qualified
customer support and service team. Ongoing customer support and service are
provided on a 24-hour-a-day, 7-day-a-week basis.
TRAINING
The Company offers complete training for its customers and partners. This
training includes end-user interaction with VALEX, administration of VALEX and
best practices in CCM.
MAINTENANCE AND PRODUCT UPGRADES
The Company provides ongoing product support services under its license and
maintenance agreements. Maintenance contracts are typically sold to customers
for one-year terms commencing on the date of the initial VALEX license and may
be renewed for additional periods. The Company also provides product updates to
VALEX free of charge for customers with a maintenance
36
<PAGE> 41
agreement. Customers who do not purchase a maintenance agreement but would like
to receive product updates must purchase them from the Company.
PRODUCT DEVELOPMENT
The Company originally introduced VALEX in July 1996 and has subsequently
made a number of product revisions and enhancements. The Company has adopted a
strategy of continuously reevaluating the needs of customers and marketplace
trends to develop new products. The Company's ongoing product development
efforts are focused on:
- RELEASE 2.1-2.2 -- These releases of VALEX will include extensions to its
existing functionality, a new component that links communications to
changes in customer behavior and an improved interface with leading
analytical applications.
- RELEASE 3.0 -- This release will include open interfaces to the VALEX
objects that will allow partners and customers to extend the software
directly, further broadening the base functionality of VALEX.
- ADAPTING VALEX FOR DIFFERENT LANGUAGES -- The Company is modifying VALEX
to support multilingual databases and to permit translation into other
languages.
- DELIVERING A LOCAL CAMPAIGN MANAGEMENT CAPABILITIES -- This new module
will enable satellite offices and remote users to design and execute
independent campaigns while coordinating with the central marketing
function.
Each of these capabilities is expected to enter beta testing within the
next 12 months. Subsequent improvements and extensions will include a more
automated customer planning and forecasting capability and improved interfaces
to customer touchpoint applications. There can be no assurance that the Company
will not experience difficulties that could delay or prevent successful
development, introduction and sales of these products or that its new products
and enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. See "Risk Factors -- Rapid Technological Change and
New Products".
SALES AND MARKETING
The Company markets its software and services through its direct sales
force of 11 quota-carrying sales representatives and indirectly through
re-sellers and co-marketers. As of June 30, 1998, the Company had sales offices
in Boston, Denver, London, England and Sydney, Australia. The Company's sales
force consists of teams made up of sales executives, managers and pre-sale
engineers organized by vertical industry. The Company currently has sales teams
focused on financial services and telecommunications and is currently evaluating
adding sales teams for other vertical industries, which may include
retail/catalog, utilities/energy and insurance.
The Company currently has re-seller relationships with IBM, NCR and others,
which grants these companies the right to re-market VALEX and utilize the
Company's marketing materials. In addition, the Company has co-marketing
arrangements with companies such as Compaq, Ernst & Young, KPMG Peat Marwick,
PricewaterhouseCoopers, SAS Institute and Sun Microsystems to generate leads and
participate in sales efforts. None of the agreements governing the re-seller or
co-marketing relationships with these organizations includes any commitments on
the part of these organizations to effect any minimum number of sales of VALEX,
or to otherwise provide the Company with business. No assurances can be given
that any revenue will be realized by the Company from any of these
relationships.
CUSTOMERS
The Company focuses on selling its CCM solution to leading businesses in
targeted vertical industries. The Company also has made significant sales to
other database-marketing intensive
37
<PAGE> 42
businesses that seek to develop customized marketing campaigns. Following are
selected large customers in the financial services and telecommunications
vertical markets, as well as certain customers from other industries.
<TABLE>
<CAPTION>
FINANCIAL SERVICES TELECOMMUNICATIONS OTHER
- ------------------ ------------------ -----
<S> <C> <C>
First USA BC TELECOM Aid Association for Lutherans
Fleet Bank British SKY Broadcasting Dutch Railways
INVESCO Funds Group NEXTEL Federal Express Corporation
KeyCorp Sprint Guidepost
Mellon Bank US WEST New England Business Services
</TABLE>
CUSTOMER CASE STUDIES:
FEDERAL EXPRESS CORPORATION, MEMPHIS
Federal Express over the last four years has re-engineered its database
marketing process -- from marketing and campaign planning to customer
segmentation, campaign execution, evaluation and refinement. VALEX has been
instrumental in Federal Express' efforts to automate and accelerate its database
marketing process.
Federal Express reports the following accomplishments:
- A dramatic time reduction in direct-marketing campaign cycles; and
- A major improvement in "prospecting" campaigns.
For its application of VALEX, Federal Express won both the 1997 "Best Data
Warehouse Application" award from the Data Warehouse Institute and the 1997
"Excellence Award" from the National Center for Database Marketing.
KEYCORP, CLEVELAND
In 1996, KeyCorp implemented a customer-centric data warehouse in an IBM
mainframe environment. KeyCorp began to develop sophisticated plans and concepts
around managing customer relationships over their financial services life cycle,
but found that the basic reporting and OLAP tools that were part of the data
warehouse did not have the capability to translate their strategic plans into
actual campaigns. As a result, KeyCorp's ability to execute campaigns was
constrained by the need for programmers to custom-develop each campaign, an
approach that is expensive, time-consuming and error-prone.
The Company installed VALEX, enabling KeyCorp to access its data warehouse
directly and more quickly and effectively than before. In addition, the Company
provided CCM process optimization services to enable KeyCorp to implement a more
efficient and targeted methodology for planning, executing and measuring
campaigns.
KeyCorp has reported increased campaign success rates due to automation of
customer segmenting and campaign testing and modeling. Profitability has also
increased due to better cross-selling and increased customer retention.
38
<PAGE> 43
BC TELECOM, VANCOUVER
In 1997, BC TELECOM, Canada's second largest telecommunications company,
faced many challenges in marketing its services, including a need to shift its
focus from product marketing to customer-centric marketing, a lack of automation
in managing customer relationships across their lifecycles and limited
capabilities to allocate marketing dollars to customers presenting the greatest
potential value. Although BC TELECOM had made a major investment in a
multi-terabyte data warehouse, it believed that its business processes and
marketing systems were not sufficiently linked to the information available, and
that its large investment was therefore not generating optimal returns.
To solve BC TELECOM's significant integration problems and its need for
quick action, Exchange Applications provided VALEX, Rapid Implementation and CCM
process optimization services in 1997. Within three months of implementation, BC
TELECOM had achieved significant results from highly targeted marketing
campaigns aimed at its 1.7 million residential customers.
COMPETITION
The market for customer optimization software and related services is
highly competitive. There can be no assurance that the Company will maintain its
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources. The Company's products and services are targeted at the
emerging market for customer optimization software solutions. The Company's
competitors are diverse in their orientation and history. The Company's current
and potential competitors fall into the following categories: (i) database
marketing vendors such as Harte Hanks, Metromail (a division of Great Universal
Stores) and Harland, which provide a combination of service bureau capabilities
and proprietary software; (ii) small independent software companies that have
created or are attempting to create offerings similar to the VALEX product;
(iii) ERP and CIS vendors such as SAP, Baan, Oracle, Siebel and Vantive, that
may have an interest in broadening their product lines to include applications
with competitive functionality; and (iv) internal information technology
departments that attempt to build their own systems.
The principal competitive factors that favor the Company include: domain
expertise and intellectual property in customer optimization process management;
reputation of the Company and its employees and products; open and flexible
architecture; strong marketing automation and campaign management functionality;
and speed and ease of implementation and use. However, there can be no assurance
that the Company will be able to compete successfully with existing or new
competitors or that competition will not have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors -- Competition".
PROPRIETARY RIGHTS AND LICENSES
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. In addition, the Company generally licenses
VALEX to end users in object code (machine readable) format, and the Company's
license agreements generally allow the use of VALEX solely by the customer for
internal purposes without the right to sublicense or transfer VALEX. However,
certain customers have required the Company to maintain a source code escrow
account with a third-party software escrow agent, and a failure by the Company
to perform its obligations under the related license and maintenance agreements
or the insolvency of the Company could conceivably cause the release of the
Company's source code to such customers for certain limited purposes. The
Company believes that the foregoing measures 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
39
<PAGE> 44
which piracy of its software products exists, software piracy is a viable risk.
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 United States.
Furthermore, there can be no assurance that the Company's competitors will not
independently develop technology similar to that of the Company. The Company may
increasingly be subject to claims of intellectual property infringement as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Although
the Company is not aware that any of its products infringe upon the proprietary
rights of third parties, there can be no assurance that third parties will not
claim infringement by the Company with respect to current or future products.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, might not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Risk Factors -- Intellectual
Property Rights; Use of Licensed Technology".
The Company has in the past and may in the future resell certain software,
which it licenses from third parties. There can be no assurance that these third
party software licenses will continue to be available to the Company on
commercially reasonable terms. The loss of or inability to maintain or obtain
any of these software licenses could result in delays or reductions in product
shipments until equivalent software could be identified, licensed and
integrated, which could adversely affect the Company's business, operating
results and financial condition.
EMPLOYEES
As of June 30, 1998, the Company had 129 full-time employees, including 33
primarily engaged in research and development and 40 in sales and marketing. The
Company's future success depends in significant part upon the continued service
of its key technical and senior management personnel and its continuing ability
to attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company can retain its key managerial and technical employees or that it can
attract, assimilate or retain other highly qualified technical and managerial
personnel in the future. None of the Company's employees is represented by
collective bargaining units and the Company, to date, has not experienced a work
stoppage. The Company believes that its employee relations are good.
FACILITIES
The Company's primary offices are located in approximately 40,000 square
feet in Boston, Massachusetts pursuant to a lease expiring in June 1, 2003. The
Company also leases space for its sales offices in Denver, Colorado and London,
England.
40
<PAGE> 45
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Andrew J. Frawley......................... 35 Chairman of the Board, President, Chief
Executive Officer and Director
John G. O'Brien........................... 47 Vice President, Chief Financial Officer,
Treasurer and Secretary
David G. McFarlane........................ 35 Executive Vice President, Worldwide Sales
and Services
David L. Fitzgerald....................... 42 Vice President, North American Sales and
Alliances
Michael D. McGonagle...................... 46 Vice President, Product Development
Patrick A. McHugh......................... 35 Vice President, Marketing and Business
Development
N. Wayne Townsend......................... 34 Vice President, Integration Services
Ramanan Raghavendran...................... 29 Director
Jeffrey Horing............................ 34 Director
Dean F. Goodermote........................ 45 Director
</TABLE>
Mr. Frawley founded the Company in November 1994 and has served as its
President and Chief Executive Officer since its incorporation in November 1996.
Mr. Frawley was elected Chairman of the Board of Directors of the Company in
January 1998. From July 1993 until founding the Company, Mr. Frawley served as a
principal of Grant & Partners Limited Partnership, a management consulting
company. From May 1989 to July 1993, Mr. Frawley held various positions at
MarketPulse, a subsidiary of Praxis International Inc. and developer and
provider of database marketing products, including serving as Vice President of
North American Operations. Mr. Frawley holds a B.S. in accounting from the
University of Maine and an M.B.A. from Babson College. Mr. Frawley has more than
10 years of experience in the high technology industry.
Mr. O'Brien joined the Company in September 1997 as Vice President, Chief
Financial Officer and Secretary and was elected Treasurer of the Company in July
1998. From November 1996 to April 1997, Mr. O'Brien served as Vice President,
Finance and Chief Financial Officer of Advanced Modular Solutions, a computer
hardware manufacturing company. From August 1993 to November 1996, Mr. O'Brien
served as Corporate Controller of Avid Technology, Inc., a computerized film
editing system manufacturing company. From February 1991 to August 1993, Mr.
O'Brien served as Assistant Corporate Controller at Wang Laboratories, Inc., a
computer hardware and office automation system manufacturing company. Mr.
O'Brien is a C.P.A., holds a B.S. in accounting from Northeastern University,
and an M.B.A. from the Wharton School of the University of Pennsylvania. Mr.
O'Brien has more than 15 years of experience in the high technology industry. As
part of the settlement of Mr. O'Brien's recent divorce proceeding, Mr. O'Brien
voluntarily filed a bankruptcy petition under Chapter 13 of the federal
bankruptcy code. The Company does not believe that the filing of such petition
or the related circumstances reflects on Mr. O'Brien's ability or integrity as
an executive officer of the Company.
Mr. McFarlane joined the Company in June 1997 as Executive Vice President,
Worldwide Sales and Services. From January 1988 until joining the Company, Mr.
McFarlane held various positions at Project Software & Development, Inc., a
publicly traded software company that develops and markets high value capital
asset software for processing plants and production equipment, most recently
serving as Vice President, International and Alliances. Mr. McFarlane holds a
B.Sc. in
41
<PAGE> 46
electrical engineering and a Masters degree in electrical engineering from the
University of Bath in the U.K. Mr. McFarlane has more than 10 years of
experience in the high technology industry.
Mr. Fitzgerald joined the Company in July 1998 as Vice President, North
American Sales and Alliances. From June 1996 until joining the Company, Mr.
Fitzgerald was the Group Vice President, Eastern Region of The Vantive
Corporation, an application software company. From April 1995 to April 1996, Mr.
Fitzgerald served as Vice President of Sales of Salesoft, Inc., a start-up
company specializing in sales force automation software. From March 1991 to
April 1995, Mr. Fitzgerald served as President of PowerCurve Corporation, a
company which he founded that specializes in systems integration and ERP
implementation services. Mr. Fitzgerald holds a B.S. in engineering from the
University of Massachusetts. Mr. Fitzgerald has more than 15 years of experience
in the high technology industry.
Mr. McGonagle joined the Company upon its founding in November 1994 and has
served as Vice President, Product Development since its incorporation in
November 1996. From November 1993 until joining the Company, he was Vice
President, Research and Development at MarketPulse. From August 1991 to November
1993, he served as Director of Client-Server Development at Praxis International
Inc. Mr. McGonagle holds a B.A. in mathematics from the University of
Massachusetts (Lowell) and a Masters degree in mathematics from Brown
University. Mr. McGonagle has more than 20 years of experience in the high
technology industry.
Mr. McHugh joined the Company in February 1996 and has served as Vice
President, Marketing and Business Development since March 1998. Mr. McHugh
served in various other capacities with the Company between February 1996 and
March 1998, including serving as Vice President, Sales and Vice President,
Marketing. From June 1995 until joining the Company, Mr. McHugh was the Eastern
Region Manager of Stanford Technology Group, a software development company.
From October 1994 to June 1995 he was Northeast Regional Manager of Siemens
Nixdorf, a computer systems manufacturing company, and from October 1993 to
October 1994 he was Northeast Regional Manager of Kendall Square Research, a
computer systems manufacturing company. Mr. McHugh holds a B.S. in marketing and
a B.S. in finance from Northeastern University. Mr. McHugh has more than 10
years of experience in the high technology industry.
Mr. Townsend joined the Company in April 1996 as Vice President,
Integration Services. From April 1994 until joining the Company, Mr. Townsend
was a Project Director at Epsilon, a database marketing services company. From
May 1990 to April 1994, he was a consultant at Andersen Consulting, a management
consulting company. Mr. Townsend holds a B.S. in mechanical engineering from the
Massachusetts Institute of Technology and an M.S. in mechanical engineering from
the University of Dayton. Mr. Townsend has more than 10 years of experience in
the systems integration industry.
Mr. Raghavendran has served as a Director of the Company since March 1997.
Mr. Raghavendran has served as a managing member of Insight Capital Partners, a
private equity investment firm, since January 1997. From 1992 to 1996, Mr.
Raghavendran was employed at General Atlantic Partners, an investment firm. Mr.
Raghavendran also serves on the boards of directors of several privately held
companies.
Mr. Horing has served as a Director of the Company since March 1997. Mr.
Horing has served as a managing member of Insight Capital Partners, a private
equity investment firm, since January 1995. From 1990 to 1994, Mr. Horing was
employed at E.M. Warburg Pincus, an investment firm. Mr. Horing also serves on
the boards of directors of several privately held companies.
Mr. Goodermote has been a Director of the Company since January 1998. Mr.
Goodermote has been the President and Chief Executive Officer of Process
Software Corporation, a software development company, since August 1996. From
August 1986 to August 1996, Mr. Goodermote held various positions at Project
Software and Development, Inc., including President and Chief Operating Officer
and most recently as Chairman of the Board of Directors. Mr. Goodermote also
42
<PAGE> 47
serves on the boards of directors of several privately held companies. Mr.
Goodermote holds a B.A. in history from the University of Rochester and a M.A.
in Law and Diplomacy from the Fletcher School of Law and Diplomacy of Tufts
University. Mr. Goodermote has more than 15 years of experience in the high
technology industry.
BOARD OF DIRECTORS
The Charter and By-laws provide that the size of the Board of Directors of
the Company (the "Board") shall be determined by resolution of the Board.
The Charter provides for classification of the Board into three classes,
with the members of the respective classes serving for staggered three-year
terms. The first class will consist of Mr. Horing, the second of Mr. Goodermote
and the third of Mr. Frawley and Mr. Raghavendran, with the initial terms of the
directors comprising the classes expiring upon the election and qualification of
the directors at the annual meetings of the stockholders held following the
fiscal years of the Company ending December 31, 1998, 1999 and 2000,
respectively. At each annual meeting of stockholders, directors will be
re-elected or elected for full three-year terms. See "Description of Capital
Stock -- Certain Provisions of the Company's Amended and Restated Certificate of
Incorporation and By-laws".
The Board has established a Compensation Committee and an Audit Committee.
The members of the Compensation Committee are Jeffrey Horing and Dean
Goodermote, and the members of the Audit Committee are Ramanan Raghavendran and
Dean Goodermote.
The current and continuing directors of the Company were nominated and
elected in accordance with the Amended and Restated Stockholders Agreement,
dated as of December 4, 1997, which will terminate upon the closing of this
Offering.
Executive officers of the Company are appointed by the Board and serve
until their successors have been duly elected and qualified. There are no family
relationships among any of the executive officers or directors of the Company.
On January 30, 1998, the Company granted to Dean Goodermote an option to
purchase 20,000 shares of Common Stock at an exercise price of $1.35 per share,
vesting over a four-year period. Prior to the Offering, no other directors of
the Company have received compensation for their services in such capacity. The
Directors' Stock Option Plan provides for the grant of stock options to
non-employee directors. The Company anticipates that, following the Offering,
directors who are employees of the Company will not be paid any fees or
additional compensation for service as members of the Board or any committee
thereof and the Company will enter into customary arrangements with respect to
fees and other compensation (including expense reimbursement) for directors who
are not employees of the Company or any of its subsidiaries. The Company
maintains directors' and officers' liability insurance and its By-laws provide
for mandatory indemnification of directors and officers to the fullest extent
permitted by Delaware law. In addition, the Charter limits the liability of
directors of the Company to the Company or its stockholders for breaches of the
directors' fiduciary duties to the fullest extent permitted by Delaware law. See
"Description of Capital Stock -- Certain Anti-Takeover, Limited Liability and
Indemnification Provisions".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In March 1997, the Board established a compensation committee responsible
for determining compensation of officers of the Company. Prior to March 1997,
the Company had no compensation committee or other committee of the Board
performing similar functions. Andrew Frawley's salary during such year was
established by the Board and decisions concerning compensation of other
executive officers were made during such year by Mr. Frawley.
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<PAGE> 48
EMPLOYMENT CONTRACTS
The officers serve at the discretion of the Board. The Company does not
presently have an employment contract in effect with any of its officers.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
compensation earned by the Company's Chief Executive Officer and the other
executive officers of the Company (collectively, "Named Officers") whose total
salary and bonus exceeded $100,000 for services rendered in capacities to the
Company and its subsidiaries during 1997. For disclosure regarding terms of the
stock options, see "Management -- Stock Option Plans".
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
OPTIONS
--------------------
ANNUAL (NUMBER OF
COMPENSATION(1) SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY BONUS OPTIONS GRANTED) COMPENSATION
------------------------------ ------ ----- ---------------- ------------
<S> <C> <C> <C> <C>
Andrew J. Frawley..................... $200,000 $100,000 151,200 --
Chairman of the Board, President and
Chief Executive Officer
David G. McFarlane(2)................. 78,757 47,500 300,000 --
Executive Vice President, Worldwide
Sales and Services
Michael D. McGonagle.................. 131,000 30,000 58,000 --
Vice President, Product Development
Patrick A. McHugh..................... 110,000 175,089 80,000 --
Vice President, Marketing
N. Wayne Townsend..................... 125,000 85,000 74,000 --
Vice President, Integration Services
</TABLE>
- ---------------
(1) Excludes certain perquisites and other benefits the amount of which did not
exceed 10% of the employee's total salary and bonus.
(2) Mr. McFarlane joined the Company in June 1997 and his salary and bonus
reflect compensation earned in the latter half of 1997.
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<PAGE> 49
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted to each of the Named Officers during 1997. No stock appreciation rights
were granted to these individuals during such year.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME GRANTED 1997 PER SHARE DATE VALUE(1)
- ---- ---------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Andrew J. Frawley....................... 151,200 10.4% $0.72 7/31/02 $ 59,053
David G. McFarlane...................... 250,000 17.3 0.65 7/31/07 100,861
David G. McFarlane...................... 50,000 3.5 0.65 7/18/06 20,172
Michael D. McGonagle.................... 18,000 1.2 0.65 7/31/07 7,262
Michael D. McGonagle.................... 40,000 2.8 0.65 7/18/06 16,138
Patrick A. McHugh....................... 30,000 2.1 0.65 7/31/07 12,103
Patrick A. McHugh....................... 50,000 3.5 0.65 7/18/06 20,172
N. Wayne Townsend....................... 18,000 1.2 0.65 7/31/07 7,262
N. Wayne Townsend....................... 56,000 3.9 0.65 7/18/06 22,593
</TABLE>
- ---------------
(1) Represents the estimated fair value of the options as of the date of grant
using the Black-Scholes option pricing model with the following assumptions:
(i) expected volatility of 79%; (ii) expected life of four years; and (iii)
risk-free interest rate of 5.96%. No dividends on common stock were assumed
for purposes of this estimate.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information concerning option
exercises during 1997 and option holdings at December 31, 1997 with respect to
each of the Named Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 1997(1) AT DECEMBER 31, 1997(2)
ACQUIRED ON VALUE --------------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE(3)(4) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew J. Frawley....... -- -- 151,200 -- $95,256 $ --
David G. McFarlane...... -- -- 25,000 275,000 17,500 192,500
Michael D. McGonagle.... -- -- 9,000 49,000 6,300 34,400
Patrick A. McHugh....... -- -- 15,000 65,000 10,500 45,500
N. Wayne Townsend....... -- -- 9,000 65,000 6,300 45,500
</TABLE>
- ---------------
(1) "Exercisable" refers to those options which were both exercisable and
vested, while "Unexercisable" refers to those options which were unvested.
(2) Value is determined by subtracting the exercise price from the fair market
value of the Common Stock at December 31, 1997 ($1.35 per share), as
determined by the Company's Board of Directors, multiplied by the number of
shares underlying the options.
(3) In March 1998, the Company granted stock options, none of which is currently
exercisable, to the following Named Officers to purchase the corresponding
number of shares of Common Stock at an option exercise price of $3.50 per
share: (i) David G. McFarlane, 30,000 shares of Common Stock; (ii) Michael
D. McGonagle, 9,000 shares of Common Stock; (iii) Patrick A. McHugh, 10,000
shares of Common Stock; and (iv) N. Wayne Townsend, 11,500 shares of Common
Stock. In addition, in March 1998, the Company granted Andrew J. Frawley
options to purchase 105,000 shares of Common Stock at an exercise price of
$3.85 per share.
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<PAGE> 50
(4) On June 12, 1998 (i) David G. McFarlane exercised options to purchase 25,000
shares of Common Stock at an exercise price of $0.65 per share for an
aggregate exercise price of $16,250, (ii) Patrick A. McHugh exercised
options to purchase 15,000 shares of Common Stock at an exercise price of
$0.65 per share for an aggregate purchase price of $9,750, and (iii) N.
Wayne Townsend exercised options to purchase 9,000 shares of Common Stock at
an exercise price of $0.65 per share for an aggregate purchase price of
$5,850.
STOCK OPTION PLANS
1998 Stock Incentive Plan. The Company's 1998 Stock Incentive Plan (the
"1998 Plan") was approved by the Board on July 15, 1998 and was adopted by the
Company's stockholders on July 15, 1998. The aggregate number of shares of
Common Stock available for awards under the 1998 Plan is 2,700,000 shares. The
1998 Plan provides for the grant or award of stock options ("Stock Options") to
purchase shares of Common Stock of the Company. Stock Options granted under the
1998 Plan may be incentive stock options or non-statutory options. The purpose
of the 1998 Plan is to attract and retain outstanding employees through the
incentives of stock ownership. Any employee of the Company (including officers),
and any consultant to and any director of the Company, is eligible to receive
Stock Options under the 1998 Plan. As of July 15, 1998, none of the shares
reserved for issuance under the 1998 Plan was subject to outstanding Stock
Options.
The 1998 Plan is administered by the Board. Subject to the provisions of
the 1998 Plan, the Board has the authority to designate participants and to
determine whether Stock Options granted are incentive stock options or not, the
number of shares to be covered by each Stock Option, the exercise price of the
Stock Option, the period of time over which Stock Options are exercisable or may
be settled, the method of payment and any other terms and conditions of the
awards. All Stock Options are evidenced by Stock Option Agreements between the
Company and the participant.
While the Board determines the prices at which Stock Options may be
exercised under the 1998 Plan, the exercise price of an incentive Stock Option
under the 1998 Plan shall be at least 100% of the fair market value (as
determined under the terms of the 1998 Plan) (or 110% of the fair market value
if the grantee is deemed to own 10% or more of the outstanding voting stock of
the Company) of a share of Common Stock on the date of grant. Stock Options must
be exercised by the tenth anniversary of the date of grant, or if the grantee
owns 10% or more of the outstanding voting stock of the Company, by the fifth
anniversary of the date of the grant.
1996 Stock Incentive Plan. The Company's 1996 Stock Incentive Plan (the
"1996 Plan"), effective November 15, 1996, was approved by the Board of
Directors on November 15, 1996 and adopted by the Company's stockholders in
March 1997. The 1996 Plan provides for the grant or award of Stock Options,
which may be incentive stock options or non-statutory stock options, and for the
direct purchase of shares of Common Stock of the Company ("Restricted Common
Stock"). The purpose of the 1996 Plan is to attract and retain outstanding
employees through the incentives of stock ownership. Any employee of the Company
(including officers), and any consultant to and any director of the Company, is
eligible to receive Stock Options and to purchase Restricted Common Stock under
the 1996 Plan. As of July 15, 1998, the Company had 2,277,283 shares of Common
Stock reserved for issuance remaining under the 1996 Plan, of which 2,085,408
shares were subject to outstanding stock options at a weighted average exercise
price of $3.10 per share.
The 1996 Plan is administered by the Board. Subject to the provisions of
the 1996 Plan, the Board has the authority to designate participants and to
determine whether Stock Options granted are incentive stock options or not, the
number of shares to be covered by each Stock Option, the price of the exercise
of the Stock Option and the purchase price of the Restricted Common Stock, the
time at which Stock Options are exercisable or may be settled, whether
restrictions such as repurchase options are to be imposed on shares subject to
the Stock Options and to the Restricted Common Stock, the method of payment and
any other terms and conditions of the awards. All Stock
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<PAGE> 51
Options and Restricted Common Stock are evidenced by Stock Option Agreements and
Restricted Stock Agreements, respectively, between the Company and the
participant.
While the Board determines the prices at which Stock Options may be
exercised under the 1996 Plan, the exercise price of an incentive Stock Option
under the 1996 Plan shall be at least 100% of the fair market value (as
determined under the terms of the 1996 Plan) (or 110% of the fair market value
if the grantee is deemed to own 10% or more of the outstanding voting stock of
the Company) of a share of Common Stock on the date of grant. Stock Options must
be exercised by the tenth anniversary of the date of grant, or if the grantee
owns 10% or more of the outstanding voting stock of the Company, by the fifth
anniversary of the date of the grant.
In the event that the Company is consolidated with or acquired by another
person or entity in a merger, sale of stock, sale of all or substantially all of
the Company's assets or otherwise (other than a merger or consolidation of the
Company with, or the sale of all or substantially all of the assets of the
Company to, any entity if 50% or more of the aggregate voting power of such
entity is held immediately after such transaction by persons who were
stockholders of the Company immediately prior to such transaction) (an
"Acquisition"), each outstanding Stock Option held by an executive officer of
the Company shall accelerate so as to be fully exercisable for all of the shares
subject to such Stock Option. The foregoing option acceleration provisions may
have the effect of discouraging, delaying or preventing a change in control of
the Company or unsolicited acquisition proposals that a stockholder might
consider favorable, and as a result, such provisions may have an adverse effect
upon the market price for the Common Stock. There are no option acceleration
provisions with respect to Stock Options held by any person other than executive
officers of the Company.
Shares underlying Stock Options generally vest over a four-year period.
However, shares underlying certain Stock Options vest as of the ninth
anniversary of the date of the grant of such options, but vesting of up to 25%
of the original amount of such shares may accelerate and may become exercisable
at the end of each calendar year commencing with 1998 upon satisfaction of
certain performance criteria determined by the Board and the Chief Executive
Officer of the Company.
Restricted Common Stock generally vests over a three-year period. However,
vesting may accelerate in the event of (i) the direct or indirect acquisition by
any person of 50% or more of the aggregate voting power of the Company, or (ii)
the sale of all or substantially all of the assets of the Company (other than a
merger or consolidation of the Company with, or the sale of all or substantially
all of the assets of the Company to, any entity if 50% or more of the aggregate
voting power of such entity is held immediately after such transaction by
persons who were stockholders of the Company immediately prior to such
transaction). Upon grant the recipient has full voting and dividend rights with
respect to all shares granted. The shares are subject to a purchase option of
the Company and are subject to restrictions on transfer.
401(k) SAVINGS PLAN
The Company has established a tax-qualified cash or deferred profit sharing
plan (the "401(k) Savings Plan") covering all of the Company's eligible
full-time employees. The Company adopted the 401(k) Savings Plan effective June
1, 1998. Under the plan, participants may elect to contribute, through salary
reductions, up to 15.0% of their annual compensation subject to a statutory
maximum. The Company does not currently provide additional matching
contributions under the 401(k) Savings Plan, but may do so in the future. The
401(k) Savings Plan is designed to qualify under Section 401 of the Internal
Revenue Code of 1986, as amended, so that contributions by employees or by the
Company to the plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Savings Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. The trustee under the plan, at the
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direction of each plan participant, currently invests the assets of the 401(k)
Savings Plan in eight investment options.
Director Stock Option Plan. The Company's 1998 Director Stock Option Plan
(the "Directors' Plan") was approved by the Board on July 15, 1998. The
Directors' Plan will be administered by the Compensation Committee of the Board.
Under the Directors' Plan, on the business day immediately following each annual
meeting of the stockholders of the Company, commencing with the first annual
meeting of stockholders after December 31, 1998, each person who is then a
non-employee director of the Company will be eligible to receive an option to
purchase such number of shares of Common Stock as determined by the Compensation
Committee at an exercise price equal to the fair market value of the Common
Stock on the date the option is granted. A total of 100,000 shares of Common
Stock have been reserved for issuance under the Directors' Plan. The Directors'
Plan is intended to help the Company attract and retain non-employee directors
on the Company's Board.
Employee Stock Purchase Plan. The Company's 1998 Employee Stock Purchase
Plan (the "Stock Purchase Plan") was approved by the Board on July 15, 1996. The
Stock Purchase Plan will be administered by the Compensation Committee of the
Board. The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. The Compensation Committee may grant options to purchase shares of
Common Stock to employees eligible under the Stock Purchase Plan who may acquire
shares of the Company's Common Stock through payroll deductions. The purchase
price for the Company's Common Stock purchased under the Stock Purchase Plan is
85% of the lesser of the fair market value of the shares on the date the option
was granted or the date the option is exercised. A total of 200,000 shares of
Common Stock have been reserved for issuance under the Stock Purchase Plan. The
Stock Purchase Plan is intended to help the Company attract and retain
outstanding employees through the incentives of stock ownership.
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<PAGE> 53
CERTAIN TRANSACTIONS
PREFERRED STOCK ISSUANCE
Pursuant to a Securities Purchase Agreement, dated as of December 4, 1997,
Insight Capital Partners II, L.P. and Wexford Insight LLC each purchased 611,977
shares of Series C Convertible Preferred Stock of the Company for an aggregate
purchase price, in each case, of $2,000,000, or $3.268 per share.
Pursuant to a Stock Purchase and Waiver Agreement (the "Stock Purchase
Agreement"), dated as of December 4, 1997, GAP Coinvestment Partners, L.P.
("GAP") sold an aggregate of 246,006 shares of Series B Convertible Preferred
Stock of the Company to the following purchasers for an aggregate purchase price
of $803,947.58 or $3.268 per share: Andrew J. Frawley, David McFarlane, Daniel
Cox, Patrick McHugh, Michael McGonagle, Stewart Vassie, Steven Feldman, Patrick
D. Brady, Gregory P. Shlopak, David H. Brault, Ted L. Axelrod, Terry B.
Angstadt, James T. Brady, Dominic F. Mammola, James A. Dooley, Diane K. Green,
and Insight Venture Partners I, L.P.
Pursuant to the Securities Purchase Agreement, dated as of March 18, 1997
(the "Securities Purchase Agreement") (i) Insight Venture Partners II, L.P.
purchased 1,154,775 shares of Series B Preferred Stock from the Company for an
aggregate purchase price of $1,807,222.88, or $1.565 per share; (ii) Wexford
Insight LLC purchased 1,154,775 shares of Series B Preferred Stock from the
Company for an aggregate purchase price of $1,807,222.88, or $1.565 per share;
(iii) GAP purchased 246,006 shares of Series B Preferred Stock from the Company
for an aggregate purchase price of $384,999.39, or $1.565 per share; (iv) GPLP
converted 2,300,000 shares of Series A Convertible Preferred Stock ("Old
Preferred Stock") to 1,725,000 shares of Common at a conversion price of
$3.01333; (v) GPLP purchased 377,408 shares of Series A Preferred Stock from the
Company in consideration of the cancellation of certain indebtedness owed by the
Company to GPLP; (vi) Cyrk purchased 2,522,592 shares of Series A Preferred
Stock from the Company in consideration of the cancellation of certain
indebtedness owed by the Company to Cyrk and (vii) the Company paid to Cyrk
$1,000,000 to discharge certain indebtedness.
REGISTRATION RIGHTS AGREEMENT
Pursuant to an Amended and Restated Registration Rights Agreement, dated as
of December 4, 1997, the Company granted registration rights to certain
stockholders of the Company, including Insight Venture Partners I, L.P., Insight
Capital Partners II, L.P., Insight Capital Partners (Cayman) II, L.P., Wexford
Management LLC, Cyrk, Inc. ("Cyrk"), Grant & Partners Limited Partnership
("GPLP"), Andrew J. Frawley, Michael J. Feldman, Michael McGonagle, David
McFarlane, Daniel Cox, Patrick McHugh, Stewart Vassie, Steven Feldman, Patrick
D. Brady, Gregory P. Shlopak, David H. Brault, Ted L. Axelrod, Terry B.
Angstadt, James T. Brady, Dominic F. Mammola, James A. Dooley and Diane K.
Green. See "Shares Eligible for Future Sale -- Registration Rights".
CONTRACT WITH EXCHANGE MARKETING GROUP
Pursuant to several Termination Agreements dated as of March 18, 1997, the
Company and each of Michael J. Feldman, a former director and employee of the
Company, and six other employees of the Company terminated their employment
arrangements with the Company. The Company repurchased an aggregate of 341,125
shares of Common Stock from the departing employees for an aggregate purchase
price of $341.13. Upon termination, Mr. Feldman formed Exchange Marketing Group,
LLC ("EMG"), a marketing consulting company. The Company engaged EMG to provide
consulting services to certain of the Company's customers pursuant to a
Consulting Agreement, dated as of March 18, 1997. As evidenced by a Promissory
Note (the "EMG Note"), dated as of March 18, 1997, the Company loaned to EMG
$350,000. On February 5, 1998, the entire principal and interest outstanding
under the EMG Note was repaid. In addition, in connection with the transactions
contemplated by the Consulting Agreement, EMG licensed from
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<PAGE> 54
the Company certain intellectual property to be used in its marketing consulting
business and the Company and EMG entered into mutual non-compete agreements.
FOUNDER'S LOANS
As evidenced by a Promissory Note (the "Note"), dated as of December 4,
1997, in the original principal amount of $124,997.73, the Company loaned to Mr.
Frawley the total amount of the purchase price for the 38,249 shares of Series B
Convertible Preferred Stock purchased by Mr. Frawley under the Stock Purchase
Agreement. The Note bears interest at 8% per annum and is secured by 38,249
shares of Series B Convertible Preferred Stock owned by Mr. Frawley. As of June
30, 1998, the outstanding balance of the indebtedness under the Note was
$130,764.74.
SEPARATION FROM GPLP
Pursuant to an Assignment and Assumption Agreement, dated as of November
15, 1996, the Company purchased certain assets, including, without limitation,
cash, accounts receivable, fixed assets and certain intangible property, from
GPLP, and the Company issued 2,300,000 shares of Series A Convertible Preferred
Stock to GPLP and assumed certain liabilities of GPLP, including, without
limitation, indebtedness owed to Cyrk, indebtedness under leasing arrangements,
indebtedness with respect to employee benefits and accounts payable. In
addition, in connection with the transactions contemplated by the Assignment and
Assumption Agreement, each of Andrew J. Frawley and Michael J. Feldman entered
into mutual releases of claims with Cyrk, GPLP, Alan Grant and GPI, and the
Company entered into a fully paid-up perpetual license with GPLP pursuant to
which the Company licensed from GPLP certain intellectual property.
LEGAL SERVICES
The Company has, with respect to this Offering and from time to time,
retained the services of the law firm of Bingham Dana LLP. The Company
anticipates that legal fees to be paid to Bingham Dana LLP for 1998 will exceed
$300,000. Neil W. Townsend, a partner at Bingham Dana LLP, is the brother of N.
Wayne Townsend, Vice President, Integration Services of the Company.
FUTURE AFFILIATE TRANSACTIONS
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and their affiliates, will be
approved by a majority of the Board, including a majority of the independent and
disinterested outside directors on the Board, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
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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, and as adjusted to
reflect the sale of shares offered hereby, by (i) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock; (ii) each of the Company's directors and Named Officers; (iii) all
current executive officers and directors as a group; and (iv) each of the
Selling Stockholders. Unless otherwise indicated, the address for the following
stockholders is 89 South Street, Boston, Massachusetts 02111.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
OFFERING(1) NUMBER OFFERING(1)(2)
----------------------- OF SHARES -----------------------
BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ---------------- ------ ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with Insight
Venture Associates, LLC(3)....... 3,557,783 46.1% -- 3,557,783 36.6%
Cyrk, Inc.(4)...................... 1,150,000 14.9 460,026 689,974 7.1
Grant & Partners Limited
Partnership(5)................... 575,000 7.5 230,058 344,942 3.5
Michael J. Feldman(6).............. 530,250 6.9 212,104 318,146 3.3
Andrew J. Frawley(7)............... 1,038,249 13.2 57,162 981,087 9.9
David G. McFarlane(8).............. 126,009 1.6 17,800 108,209 1.1
David J. Fitzgerald................ -- -- -- -- --
John G. O'Brien(9)................. 10,000 * -- 10,000 *
Michael D. McGonagle(10)........... 114,000 1.5 8,600 105,400 *
Patrick A. McHugh(11).............. 75,000 * 7,500 67,500 *
N. Wayne Townsend(12).............. 59,000 * 6,750 52,250 *
Ramanan Raghavendran(13)(14)....... 3,557,783 46.1 -- 3,557,783 36.6
Jeffrey Horing(15)................. 3,557,783 46.1 -- 3,557,783 36.6
Dean F. Goodermote(16)............. -- -- -- -- --
All directors and executive
officers as a group (ten
persons)......................... 4,980,041 62.5 97,812 4,882,229 49.0
</TABLE>
- ---------------
* Indicates less than 1% of the outstanding shares of Common Stock.
(1) Beneficial ownership is calculated in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or become exercisable within 60 days following June
30, 1998 are deemed outstanding. However, such shares are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person. Unless otherwise indicated in the footnotes to this table,
the persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Includes 1,209,054 shares held by Insight Venture Partners I, L.P., 520,779
shares held by Insight Capital Partners II, L.P. and 61,198 shares held by
Insight Capital Partners (Cayman) II, L.P., each of which is under common
control with Insight Venture Partners I, L.P. Also includes 1,766,752
shares held by Wexford Insight LLC. Pursuant to a consulting agreement
dated as of June 1, 1996 (the "Insight Consulting Agreement") between
Insight Venture Management Inc. and Wexford Insight LLC, Insight Venture
Partners I, L.P. may vote all of the shares held by Wexford Insight LLC for
certain matters until six months after the completion of this Offering. As
a result, Insight Venture Associates, LLC and its affiliates may be deemed
to be the beneficial owners of all of the shares held by Wexford Insight
LLC. The address of the Insight entities is 122 East 42nd Street, Ste 2300,
New York, New York 10168, and the address of Wexford Insight LLC 411 West
Putnam Avenue, Suite 125, Greenwich, Connecticut 06830.
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<PAGE> 56
(4) Does not include 2,900,000 shares of Series A Preferred Stock which are
eliminated upon consummation of the Offering. In addition to the number of
shares shown as offered for sale in the table, Cyrk, Inc. intends to grant
the Underwriters the right to purchase up to an additional 229,455 shares
pursuant to the Underwriters' over-allotment option. The address of Cyrk,
Inc. is 3 Pond Road, Gloucester, Massachusetts 01930.
(5) In addition to the number of shares shown as offered for sale in the table,
Grant & Partners Limited Partnership intends to grant the Underwriters the
right to purchase up to an additional 114,750 shares pursuant to the
Underwriters' over-allotment option. The address of Grant & Partners
Limited Partnership is 150 Federal Street, Boston, Massachusetts 02110.
(6) Includes 30,000 shares held by Smith Barney IRA f/b/o Michael Feldman. In
addition to the number of shares shown as offered for sale in the table,
Mr. Feldman intends to grant the Underwriters the right to purchase up to
an additional 105,795 shares pursuant to the Underwriters' over-allotment
option.
(7) Includes 151,200 shares subject to options that currently are exercisable.
Includes 848,800 shares of Restricted Common Stock, 141,495 shares of which
are unvested and therefore subject to a repurchase option in favor of the
Company.
(8) Includes 75,000 shares subject to options that currently are exercisable.
(9) Includes 10,000 shares subject to options that currently are exercisable.
(10) Includes 9,000 shares subject to options that currently are exercisable.
Includes 100,000 shares of Restricted Common Stock which are subject to a
repurchase option in favor of the Company.
(11) Includes 50,000 shares of Restricted Common Stock which are subject to a
repurchase option in favor of the Company.
(12) Includes 50,000 shares of Restricted Common Stock which are subject to a
repurchase option in favor of the Company.
(13) Includes 1,209,054 shares held by Insight Venture Partners I, L.P., 520,779
shares held by Insight Capital Partners II, L.P., 61,198 shares held by
Insight Capital Partners (Cayman) II, L.P. and 1,766,752 shares held by
Wexford Insight LLC. Mr. Raghavendran is a managing member of Insight
Capital Partners and as such he may be deemed to be a beneficial owner of
all of the shares held by entities affiliated with Insight Capital
Partners. In addition, Insight Venture Partners I, L.P., Insight Capital
Partners II, L.P. and Insight Capital Partners (Cayman) II, L.P. may be
deemed to be beneficial owners of all of the shares held by Wexford Insight
LLC (see Notes 3, 4 and 5), and as a managing member of Insight Capital
Partners, Mr. Raghavendran may be deemed to be a beneficial owner of all of
the shares held by Wexford Insight LLC.
(14) The address of Mr. Raghavendran and Mr. Horing is c/o Insight Venture
Associates, LLC, 122 East 42nd Street, Ste 2300, New York, New York 10168.
(15) Includes 1,209,054 shares held by Insight Venture Partners I, L.P., 520,779
shares held by Insight Capital Partners II, L.P., 61,198 shares held by
Insight Capital Partners (Cayman) II, L.P. and 1,766,752 shares held by
Wexford Insight LLC. Mr. Horing is a managing member of Insight Capital
Partners and as such he may be deemed to be a beneficial owner of all of
the shares held by entities affiliated with Insight Capital Partners. In
addition, Insight Venture Partners I, L.P., Insight Capital Partners II,
L.P. and Insight Capital Partners (Cayman) II, L.P. may be deemed to be
beneficial owners of all of the shares held by Wexford Insight LLC (see
Notes 3, 4 and 5), and as a managing member of Insight Capital Partners,
Mr. Horing may be deemed to be a beneficial owner of all of the shares held
by Wexford Insight LLC.
(16) Does not include 20,000 shares subject to options that are not exercisable
within 60 days of June 30, 1998.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.001 per share, and 10,000,000 shares of preferred
stock, par value $.001 per share ("Preferred Stock"). Upon consummation of the
Offering, no shares of Preferred Stock and 9,716,740 shares of Common Stock
(10,166,740 shares if the Underwriters' over-allotment option is exercised in
full) will be outstanding. The following summary is qualified in its entirety by
reference to the Company's Charter and By-laws.
COMMON STOCK
As of June 30, 1998, there were 7,716,740 shares of Common Stock
outstanding held of record by 68 stockholders, assuming the conversion of all
shares of Convertible Preferred Stock into an aggregate of 3,779,510 shares of
Common Stock upon closing of this Offering. The holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock offered by the Company in the Offering will, when issued,
be fully paid and nonassessable.
PREFERRED STOCK
The Board has the authority to issue the Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the Company's stockholders. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company and may adversely affect the voting and other rights of the holders of
Common Stock. At present, the Company has no plans to issue any shares of
Preferred Stock.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Charter provides for the division of the Board into three classes as
nearly equal in size as practicable with staggered three-year terms, effective
upon consummation of this Offering. See "Management -- Board of Directors". A
director may be removed only for cause and then only by the vote of a majority
of the shares entitled to vote for the election of directors.
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) comparison of the proposed consideration to be received by
stockholders in relation to the then current market price of the Company's
capital stock, the estimated current value of the Company in a freely negotiated
transaction or the estimated future value of the Company as an independent
entity and (ii) the impact of such a transaction on the employees, suppliers and
customers of the Company and its effect on the communities in which the Company
operates.
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The Charter and By-laws provide that, effective upon consummation of the
Offering, 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 and that special meetings may be called only by the Chairman of the
Board, the President or a majority of the entire Board. These provisions could
have the effect of delaying until the next annual stockholders meeting
stockholder actions which are favored by the holders of a majority of the
outstanding voting securities of the Company, including actions to remove
directors. 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 Delaware General Corporation Law ("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 or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Charter requires the affirmative vote of
a majority of the entire Board and the holders of at least 66 2/3% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions or to reduce the number of authorized shares of Common Stock
and Preferred Stock. A 66 2/3% vote is also required to amend or repeal the
Company's By-laws. Such stockholder vote would in either case be in addition to
any separate class vote that might in the future be required pursuant to the
terms of any Preferred Stock that might be outstanding at the time any such
amendments are submitted to stockholders. The By-laws may also be amended or
repealed by a majority vote of the Board of Directors.
The By-laws provide that for nominations for the Board 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 later than 120 days in advance of the first
anniversary of the date that the Company's proxy statement to stockholders is
delivered in connection with the prior year's annual meeting of stockholders or
90 days prior to the date of the meeting if no such proxy statement was
delivered to the 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 of discouraging a third party from attempting
to acquire, control of the Company. See "Risk Factors -- Effect of Anti-takeover
Provisions".
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. 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
director's 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 and officers of the Company to the fullest
extend permitted by the DGCL. The Company expects to obtain, prior to the
consummation of the Offering, a directors and officers liability insurance
policy which provides for indemnification of its directors and officers against
certain liabilities incurred in their capacities as such, which may include
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
The Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.
The Company is subject to the provisions of Section 203 of 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 the interested stock-
54
<PAGE> 59
holder attained such status with the approval of the Board or unless the
business combination is approved in a prescribed manner. A "business
combination" includes certain mergers, assets sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
his or her affiliates and associates, owns, or owned within three years prior
15% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is BankBoston, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 9,716,740 shares of
Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options under the Company's
1996 Plan or other options after June 30, 1998). Of such shares, the 3,000,000
shares sold in this Offering will be freely transferable without restriction or
further registration under the Securities Act, except for any shares held by an
existing "affiliate" of the Company, as that term is defined by the Securities
Act (an "Affiliate"), which shares will be subject to the resale limitations of
Rule 144 adopted under the Securities Act. As of the date of this Prospectus,
7,716,740 "restricted shares" as defined in Rule 144 will be outstanding. Of
such shares, and without consideration of the contractual restrictions described
below, no shares would be available for immediate sale in the public market
without restriction pursuant to Rule 144(k). Beginning 90 days after the date of
this Prospectus, and without consideration of the contractual restrictions
described below, 939,067 shares would be eligible for sale in reliance upon Rule
144 promulgated under the Securities Act and 1,330,595 shares would be eligible
for sale in reliance upon Rule 701 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a person (or persons whose shares are aggregated) who owns shares
that were purchased from the Company (or any Affiliate) at least one year
previously, including a person who may be deemed an Affiliate of the Company, is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of the Common Stock
(approximately 97,167 shares immediately after the Offering) or (ii) the average
weekly trading volume of the Common Stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission (the "Commission"). Sales under Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. Any person
(or persons whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who owns shares within the definition of "restricted securities" under Rule 144
under the Securities Act that were purchased from the Company (or any Affiliate)
at least two years previously, would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit
plans or written contracts relating to compensation of such persons. In
addition, the Commission has indicated that Rule 701 will apply to the typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above,
55
<PAGE> 60
beginning 90 days after the date of this Prospectus, may be sold (i) by persons
other than Affiliates, subject only to the manner of sale provisions of Rule
144, and (ii) by Affiliates under Rule 144 without compliance with its one-year
holding period requirement.
All stockholders of the Company, including the officers, directors and
Selling Stockholders, have agreed not to sell any of their shares of Common
Stock for 180 days after the date of this Prospectus without the prior written
consent of the representatives of the Underwriters. As a result of these
contractual restrictions and subject to the provisions of Rules 144(k), 144 and
701, as applicable, 2,651,892 shares subject to restriction will be eligible for
sale upon expiration of the Lock-Up Agreements 180 days after the date of this
Prospectus. See "Underwriting".
The Company has agreed not to offer, sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a period
of 180 days after the date of this prospectus, without the prior written consent
of the Representatives of the Underwriters, subject to certain limited
exceptions. See "Underwriting".
After the Offering, the holders of 6,025,310 shares of Common Stock or
their respective transferees, would be entitled to certain rights with respect
to the registration of such shares under the Securities Act. Registration of
such shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by Affiliates) immediately upon the effectiveness of such
registration.
The Company intends to file a registration statement under the Securities
Act covering all shares of Common Stock subject to outstanding stock options as
well as all shares of Common Stock reserved for issuance under the Company's
Stock Plans. Such registration statement is expected to be filed within 90 days
after the date of this Prospectus and will automatically become effective upon
filing. Following such filing, shares registered under such registration
statement will, subject to the Lock-Up Agreements, Rule 144 volume limitation
applicable to Affiliates and the lapsing of the Company's repurchase rights, be
available for sale in the open market upon the exercise of vested options 90
days after the effective date of this Prospectus. At July 15, 1998, options to
purchase 2,085,408 shares were issued and outstanding under the 1996 Plan and no
options were issued and outstanding outside of the 1996 Plan.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Bingham Dana LLP, Boston, Massachusetts. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by Ropes &
Gray, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Exchange Applications, Inc. as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997 included in this Prospectus and Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and 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"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form S-1 (Reg. No. 333-01752) (the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits to the Registration Statement. For further
information
56
<PAGE> 61
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and the exhibits filed as part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document are not necessarily complete;
reference is made in each instance to the copy of such contract or any other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from such office after payment of fees prescribed by the
Commission.
57
<PAGE> 62
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Exchange Applications, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Exchange
Applications, Inc., a Delaware corporation, and subsidiaries as of December 31,
1996 and 1997, and the related consolidated 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 Exchange Applications, Inc.
and subsidiaries 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
Boston, Massachusetts
June 16, 1998 (Except with
respect to the matters discussed
in Note 17, as to which the
date is July 15, 1998)
F-2
<PAGE> 64
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 1998
DECEMBER 31, --------------------
------------------ PRO FORMA
1996 1997 ACTUAL (NOTE 3)
------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 361 $ 5,273 $ 3,977 $ 3,977
Marketable securities..................................... -- 202 205 205
Accounts receivable, less allowance for doubtful accounts
of $43, $206 and $212 at December 31, 1996 and 1997 and
June 30, 1998, respectively............................. 2,002 3,848 5,240 5,240
Prepaid expenses and other current assets................. -- 729 727 727
------- -------- -------- --------
Total current assets............................... 2,363 10,052 10,149 10,149
Property and equipment, net................................. 606 913 1,627 1,627
Software development costs, net............................. 1,211 -- -- --
Other assets................................................ 9 435 358 358
------- -------- -------- --------
Total assets....................................... $ 4,189 $ 11,400 $ 12,134 $ 12,134
======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of obligations under capital leases....... $ 22 $ 212 $ 232 $ 232
Current portion of notes payable to related parties....... 1,000 -- -- --
Accounts payable.......................................... 535 422 1,234 1,234
Accrued expenses.......................................... 1,313 3,247 3,445 3,445
Deferred revenue.......................................... 346 922 1,723 1,723
------- -------- -------- --------
Total current liabilities.......................... 3,216 4,803 6,634 6,634
Obligations under capital leases, net of current portion.... 34 237 128 128
Notes payable to related parties, net of current portion.... 2,234 -- -- --
Commitments (Note 9)
Redeemable Preferred Stock (Notes 10 and 11)................ -- 7,088 7,208 --
Stockholders' equity (deficit):
Preferred Stock; $.001 par value --
10,000,000 shares authorized; 2,300,000 shares issued
and outstanding at December 31, 1996.................... 2 -- -- --
Series C Preferred Stock, $.001 par value --
1,223,954 shares designated, issued and outstanding at
December 31, 1997 and June 30, 1998, actual............. -- 1 1 --
Common Stock, $.001 par value --
12,078,698 shares authorized; 2,484,375, 4,234,971,
4,298,305 shares issued at December 31, 1996 and 1997
and June 30, 1998, actual, respectively, and 8,077,815
shares issued on a pro forma basis at June 30, 1998..... 2 4 4 8
Additional paid-in capital................................ 868 4,837 4,878 12,083
Accumulated deficit....................................... (2,167) (5,450) (6,649) (6,649)
Due from officer.......................................... -- (125) (125) (125)
Cumulative translation adjustment......................... -- 2 50 50
Unrealized gain on marketable securities.................. -- 3 5 5
Treasury stock, at cost; 354,825 shares at December 31,
1997 and 361,075 shares at June 30, 1998, actual and pro
forma................................................... -- -- -- --
------- -------- -------- --------
Total stockholders' equity (deficit)............... (1,295) (728) (1,836) 5,372
------- -------- -------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $ 4,189 $ 11,400 $ 12,134 $ 12,134
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 65
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ------------ ---------- ---------- ----------
(NOTE 1) (NOTE 1) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees............... $ -- $ 1,500 $ 5,765 $ 1,793 $ 5,816
Services and maintenance............ 1,693 4,534 6,904 3,029 4,602
---------- ---------- ---------- ---------- ----------
Total revenues............... 1,693 6,034 12,669 4,822 10,418
Cost of revenues:
Software license fees............... -- 890 1,707 863 129
Services and maintenance............ 1,012 3,205 5,227 2,297 3,302
---------- ---------- ---------- ---------- ----------
Total cost of revenues....... 1,012 4,095 6,934 3,160 3,431
---------- ---------- ---------- ---------- ----------
Gross profit.......................... 681 1,939 5,735 1,662 6,987
Operating expenses:
Sales and marketing................. 128 1,007 3,602 1,268 4,163
Research and development............ 708 1,325 2,599 1,031 2,716
General and administrative.......... 352 1,018 2,158 813 1,216
---------- ---------- ---------- ---------- ----------
Total operating expenses..... 1,188 3,350 8,359 3,112 8,095
---------- ---------- ---------- ---------- ----------
Loss from operations.................. (507) (1,411) (2,624) (1,450) (1,108)
Interest income (expense):
Interest income..................... -- 2 89 39 56
Interest expense.................... (47) (197) (64) (49) (27)
---------- ---------- ---------- ---------- ----------
Total interest income
(expense).................. (47) (195) 25 (10) 29
---------- ---------- ---------- ---------- ----------
Net loss.............................. (554) (1,606) (2,599) (1,460) (1,079)
Accretion of discount and dividends on
preferred stock..................... -- -- (684) (565) (120)
---------- ---------- ---------- ---------- ----------
Net loss applicable to common
stockholders........................ $ (554) $ (1,606) $ (3,283) $ (2,025) $ (1,199)
========== ========== ========== ========== ==========
Net loss per share (Note 2(c)):
Basic and diluted net loss per share
applicable to common
stockholders...................... $ (0.46) $ (1.33) $ (1.12) $ (0.82) $ (0.33)
========== ========== ========== ========== ==========
Basic and diluted weighted average
common shares outstanding......... 1,200,016 1,205,041 2,919,775 2,477,683 3,597,711
========== ========== ========== ========== ==========
Pro forma net loss per share (Note
2(c)):
Pro forma basic and diluted net loss
per share......................... $ (0.19) $ (0.55) $ (0.48) $ (0.31) $ (0.15)
========== ========== ========== ========== ==========
Pro forma basic and diluted
weighted average common shares
outstanding....................... 2,925,016 2,930,041 5,390,779 4,682,560 7,377,221
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 66
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES C
PREFERRED STOCK PREFERRED STOCK
NET PARENT ---------------------- ----------------------
COMPANY NUMBER OF $.001 NUMBER OF $.001
INVESTMENT SHARES PAR VALUE SHARES PAR VALUE
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995................................ $ (7) -- $-- -- $--
Net loss............................................... (554) -- -- -- --
Comprehensive net loss for the year ended December 31,
1995................................................. -- -- -- -- --
------- ---------- --- ---------- ---
Balance, December 31, 1995.............................. (561) -- -- -- --
Net loss prior to incorporation of the Company......... (2,093) -- -- -- --
Capitalization of the Company.......................... 2,654 -- -- -- --
Issuance of Preferred Stock............................ -- 2,300,000 2 -- --
Issuance of common stock............................... -- -- -- -- --
Net income after incorporation of the Company.......... -- -- -- -- --
Comprehensive net loss for the year ended December 31,
1996................................................. -- -- -- -- --
------- ---------- --- ---------- ---
Balance, December 31, 1996.............................. -- 2,300,000 2 -- --
Issuance costs relating to the sale of Series B
Preferred Stock...................................... -- -- -- -- --
Conversion of Preferred Stock to common stock.......... -- (2,300,000) (2) -- --
Compensation expense relating to stock options......... -- -- -- -- --
Sale of Series C Preferred Stock, net of issuance costs
of $13............................................... -- -- -- 1,223,954 1
Accretion of discount and dividends on Series A
Preferred Stock...................................... -- -- -- -- --
Loan to officer........................................ -- -- -- -- --
Issuance of common stock............................... -- -- -- -- --
Exercise of common stock options....................... -- -- -- -- --
Cumulative translation adjustment...................... -- -- -- -- --
Unrealized gain on marketable securities............... -- -- -- -- --
Net loss............................................... -- -- -- -- --
Comprehensive net loss for the year ended December 31,
1997................................................. -- -- -- -- --
------- ---------- --- ---------- ---
Balance, December 31, 1997.............................. -- -- -- 1,223,954 1
Accretion of dividends on Series A Preferred Stock..... -- -- -- -- --
Exercise of common stock options....................... -- -- -- -- --
Cumulative translation adjustment...................... -- -- -- -- --
Unrealized gain on marketable securities............... -- -- -- -- --
Net loss............................................... -- -- -- -- --
Comprehensive net loss for the six months ended June
30, 1998............................................. -- -- -- -- --
------- ---------- --- ---------- ---
Balance, June 30, 1998 (unaudited)...................... -- -- -- 1,223,954 1
Cancellation of Series A Preferred Stock............... -- -- -- -- --
Conversion of Series B Preferred Stock to common
stock................................................ -- -- -- -- --
Conversion of Series C Preferred Stock to common
stock................................................ -- -- -- (1,223,954) (1)
------- ---------- --- ---------- ---
Pro Forma Balance, June 30, 1998 (unaudited) (Note 3)... $ -- -- $-- -- $--
======= ========== === ========== ===
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL CUMULATIVE
NUMBER OF $.001 PAID-IN ACCUMULATED DUE FROM TRANSLATION
SHARES PAR VALUE CAPITAL DEFICIT OFFICER ADJUSTMENT
--------- --------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................................ -- $-- $ -- $ -- $ -- $--
Net loss............................................... -- -- -- -- -- --
Comprehensive net loss for the year ended December 31,
1995................................................. -- -- -- -- -- --
--------- -- ------- ------- ----- --
Balance, December 31, 1995.............................. -- -- -- -- -- --
Net loss prior to incorporation of the Company......... -- -- -- -- -- --
Capitalization of the Company.......................... -- -- -- (2,654) -- --
Issuance of Preferred Stock............................ -- -- 868 -- -- --
Issuance of common stock............................... 2,484,375 2 -- -- -- --
Net income after incorporation of the Company.......... -- -- -- 487 -- --
Comprehensive net loss for the year ended December 31,
1996................................................. -- -- -- -- -- --
--------- -- ------- ------- ----- --
Balance, December 31, 1996.............................. 2,484,375 2 868 (2,167) -- --
Issuance costs relating to the sale of Series B
Preferred Stock...................................... -- -- (111) -- -- --
Conversion of Preferred Stock to common stock.......... 1,725,000 2 -- -- -- --
Compensation expense relating to stock options......... -- -- 77 -- -- --
Sale of Series C Preferred Stock, net of issuance costs
of $13............................................... -- -- 3,986 -- -- --
Accretion of discount and dividends on Series A
Preferred Stock...................................... -- -- -- (684) -- --
Loan to officer........................................ -- -- -- -- (125) --
Issuance of common stock............................... 15,500 -- 10 -- -- --
Exercise of common stock options....................... 10,096 -- 7 -- -- --
Cumulative translation adjustment...................... -- -- -- -- -- 2
Unrealized gain on marketable securities............... -- -- -- -- -- --
Net loss............................................... -- -- -- (2,599) -- --
Comprehensive net loss for the year ended December 31,
1997................................................. -- -- -- -- -- --
--------- -- ------- ------- ----- --
Balance, December 31, 1997.............................. 4,234,971 4 4,837 $(5,450) (125) 2
Accretion of dividends on Series A Preferred Stock..... -- -- -- (120) -- --
Exercise of common stock options....................... 63,334 -- 41 -- -- --
Cumulative translation adjustment...................... -- -- -- -- -- 48
Unrealized gain on marketable securities............... -- -- -- -- -- --
Net loss............................................... -- -- -- (1,079) -- --
Comprehensive net loss for the six months ended June
30, 1998............................................. -- -- -- -- -- --
--------- -- ------- ------- ----- --
Balance, June 30, 1998 (unaudited)...................... 4,298,305 4 4,878 (6,649) (125) 50
Cancellation of Series A Preferred Stock............... -- -- 3,209 -- -- --
Conversion of Series B Preferred Stock to common
stock................................................ 2,555,556 3 3,996 -- -- --
Conversion of Series C Preferred Stock to common
stock................................................ 1,223,954 1 -- -- -- --
--------- -- ------- ------- ----- --
Pro Forma Balance, June 30, 1998 (unaudited) (Note 3)... 8,077,815 $8 $12,083 $(6,649) $(125) $50
========= == ======= ======= ===== ===
<CAPTION>
UNREALIZED
GAIN ON
MARKETABLE COMPREHENSIVE
SECURITIES TOTAL INCOME (LOSS)
---------- ------- -------------
<S> <C> <C> <C>
Balance, January 1, 1995................................ $-- $ (7) $ --
Net loss............................................... -- (554) (554)
-------
Comprehensive net loss for the year ended December 31,
1995................................................. -- -- $ (554)
-- ------- =======
Balance, December 31, 1995.............................. -- (561)
Net loss prior to incorporation of the Company......... -- (2,093) $(2,093)
Capitalization of the Company.......................... -- --
Issuance of Preferred Stock............................ -- 870
Issuance of common stock............................... -- 2
Net income after incorporation of the Company.......... -- 487 487
-------
Comprehensive net loss for the year ended December 31,
1996................................................. -- -- $(1,606)
-- ------- =======
Balance, December 31, 1996.............................. -- (1,295)
Issuance costs relating to the sale of Series B
Preferred Stock...................................... -- (111)
Conversion of Preferred Stock to common stock.......... -- --
Compensation expense relating to stock options......... -- 77
Sale of Series C Preferred Stock, net of issuance costs
of $13............................................... -- 3,987
Accretion of discount and dividends on Series A
Preferred Stock...................................... -- (684)
Loan to officer........................................ -- (125)
Issuance of common stock............................... -- 10
Exercise of common stock options....................... -- 7
Cumulative translation adjustment...................... -- 2 $ 2
Unrealized gain on marketable securities............... 3 3 3
Net loss............................................... -- (2,599) (2,599)
-------
Comprehensive net loss for the year ended December 31,
1997................................................. -- -- $(2,594)
-- ------- =======
Balance, December 31, 1997.............................. 3 (728)
Accretion of dividends on Series A Preferred Stock..... -- (120)
Exercise of common stock options....................... -- 41
Cumulative translation adjustment...................... -- 48 $ 48
Unrealized gain on marketable securities............... 2 2 2
Net loss............................................... -- (1,079) (1,079)
-------
Comprehensive net loss for the six months ended June
30, 1998............................................. -- -- $(1,029)
-- ------- =======
Balance, June 30, 1998 (unaudited)...................... 5 (1,836)
Cancellation of Series A Preferred Stock............... -- 3,209
Conversion of Series B Preferred Stock to common
stock................................................ -- 3,999
Conversion of Series C Preferred Stock to common
stock................................................ -- --
-- -------
Pro Forma Balance, June 30, 1998 (unaudited) (Note 3)... $5 $ 5,372
== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 67
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (554) $(1,606) $(2,599) $(1,460) $(1,079)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities --
Amortization of software development costs................ -- 712 1,211 641 --
Depreciation and other amortization....................... 49 176 275 99 228
Noncash compensation expense.............................. -- -- 77 36 --
Changes in operating assets and liabilities --
Accounts receivable..................................... (452) (1,549) (1,846) (5) (1,392)
Prepaid expenses and other current assets............... -- -- (476) (232) 2
Accounts payable........................................ 150 385 (113) (296) 812
Accrued expenses........................................ 525 872 2,105 181 198
Deferred revenue........................................ 418 (72) 576 (54) 802
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities........................................ 136 (1,082) (790) (1,090) (429)
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchase of marketable securities......................... -- -- (200) -- --
Purchases of property and equipment....................... (303) (441) (102) (102) (923)
Increase in software development costs.................... (1,107) (703) -- -- --
Increase (decrease) in other assets....................... (6) (3) (679) (599) 77
------- ------- ------- ------- -------
Net cash used in investing activities............... (1,416) (1,147) (981) (701) (846)
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable to related parties............ 1,800 2,100 -- -- --
Payments of notes payable to related parties.............. -- -- (1,000) (1,000) --
Repayments under capital leases........................... (20) (12) (86) (10) (110)
Due from officer.......................................... -- -- (125) -- --
Exercise of common stock options.......................... -- -- 7 -- 41
Issuance of common stock.................................. -- 2 10 -- --
Issuance of Series B Preferred Stock, net of offering
costs................................................... -- -- 3,888 3,888 --
Issuance of Series C Preferred Stock, net of offering
costs................................................... -- -- 3,987 -- --
------- ------- ------- ------- -------
Net cash provided by financing (used in)
activities........................................ 1,780 2,090 6,681 2,878 (69)
------- ------- ------- ------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... -- -- 2 -- 48
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 500 (139) 4,912 1,087 (1,296)
------- ------- ------- ------- -------
Cash and cash equivalents, beginning of period.............. -- 500 361 361 5,273
------- ------- ------- ------- -------
Cash and cash equivalents, end of period.................... $ 500 $ 361 $ 5,273 $ 1,448 $ 3,977
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information --
Cash paid for interest.................................... $ 35 $ 155 $ 19 $ 4 $ 13
======= ======= ======= ======= =======
Cash paid for income taxes................................ $ -- $ -- $ 476 $ 198 $ --
======= ======= ======= ======= =======
Supplemental disclosure of noncash financing and investing
activities:
Equipment acquired under capital leases................... $ 81 $ 35 $ 479 $ 186 $ 20
======= ======= ======= ======= =======
Conversion of amounts due to a related party to Preferred
Stock................................................... $ -- $ 870 $ -- $ -- $ --
======= ======= ======= ======= =======
Conversion of Preferred Stock to common stock............. $ -- $ -- $ 2 $ 2 $ --
======= ======= ======= ======= =======
Conversion of notes payable to related parties to Series A
Preferred Stock......................................... $ -- $ -- $ 2,405 $ 2,405 $ --
======= ======= ======= ======= =======
Accretion of discount and dividends on preferred stock.... $ -- $ -- $ 684 $ 565 $ 120
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 68
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) BACKGROUND AND BASIS OF PRESENTATION
Exchange Applications, Inc. and its subsidiaries (the "Company") is a
leading provider of customer optimization software and solutions that enable
businesses to maximize the economic value of their customers. The Company's
Continuous Customer Management ("CCM") solution, including its VALEX software
and related consulting and integration services, enables businesses to retain
and expand existing profitable customer relationships and to acquire new
customers by: (i) analyzing enterprise-wide databases of customer information;
(ii) identifying and prioritizing opportunities; (iii) creating customized
streams of targeted, real-time, event-triggered customer communications, such as
special offers, follow-up communications, special discounts, new products or
service offerings and other marketing campaigns; (iv) selecting the most
effective channels through which to communicate with customers, such as direct
mail, call centers, the Internet and sales forces; and (v) continuously
evaluating the impact of individual and collective customer communications on
marketing strategies and customer profitability.
The Company was incorporated in Delaware on November 7, 1996. Prior to
incorporation, the Company operated as a division of two entities, Grant &
Partners, Inc. ("GPI") and Grant & Partners L.P. ("GPLP").
GPI was incorporated in June 1993 and was primarily engaged in providing
management consulting services. In November 1994, the Company began operations
when it acquired the rights to certain intellectual property and hired employees
to commence the development of the VALEX software product.
On March 28, 1995, GPI entered into a limited partnership agreement with
Cyrk, Inc. ("Cyrk") to form GPLP. GPI, as the general partner, contributed all
of its assets and liabilities to GPLP for a 50% limited partnership interest.
Cyrk purchased the remaining 50% limited partnership interest in GPLP. Upon
entering into the partnership agreement, GPI became a holding company, with no
substantial operations.
GPLP was established to provide marketing and customer management services
for companies in a wide range of industries including retailing, transportation,
banking and manufacturing. GPLP operated as two separate divisions, Exchange
Applications ("EA") and Exchange Partners ("EP"). EA's focus was marketing
program design and execution and customer database and technology development.
EP's focus was providing a variety of management consulting services for
marketing organizations.
On November 15, 1996, the Company and GPLP entered into an assignment and
assumption agreement whereby GPLP contributed EA to the Company in exchange for
2,300,000 shares of preferred stock ("Preferred Stock") of the Company. In
addition, the Company issued 2,484,375 shares of common stock to certain
employees. The Preferred Stock held by GPLP contained voting rights equal to two
votes for each share of common stock into which the Preferred Stock would
convert. As a result, GPLP held approximately 70% of the voting rights of the
Company, thereby retaining a controlling interest over the Company.
In March 1997, the Company restructured its ownership interests through the
conversion of the 2,300,000 shares of Preferred Stock into 1,725,000 shares of
common stock, the conversion of notes payable to related parties (Cyrk and GPLP)
into 2,900,000 shares of Series A redeemable preferred stock ("Series A
Preferred Stock") (see Note 10), the payment of $1,000,000 to discharge certain
indebtedness to Cyrk, and the sale of 2,555,556 shares of Series B redeemable
convertible preferred stock ("Series B Preferred Stock") to venture capital
investors. As a result of the issuance of Series B Preferred Stock, GPLP and
Cyrk's ownership of the Company decreased
F-7
<PAGE> 69
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
to approximately 11% and 38%, respectively, on an as-converted basis.
Accordingly, neither GPLP nor Cyrk retained a controlling interest in the
Company.
The accompanying consolidated financial statements prior to the formation
of the Company represent the financial results of the EA division as included in
the consolidated financial statements of GPI from January 1, 1995 to March 27,
1995 and of GPLP from March 28, 1995 to November 14, 1996.
General corporate overhead costs related to corporate headquarters and
shared administrative support were allocated by GPI and GPLP to EA based on a
number of factors, including, for example, personnel and space utilized.
Management believes these allocations were reasonable and the costs of the
services charged to the Company were not materially different from the costs
that would have been incurred if the Company had performed these functions as a
standalone entity.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances have been eliminated in consolidation.
(b) INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements as of June 30, 1997
and 1998 are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of results of operations for the interim period.
Certain financial information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted with respect to the six-month
periods, although the Company believes that the disclosures included are
adequate to make the information presented not misleading. The results for
the six months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the entire year.
(c) NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, basic and diluted net loss per common
share is calculated by dividing the net loss applicable to common
stockholders by the weighted average number of vested common shares
outstanding (See Note 12(b)) for all periods presented. For the year ended
December 31, 1995 and for the period from January 1, 1996 to November 14,
1996 (representing the period prior to the Company's incorporation), the
calculation of basic and diluted net loss per share applicable to common
stockholders includes the number of shares of common stock that were vested
upon issuance (November 15, 1996) as if those shares had been outstanding
for the entire period. Pro forma basic and diluted net loss per share is
calculated by dividing net loss by the weighted average number of vested
shares of common stock and preferred stock, on an as-converted basis,
outstanding during the period. For the years ended
F-8
<PAGE> 70
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
December 31, 1995 and for the period from January 1, 1996 to November 14,
1996 (representing the period prior to the Company's formation), the
calculation of pro forma net loss per share includes 1,725,000 shares of
common stock issued in March 1997 upon the conversion of the 2,300,000
shares of Preferred Stock that were issued on November 15, 1996 (See Note
10) as if those shares had been outstanding for the entire period.
The Company has applied the provisions of SFAS No. 128 retroactively
to all periods presented. In accordance with Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 98, the Company
has determined that there were no nominal issuances of potential common
stock in the twelve months prior to the Company's planned initial public
offering. The dilutive effect of potential common shares, consisting of
outstanding stock options and convertible preferred stock, is determined
using the treasury stock method and the as-converted method, respectively,
in accordance with SFAS No. 128. The following table reconciles the
weighted average common shares outstanding to the shares used in the
computation of basic and diluted and pro forma basic and diluted weighted
average common shares outstanding:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding......... 2,484,375 2,484,375 3,575,244 3,283,947 3,889,609
Less: Weighted average
unvested common shares
outstanding................ 1,284,359 1,279,334 655,469 806,264 291,898
--------- --------- --------- --------- ---------
Basic and diluted weighted
average common shares
outstanding................ 1,200,016 1,205,041 2,919,775 2,477,683 3,597,711
--------- --------- --------- --------- ---------
Add: Weighted average common
shares issuable upon
conversion of preferred
stock...................... 1,725,000 1,725,000 2,471,004 2,204,877 3,779,510
--------- --------- --------- --------- ---------
Pro forma basic and diluted
weighted average common
shares outstanding......... 2,925,016 2,930,041 5,390,779 4,682,560 7,377,221
========= ========= ========= ========= =========
</TABLE>
Diluted weighted average shares outstanding for all periods presented
exclude the potential common shares from stock options, unvested common
stock and convertible preferred stock, because to include such shares would
have been antidilutive. As of December 31, 1996 and 1997, and June 30,
1998, 3,004,334, 5,598,003 and 5,886,927 potential common shares were
outstanding, respectively.
(d) CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts for cash equivalents and marketable securities in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Cash equivalents are short-term, highly liquid
investments with original maturity dates of three months or less. Cash
equivalents are carried at cost, which approximates fair market value. The
Company's marketable securities are classified as available-for-sale and
are recorded at fair value with any unrealized gain or loss recorded as an
element of stockholders' equity (deficit).
F-9
<PAGE> 71
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
As of December 31, 1997 and June 30, 1998, the Company's marketable
securities consisted of investment-grade corporate bonds. As of December
31, 1997 and June 30, 1998, the Company had recorded unrealized gains of
approximately $3,000 and $5,000, respectively.
(e) LONG-LIVED ASSETS
In accordance with the provisions of SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of, the Company evaluates the realizability of its long-lived assets at
each reporting period based on projected future cash flows. As of December
31, 1996 and 1997 and June 30, 1998, the Company has determined that no
material adjustment was required to the carrying value of its long-lived
assets.
(f) SOFTWARE DEVELOPMENT COSTS
The Company's VALEX software is highly technical and required a
significant engineering and development effort. In accordance with SFAS No.
86, Accounting for the Costs of Computer Software To Be Sold, Leased or
Otherwise Marketed, during 1994, 1995 and 1996, the Company capitalized
certain software development costs relating to VALEX incurred from the date
technological feasibility of the software development project had been
established through June 1996. These costs were amortized over an estimated
useful life of 18 months commencing with the general availability of the
product in July 1996. For the years ended December 31, 1995, 1996 and 1997
and the six months ended June 30, 1997, the Company charged approximately
$0, $712,000, $1,211,000 and $641,000, respectively, to cost of software
license fee revenues for the amortization of these costs. As of December
31, 1997, capitalized software development costs were fully amortized.
The software development costs incurred subsequent to the commercial
release of VALEX were primarily related to product enhancements and product
maintenance. Consequently, software development costs that would otherwise
be capitalized were not material and, therefore, were expensed as incurred.
(g) INCOME TAXES
The Company accounts for income taxes in accordance with the
provisions of SFAS No. 109, Accounting for Income Taxes. This statement
requires the Company to recognize a current tax liability or asset for
current taxes payable or refundable and to record a deferred tax asset or
liability for the estimated future tax effects of temporary differences and
carryforwards to the extent they are realizable. A deferred tax provision
or benefit results from the net change in deferred tax assets and
liabilities during the year. A deferred tax valuation allowance is required
if it is "more likely than not" that all or a portion of recorded deferred
tax assets will not be realized.
(h) FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires disclosures about the fair value of financial instruments.
Financial instruments consist principally of cash equivalents, marketable
securities, accounts receivable, accounts payable, notes payable to related
parties and redeemable preferred stock. The estimated fair value of these
financial instruments approximates their carrying value.
F-10
<PAGE> 72
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(i) CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information About Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations
of Credit Risk, requires disclosure of any significant off-balance-sheet
and credit risk concentrations. The Company has no significant
off-balance-sheet concentration of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging arrangements.
Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash equivalents, marketable
securities and accounts receivable. Concentration of credit risk with
respect to accounts receivable is limited to certain customers to whom the
Company makes substantial sales. The Company performs periodic credit
evaluations of its customers and has recorded allowances for estimated
losses.
The following table summarizes the number of customers that
individually comprise greater than 10% of total revenue and/or total
accounts receivable and their aggregate percentage of the Company's total
revenues and accounts receivable.
<TABLE>
<CAPTION>
REVENUE ACCOUNTS RECEIVABLE
----------------------- ------------------------
PERCENT OF PERCENT OF
NUMBER OF TOTAL NUMBER OF TOTAL TRADE
CUSTOMERS REVENUE CUSTOMERS RECEIVABLES
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Year Ended --
December 31, 1995...................... 4 78% 3 48%
December 31, 1996...................... 3 41 4 74
December 31, 1997...................... 2 56 2 66
Six Months Ended --
June 30, 1997.......................... 3 76 3 86
June 30, 1998.......................... 3 41 2 28
</TABLE>
(j) FOREIGN CURRENCY
The functional currencies of the Company's wholly owned subsidiaries
in the United Kingdom and Australia are the local currencies. The financial
statements of the subsidiaries are translated to United States dollars
using period-end exchange rates for assets and liabilities and average
exchange rates during the corresponding period for revenues, cost of
revenues and expenses. Translation gains and losses are deferred and
accumulated as a component of stockholders' equity (deficit). Net gains and
losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not significant during the
periods presented.
(k) REVENUE RECOGNITION
The Company generates revenue from licensing the rights to use its
software to end users and certain re-sellers. The Company also generates
service and maintenance revenues from integrating its software with its
customers' operating environments, the sale of maintenance services and the
sale of certain other consulting and development services.
The Company has recognized revenue in accordance with the provisions
of Statement of Position ("SOP") No. 91-1, Software Revenue Recognition. In
October 1997, the American Institute of Certified Public Accountants
("AICPA") issued SOP 97-2, Software Revenue Recognition, which supercedes
SOP 91-1 and is effective for transactions entered into for fiscal
F-11
<PAGE> 73
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
years beginning after December 15, 1997. The Company adopted the provisions
of SOP 97-2 for the year ended December 31, 1997. The adoption of this
statement did not have a material impact on the Company's results of
operations or financial position.
Revenues from software license fee agreements are recognized upon
execution of a license agreement and delivery of the software, provided
that the fee is fixed or determinable and deemed collectible by management.
If conditions for acceptance are required subsequent to delivery, revenues
are recognized upon customer acceptance. Revenues from software maintenance
agreements are recognized ratably over the term of the maintenance period,
which is typically one year. Revenues from professional service
arrangements are recognized on either a time and materials or
percentage-of-completion basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible
by management. Amounts collected or billed prior to satisfying the above
revenue recognition criteria are reflected as deferred revenue or as
customer deposits.
Cost of software license fee revenues consists of costs to distribute
the product, including the cost of the media on which it is delivered and
royalty payments to third party vendors, as well as the amortization of
software development costs. Cost of service and maintenance revenues
consists primarily of consulting and support personnel salaries and related
costs.
(l) ACCOUNTING FOR STOCK-BASED COMPENSATION
In 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company has continued to
account for employee stock options in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and has
included the pro forma disclosures required by SFAS No. 123 for all periods
presented.
(m) NEW ACCOUNTING STANDARDS
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities, which requires that all nongovernmental entities
expense the costs of start-up activities, including organizational costs,
as those costs are incurred. The Company has historically recorded all such
costs as expense, in the period incurred.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires
disclosure of all components of comprehensive income on an annual and
interim basis. Comprehensive income is defined as the change in
stockholders' equity (deficit) of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources.
The Company adopted SFAS No. 130, effective January 1, 1998, and has
disclosed comprehensive income (loss) for all periods presented in the
accompanying consolidated statements of stockholders' equity (deficit).
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Unless
impracticable, companies would be required to restate prior period
information upon adoption. The Company does not believe the adoption of
this accounting pronouncement will have a significant impact on the
Company's financial statements.
F-12
<PAGE> 74
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(n) POSTRETIREMENT BENEFITS
The Company has no obligations for postretirement benefits.
(o) 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, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
(3) PRO FORMA CONVERSION AND RETIREMENT OF PREFERRED STOCK
On July 15, 1998, the Board of Directors of the Company authorized
management to pursue an initial public offering ("IPO") of the Company's common
stock. Upon closing of the Company's proposed IPO, all of the Company's Series B
and C Preferred Stock will automatically convert into 3,779,510 shares of common
stock. In addition, based on the terms of the redemption preference of the
Series A Preferred Stock, Series A Preferred Stock will be cancelled and the
Company will not be required to pay the redemption preference of $3,209,000. As
a result, such amount will be reclassified to additional paid-in capital (see
Note 10). The pro forma effect of the conversion and cancellation of the
preferred stock on stockholders' equity (deficit) has been presented separately
in the Company's accompanying consolidated balance sheets and consolidated
statements of stockholders' equity (deficit) and Note 11, assuming the
conversion and cancellation had occurred as of June 30, 1998.
(4) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. The Company provides for depreciation and amortization using
the straight-line method to allocate the cost of property and equipment over
their estimated useful lives. Property and equipment, at cost, and their
estimated useful lives are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED --------------- JUNE 30,
USEFUL LIFE 1996 1997 1998
----------- ---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Computers and equipment...................... 4 years $ 621 $ 912 $1,322
Furniture and fixtures....................... 10 years 156 307 557
Purchased software........................... 3 years 45 60 292
Leasehold improvements....................... Life of the lease 8 39 89
----- ------ ------
830 1,318 2,260
Less -- Accumulated depreciation and
amortization............................... 224 405 633
----- ------ ------
$ 606 $ 913 $1,627
===== ====== ======
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998 was
approximately $49,000, $176,000, $275,000, $99,000 and $228,000, respectively.
F-13
<PAGE> 75
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 and June 30, 1998 consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1996 1997 1998
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Payroll and related costs.............................. $ 859 $1,508 $1,474
Royalties.............................................. 153 283 --
Other.................................................. 301 1,456 1,971
------ ------ ------
$1,313 $3,247 $3,445
====== ====== ======
</TABLE>
(6) INCOME TAXES
No provision for federal or state income taxes has been recorded, as the
Company incurred net operating losses for all periods presented. The Company had
net operating loss carryforwards of approximately $792,000 at December 31, 1997
to reduce future income taxes, if any. These carryforwards expire through 2013
and are subject to review and possible adjustment by the Internal Revenue
Service ("IRS").
The Tax Reform Act of 1986 contains provisions that may limit the amount of
net operating loss and credit carryforwards that the Company may utilize in any
one year in the event of certain cumulative changes in ownership over a
three-year period in excess of 50%, as defined. The Company believes it has
experienced a change in ownership in excess of 50%. The Company does not believe
that this change in ownership will significantly impact the Company's ability to
utilize its net operating loss carryforwards.
The approximate tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Nondeductible expenses and reserves....................... $ 365 $ 465
Net operating loss carryforwards.......................... -- 318
----- -----
365 783
----- -----
Less -- Valuation allowance............................... (365) (783)
----- -----
Net deferred tax asset.......................... $ -- $ --
===== =====
</TABLE>
It is the Company's objective to become a profitable enterprise and to
realize the benefits of its deferred tax assets. However, in evaluating the
realizability of these deferred tax assets, management has considered the
Company's short operating history, the volatility of the market in which it
competes, the operating losses incurred to date, and believes that given the
significance of this evidence, a full valuation reserve against its deferred tax
assets is required as of December 31, 1996 and 1997. The increase in the
valuation allowance during these periods relates primarily to the Company's
operating results.
F-14
<PAGE> 76
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) REVOLVING NOTE AGREEMENT
In December 1997, the Company entered into a $2,000,000 revolving note
agreement (the "Note") with a bank. Borrowings and the face amount of
outstanding letters of credit are limited to 75% of qualified receivables. As of
December 31, 1997 and June 30, 1998, letters of credit totaling $945,000 and
$971,000, respectively, were outstanding. Borrowings under the Note bear
interest at the bank's prime rate (8.5% at June 30, 1998) plus .75% per annum,
payable monthly in arrears. The Note, which expires May 31, 1999, is secured by
substantially all assets of the Company. As of December 31, 1997 and June 30,
1998, no borrowings were outstanding under the Note.
Under the Note agreement as amended, the Company must comply with certain
restrictive financial covenants. As of December 31, 1997 and June 30, 1998, the
Company had received waivers from the bank for all events of default.
(8) RELATED PARTY TRANSACTIONS
(a) NOTES PAYABLE
As of December 31, 1996, the Company had outstanding demand notes
payable totaling $2,960,000 to Cyrk and $274,000 to GPLP. These notes bore
interest at the prime rate payable monthly in arrears. Interest expense on
the demand notes payable amounted to approximately $41,000, $193,000 and
$43,000 for the years ended December 31, 1995 and 1996 and the six months
ended June 30, 1997, respectively. On March 18, 1997, $1,000,000 of
principal and accrued interest was repaid and the remaining principal
balance on the Notes was converted into 2,900,000 shares of Series A
Preferred Stock (see Note 11).
(b) TRANSACTIONS WITH GPLP
As discussed in Note 1, on November 15, 1996, the Company and GPLP
entered into an assignment and assumption agreement whereby the Company
received the EA business from GPLP in exchange for 2,300,000 shares of the
Company's convertible preferred stock. At the date of transfer, the total
liabilities of the EA business exceeded its total assets by approximately
$1,700,000. GPLP contributed $870,000 of its advances to EA to the capital
of the Company.
(c) EXCHANGE MARKETING GROUP
In March 1997, the Company entered into an employment termination
agreement with an officer of the Company. Upon termination, the officer
established Exchange Marketing Group ("EMG"). The Company repurchased
341,125 shares of common stock from the officer and six other employees who
also terminated their employment with the Company.
In March 1997, the Company loaned EMG $350,000, as evidenced by a note
receivable. This note accrued interest at 9% per annum with quarterly
interest payments due commencing June 30, 1997. This note and all accrued
interest were repaid in February 1998.
(9) COMMITMENTS
(a) LEASE OBLIGATIONS
The Company leases certain equipment under agreements that are
accounted for as capital leases and expire at various dates through year
2000. Interest rates on these leases range from 12.0% to 14.5%.
F-15
<PAGE> 77
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The Company has certain noncancellable operating leases for facilities
and equipment. The operating leases expire at various dates through the
year 2003. The Company has letters of credit outstanding with a bank (see
Note 7) for $971,000 as collateral on its leased facilities and certain
equipment. Total rent expense under these agreements was approximately
$17,000, $239,000, $399,000, $155,000 and $254,000 for the years ended
December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and
1998, respectively.
At December 31, 1997, the minimum lease commitments for all leased
facilities and equipment with an initial or remaining term in excess of one
year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998..................................................... $ 258 $1,409
1999..................................................... 196 1,412
2000..................................................... 62 1,407
2001..................................................... -- 1,293
2002..................................................... -- 1,080
Thereafter............................................... -- 450
----- ------
Total minimum payments......................... 516 $7,051
======
Less -- Amount representing interest..................... 67
-----
Principal obligation........................... 449
Less -- Current portion.................................. 212
-----
$ 237
=====
</TABLE>
As of December 31, 1997, the Company had entered into two sublease
agreements that will reduce rent expense by approximately $275,000, $550,000,
$355,000 and $236,000 for the years ended December 31, 1998, 1999, 2000, and
2001, respectively.
(b) ROYALTY
The Company licensed certain intellectual property from a third party,
which has been integrated with VALEX, under a royalty-bearing agreement.
Under the terms of the license agreement, the Company is required to pay
royalties to the licensor totaling approximately $656,000 on the first
$10,000,000 of cumulative VALEX license fees. For the years ended December
31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998,
the Company charged royalties of approximately $0, $114,000, $456,000
$160,000 and $86,000, respectively, to the cost of software license fees
relating to this agreement. As of June 30, 1998, the aggregate sales of
VALEX had exceeded the $10,000,000 limit. Accordingly, the Company has no
further royalty obligation under this agreement.
(10) PREFERRED STOCK
At incorporation on November 7, 1996, the Company authorized 10,000,000
shares of $.001 par value Preferred Stock for future issuance in one or more
series. On November 15, 1996, the Company issued 2,300,000 shares of Preferred
Stock to GPLP in consideration for a capital contribution of $870,000, as
discussed in Note 1 and Note 8(b).
F-16
<PAGE> 78
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
On March 18, 1997, the Company converted all of its previously outstanding
shares of Preferred Stock into 1,725,000 shares of common stock. The Company
then amended its certificate of incorporation to reduce the number of authorized
shares of its $.001 par value preferred stock to 5,455,556 shares, of which
2,900,000 shares were designated as Series A Preferred Stock and 2,555,556
shares were designated Series B Preferred Stock. The 2,900,000 shares of Series
A Preferred Stock were issued upon the conversion of $2,405,000 of notes payable
to the related parties, as discussed in Note 8(a). The 2,555,556 shares of
Series B Preferred Stock were sold to venture capital investors at a price of
$1.565 per share, with net proceeds to the Company of $3,888,000.
On December 4, 1997, the Company authorized an additional 1,223,954 shares
of $.001 par value Preferred Stock and designated these shares as Series C
Convertible Preferred Stock (Series C Preferred Stock). The 1,223,954 shares of
the Series C Preferred Stock were sold to venture capital investors at a price
of $3.268 per share, with net proceeds to the Company of $3,987,000.
The Company loaned $125,000 to an officer for the purchase of approximately
38,000 shares of Series B Preferred Stock from another stockholder. The loan is
evidenced by a note that bears interest at the prime rate and is secured by the
38,000 shares of Series B Preferred Stock the officer purchased. The Company has
accounted for this loan as a stock subscription receivable classified as Due
from Officer in the accompanying consolidated statements of stockholders' equity
(deficit) as of December 31, 1997 and June 30, 1998.
The rights and preferences of the Company's preferred stock are as follows:
DIVIDENDS
Each outstanding share of Series A Preferred Stock accrues a
cumulative annual dividend of 8.25%. Holders of Series B Preferred Stock
and Series C Preferred Stock are entitled to a proportionate share of any
cash or noncash common stock dividend as though they were holders of the
number of shares of common stock into which their shares were convertible
as of the date declared. To date, no dividends have been declared. The
Company has provided for Series A Preferred Stock cumulative dividends by
accreting charges against the accumulated deficit with corresponding
increases to the carrying value of the Series A Preferred Stock. Such
increases aggregated approximately $189,000, $70,000 and $120,000 for the
year ended December 31, 1997 and the six months ended June 30, 1997 and
1998, respectively.
LIQUIDATION PREFERENCE
Upon liquidation, the holders of Series C Preferred Stock are entitled
to receive $3.268 per share, plus all accrued or declared but unpaid
dividends, prior to any distribution to any holder of any share of any
other class or series of capital stock. If available assets are sufficient
to permit payment of the full preferential amounts on the Series C
Preferred Stock, then holders of Series B Preferred Stock are entitled to
receive out of any additional assets up to $1.565 per share, plus all
accrued or declared but unpaid dividends, and then holders of Series A
Preferred Stock are entitled to receive out of any additional assets up to
$1.00 per share, plus all accrued or declared but unpaid dividends. If the
assets available for distribution with respect to any such series of
capital stock are insufficient to permit the payment of the full
preferential amount on such series, as described above, then the holders of
such series shall share ratably on the distribution of assets within that
series of stock. If the remaining assets of the Company permit a
distribution to common stockholders, then holders of Series B Preferred
Stock are entitled to
F-17
<PAGE> 79
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
share ratably in such distribution with the holders of common stock as if
their shares had been converted to common stock.
REDEMPTION
The Company may at any time redeem all or any portion of the shares of
Series A Preferred Stock then outstanding at $1.00 per share, plus all
accrued or declared but unpaid dividends. The number of shares to be
redeemed by each holder shall be equal to each specific holder's pro rata
share of the total amount outstanding.
If upon any redemption of Series A Preferred Stock the assets
available for redemption are insufficient to pay to the holders of Series A
Preferred Stock the full redemption value, the holders of a majority of
Series A Preferred Stock may elect (i) that no redemption be made (in which
event all rights in respect of the shares to be redeemed shall continue in
full force and effect) or (ii) that the holders shall share ratably in the
redemption according to the respective amounts which would have been
payable to them.
Upon an IPO with gross proceeds of at least $20,000,000 at an offering
price per common share such that the amount obtained by multiplying such
offering price by the number of common stock equivalents, as defined,
outstanding immediately after such offering would be at least $130,000,000
(a "Qualified Offering"), all shares of Series A Preferred Stock shall be
automatically canceled and the shares outstanding prior to such closing
shall no longer be deemed to be outstanding.
In the event that the Company completes an IPO that is not a Qualified
Offering, holders of Series A Preferred Stock have the option to redeem all
shares held for $1.00 per share. All shares surrendered under such
redemption shall be canceled. Subsequent to redemption, all rights in
respect of the Series A Preferred Stock, except the right to receive the
liquidation preference, shall cease and terminate, and such shares shall no
longer be deemed to be outstanding.
Upon an IPO, all shares of Series B Preferred Stock will automatically
convert into shares of common stock. In the event that the Company
completes an IPO that is not a Qualified Offering, the Company, in addition
to converting such Series B Preferred Stock to Common Stock, shall pay to
each holder of Series B Preferred Stock being thereby converted, $1.565 per
share, prior and in preference to any distribution to any holder of any
class or series of capital stock of the Company.
Upon the closing of a qualified sale of the Company, as defined,
holders of Series B Preferred Stock not selling shares as part of the sale
of the Company may redeem their Series B Preferred Stock at the liquidation
preference or convert all or any part of such shares into shares of common
stock. Subsequent to redemption, all rights in respect of the Series B
Preferred Stock, except the right to receive the liquidation preference,
shall cease and terminate, and such shares shall no longer be deemed to be
outstanding.
In connection with the proposed IPO, the Company expects to satisfy
the conditions of a Qualified Offering. Accordingly, upon the closing of
the IPO, Series A Preferred Stock will be reclassified to $3,209,000 of
additional paid-in capital and the Series B Preferred Stock, at a
redemption value of $3,999,000, will be converted into 2,555,556 shares of
Common Stock without any cash payment required to be made to the holders of
Series B Preferred Stock.
F-18
<PAGE> 80
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The Company has presented the Series A and Series B Preferred Stock
outside of stockholders' equity (deficit) due to the existence of
redemption rights beyond the control of the Company. A summary of the
activity of Series A and Series B Preferred Stock is provided in Note 11.
VOTING
Holders of Series A Preferred Stock do not have voting rights. Each
share of Series B and Series C Preferred Stock votes ratably with the
common stockholders as if their shares had been converted to common stock.
CONVERSION
Holders of Series B and Series C Preferred Stock have the option to
convert any such shares into common shares at any time. Upon a conversion
of each share of Series B and Series C Preferred Stock the number of common
shares to be issued is an amount equal to (i) their respective liquidation
preferences divided by (ii) the product of the number of shares being
converted and the conversion price at that time, as defined.
The conversion price shall initially be the respective per share
liquidation preference for each series of preferred stock and is subject to
adjustment in the event that common stock or common stock equivalents are
issued for less per share than the conversion price, subject to certain
exceptions.
Upon closing of any IPO, all outstanding shares of preferred stock
shall be automatically converted into that number of shares of common stock
as would have been the case in the event of an optional conversion. All
rights with respect to the preferred stock shall be deemed automatically
waived upon such conversion.
In connection with the proposed IPO, the Company expects to satisfy
the conditions of a Qualified Offering. Accordingly, upon the closing of
the IPO, all 2,555,556 outstanding shares of Series B Preferred Stock will
be converted into 2,555,556 shares of common stock, and all 1,223,954
outstanding shares of Series C Preferred Stock will be converted into
1,223,954 shares of common stock.
F-19
<PAGE> 81
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(11) REDEEMABLE PREFERRED STOCK
The following is a summary of the activity for the Series A and Series B
Preferred Stock:
<TABLE>
<CAPTION>
SERIES A SERIES B
REDEEMABLE CONVERTIBLE REDEEMABLE
PREFERRED STOCK PREFERRED STOCK
----------------------- ----------------------- TOTAL
NUMBER OF REDEMPTION NUMBER OF REDEMPTION REDEMPTION
SHARES VALUE SHARES VALUE VALUE
--------- ---------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ -- $ -- -- $ -- $ --
Conversion of notes payable to
related parties into Series A
Preferred Stock.............. 2,900,000 2,405 -- -- 2,405
Issuance of Series B Preferred
Stock........................ -- -- 2,555,556 3,999 3,999
Accretion of discount and
dividends on Series A
Preferred Stock.............. -- 684 -- -- 684
---------- ------- ---------- ------- -------
BALANCE, DECEMBER 31, 1997........ 2,900,000 3,089 2,555,556 3,999 7,088
Accretion of dividends on Series
A Preferred Stock............ -- 120 -- -- 120
---------- ------- ---------- ------- -------
BALANCE, JUNE 30, 1998
(UNAUDITED)..................... 2,900,000 3,209 2,555,556 3,999 7,208
Pro forma effect of proposed IPO:
Retirement of Series A Preferred
Stock........................ (2,900,000) (3,209) -- -- (3,209)
Conversion of Series B Preferred
Stock to common stock........ -- -- (2,555,556) (3,999) (3,999)
---------- ------- ---------- ------- -------
PRO FORMA BALANCE, JUNE 30, 1998
(UNAUDITED) (Note 3)............ -- $ -- -- $ -- $ --
========== ======= ========== ======= =======
</TABLE>
During 1997, the Company issued Series A Preferred Stock at a discount of
$495,000 from its redemption value. The Company accreted this discount to the
Series A Preferred Stock through a charge to accumulated deficit upon issuance.
(12) STOCKHOLDERS' EQUITY (DEFICIT)
(a) COMMON STOCK
At incorporation, the Company authorized 10,000,000 shares of $.001
par value common stock. In March 1997 and December 1997, the Company
amended its certificate of incorporation to increase the number of
authorized shares of $.001 par value common stock to a total of 12,078,698
shares.
The Company has reserved 3,779,510 shares of common stock for the
potential conversion of Series B and Series C Preferred Stock into common
stock. The Company also has reserved 3,124,963 shares of common stock for
the issuance of stock options under the 1996 Stock Incentive Plan.
Subsequent to June 30, 1998, the Company reserved additional shares of
common stock in connection with the adoption of the 1998 Stock Incentive
Plan, an Employee Stock Purchase Plan and a Directors' Stock Option Plan.
(See Note 17).
F-20
<PAGE> 82
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(b) RESTRICTED COMMON STOCK
At incorporation, the Company issued 2,484,375 shares of common stock
to the Company's founders and employees at $.001 per share, the fair market
value as determined by the Board of Directors at the time of issuance.
In connection with the issuance of common stock, the Company and two
of its founders signed a Founder Restricted Stock Agreement (the Founder
Agreement). These shares vested 50% immediately with the balance vesting
ratably on an annual basis through January 1, 1999.
As provided in the Founder Agreement, if the employment of the
founders is terminated, the Company has the option (the Company Option) to
purchase their unvested stock. This Company Option shall be exercisable by
the Company at a price equal to the lesser of the issue price or the fair
market value of the stock as determined by the Board of Directors. In March
1997, one of the founders terminated employment, resulting in the Company's
repurchase of unvested common shares (see Note 8(c)).
In addition, on November 15, 1996, the Company and all of its
employees holding common stock, excluding the two founders, signed
restricted stock agreements (the Restricted Stock Agreements) providing for
shares issued from the 1996 Stock Incentive Plan to vest retroactively, 25%
on the respective employee's date of hire with an additional 25% on each
anniversary thereafter.
According to the Restricted Stock Agreements, if an employee ceases to
provide services to the Company either as a consultant or employee prior to
the third anniversary of the date of hire, the Company has the right to
repurchase the unvested stock from the employee at the price paid by the
employee.
In the event of a change of control, as defined, all remaining
unvested stock held by the founders and employees issued under the Founder
Agreement and Restricted Stock Agreements shall be deemed vested and the
Company's options to repurchase unvested shares of restricted common stock
shall immediately terminate.
During 1997, the Company repurchased 341,125 shares of unvested common
stock at $.001 per share from an officer and six employees who terminated
their employment with the Company. (See Note 8(c)). The Company also
repurchased 13,700 shares and 6,250 shares of unvested common stock at
$.001 per share in July 1997 and June 1998, respectively, from other
terminated employees.
(13) STOCK OPTIONS
In November 1996, the Company adopted the 1996 Stock Incentive Plan (the
1996 Plan), which provides for the grant of incentive stock options,
nonqualified stock options and restricted common stock to officers, employees
and directors who are also employees of the Company. Nonemployee directors and
outside consultants to the Company are eligible to receive nonqualified options
and restricted common stock only.
The 1996 Plan is administered by the Board of Directors, which determines
the fair market value and the purchase price for such options. Options generally
vest over a four-year period and expire 10 years from the date of grant.
Restricted common stock awards entitle recipients to purchase shares of the
Company's common stock subject to restrictions concerning the sale, transfer and
other disposition of the shares issued until such shares are vested. The shares
subject to options
F-21
<PAGE> 83
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
that expire or are not exercised for other reasons, or any restricted common
stock that is repurchased by the Company will be available for future grant
under the 1996 Plan.
In addition, the 1996 Plan provides for the granting of time accelerated
incentive stock options. During 1997 and 1998, approximately 590,000 time
accelerated incentive stock options were granted to certain employees. These
options vest and become exercisable 25% annually upon the achievement of certain
performance criteria (the Criteria) as approved by the Company on an annual
basis, or after nine years from the date of grant. The Criteria, which are set
each year by the Board of Directors, allows for vesting upon the achievement of
the Criteria as of December 31 for that year.
Stock option activity from the 1996 Plan's inception through June 30, 1998
is as follows:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF WEIGHTED AVERAGE
SHARES EXERCISE PRICES EXERCISE PRICE
--------- --------------- ----------------
<S> <C> <C> <C>
Outstanding, December 31, 1995.............. -- $ -- $ --
Granted................................... 968,575 0.001 0.001
Exercised................................. (968,575) 0.001 0.001
--------- --------------- ------
Outstanding, December 31, 1996.............. -- -- --
Granted................................... 1,449,475 0.65 - 1.35 0.74
Exercised................................. (10,096) 0.65 0.65
Canceled.................................. (40,154) 0.65 - 0.85 0.66
--------- --------------- ------
Outstanding, December 31, 1997.............. 1,399,225 0.65 - 1.35 0.74
Granted................................... 572,000 1.35 - 14.50 4.51
Exercised................................. (63,334) 0.65 - 0.85 0.65
Canceled.................................. (23,333) 0.65 - 3.50 1.31
--------- --------------- ------
Outstanding, June 30, 1998 (unaudited)...... 1,884,558 $ 0.65 - $14.50 $ 1.88
========= =============== ======
Exercisable, June 30, 1998 (unaudited)...... 324,232 $ 0.65 - $ 1.35 $ 0.72
========= =============== ======
</TABLE>
Subsequent to June 30, 1998, the Company granted options to purchase
200,850 shares of common stock at $14.50 per share.
The Company has computed the pro forma disclosures required under SFAS No.
123 for options granted during 1996 and 1997 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The weighted average assumptions used
were as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Risk-free interest rate..................................... 6.3% 5.96%
Expected dividend yield..................................... -- --
Expected lives.............................................. 4 years 4 years
Expected volatility......................................... 76% 79%
Weighted average grant date fair value...................... $.002 $.46
Weighted average remaining contractual life of options
outstanding............................................... 9.9 years 9.1 years
</TABLE>
F-22
<PAGE> 84
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Had compensation expense for the Company's stock option plans been
determined consistent with SFAS No. 123, net loss and net loss per share would
have been approximately as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
As reported --
Net loss applicable to common stockholders................ $(1,606) $(3,283)
======= =======
Basic and diluted net loss per share...................... $ (1.33) $ (1.12)
======= =======
Pro forma --
Net loss applicable to common stockholders................ $(1,607) $(3,455)
======= =======
Basic and diluted net loss per share...................... $ (1.33) $ (1.18)
======= =======
</TABLE>
(14) EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) savings plan (the 401(k) Plan) covering
all of the Company's eligible full-time employees. Under this plan, participants
may elect to defer a portion of their compensation, subject to certain IRS
limitations. The Company does not currently provide employer matching
contributions under the 401(k) Plan.
(15) GEOGRAPHIC INFORMATION
Revenues by geographic destination as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
United States................................... 81% 96% 86% 100% 78%
United Kingdom.................................. -- -- 5 -- 14
Canada.......................................... 19 4 8 -- 7
Other........................................... -- -- 1 -- 1
--- --- --- ---- ---
100% 100% 100% 100% 100%
=== === === ==== ===
</TABLE>
(16) ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997 1998
---- ---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period..................... $ -- $ 75 $ 43 $206
Provision for doubtful accounts................ 121 99 180 55
Write-offs..................................... (46) (131) (17) (49)
---- ----- ---- ----
Balance, end of period........................... $ 75 $ 43 $206 $212
==== ===== ==== ====
</TABLE>
F-23
<PAGE> 85
EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(17) STOCK PLANS AND AMENDMENT TO CERTIFICATE OF INCORPORATION
On July 15, 1998, the Board of Directors and stockholders approved (i) the
adoption of the 1998 Stock Incentive Plan pursuant to which 2,700,000 additional
shares of the Company's common stock have been reserved for future issuance,
(ii) the adoption of an Employee Stock Purchase Plan pursuant to which 200,000
shares of the Company's common stock have been reserved for future issuance,
(iii) the adoption of a Directors' Stock Option Plan pursuant to which 100,000
shares of the Company's common stock have been reserved for future issuance,
(iv) an increase in the number of authorized shares of common stock to
30,000,000 shares and (v) the authorization of 10,000,000 shares of $.001 par
value preferred stock, of which the Board of Directors has full authority to
issue and fix the voting powers, preferences, rights, qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, redemption privileges and liquidation preferences and the number of
shares constituting any series or designation of such series.
F-24
<PAGE> 86
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., BT Alex. Brown Incorporated and Hambrecht & Quist LLC are acting as
representatives, has severally agreed to purchase from the Company and the
Selling Stockholders, the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co. .......................................
BT Alex. Brown Incorporated.................................
Hambrecht & Quist LLC.......................................
--------
Total.............................................
========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
Certain of the Selling Stockholders have granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 450,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
3,000,000 shares of Common Stock offered.
The Company, the Selling Stockholders and certain other stockholders have
agreed that, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of this Prospectus,
they will not offer, sell, contract to sell or otherwise dispose of any
securities of the Company (other than pursuant to employee stock option plans
existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus) which are substantially
similar to the shares of Common Stock or which are convertible or exchangeable
into securities which are substantially similar to the shares of Common Stock
without the prior written consent of the representatives except for the shares
of Common Stock offered in connection with the Offering and shares of Common
Stock acquired in the public market after the date of this Prospectus. The
representatives have informed the Company that the Underwriters have no current
intention to release shares from the Lock-Up Agreements prior to expiration of
the [180] -day term of such agreements. Any request for release would be
evaluated by the representatives, and the decision whether or not to permit
early release of shares would be made dependent upon the facts and circumstances
existing at the time of the request.
U-1
<PAGE> 87
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price was negotiated among the
Company, the Selling Stockholders and the representatives. Among the factors
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, were the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "EXAP," subject to official notice of issuance.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
U-2
<PAGE> 88
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appropriate touch point for delivery of the customer communication stream.
Promotion history is captured for all three branches in order to measure
campaign effectiveness.
[Back page Graphic]
3. Users can easily schedule dates and times to run campaigns. In this
example, the user has set the "Likely to Leave" campaign to run every third
day, at which time VALEX automatically selects the appropriate customers
and delivers information to the selected customer touchpoint.
[Back page Graphic]
[ART WORK]
[A graphic depicting a recreation of screens from a desktop
PC showing the VALEX Campaign decision tree.]
<PAGE> 89
==========================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 1
Risk Factors............................. 4
The Company..............................
Use of Proceeds.......................... 11
Dividend Policy.......................... 11
Capitalization........................... 12
Dilution................................. 13
Selected Consolidated Financial Data..... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 16
Business................................. 27
Management............................... 41
Certain Transactions..................... 49
Principal and Selling Stockholders....... 51
Description of Capital Stock............. 53
Shares Eligible for Future Sale.......... 55
Legal Matters............................ 56
Experts.................................. 56
Additional Information................... 56
Index to Consolidated Financial
Statements............................. F-1
Underwriting............................. U-1
</TABLE>
----------------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER 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.
==========================================================
3,000,000 SHARES
EXCHANGE
APPLICATIONS, INC.
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
----------------------
[EXCHANGE APPLICATION LOGO]
----------------------
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
HAMBRECHT & QUIST
REPRESENTATIVES OF THE UNDERWRITERS
==========================================================
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
Expenses of the Registrant in connection with the issuance and distribution
of the securities being registered, other than the underwriting discount, are
estimated as follows:
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
SEC Registration Fee........................................ $16,284.00
NASD Fees................................................... $ 6,020.00
NASDAQ Listing Fees......................................... $22,250.00
Printing and Engraving Expenses............................. $ *
Legal Fees and Expenses..................................... $ *
Accountants' Fees and Expenses.............................. $ *
Expenses of Qualification Under State Securities Laws,
Including Attorneys' Fees................................. $ *
Transfer Agent and Registrar's Fees......................... $ *
Miscellaneous Costs......................................... $ *
----------
Total............................................. $ *
==========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. Indemnification of Directors, Officers and Employees
Section 145 of the Delaware General Corporation law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
The Amended and Restated Certificate of Incorporation of the Company and
the Amended and Restated By-laws of the Company, copies of which are filed as
Exhibits 3.1 and 3.2, provide for indemnification of officers and directors of
the Company and certain other persons against liabilities and expenses incurred
by any of them in certain stated proceedings and under certain stated
conditions.
ITEM 15. Recent Sales of Unregistered Securities
On November 15, 1996, in connection with the organization of the
Registrant, the Registrant entered into Restricted Stock Agreements dated as of
such date (Restricted Stock Agreements) with certain key employees of the
Registrant. Pursuant to the Restricted Stock Agreements, the Registrant issued
968,575 shares of restricted Common Stock under the Registrant's 1996 Stock
Incentive Plan to such employees for an aggregate consideration of $968.58 at a
purchase price of $.001 per share.
On November 15, 1996, in addition to the shares of restricted Common Stock
issued pursuant to the Registrant's 1996 Stock Incentive Plan, (i) the
Registrant issued 848,800 shares of restricted Common Stock to Andrew J. Frawley
for an aggregate consideration of $848.80 pursuant to a Restricted Stock
Agreement entered into between the Registrant and Andrew J. Frawley, and (ii)
the Registrant issued 667,000 shares of restricted Common Stock to Michael J.
Feldman for an aggregate consideration of $667.00 pursuant to a Restricted Stock
Agreement entered into between the Registrant and Michael J. Feldman.
The Registrant has, from time to time, repurchased an aggregate of 361,075
shares of Common Stock from its employees for an aggregate consideration of
$361.08.
II-1
<PAGE> 91
On November 15, 1996, in connection with the organization of the
Registrant, the Registrant entered into an Assignment and Assumption Agreement
dated as of such date (Assignment Agreement) with Grant & Partners Limited
Partnership (GPLP) pursuant to which the Registrant issued 2,300,000 shares of
Series A Convertible Preferred Stock to GPLP and assumed certain liabilities of
GPLP in exchange for certain assets of GPLP.
On March 18, 1997, the Registrant entered into a Securities Purchase
Agreement dated as of such date (Securities Purchase Agreement) with certain of
its existing stockholders and certain new investors. Pursuant to the Securities
Purchase Agreement, (i) the Registrant issued 1,154,775 shares of Series B
Preferred Stock to Insight Venture Partners II, L.P. for an aggregate
consideration of $1,807,222.88, (ii) the Registrant issued 1,154,775 shares of
Series B Preferred Stock to Wexford Insight LLC for an aggregate consideration
of $1,807,222.88, (iii) the Registrant issued 246,006 shares of Series B
Convertible Preferred Stock to GAP Coinvestment Partners, L.P. for an aggregate
consideration of $384,999.39, (iv) the Registrant converted 2,300,000 shares of
Series A Convertible Preferred Stock held by GPLP to 1,725,000 shares of Common
Stock, (v) the Registrant issued 377,408 shares of a newly designated Series A
Preferred Stock to GPLP in consideration of the cancellation of certain
indebtedness owed by the Registrant to GPLP, and (vi) the Registrant issued
2,522,592 shares of Series A Preferred Stock to Cyrk, Inc. (Cyrk) in
consideration of the cancellation of certain indebtedness owed by the Registrant
to Cyrk.
On October 3, 1997, the Registrant entered into a Subscription Agreement
dated as of such date with Michael Caccavale pursuant to which the Registrant
issued 15,500 shares of Common Stock to Michael Caccavale for an aggregate
consideration of $13,175.
On December 4, 1997, the Registrant entered into a Securities Purchase
Agreement dated as of such date with Insight Capital Partners II, L.P. and
Wexford Insight LLC pursuant to which (i) the Registrant issued 611,977 shares
of Series C Convertible Preferred Stock to Insight Capital Partners II, L.P. for
an aggregate consideration of $2,000,000, and (ii) the Registrant issued 611,977
shares of Series C Convertible Preferred Stock to Wexford Insight LLC for an
aggregate consideration of $2,000,000.
The Registrant has, from time to time, issued an aggregate of 73,430 shares
of restricted Common Stock to various employees upon the exercise of options
granted pursuant to the Registrant's 1996 Stock Incentive Plan for an aggregate
consideration of $47,979.50 at an average exercise price of $0.65 per share.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relating to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of certain restricted shares, options to purchase
Common Stock and shares issuable upon the exercise of such options, Rule 701 of
the Act. All of the foregoing securities are deemed restricted securities for
purposes of the Act.
II-2
<PAGE> 92
ITEM 16. Exhibits and Financial Statement Schedules
(a) The following is a list of exhibits filed as a part of this
registration statement:
<TABLE>
<CAPTION>
EXHIBITS
- --------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Form of Amended and Restated By-laws of the Registrant.
4.1* Specimen Certificate for Shares of the Registrant's Common
Stock, $0.001 par value.
5.1* Opinion of Bingham Dana LLP with respect to the legality of
the shares being registered.
10.1* Form of 1998 Stock Incentive Plan, with related forms of
stock option agreements.
10.2 1996 Stock Incentive Plan, as amended, with related forms of
stock option agreements and form of restricted stock
agreement.
10.3 Form of 1998 Director Stock Option Plan, with related form
of stock option agreement.
10.4 Form of 1998 Employee Stock Purchase Plan.
10.5 401(k) Plan.
10.6 Employment Agreement, dated November 15, 1996, between the
Registrant and Andrew J. Frawley.
10.7 Restricted Stock Agreement, dated November 8, 1996, between
the Registrant and Andrew J. Frawley.
10.8 Consulting Agreement, dated March 18, 1997, between the
Registrant and Exchange Marketing Group, LLC.
10.9 Securities Purchase Agreement, dated March 18, 1997.
10.10 Securities Purchase Agreement, dated December 4, 1997.
10.11 Stock Purchase and Waiver Agreement, dated December 4, 1997.
10.12 Promissory Note, dated December 4, 1997, by Andrew J.
Frawley payable to the Registrant.
10.13 Amended and Restated Stockholders Agreement dated
December 4, 1997.
10.14 Amended and Restated Registration Rights Agreement dated
December 4, 1997.
10.15 Letter Agreement, dated December 22, 1997, between the
Registrant and Fleet National Bank, as amended, and the
related Promissory Note.
10.16 Stock Purchase Agreement, dated June 25, 1998, and the
related Waiver Agreement to the Amended and Restated
Stockholders Agreement, dated June 25, 1998.
10.17 Office lease for 89 South Street, Boston, Massachusetts.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Bingham Dana LLP, counsel to Registrant (included
in Exhibit 5.1).
24.1 Power of Attorney (included in signature page to
Registration Statement).
27.1 Financial Data Schedule (6 months ended June 30, 1998)
27.2 Financial Data Schedule (12 months ended December 31, 1997)
27.3 Financial Data Schedule (12 months ended December 31, 1996)
</TABLE>
- ---------------
* To be filed by amendment
(b) Financial Statement Schedules
II-3
<PAGE> 93
SCHEDULES
All schedules have been omitted because either they are not required, are
not applicable or the information is otherwise set forth in the Consolidated
Financial Statements and notes thereto.
ITEM 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 hereof, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To provide the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(2) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a 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.
(3) That for the purpose of determining any liability under the
Securities Act of 1933, 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-4
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
Exchange Applications, Inc., certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-1 and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts,
on this 22nd day of July, 1998.
EXCHANGE APPLICATIONS, INC.
By: /s/ ANDREW J. FRAWLEY
------------------------------------
Andrew J. Frawley
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Andrew J. Frawley
and John G. O'Brien, each of them severally, acting alone and without the other,
his/her true and lawful attorney-in-fact with the authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments (including without limitation post-effective amendments)
to this Registration Statement necessary or advisable to enable the Registrant
to comply with the Securities Act of 1933, as amended (the "Act"), and any
rules, regulations and requirements of the Securities and Exchange Commission in
respect thereof, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Act, which amendments may make
such other changes in the Registration Statement as the aforesaid
attorney-in-fact executing the same deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ANDREW J. FRAWLEY Chairman of the Board, President, July 22, 1998
- --------------------------------------------------- Chief Executive Officer and
Andrew J. Frawley Director (Principal Executive
Officer)
/s/ DEAN F. GOODERMOTE Director July 22, 1998
- ---------------------------------------------------
Dean F. Goodermote
/s/ JEFFREY HORING Director July 22, 1998
- ---------------------------------------------------
Jeffrey Horing
/s/ RAMANAN RAGHAVENDRAN Director July 22, 1998
- ---------------------------------------------------
Ramanan Raghavendran
/s/ JOHN G. O'BRIEN Vice President, Chief Financial July 22, 1998
- --------------------------------------------------- Officer, Treasurer and Secretary
John G. O'Brien (Principal Financial and Accounting
Officer)
</TABLE>
II-5
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Form of Amended and Restated By-laws of the Registrant.
4.1* Specimen Certificate for Shares of the Registrant's Common
Stock, $0.001 par value.
5.1* Opinion of Bingham Dana LLP with respect to the legality of
the shares being registered.
10.1* Form of 1998 Stock Incentive Plan, with related forms of
stock option agreements.
10.2 1996 Stock Incentive Plan, as amended, with related forms of
stock option agreements and form of restricted stock
agreement.
10.3 Form of 1998 Director Stock Option Plan, with related form
of stock option agreement.
10.4 Form of 1998 Employee Stock Purchase Plan.
10.5 401(k) Plan.
10.6 Employment Agreement, dated November 15, 1996, between the
Registrant and Andrew J. Frawley.
10.7 Restricted Stock Agreement, dated November 8, 1996, between
the Registrant and Andrew J. Frawley.
10.8 Consulting Agreement, dated March 18, 1997, between the
Registrant and Exchange Marketing Group, LLC.
10.9 Securities Purchase Agreement, dated March 18, 1997.
10.10 Securities Purchase Agreement, dated December 4, 1997.
10.11 Stock Purchase and Waiver Agreement, dated December 4, 1997.
10.12 Promissory Note, dated December 4, 1997, by Andrew J.
Frawley payable to the Registrant.
10.13 Amended and Restated Stockholders Agreement dated December
4, 1997.
10.14 Amended and Restated Registration Rights Agreement dated
December 4, 1997.
10.15 Letter Agreement, dated December 22, 1997, between the
Registrant and Fleet National Bank, as amended, and the
related Promissory Note.
10.16 Stock Purchase Agreement, dated June 25, 1998, and the
related Waiver Agreement to the Amended and Restated
Stockholders Agreement, dated June 25, 1998.
10.17 Office lease for 89 South Street, Boston, Massachusetts.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Bingham Dana LLP, counsel to Registrant (included
in Exhibit 5.1).
24.1 Power of Attorney (included in signature page to
Registration Statement).
27.1 Financial Data Schedule (6 months ended June 30, 1998)
27.2 Financial Data Schedule (12 months ended December 31, 1997)
27.3 Financial Data Schedule (12 months ended December 31, 1996)
</TABLE>
- ---------------
* To be filed by amendment
<PAGE> 1
Draft of July 21, 1998 Exhibit 1.1
EXCHANGE APPLICATIONS, INC.
Common Stock
(par value $0.001 per share)
------------------------------------------------------------------
UNDERWRITING AGREEMENT
_____ __, 1998
Goldman, Sachs & Co.,
BT Alex. Brown
Hambrecht & Quist LLC
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Exchange Applications, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 2,000,000 shares of Common Stock (par value $0.001 per share) ("Stock") of
the Company and the stockholders of the Company named in Schedule II hereto (the
"Selling Stockholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of 1,000,000 shares and, at the
election of the Underwriters, up to 450,000 additional shares of stock. The
aggregate of 3,000,000 shares to be sold by the Company and the Selling
Stockholders is herein called the "Firm Shares" and the aggregate of 450,000
additional shares to be sold by the Company and the Selling Stockholders is
herein called the "Optional Shares". The Firm Shares and the Optional Shares
that the Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-....) (the
"Initial Registration Statement") in respect of the Shares has
been filed with the Securities and
<PAGE> 2
Exchange Commission (the "Commission"); the Initial
Registration Statement and any post effective amendment
thereto, each in the form heretofore delivered to you, and,
excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended (the "Act"), which
became effective upon filing, no other document with respect
to the Initial Registration Statement has heretofore been
filed with the Commission; no stop order suspending the
effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b)
Registration Statement, if any, has been issued and no
proceeding for that purpose has been initiated or threatened
by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission
pursuant to Rule 424(a) of the rules and regulations of the
Commission under the Act is hereinafter called a "Preliminary
Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any,
including all exhibits thereto and including the information
contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance
with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement
at the time it was declared effective, each as amended at the
time such part of the Initial Registration Statement became
effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement";
and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the
"Prospectus");
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof,
conformed in all material respects to the requirements of the
Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished
in writing to the Company by an Underwriter through Goldman,
Sachs & Co. expressly for use therein or by a Selling
Stockholder expressly for use in the preparation of the
answers therein to Items 7 and 11(l) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration
Statement or the Prospectus will conform, in all material
respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the
Registration Statement and any amendment thereto, and as of
the applicable filing date as to the Prospectus and any
amendment or supplement thereto, contain an untrue statement
of a material fact or omit to state a material fact required
to be stated therein or necessary to make
-2-
<PAGE> 3
the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in
conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein or by a Selling Stockholder
expressly for use in the preparation of the answers therein to
Items 7 and 11(l) of Form S-1;
(iv) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements
included in the Prospectus any material loss or interference
with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock
or long-term debt of the Company or any of its subsidiaries or
any material adverse change, or any development involving a
prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders'
equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in
the Prospectus;
(v) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and
marketable title to all personal property owned by them, in
each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries; and any
real property and buildings held under lease by the Company
and its subsidiaries are held by them under valid, subsisting
and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed
to be made of such property and buildings by the Company and
its subsidiaries;
(vi) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to
own its properties and conduct its business as described in
the Prospectus, and has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to
require such qualification, or is subject to no material
liability or disability by reason of the failure to be so
qualified in any such jurisdiction; and each subsidiary of the
Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its
jurisdiction of incorporation;
(vii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock
of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and conform to the
description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each subsidiary of
the Company have been duly and validly
-3-
<PAGE> 4
authorized and issued, are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly
or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(viii) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment
therefor as provided herein, will be duly and validly issued
and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(ix) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of
the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any
violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any
order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification
of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated
by this Agreement, except the registration under the Act of
the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in
default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by
which it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock and under the
caption "Underwriting", insofar as they purport to describe
the provisions of the laws and documents referred to therein,
are accurate, complete and fair;
(xii) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or
any of its subsidiaries is a party or of which any property of
the Company or any of its subsidiaries is the subject which,
if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a
material adverse effect on the current or future
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<PAGE> 5
consolidated financial position, stockholders' equity or
results of operations of the Company and its subsidiaries;
and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(xiii) The Company owns or has the right to use pursuant to license,
sublicense, agreement, or permission all patents, patent
applications, trademarks, service marks, trade names,
copyrights, trade secrets, confidential information and
proprietary rights and processes ("Intellectual Property")
necessary or desirable for the operation of the business of
the Company as presently conducted and as presently proposed
to be conducted. The Company has taken all necessary and
desirable action to maintain and protect each item of
Intellectual Property that the Company owns or uses. To the
knowledge of the Company, no third party has interfered with,
infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Company.
The Company has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any
Intellectual Property rights of third parties, and there has
never been any charge, complaint, claim, demand, or notice
alleging any such interference, infringement,
misappropriation, or violation (including any claim that the
Company must license or refrain from using any Intellectual
Property rights of any third party). The Company will not
interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of
third parties as a result of the continued operation of its
business as presently conducted.
(xiv) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company" or
an entity "controlled" by an "investment company", as such
terms are defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act");
(xv) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida
Statutes; and
(xvi) Arthur Andersen LLP, who have certified certain financial
statements of the Company and its subsidiaries, are
independent public accountants as required by the Act and the
rules and regulations of the Commission thereunder.
(b) Each of the Selling Stockholders severally represents and warrants
to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Stockholder of
this Agreement and the Power of Attorney and the Custody
Agreement hereinafter referred to, and for the sale and
delivery of the Shares to be sold by such Selling Stockholder
hereunder, have been obtained; and such Selling Stockholder
has full right, power and authority to enter into this
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<PAGE> 6
Agreement, the Power-of-Attorney and the Custody Agreement and
to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with
all of the provisions of this Agreement, the Power of Attorney
and the Custody Agreement and the consummation of the
transactions herein and therein contemplated will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder is bound or to
which any of the property or assets of such Selling
Stockholder is subject, nor will such action result in any
violation of the provisions of the Certificate of
Incorporation or By-laws of such Selling Stockholder if such
Selling Stockholder is a corporation, the Partnership
Agreement of such Selling Stockholder if such Selling
Stockholder is a partnership or any statute or any order, rule
or regulation of any court or governmental agency or body
having jurisdiction over such Selling Stockholder or the
property of such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to each
Time of Delivery (as defined in Section 4 hereof) such Selling
Stockholder will have, good and valid title to the Shares to
be sold by such Selling Stockholder hereunder, free and clear
of all liens, encumbrances, equities or claims; and, upon
delivery of such Shares and payment therefor pursuant hereto,
good and valid title to such Shares, free and clear of all
liens, encumbrances, equities or claims, will pass to the
several Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date
of the Prospectus, not to offer, sell contract to sell or
otherwise dispose of, except as provided hereunder, any
securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that
are convertible into or exchangeable for, or that represent
the right to receive, Stock or any such substantially similar
securities (other than pursuant to employee stock option plans
existing on, or upon the conversion or exchange of convertible
or exchangeable securities outstanding as of, the date of this
Agreement), without your prior written consent;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or
which has constituted or which might reasonably be expected to
cause or result in stabilization or manipulation of the price
of any security of the Company to facilitate the sale or
resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto are made in
reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder expressly
for use therein, such Preliminary Prospectus and the
Registration
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<PAGE> 7
Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the
Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform in all material
respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and will not contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 with respect to the
transactions herein contemplated, such Selling Stockholder
will deliver to you prior to or at the First Time of Delivery
(as hereinafter defined) a properly completed and executed
United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department
regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the Shares
to be sold by such Selling Stockholder hereunder have been
placed in custody under a Custody Agreement, in the form
heretofore furnished to you (the "Custody Agreement"), duly
executed and delivered by such Selling Stockholder to [NAME OF
CUSTODIAN], as custodian (the "Custodian"), and such Selling
Stockholder has duly executed and delivered a Power of
Attorney, in the form heretofore furnished to you (the "Power
of Attorney"), appointing the persons indicated in Schedule II
hereto, and each of them, as such Selling Stockholder's
attorneys-in-fact (the "Attorneys-in-Fact") with authority to
execute and deliver this Agreement on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the
Underwriters to the Selling Stockholders as provided in
Section 2 hereof, to authorize the delivery of the Shares to
be sold by such Selling Stockholder hereunder and otherwise to
act on behalf of such Selling Stockholder in connection with
the transactions contemplated by this Agreement and the
Custody Agreement; and
(ix) The Shares represented by the certificates held in custody for
such Selling Stockholder under the Custody Agreement are
subject to the interests of the Underwriters hereunder; the
arrangements made by such Selling Stockholder for such
custody, and the appointment by such Selling Stockholder of
the Attorneys-in-Fact by the Power of Attorney, are to that
extent irrevocable; the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of
law, whether by the death or incapacity of any individual
Selling Stockholder or, in the case of an estate or trust, by
the death or incapacity of any executor or trustee or the
termination of such estate or trust, or in the case of a
partnership or corporation, by the dissolution of such
partnership or corporation, or by the occurrence of any other
event; if any individual Selling Stockholder or any such
executor or trustee should die or become incapacitated, or if
any such estate or trust should be terminated, or if any such
partnership or corporation should be dissolved, or if any
other such event should occur, before the delivery of the
Shares hereunder, certificates representing the Shares shall
be delivered by or on behalf of the Selling Stockholders in
accordance with the terms and conditions of this
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<PAGE> 8
Agreement and of the Custody Agreements; and actions taken by
the Attorneys-in-Fact pursuant to the Powers of Attorney shall
be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of
whether or not the Custodian, the Attorneys-in-Fact, or any of
them, shall have received notice of such death, incapacity,
termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the Company and
each of the Selling Stockholders agree, severally and not jointly, to sell to
each of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and each of the Selling Stockholders, at a
purchase price per share of $.............., the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Shares to be sold by the Company and each of the Selling
Stockholders as set forth opposite their respective names in Schedule II hereto
by a fraction, the numerator of which is the aggregate number of Firm Shares to
be purchased by such Underwriter as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the aggregate
number of Firm Shares to be purchased by all of the Underwriters from the
Company and all of the Selling Stockholders hereunder and (b) in the event and
to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company and each of the Selling
Stockholders agree, severally and not jointly, to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company and each of the Selling Stockholders, at the purchase
price per share set forth in clause (a) of this Section 2, that portion of the
number of Optional Shares as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Optional Shares by a fraction the numerator of which
is the maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I hereto
and the denominator of which is the maximum number of Optional Shares that all
of the Underwriters are entitled to purchase hereunder.
The Company and the Selling Stockholders, as and to the extent
indicated in Schedule II hereto, hereby grant, severally and not jointly, to the
Underwriters the right to purchase at their election up to 450,000 Optional
Shares, at the purchase price per share set forth in the paragraph above, for
the sole purpose of covering overallotments in the sale of the Firm Shares. Any
such election to purchase Optional Shares shall be made in proportion to the
maximum number of Optional Shares to be sold by the Company and each Selling
Stockholder as set forth in Schedule II hereto initially with respect to the
Optional Shares to be sold by the Company and then among the Selling
Stockholders in proportion to the maximum number of Optional Shares to be sold
by each Selling Stockholder as set forth in Schedule II hereto. Any such
election to purchase Optional Shares may be exercised only by written notice
from you to the Company and the Attorneys-in-Fact, given within a period of 30
calendar days after the date of this Agreement and setting forth the aggregate
number of Optional Shares to be purchased and the date on which such Optional
Shares are to be delivered, as determined by you but in no event earlier than
the First Time of Delivery (as defined in Section 4 hereof) or, unless you and
the Company and the Attorneys-in-Fact otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
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<PAGE> 9
3. Upon the authorization by you of the release of the Firm Shares, the several
Underwriters propose to offer the Firm Shares for sale upon the terms and
conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive
form, and in such authorized denominations and registered in such names as
Goldman, Sachs & Co. may request upon at least forty-eight hours' prior notice
to the Company and the Selling Stockholders shall be delivered by or on behalf
of the Company and the Selling Stockholders to Goldman, Sachs & Co., through the
facilities of the Depository Trust Company ("DTC"), for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the purchase
price therefor by wire transfer to an account designated by the Company and each
of the Selling Stockholders in Federal (same day) funds. The Company and each
Selling Stockholder will cause the certificates representing the Shares to be
made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery (as defined below) with respect thereto at the office of
DTC or its designated custodian (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York City time, on _______ __, 1998 or such other time and date as Goldman,
Sachs & Co., the Company and the Selling Stockholders may agree upon in writing,
and, with respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs
& Co. of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Goldman, Sachs & Co., the Company and the Selling
Stockholders may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Time of Delivery", such time and date
for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(i) hereof, will be delivered at the offices
of Ropes & Gray at One International Place, Boston, Massachusetts, 02110 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
.......p.m., New York City time, on the New York Business Day next preceding
such Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
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<PAGE> 10
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to obtain
the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months after the time of
issue of the Prospectus in connection with the offering or sale of the Shares
and if at such time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and upon your request
to prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the Shares
at any time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar
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<PAGE> 11
securities (other than pursuant to employee or director stock option, stock
purchase or stock incentive plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of, the date
of this Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q as may be
required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payments of such fee pursuant to Rule 111(b) under the Act.
6. The Company and each of the Selling Stockholders covenant and agree with one
another and with the several Underwriters that (a) the Company will pay or cause
to be paid the following: (i) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the Blue
Sky Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for
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<PAGE> 12
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(v) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the cost of preparing stock certificates; (vii) the costs and
charges of any transfer agent or registrar; and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section; and (c) such Selling
Stockholder will pay or cause to be paid all costs and expenses incident to the
performance of such Selling Stockholder's obligations hereunder which are not
otherwise specifically provided for in this section, including (i) any fees and
expenses of counsel for such Selling Stockholder, (ii) such Selling
Stockholder's pro rata share of the fees and expenses of the Attorneys-in-fact
and the Custodian, and (iii) all expenses and taxes incident to the sale and
delivery of the Shares to be sold by such Selling Stockholder to the
Underwriters hereunder. In connection with clause (c) of the preceding sentence,
Goldman, Sachs & Co. agrees to pay New York State stock transfer tax, and the
Selling Stockholder agrees to reimburse Goldman, Sachs & Co. for associated
carrying costs if such tax payment is not rebated on the day of payment and for
any portion of such tax payment not rebated. It is understood, however, that the
Company shall bear, and the Selling Stockholders shall not be required to pay or
reimburse the Company for, the cost of any other matters not directly relating
to the sale and purchase of the Shares pursuant to this Agreement, and that,
except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Ropes & Gray, counsel for the Underwriters, shall have furnished to
you such opinion or opinions (a draft of such opinion is attached as Annex II(a)
hereto), dated such Time of Delivery, with respect to the matters covered in
paragraphs (i), (ii), (vii), (xi) and (xiii) of subsection (c) below as well as
such other related matters as you may reasonably request, and such counsel
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<PAGE> 13
shall have received such papers and information as they may reasonably request
to enable them to pass upon such matters;
(c) Bingham Dana, LLP, counsel for the Company, shall have furnished to
you their written opinion (a draft of such opinion is attached as Annex II(B)
hereto), dated such Time of Delivery, in form and substance satisfactory to you,
to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock
of the Company (including the Shares being delivered at such
Time of Delivery) have been duly and validly authorized and
issued and are fully paid and non-assessable; and the Shares
conform in all material respects to the description of the
Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under
the laws of each other jurisdiction in which it owns or leases
properties or to such counsel's knowledge conducts any
business so as to require such qualification or is subject to
no material liability or disability by reason of failure to be
so qualified in any such jurisdiction (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact
upon certificates of officers of the Company, provided that
such counsel shall state that they believe that both you and
they are justified in relying upon such opinions and
certificates);
(iv) Each domestic subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation;
and all of the issued shares of capital stock of each such
subsidiary have been duly and validly authorized and issued,
are fully paid and non-assessable, and (except for directors'
qualifying shares and except as otherwise set forth in the
Prospectus) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims
(such counsel being entitled to rely in respect of the opinion
in this clause upon opinions of local counsel and in respect
to matters of fact upon certificates of officers of the
Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified
in relying upon such opinions and certificates);
(v) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a
material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of
operations of the Company and its subsidiaries;
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<PAGE> 14
and, to the best of such counsel's knowledge, no such
proceedings are threatened by governmental authorities or
others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at such Time
of Delivery to be sold by the Company and the compliance by
the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will
not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of
the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any
violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any
order, rule or regulation known to such counsel of any court
or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties;
(viii) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency
or body is required for the issue and sale of the Shares or
the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under
the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters;
(ix) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in
default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument which is filed as an exhibit to,
or referred to, in the Registration Statement;
(x) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, and under the
caption "Underwriting", insofar as they purport to describe
the provisions of the laws and documents referred to therein,
are accurate, complete and fair;
(xi) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are
defined in the Investment Company Act; and
(xii) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements,
notes to financial statements, related schedules and other
financial date contained therein, as to which such counsel
need express no
-14-
<PAGE> 15
opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations
thereunder. Such counsel shall also state that although they
do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those
referred to in the opinion in subsection (x) of this section
7(c), no facts have come to their attention that have caused
them to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made
by the Company prior to such Time of Delivery (other than the
financial statements and related schedules and other financial
data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or
that, as of its date, the Prospectus or any further amendment
or supplement thereto made by the Company prior such Time of
Delivery (other than the financial statements and related
schedules and other financial data therein, as to which such
counsel need express no opinion) contained an untrue statement
of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or
that, as of such Time of Delivery, either the Registration
Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or
omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading; and they do not know of
any amendment to the Registration Statement required to be
filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described
as required;
(d) The respective counsel for each of the Selling Stockholders, as
indicated in Schedule II hereto, each shall have furnished to you their written
opinion with respect to each of the Selling Stockholders for whom they are
acting as counsel (a draft of each such opinion is attached as Annex II(c)
hereto), dated the Time of Delivery, in form and substance satisfactory to you,
to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Stockholder and
constitute valid and binding agreements of such Selling
Stockholder in accordance with their terms;
(ii) This Agreement has been duly executed and delivered by or on
behalf of such Selling Stockholder; and the sale of the Shares
to be sold by such Selling Stockholder hereunder and the
compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power-of-Attorney and the
Custody Agreement and the consummation of the transactions
herein and therein contemplated will not conflict with or
result in a breach or violation of any terms or provisions of,
or constitute a default under, any statute, indenture,
mortgage, deed
-15-
<PAGE> 16
of trust, loan agreement or other agreement or instrument
known to such counsel to which such Selling Stockholder is a
party or by which such Selling Stockholder is bound or to
which any of the property or assets of such Selling
Stockholder is subject, nor will such action result in any
violation of the provisions of [the Certificate of
Incorporation or By-laws of such Selling Stockholder if such
Selling Stockholder is a corporation[ [,] [the Partnership
Agreement of such Selling Stockholder if such Selling
Stockholder is a partnership] or any order, rule or regulation
known to such counsel of any court or governmental agency or
body having jurisdiction over such Selling Stockholder or the
property of such Selling Stockholder;
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation
of the transactions contemplated by this Agreement in
connection with the Shares to be sold by such Selling
Stockholder hereunder, except such as have been obtained under
the Act and such as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution
of such Shares by the Underwriters;
(iv) Immediately prior to such Time of Delivery, such Selling
Stockholder had good and valid title to the Shares to be sold
at Time of Delivery by such Selling Stockholder under this
Agreement, free and clear of all liens, encumbrances, equities
or claims, and full right, power and authority to sell,
assign, transfer and deliver the Shares to be sold by such
Selling Stockholder hereunder; and
(v) Good and valid title to such Shares, free and clear of all
liens, encumbrances, equities or claims, has been transferred
to each of the several Underwriters who have purchased such
Shares in good faith and without notice of any such lien,
encumbrance, equity or claim or any other adverse claim within
the meaning of the Uniform Commercial Code.
In rendering the opinion in paragraph (iv), such counsel may rely upon
a certificate of such Selling Stockholder in respect of matters of fact as to
ownership of, and liens, encumbrances, equities or claims on, the Shares sold by
such Selling Stockholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate;
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Arthur Andersen LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto;
(f) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or
-16-
<PAGE> 17
long-term debt of the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in Clause (i) or
(ii), is in the judgment of the Representatives so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities by any "nationally
recognized statistical rating organization", as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities;
(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on NASDAQ; (ii) a suspension or
material limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by Federal, New
York State or Massachusetts State authorities; or (iv) the outbreak or
escalation of hostilities involving the United States or the declaration by the
United States of a national emergency or war, if the effect of any such event
specified in this Clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(i) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(j) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from each [LIST APPROPRIATE STOCKHOLDERS OF THE COMPANY],
substantially to the effect set forth in Subsection 5(e) hereof in form and
substance satisfactory to you;
(k) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement; and
(l) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and the Selling Stockholders, respectively satisfactory to you as
to the accuracy of the representations and warranties of the Company and the
Selling Stockholders, respectively herein at and as of such Time of Delivery, as
to the performance by the Company and the Selling Stockholders of all of their
respective obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (f) of this Section
and as to such other matters as you may reasonably request.
-17-
<PAGE> 18
8. (a) The Company will indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company and the Selling Stockholders shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein.
(b) Each of the Selling Stockholders will indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that such Selling Stockholder shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished by any Underwriter through Goldman, Sachs & Co. expressly for use
therein; provided, further, that the liability of a Selling Stockholder pursuant
to this subsection (b) shall not exceed the product of the number of Shares sold
by such Selling Stockholder and the initial public offering price of the Shares
as set forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company
-18-
<PAGE> 19
by such Underwriter through Goldman, Sachs & Co. expressly for use therein; and
will reimburse the Company and each Selling Stockholder for any legal or other
expenses reasonably incurred by the Company or such Selling Stockholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page
-19-
<PAGE> 20
of the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Stockholders on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, each of the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (e) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (e). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company (including any person
who, with his or her consent, is named in the Registration Statement as about to
become a director of the Company) and to each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the Shares
which it has agreed to purchase hereunder at a Time of Delivery, you may in your
discretion arrange for you or another party or other parties to purchase such
Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company and the Selling Stockholders shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company and the
Selling Stockholders that you have so arranged for the purchase of such Shares,
or the Company notify you that they have so arranged for the purchase of such
Shares, you or the Company and the Selling Stockholders shall have the right to
postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term
-20-
<PAGE> 21
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery, or
if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company and the Selling Stockholders to sell
the Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company or the Selling Stockholders,
except for the expenses to be borne by the Company and the Selling Stockholders
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Shareholders or any officer
or director or controlling person of the Company, and shall survive delivery of
and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof, neither
the Company nor the Selling Stockholders shall then be under any liability to
any Underwriter except as provided in Sections 6 and 8 hereof; but, if for any
other reason, any Shares are not delivered by or on behalf of the Company and
the Selling Stockholders as provided herein, the Company and each of the Selling
Stockholders pro rata (based on the number of Shares to be sold by the Company
and such Selling Stockholder hereunder) will reimburse the Underwriters through
you for all out-of-pocket expenses approved in writing by you, including fees
and disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery
-21-
<PAGE> 22
of the Shares not so delivered, but the Company and the Selling Stockholders
shall then be under no further liability to any Underwriter except as provided
in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10004, Attention: Registration
Department; and if to any Selling Stockholder shall be delivered or sent by
mail, telex or facsimile transmission to counsel for such Selling Stockholder at
its address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 8(d) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire, or
telex constituting such Questionnaire, which address will be supplied to the
Company or the Selling Stockholders by you upon request. Any such statements,
requests, notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit of,
the Underwriters, the Company and, to the extent provided in Sections 8 and 10
hereof, the officers and directors of the Company and each person who controls
the Company, any Selling Stockholder or any Underwriter, and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the term
"business day" shall mean any day when the Commission's office in Washington,
D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties hereto in
any number of counterparts, each of which shall be deemed to be an original, but
all such counterparts shall together constitute one and the same instrument.
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<PAGE> 23
If the foregoing is in accordance with your understanding, please sign
and return to us eight counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters, the
Company and each of the Selling Stockholders. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters, the form of
which shall be submitted to the Company and the Selling Stockholders for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Any person executing and delivery this Agreement as Attorney-in-Fact
for a Selling Stockholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing
and binding Power-of-Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
Exchange Applications, Inc.
By:
--------------------------------------
Name:
Title:
Cyrk, Inc.
Grant & Partners Limited Partnership
Michael J. Feldman
Andrew J. Frawley
David G. McFarlane
Michael D. McGonagle
Patrick A. McHugh
N. Wayne Townsend
By:
--------------------------------------
Name:
Title:
As Attorney-in-Fact acting on behalf of each
of the Selling Stockholders named in
Schedule II to this Agreement
Accepted as of the date hereof:
Goldman, Sachs & Co.
BT Alex. Brown
Hambrecht & Quist LLC
By:
-----------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-23-
<PAGE> 24
SCHEDULE I
Number of Optional
Shares to be
Total Number Purchased if
of
Firm Shares Maximum Option
to be Exercised
Purchased by Underwriter
--------- --------------
Goldman, Sachs & Co.
BT Alex. Brown
Hambrecht & Quist LLC
[NAMES OF OTHER UNDERWRITERS]
-24-
<PAGE> 25
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
OPTIONAL SHARES
TO BE SOLD IF
TOTAL NUMBER OF FIRM MAXIMUM OPTION
NAME SHARES TO BE SOLD EXERCISED
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
The Company..................................... 2,000,000 --
The Selling Stockholders:
Cyrk, Inc.(a)................................... 460,026 229,455
Grant & Partners Limited Partnership(b)......... 230,058 114,750
Michael J. Feldman(c)........................... 212,104 105,795
Andrew J. Frawley(d)............................ 57,162 --
David G. McFarlane(e)........................... 17,800 --
Michael D. McGonagle(f)......................... 8,600 --
Patrick A. McHugh(g)............................ 7,500 --
N. Wayne Townsend(h)............................ 6,750 --
--------- -------
Total...........................................3,000,000 450,000
</TABLE>
(a) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(b) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(c) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(d) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(e) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(f) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(g) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(h) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL] and
has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
-25-
<PAGE> 26
ANNEX I
DESCRIPTION OF COMFORT LETTER
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and
the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been furnished to the representatives of
the Underwriters (the "Representatives") and are attached hereto;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as indicated in their reports thereon copies
of which are attached hereto and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility
for financial and accounting matters regarding whether the unaudited
condensed consolidated financial statements referred to in paragraph
(vi)(A)(i) below comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations, nothing came to their attention that caused them
to believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included or incorporated by reference
in the Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
-26-
<PAGE> 27
material respects with the disclosure requirements of Items 301, 302,
402 and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the related published rules and regulations, or (ii)
any material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in Clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in Clause (B)
were not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements included
in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements
of the Act and the published rules and regulations thereunder or
the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other
items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared
with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for
-27-
<PAGE> 28
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such
letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or per
share amounts of consolidated net income or other items specified
by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period
of corresponding length specified by the Representatives, except
in each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs
(iii) and (vi) above, they have carried out certain specified
procedures, not constituting an examination in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Representatives,
which are derived from the general accounting records of the Company
and its subsidiaries, which appear in the Prospectus, or in Part II of,
or in exhibits and schedules to, the Registration Statement specified
by the Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of
the Company and its subsidiaries and have found them to be in
agreement.
-28-
<PAGE> 1
EXHIBIT 3.1
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
EXCHANGE APPLICATIONS, INC.
Incorporated pursuant to a Certificate of
Incorporation filed with the Secretary of State
of the state of Delaware on November 7, 1996
-----------------------------------------------
EXCHANGE APPLICATIONS, INC. (the "CORPORATION"), a Delaware
corporation, hereby certifies that this Amended and Restated Certificate of
Incorporation, which amends the authorized capital stock and the number and term
of the members of the Board of Directors, has been duly adopted in accordance
with the provisions of Sections 228, 242, and 245 of the General Corporation Law
of the State of Delaware:
FIRST: The name of the Corporation is Exchange Applications, Inc.
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle, Delaware 19805. The name of the Corporation's registered agent is
Corporation Service Company The address of the Corporation's principal office in
The Commonwealth of Massachusetts is 89 South Street, Boston, Massachusetts
02111.
THIRD: The purposes of the Corporation are to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of capital stock that
the Corporation shall have authority to issue is 40,000,000, consisting solely
of:
30,000,000 shares of common stock, $.001 par value per share ("COMMON
STOCK"); and
10,000,000 shares of Preferred Stock, $.001 par value per share
("PREFERRED STOCK").
<PAGE> 2
-2-
A. PREFERRED STOCK.
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized to establish and
designate the different series, and to fix and determine the voting powers,
designations, preferences, and relative, participating, optional or other
special rights, if any, and qualifications, limitations, and restrictions
thereof, if any, as shall be stated or expressed in a resolution or resolutions
of the Board of Directors providing for the issue of such series of Preferred
Stock, which powers, preferences, rights, qualifications, limitations and
restrictions need not be uniform among series, and may include, without
limitation:
(a) the distinctive serial designation and the number of
shares constituting the series;
(b) the dividend rate or rates on share of the series, whether
dividends are cumulative and, if so, from which date, the payment date
or dates for dividends on shares of the series, and the participating
or other special rights, if any, with respect to dividends;
(c) the voting powers, full or limited, if any, of shares of
the series;
(d) whether shares of the series are redeemable and, if so,
the price or prices at which, and the terms and conditions on which,
the shares may be redeemed;
(e) the amount or amounts payable upon the shares in the event
of voluntary or involuntary liquidation, dissolution or winding up of
the Corporation prior to any payment or distribution of the assets of
the Corporation to any class or series of stock of the Corporation
ranking junior to the shares of the series;
(f) whether the shares of the series are entitled to the
benefit of a sinking or retirement fund to be applied to the purchase
or redemption of shares of the series and, if so entitled, the amount
of the fund and the manner of its application, including the price or
prices at which the shares may be redeemed or purchased through the
application of the fund;
(g) whether the shares are convertible into, or exchangeable
for, shares of any other class or classes or of any
<PAGE> 3
-3-
other series of the same or any other class or classes of capital stock
of the Corporation and, if so convertible or exchangeable, the
conversion price or prices, or the rates of exchange, and the
adjustments thereof, if any, at which the conversion or exchange may be
made, and any other terms and conditions of the conversion or exchange;
and
(h) any other preferences, privileges and powers, and relative
participating, optional or other special rights, qualifications,
limitations or restrictions, as the Board of Directors may deem
advisable and as are not inconsistent with the provisions of this
Amended and Restated Certificate of Incorporation or applicable law.
Any of the voting powers, designations, preferences, rights and
qualifications, limitations or restrictions of any such series of Preferred
Stock may be made dependent upon facts ascertainable outside the resolution or
resolutions providing for the issue of such series adopted by the Board of
Directors, provided that the manner in which such facts shall operate upon the
voting powers, designations, preferences, rights and qualifications, limitations
or restrictions of such series is clearly and expressly set forth in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors.
Different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purposes of voting by classes
unless expressly so provided in such resolution or resolutions. No resolution,
vote or consent of the holders of the capital stock of the Corporation shall be
required in connection with the creation or issuance of any shares of any series
of Preferred Stock authorized by and complying with the conditions of this
Amended and Restated Certificate of Incorporation, the right to any such
resolution, vote, or consent being expressly waived by all present and future
holders of the capital stock of the Corporation.
B. COMMON STOCK.
1. DIVIDENDS
The holders of record of shares of Common Stock shall be entitled to
receive such dividends as may be declared by the Board of Directors from time to
time out of any funds of the Corporation at the time legally available for the
payment of dividends, subject to the dividend rights of outstanding shares of
the Corporation's Preferred Stock.
<PAGE> 4
-4-
2. LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, the holders of record of shares
of Common Stock shall be entitled to receive PRO RATA the assets of the
Corporation available for distribution, after the holders of outstanding shares
of Preferred Stock shall have received such payment or distribution from the
assets of the Corporation as they shall be entitled to receive.
The merger or consolidation of the Corporation into or with any other
corporation, the merger of any other corporation into it, or the sale or lease
of all or substantially all of the assets of the Corporation shall not be deemed
to be a liquidation, dissolution, or winding up of the Corporation for the
purposes of this Section B(2).
3. VOTING RIGHTS
Except as otherwise expressly provided by law, and subject to any
voting rights that may be granted by the Board of Directors to holders of any
class or series of Preferred Stock, all the voting power of the Corporation
shall be vested, as to all matters requiring stockholder approval, in the Common
Stock. Each holder of record of a share or shares of Common Stock shall have the
right to one vote per share.
FIFTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation and for defining
and regulating the powers of the Corporation and its directors and stockholders
and are in furtherance and not in limitation of the powers conferred upon the
Corporation by statute:
(a) The size of the Board of Directors shall be fixed by the
Board of Directors from time to time, but in no event shall there be
less than three (3) directors, and in no event shall any amendment
decreasing the number of directors have the effect of shortening the
term of any incumbent director.
(b) From and after the IPO Closing the Board of Directors
shall be divided into three classes of directors, such classes to be as
nearly equal in number of directors as possible, having staggered
three-year terms of office, the term of office of the directors of the
first such class ("Class I") to expire as of the first annual meeting
of the Corporation's stockholders following the IPO Closing, those of
the
<PAGE> 5
-5-
second class ("Class II") to expire as of the second annual meeting of
the Corporation's stockholders following the IPO Closing, and those of
the third class ("Class III") to expire as of the third annual meeting
of the Corporation's stockholders following the IPO Closing, such that
at each annual meeting of stockholders after the IPO Closing, nominees
will stand for election to succeed those directors whose terms are to
expire as of such meeting. Any director serving as such pursuant to
this paragraph (b) of Article FIFTH may be removed only for cause
pursuant to the vote of the holders of a majority of the shares of the
Corporation's stock entitled to vote for the election of directors.
Those directors in office immediately prior to the IPO Closing shall be
allocated among Class I, Class II and Class III as determined by a
resolution or resolutions of the Board of Directors, which may have
been adopted prior to the effectiveness of this Amended and Restated
Certificate of Incorporation.
(c) The Board of Directors shall have the power and authority:
(1) to adopt, amend or repeal by-laws of the Corporation, subject only
to such limitations, if any, as may be from time to time imposed by
other provisions of this Certificate, by law, or by the By-Laws; and
(2) to the fullest extent permitted or not prohibited by law, and
without the consent of or other action by the stockholders, to
authorize or create mortgages, pledges or other liens or encumbrances
upon any or all of the assets, real, personal or mixed, and franchises
of the Corporation, including after-acquired property, and to exercise
all of the powers of the Corporation in connection therewith. In case
of any vacancy on the Board of Directors, the vacancies shall be filled
by the directors at the time having voting power, as may be prescribed
herein and in the By-Laws. Directors need not be stockholders of the
Corporation. The election of directors need not be by written ballot.
SIXTH: No director of the Corporation shall be personally liable to the
Corporation or to any of its stockholders for monetary damages for breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability; PROVIDED, HOWEVER, that to the extent required from time to time by
applicable law, this Article Sixth shall not eliminate or limit the liability of
a director, to the extent such liability is provided by applicable law, (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
Title 8 of the Delaware Code, or (iv) for any transactions from which the
director derived an improper personal benefit. No amendment to or repeal of this
Article Sixth shall apply to or have any effect on the liability or alleged
<PAGE> 6
-6-
liability of any director for or with respect to any acts or omissions of such
director occurring prior to the effective date of such amendment or repeal.
SEVENTH: Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding, by
reason of being or having been a director or officer of the Corporation or
serving or having served at the request of the Corporation as a director,
trustee, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan, whether the basis of such proceeding is alleged action or
failure to act in an official capacity as a director, trustee, officer, employee
or agent or in any other capacity while serving as a director, trustee, officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended, against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such person
in connection therewith, as further provided in the By-Laws.
EIGHTH: The Board of Directors, when considering a tender offer or
merger or acquisition proposal, may take into account factors in addition to
potential short-term economic benefits to stockholders of the Corporation,
including without limitation (A) comparison of the proposed consideration to be
received by stockholders in relation to the then current market price of the
Corporation's capital stock, the estimated current value of the Corporation in a
freely negotiated transaction, and the estimated future value of the Corporation
as an independent entity and (B) the impact of such a transaction on the
employees, suppliers, and customers of the Corporation and its effect on the
communities in which the Corporation operates.
NINTH: Effective from and after the IPO Closing, any action required or
permitted to be taken by the stockholders of the Corporation may be taken only
at a duly called annual or special meeting of the stockholders, and not by
written consent in lieu of such a meeting, and special meetings of stockholders
may be called only by the Chairman of the Board of Directors, the President, or
a majority of the Board of Directors.
TENTH: Effective from and after the IPO Closing, the affirmative vote
of the holders of at least sixty-six and two thirds percent (66 2/3%) of the
outstanding voting stock of the Corporation (in addition to any separate class
vote that may in the future be required pursuant to the terms of any outstanding
Preferred Stock) shall be required to amend or repeal any of the
<PAGE> 7
-7-
provisions of this Amended and Restated Certificate of Incorporation, to amend,
adopt or repeal the Company's By-Laws (without, however, limiting the power and
authority of the Board of Directors to amend, adopt or repeal By-Laws), or to
reduce the numbers of authorized shares of Common Stock or Preferred Stock.
Executed on ________, 1998.
EXCHANGE APPLICATIONS, INC.
By: ________________________________________
Title: _____________________________________
<PAGE> 1
EXHIBIT 3.2
FORM OF
EXCHANGE APPLICATIONS, INC.
AMENDED AND RESTATED BY-LAWS
<PAGE> 2
FORM OF
AMENDED AND RESTATED
BY-LAWS OF
EXCHANGE APPLICATIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Article I - General..............................................................................
Section 1.1. Offices................................................................
Section 1.2. Seal...................................................................
Section 1.3. Fiscal Year............................................................
Article II - Stockholders
Section 2.1. Place of Meetings......................................................
Section 2.2. Annual Meeting.........................................................
Section 2.3. Special Meeting........................................................
Section 2.4. Notice of Meeting......................................................
Section 2.5. Quorum and Adjournment.................................................
Section 2.6. Right to Vote; Proxies.................................................
Section 2.7. Voting.................................................................
Section 2.8. Notice of Stockholder Business and Nominations.........................
Section 2.9. Stockholders' List.....................................................
Section 2.10. No Stockholder Action by Written Consent...............................
Section 2.11. Inspectors.............................................................
Article III - Directors..........................................................................
Section 3.1. General Powers.........................................................
Section 3.2. Qualifications of Directors............................................
Section 3.3. Number of Directors; Vacancies.........................................
Section 3.4. Resignation............................................................
Section 3.5. Removal................................................................
Section 3.6. Place of Meetings and Books............................................
Section 3.7. Executive Committee....................................................
Section 3.8. Other Committees.......................................................
Section 3.9. Powers Denied to Committees............................................
Section 3.10. Substitute Committee Member............................................
Section 3.11. Compensation of Directors..............................................
Section 3.12. Regular Meetings.......................................................
Section 3.13. Special Meetings.......................................................
</TABLE>
<PAGE> 3
-2-
<TABLE>
<CAPTION>
<S> <C>
Section 3.14. Quorum.................................................................
Section 3.15. Telephonic Participation in Meetings...................................
Section 3.16. Action by Consent......................................................
Article IV - Officers............................................................................
Section 4.1. Selection; Statutory Officers..........................................
Section 4.2. Time of Election.......................................................
Section 4.3. Additional Officers....................................................
Section 4.4. Terms of Office........................................................
Section 4.5. Compensation of Officers...............................................
Section 4.6. Chairman of the Board..................................................
Section 4.7. President..............................................................
Section 4.8. Vice-President.........................................................
Section 4.9. Chief Financial Officer................................................
Section 4.10. Treasurer..............................................................
Section 4.11. Secretary..............................................................
Section 4.12. Assistant Secretary....................................................
Section 4.13. Assistant Treasurer....................................................
Section 4.14. Subordinate Officers...................................................
Section 4.15. Removal................................................................
Section 4.16. Vacancies..............................................................
Article V - Stock Certificates and Transfers
Section 5.1. Stock Certificates.....................................................
Section 5.2. Lost, Stolen or Destroyed Certificates.................................
Section 5.3. Dividends..............................................................
Article VI - Miscellaneous Management Provisions.................................................
Section 6.1. Checks, Drafts and Notes...............................................
Section 6.2. Notices................................................................
Section 6.3. Conflict of Interest...................................................
Section 6.4. Voting of Securities owned by this Corporation.........................
Section 6.5. Inspection of Books....................................................
Section 6.6. Minute Book............................................................
Article VII - Indemnification....................................................................
Section 7.1. Right to Indemnification...............................................
Section 7.2. Right of Indemnitee to Bring Suit......................................
Section 7.3. Non-Exclusivity of Rights..............................................
Section 7.4. Insurance..............................................................
</TABLE>
<PAGE> 4
-3-
<TABLE>
<CAPTION>
<S> <C>
Section 7.5. Indemnification of Employees and Agents of the
Corporation............................................................
Article VIII - Amendments........................................................................
Section 8.1. Amendments.............................................................
</TABLE>
<PAGE> 5
FORM OF
AMENDED AND RESTATED
BY-LAWS OF
EXCHANGE APPLICATIONS, INC.
ARTICLE I - GENERAL
1.1. OFFICES. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware. The Corporation may also have offices
at such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine or the business of the Corporation
may require.
1.2. SEAL. The seal of the Corporation shall be in the form of a circle
and shall have inscribed thereon the name of the Corporation, the year of its
organization and the words "Corporate Seal, Delaware".
1.3. FISCAL YEAR. The fiscal year of the Corporation shall be the
period from January 1 through December 31.
ARTICLE II - STOCKHOLDERS
2.1. PLACE OF MEETINGS. All meetings of the stockholders shall be held
at the office of the Corporation in Boston, Massachusetts except such meetings
as the Board of Directors expressly determine shall be held elsewhere, in which
case meetings may be held upon notice as hereinafter provided at such other
place or places within or without the State of Delaware as the Board of
Directors shall have determined and as shall be stated in such notice.
2.2. ANNUAL MEETING. The annual meeting of stockholders of the
Corporation shall be held on such date and at such place and time as may be
fixed by resolution of the Board of Directors and stated in the notice of the
meeting, at which they shall elect such members of the Board of Directors as are
standing for election at such meeting, as determined by the Corporation's
Amended and Restated Certificate of Incorporation, as it may be further amended
or amended and restated from time to time ("CERTIFICATE OF INCORPORATION") and
shall transact such other business as may properly be brought before the meeting
(except as otherwise provided in these by-laws).
<PAGE> 6
-2-
2.3. SPECIAL MEETING. Subject to the rights of the holders of any
series of stock having a preference over the Common Stock of the Corporation as
to dividends upon liquidation ("Preferred Stock") with respect to such series of
Preferred Stock, special meetings of the stockholders for any purpose or
purposes may only be called by the Chairman of the Board of Directors, the
President, or a majority of the total number of directors which the Corporation
would have if there were no vacancies (the "Whole Board"). Only such business
shall be conducted at a special meeting as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting.
2.4. NOTICE OF MEETING. Written notice of any meeting of the
stockholders stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote at such meeting not less than ten (10) nor
more than sixty (60) days before the date of the meeting. Notice need not be
given to any stockholder who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of a stockholder at a
meeting of stockholders shall constitute a waiver of notice of such meeting,
except when the stockholder attends the 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 to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice. Any previously
scheduled meeting of the stockholders may be postponed, and (unless the
Certificate of Incorporation otherwise provides) any special meeting of the
stockholders may be canceled, by resolution of the Board of Directors upon
public notice given prior to the date previously scheduled for such meeting of
stockholders.
2.5. QUORUM AND ADJOURNMENT. At all meetings of the stockholders the
holders of a majority of the stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
requisite for the transaction of business except as otherwise provided by law,
by the Certificate of Incorporation or by these by-laws. The Chairman of the
meeting may adjourn the meeting from time to time, whether or not there is such
a quorum. If the adjournment is for more than thirty (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 record entitled to
vote at the meeting. At such adjourned meeting, at which the requisite amount of
voting stock shall be represented, any business may be transacted which might
have been transacted if the meeting had been held as originally called. The
stockholders present at a duly called
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meeting at which a quorum is present may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum.
2.6. RIGHT TO VOTE; PROXIES. Each holder of a share or shares of
capital stock of the Corporation having the right to vote at any meeting shall
be entitled to one vote for each such share of stock held by him. Any
stockholder entitled to vote at any meeting of stockholders may vote either in
person or by proxy, but no proxy which is dated more than three (3) years prior
to the meeting at which it is offered shall confer the right to vote thereat
unless the proxy provides that it shall be effective for a longer period. A
proxy may be granted by a writing executed by the stockholder or his authorized
officer, director, employee or agent or by transmission or authorization of
transmission of a telegram, cablegram, or other means of electronic 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, subject
to the conditions set forth in Section 212 of the Delaware General Corporation
Law, as it may be amended from time to time (the "Delaware GCL").
2.7. VOTING. At all meetings of stockholders, except as otherwise
expressly provided for by statute, the Certificate of Incorporation or these
by-laws, (i) in all matters other than the election of directors, the
affirmative vote of a majority of shares present in person or represented by
proxy at the meeting and entitled to vote on such matter shall be the act of the
stockholders and (ii) directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors. Except as otherwise expressly provided by
law, the Certificate of Incorporation or these by-laws, at all meetings of
stockholders the voting shall be by voice vote, but any stockholder qualified to
vote on the matter in question may demand a stock vote, by shares of stock, upon
such question, whereupon such stock vote shall be taken by ballot, each of which
shall state the name of the stockholder voting and the number of shares voted by
him, and, if such ballot be cast by a proxy, it shall also state the name of the
proxy.
2.8. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (i) Nominations of
persons for election to the Board of Directors of the Corporation and the
proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the Corporation who
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was a stockholder of record at the time of giving notice provided for in this
By-Law, who is entitled to vote at the meeting and who complies with the notice
procedures set forth in this By-Law.
(ii) For nominations for the Board of Directors or for other business
to be properly brought by a stockholder before a meeting of stockholders, the
stockholder must first have given timely written notice thereof to the Secretary
of the Company. To be timely, a notice of nominations or other business to be
brought before an annual meeting of stockholders must be delivered to the
Secretary not less than 120 and not more than 150 days prior to the first
anniversary of the date of the Company's proxy statement delivered to
stockholders in connection with the preceding year's annual meeting, or if the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary, or if no proxy statement was delivered to stockholders
by the Company in connection with the preceding year's annual meeting, such
notice must be delivered not earlier than 90 days prior to such annual meeting
and not later than the later of (a) 60 days prior to the annual meeting or (b)
10 days following the date on which public announcement of the date of such
annual meeting is first made by the Company. With respect to special meetings of
stockholders, such notice must be delivered to the Secretary not more than 90
days prior to such meeting and not later than the later of (1) 60 days prior to
such meeting or (2) 10 days following the date on which public announcement of
the date of such meeting is first made by the Company. Such notice must contain
(A) the name and address of the stockholder delivering the notice (B) a
statement with respect to the amount of the Company's stock beneficially and/or
legally owned by such stockholder, (C) the nature of any such beneficial
ownership of such stock, the beneficial ownership of any such stock legally held
by such stockholder but beneficially owned by one or more others, and the length
of time for which all such stock has been beneficially and/or legally owned by
such stockholder, (D) information about each nominee for election as a director
substantially equivalent to that which would be required in a proxy statement
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated by the Securities and Exchange Commission thereunder,
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected) and/or (E) a description
of the proposed business to be brought before the meeting, as the case may be,
and the reason for conducting such business at the meeting, and any material
interest in such business of such stockholder and the beneficial owner, if any,
on whose behalf the proposal is made.
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2.9. STOCKHOLDERS' LIST. A complete list of the stockholders entitled
to vote at any meeting of stockholders, arranged in alphabetical order and
showing the address of each stockholder, and the number of shares registered in
the name of each stockholder, shall be prepared by the Secretary and filed
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held, at least 10 days before such meeting, and
shall at all times during the usual hours for business, and during the whole
time of said election, be open to the examination of any stockholder for a
purpose germane to the meeting.
2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. From and after the
closing (or first closing) of the initial registered public offering of
securities of the Company (the "IPO Closing"), unless otherwise provided in the
Certificate of Incorporation, and subject to the rights of the holders of
Preferred Stock with respect to such series of Preferred Stock, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of stockholders of the Corporation and
may not be effected by any consent in writing by such stockholders.
2.11. INSPECTORS. The Board of Directors by resolutions shall appoint
one or more inspectors, which inspector or inspectors may include individuals
who serve the Corporation in other capacities, including, without limitation, as
officers, employees, agents or representatives, to act as the meeting of
stockholders and make a written report thereof. One or more persons may be
designated as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate has been appointed to act or is able to act at a
meeting of stockholders, the Chairman of the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before discharging 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. The inspectors shall have the duties prescribed by law.
The Chairman of the meeting shall fix and announce at the meeting 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
ARTICLE III - DIRECTORS
3.1. GENERAL POWERS. In addition to the powers and authority expressly
conferred upon them by these by-laws, the board may exercise all such powers of
the Corporation and do all such lawful acts and things
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as are not by statute or by the Certificate of Incorporation or by these by-laws
directed or required to be exercised or done by the stockholders.
3.2. QUALIFICATIONS OF DIRECTORS. A director need not be a stockholder,
a citizen of the United States, or a resident of the State of Delaware.
3.3. NUMBER OF DIRECTORS; VACANCIES.
(a) Until the IPO Closing: The size of the Board of Directors shall be
fixed from time to time pursuant to a resolution adopted by a majority of the
Whole Board of Directors or by the stockholders. The Board of Directors shall
hold office until the annual meeting of stockholders and until their successors
are elected and qualified or until their earlier resignation or removal. Any
director may resign at any time upon written notice to the corporation. Except
as the General Corporation Law of Delaware may otherwise require, in the interim
between annual meetings of stockholders or of special meetings of stockholders
called for the election of directors and/or for the removal of one or more
directors and for the filling of any vacancy in that connection, any vacancies
in the Board of Directors, including unfilled vacancies resulting from the
removal of directors for cause or without cause, may be filled by the vote of a
majority of the remaining directors then in office, although less than a quorum,
or by the sole remaining director, or by the stockholders.
(b) Effective from and after the IPO Closing: The number of directors
constituting the full Board of Directors shall be fixed from time to time
exclusively pursuant to a resolution adopted by a majority of the Whole Board of
Directors. The Board of Directors shall be divided into three classes of
directors, such classes to be as nearly equal in number of directors as
possible, having staggered three-year terms of office, the term of office of the
directors of the first such class to expire as of the first annual meeting of
the Corporation's stockholders following the IPO Closing, those of the second
class to expire as of the second annual meeting of the Corporation's
stockholders following the IPO Closing, and those of the third class as of the
third annual meeting of the Corporation's stockholders following the IPO
Closing, such that at each annual meeting of stockholders after such IPO
Closing, nominees will stand for election for three-year terms to succeed those
directors whose terms are to expire as of such meeting. Members of the Board of
Directors shall hold office until the annual meeting of stockholders at which
their respective successors are elected and qualified or until their earlier
death, incapacity, resignation, or removal. Except as the General Corporation
Law of Delaware may otherwise require, in the interim between annual meetings
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of stockholders or special meetings of stockholders called for the election of
directors and/or for the removal of one or more directors and for the filling of
any vacancy in that connection, any vacancies or new directorships in the Board
of Directors, including unfilled vacancies or new directorships resulting from
the removal of directors for cause or any increase in the number of directors,
may be filled only by the vote of a majority of the remaining directors then in
office.
3.4. RESIGNATION. Any director of this Corporation may resign at any
time by giving written notice to the Chairman of the Board, if any, the
President or the Secretary of the Corporation. Such resignation shall take
effect at the time specified therein, at the time of receipt if no time is
specified therein and at the time of acceptance if the effectiveness of such
resignation is conditioned upon its acceptance. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
3.5. REMOVAL. Except as may otherwise be provided by the General
Corporation Law of Delaware or the Corporation's Certificate of Incorporation,
as amended and in effect from time to time, prior to the IPO Closing, any
director or the entire Board of Directors may be removed, with or without cause,
by the holders of a majority of the shares then entitled to vote at an election
of directors. Effective from and after the IPO Closing, subject to the rights of
the holders of any series of Preferred Stock with respect to such series of
Preferred Stock, any director or the entire Board of Directors may be removed
from office at any time, but only for cause and only by the affirmative vote of
the holders of a majority of the then-outstanding shares entitled to vote
thereon, voting together as a class.
3.6. PLACE OF MEETINGS AND BOOKS. The Board of Directors may hold their
meetings and keep the books of the Corporation outside The State of Delaware, at
such places as they may from time to time determine.
3.7. EXECUTIVE COMMITTEE. There may be an executive committee of one or
more directors designated by resolution passed by a majority of the whole board.
The act of a majority of the members of such committee shall be the act of the
committee. Said committee may meet at stated times or on notice to all by any of
their own number, and shall have and may exercise those powers of the Board of
Directors in the management of the business affairs of the Company as are
provided by law and may authorize the seal of the Corporation to be affixed to
all
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papers which may require it. Vacancies in the membership of the committee shall
be filled by the Board of Directors at a regular meeting or at a special meeting
called for that purpose.
3.8. OTHER COMMITTEES. The Board of Directors may also designate one or
more committees in addition to the executive committee, by resolution or
resolutions passed by a majority of the whole board; such committee or
committees shall consist of one or more directors of the Corporation, and to the
extent provided in the resolution or resolutions designating them, shall have
and may exercise specific powers of the Board of Directors in the management of
the business and affairs of the Corporation to the extent permitted by statute
and shall have power to authorize the seal of the Corporation to be affixed to
all papers which may require it. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
3.9. POWERS DENIED TO COMMITTEES. Committees of the Board of Directors
shall not, in any event, have any power or authority to amend the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares adopted by the
Board of Directors as provided in Section 151(a) of the Delaware GCL, fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any series),
adopt an agreement of merger or consolidation, recommend to the stockholders the
sale, lease or exchange of all or substantially all of the Corporation's
property and assets, recommend to the stockholders a dissolution of the
Corporation or a revocation of a dissolution or to amend the by-laws of the
Corporation. Further, no committee of the Board of Directors shall have the
power or authority to declare a dividend, to authorize the issuance of stock or
to adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware GCL, unless the resolution or resolutions designating such committee
expressly so provides.
3.10. SUBSTITUTE COMMITTEE MEMBER. In the absence or on the
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of such
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absent or disqualified member. Any committee shall keep regular minutes of its
proceedings and report the same to the board as may be required by the board.
3.11. COMPENSATION OF DIRECTORS. The Board of Directors shall have the
power to fix the compensation of directors and members of committees of the
Board. The directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum for attendance at
each meeting of the Board of Directors and/or a stated annual fee (some or all
of which may be paid in the form of capital stock of the Corporation) as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.12. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this By-Law, immediately after, and at
the same place as, the Annual Meeting of Stockholders. The Board of Directors
may, by resolutions, provide the time and place for the holding of additional
regular meetings without other notice than such resolution. Such regular
meetings shall be held at such place within or without the State of Delaware as
shall be fixed by the Board.
3.13. SPECIAL MEETINGS. Special meetings of the board may be called by
any director or the President, on two (2) days notice to each director, or such
shorter period of time before the meeting as will nonetheless be sufficient for
the convenient assembly of the directors so notified; special meetings shall be
called by the Secretary in like manner and on like notice, on the written
request of two or more directors.
3.14. QUORUM. At all meetings of the Board of Directors, a majority of
the total number of directors shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically permitted or
provided by statute, or by the Certificate of Incorporation, or by these
By-Laws. If at any meeting of the board there shall be less than a quorum
present, a majority of those present may adjourn the meeting from time to time
until a quorum is obtained, and no further notice thereof need be given other
than by announcement at said meeting which shall be so adjourned.
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3.15. TELEPHONIC PARTICIPATION IN MEETINGS. Members of the Board of
Directors or any committee designated by such board may participate in a meeting
of the board or 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 shall constitute presence in person at such meeting.
3.16. ACTION BY CONSENT. Unless otherwise restricted by the Certificate
of Incorporation or these by-laws, 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 written consent thereto is signed by all members of
the board or of such committee as the case may be and such written consent is
filed with the minutes of proceedings of the board or committee.
ARTICLE IV - OFFICERS
4.1. SELECTION; STATUTORY OFFICERS. The officers of the Corporation
shall be chosen by the Board of Directors. There shall be a President, a
Secretary and a Treasurer, and there may be a Chairman of the Board of
Directors, one or more Vice Presidents, one or more Assistant Secretaries, and
one or more Assistant Treasurers, as the Board of Directors may elect. Any
number of offices may be held by the same person, unless the Certificate of
Incorporation or these By-Laws otherwise provide.
4.2. TIME OF ELECTION. The officers above named shall be chosen by the
Board of Directors at its first meeting after each annual meeting of
stockholders. None of said officers need be a director.
4.3. ADDITIONAL OFFICERS. The board may appoint such other officers and
agents as it shall deem necessary, who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
4.4. TERMS OF OFFICE. The officers of the Company shall hold office
until their successors are chosen and qualify. Any vacancy occurring in any
office of the Corporation shall be filled by the Board of Directors.
4.5. COMPENSATION OF OFFICERS. The Board of Directors (or a duly
appointed committee of the Board of Directors) shall have power to fix the
compensation of all officers of the Corporation.
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4.6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if any,
otherwise the President, if a director, or such other director as the Board may
choose, shall preside at all meetings of the Board of Directors and of the
stockholders of the Corporation. In the absence of the President, or in the
event of the President's inability or refusal to act, the Chairman of the Board
shall perform the duties and exercise the powers of the President until such
vacancy shall be filled in the manner prescribed by these By-Laws or by law. The
Chairman of the Board shall have such other powers and perform such other duties
as may from time to time be prescribed by the Board of Directors or these
By-Laws.
4.7. PRESIDENT. Unless the Board of Directors otherwise determines, the
President shall be the chief executive officer and head of the Corporation.
Unless there is a Chairman of the Board, the President shall preside at all
meetings of directors and stockholders. Under the supervision of the Board of
Directors and of the executive committee, the President shall have the general
control and management of its business and affairs, subject, however, to the
right of the Board of Directors and of the executive committee to confer any
specific power, except such as may be by statute exclusively conferred on the
President, upon any other officer or officers of the Corporation. The President
shall perform and do all acts and things incident to the position of President
and such other duties as may be assigned to him or her from time to time by the
Board of Directors or the executive committee.
4.8. VICE-PRESIDENTS. The Vice-Presidents shall perform such of the
duties of the President on behalf of the Corporation as may be respectively
assigned to them from time to time by the Board of Directors or by the executive
committee or by the President. The Board of Directors or the executive committee
may designate one of the Vice-Presidents as the Executive Vice-President, and in
the absence or inability of the President to act, such Executive Vice-President
shall have and possess all of the powers and discharge all of the duties of the
President, subject to the control of the board and of the executive committee.
4.9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer (if any)
shall be a Vice President and act in an executive financial capacity. The Chief
Financial Officer shall assist the Chairman of the Board and the President in
the general supervision of the Corporation's financial policies and affairs.
4.10. TREASURER. The Treasurer shall have the care and custody of all
the funds and securities of the Corporation which may come into his or her hands
as Treasurer, and the power and authority to endorse checks,
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drafts and other instruments for the payment of money for deposit or collection
when necessary or proper and to deposit the same to the credit of the
Corporation in such bank or banks or depository as the Board of Directors or the
executive committee, or the officers or agents to whom the Board of Directors or
the executive committee may delegate such authority, may designate, and he or
she may endorse all commercial documents requiring endorsements for or on behalf
of the Corporation. He or she may sign all receipts and vouchers for the
payments made to the Corporation. He or she shall render an account of his
transactions to the Board of Directors or to the executive committee as often as
the board or the committee shall require the same. He or she shall enter
regularly in the books to be kept by him for that purpose full and adequate
account of all moneys received and paid by him on account of the Corporation. He
or she shall perform all acts incident to the position of Treasurer, subject to
the control of the Board of Directors and of the executive committee. He or she
shall when requested, pursuant to vote of the Board of Directors or the
executive committee, give a bond to the Corporation conditioned for the faithful
performance of his or her duties, the expense of which bond shall be borne by
the Corporation.
4.11. SECRETARY. The Secretary shall keep the minutes of all meetings
of the Board of Directors and of the stockholders; and shall attend to the
giving and serving of all notices of the Corporation. Except as otherwise
ordered by the Board of Directors or the executive committee, the Secretary
shall attest the seal of the Corporation upon all contracts and instruments
executed under such seal and shall affix the seal of the Corporation thereto and
to all certificates of shares of capital stock of the Corporation. The Secretary
shall have charge of the stock certificate book, transfer book and stock ledger,
and such other books and papers as the Board of Directors or the executive
committee may direct. He or she shall, in general, perform all the duties of
Secretary, subject to the control of the Board of Directors and of the executive
committee.
4.12. ASSISTANT SECRETARY. The Assistant Secretary, or if there be more
than one, the assistant secretaries in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Secretary or in the event of his or her
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
4.13. ASSISTANT TREASURER. The Assistant Treasurer, or if there shall
be more than one, the Assistant Treasurers in the order determined by the Board
of Directors (or if there be no such determination, then in the
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order of their election), shall, in the absence of the Treasurer or in the event
of his or her inability or refusal to act, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
4.14. SUBORDINATE OFFICERS. The Board of Directors may select such
subordinate officers as it may deem desirable. Each such officer shall hold
office for such period, have such authority, and perform such duties as the
Board of Directors may prescribe. The Board of Directors may, from time to time,
authorize any officer to appoint and remove subordinate officers and to
prescribe the powers and duties thereof.
4.15. REMOVAL. Any officer elected, or agent appointed, by the Board of
Directors may be removed by the affirmative vote of a majority of the whole
Board whenever, in their judgment, the best interests of the Corporation would
be served thereby. Any officer or agent appointed by the Chairman of the Board
or the President may be removed by him whenever, in his judgment, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of his or her successor, his or
her death, or his or her resignation or removal, whichever event shall first
occur, except as otherwise provided in an employment contract or under an
employee deferred compensation plan.
4.16. VACANCIES. A newly created elected office and a vacancy in any
elected office because of death, resignation or removal may be filled by the
Board of Directors for the unexpired portion of the term at any meeting of the
Board of Directors. Any vacancy in an office appointed by the Chairman of the
Board or the President because of death, resignation, or removal may be filled
by the Chairman of the Board or the President.
ARTICLE V - STOCK CERTIFICATES AND TRANSFERS
5.1. STOCK CERTIFICATES. Every holder of stock in the Corporation shall
be entitled to have a certificate, signed by, or in the name of the Company by,
the President or a Vice-President and the Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by him 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
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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 he were such
officer, transfer agent or registrar at the date of issue.
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
5.2. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may direct
a new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Corporation
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or certificates,
or his legal representative, to advertise the same in such manner as it shall
require and/or to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
5.3. DIVIDENDS.
(a) POWER TO DECLARE. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, in
promissory notes or in shares of the Corporation's capital stock, subject to the
provisions of the Certificate of Incorporation and the laws of Delaware.
(b) RESERVES. Before payment of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
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ARTICLE VI - MISCELLANEOUS MANAGEMENT PROVISIONS
6.1. CHECKS, DRAFTS AND NOTES. All checks, drafts or orders for the
payment of money, and all notes and acceptances of the Corporation shall be
signed by such officer or officers, agent or agents as the Board of Directors
may designate.
6.2. NOTICES.
(a) Whenever, under the provisions of these By-Laws, notice is required
to be given to any stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail with postage
thereon prepaid. Notice may also be given personally.
(b) Whenever any notice is required to be given under the provisions of
the statutes or of the Certificate of Incorporation of the Corporation of the
Corporation or of these by-laws, a written waiver of notice, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein or the meeting or action to which such notice relates, 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.
6.3. CONFLICT OF INTEREST. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the board of or committee thereof which
authorized the contract or transaction, or solely because his or their votes are
counted for such purpose, if: (i) the material facts as to his relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee and the board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or (ii) the material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
of the Corporation entitled to
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vote thereon, and the contract or transaction as specifically approved in good
faith by vote of such stockholders; or (iii) the contract or transaction is fair
as to the Corporation as of the time it is authorized, approved or ratified, by
the Board of Directors, a committee or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
6.4. VOTING OF SECURITIES OWNED BY THIS CORPORATION. Subject always to
the specific directions of the Board of Directors, (i) any shares or other
securities issued by any other Corporation and owned or controlled by this
Corporation may be voted in person at any meeting of security holders of such
other corporation by the President of this Corporation if he is present at such
meeting, or in his absence by the Treasurer of this Corporation if he is present
at such meeting, and (ii) whenever, in the judgment of the President, it is
desirable for this Corporation to execute a proxy or written consent in respect
to any shares or other securities issued by any other Corporation and owned by
this Corporation, such proxy or consent shall be executed in the name of this
Corporation by the President, without the necessity of any authorization by the
Board of Directors, affixation of corporate seal or countersignature or
attestation by another officer, provided that if the President is unable to
execute such proxy or consent by reason of sickness, absence from the United
States or other similar cause, the Treasurer may execute such proxy or consent.
Any person or persons designated in the manner above stated as the proxy or
proxies of this Corporation shall have full right, power and authority to vote
the shares or other securities issued by such other corporation and owned by
this Corporation the same as such shares or other securities might be voted by
this Corporation.
6.5. INSPECTION OF BOOKS. The Board of Directors shall present at each
annual meeting, and at any special meeting of the stockholders when called for
by vote of the stockholders, a full and clear statement of the business and
condition of the Corporation.
6.6. MINUTE BOOK. The original, or attested copies, of the Certificate
of Incorporation, By-Laws and records of all meetings of incorporators and
stockholders, and the stock and transfer records, which shall contain the names
of all stockholders and the record address and the amount of stock held by each,
shall be kept at the principal office of the Corporation or at an office of its
transfer agent or of the Secretary or any Assistant Secretary or of its resident
agent or of its legal counsel. Such copies and records need not all be kept in
the same office. They shall be available at all reasonable times to the
inspection of any stockholder for
<PAGE> 21
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any proper purpose but not to secure a list of stockholders or other information
for the purpose of selling the same or information or copies thereof or of using
the same for a purpose other than in the interest of the applicant, or a
stockholder, relative to the affairs of the Corporation.
ARTICLE VII - INDEMNIFICATION
7.1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of being or having been a director or officer of the
Corporation or serving or having served at the request of the Corporation as a
director, trustee, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (an "Indemnitee"), whether the basis of such
proceeding is alleged action or failure to act in an official capacity as a
director, trustee, officer, employee or agent or in any other capacity while
serving as a director, trustee, officer, employee or agent, shall be indemnified
and held harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than permitted
prior thereto) (as used in this Article VII, the "Delaware Law"), against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such Indemnitee in connection therewith and such indemnification
shall continue as to an Indemnitee who has ceased to be a director, trustee,
officer, employee or agent and shall inure to the benefit of the Indemnitee's
heirs, executors and administrators; provided, however, that, except as provided
in ss.7.2 hereof with respect to Proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a Proceeding (or part thereof) initiated by such Indemnitee only
if such Proceeding (or part thereof) was authorized by the board of directors of
the Corporation. The right to indemnification conferred in this Article VII
shall be a contract right and shall include the right to be paid by the
Corporation the expenses (including attorneys' fees) incurred in defending any
such Proceeding in advance of its final disposition (an "Advancement of
Expenses"); provided, however, that, if the Delaware Law so requires, an
Advancement of Expenses incurred by an Indemnitee shall be made only upon
delivery to the Corporation of an undertaking (an "Undertaking"), by or on
behalf of such Indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision
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from which there is no further right to appeal (a "Final Adjudication") that
such Indemnitee is not entitled to be indemnified for such expenses under this
Article VII or otherwise.
7.2. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under ss. 7.1 hereof
is not paid in full by the Corporation within sixty days after a written claim
has been received by the Corporation, except in the case of a claim for an
Advancement of Expenses, in which case the applicable period shall be twenty
days, the Indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the Indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the Indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the Indemnitee to
enforce a right to an Advancement of Expenses) it shall be a defense that, and
(ii) in any suit by the Corporation to recover an Advancement of Expenses
pursuant to the terms of an Undertaking the Corporation shall be entitled to
recover such expenses upon a Final Adjudication that, the Indemnitee has not met
the applicable standard of conduct set forth in the Delaware Law. Neither the
failure of the Corporation (including its board of directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the Delaware Law, nor an actual determination by the
Corporation (including its board of directors, independent legal counsel, or its
stockholders) that the Indemnitee has not met such applicable standard of
conduct, shall create a presumption that the Indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification or to an Advancement of Expenses hereunder,
or by the Corporation to recover an Advancement of Expenses pursuant to the
terms of an Undertaking, the burden of proving that the Indemnitee is not
entitled to be indemnified, or to such Advancement of Expenses, under this
Article VII or otherwise shall be on the Corporation.
7.3. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to
the Advancement of Expenses conferred in this Article 7 shall not be exclusive
of any other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation,
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By-Law, agreement, vote of stockholders or disinterested directors or otherwise.
7.4. INSURANCE. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under this Article VII or under the Delaware Law.
7.5. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. 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 employee or agent of the Corporation to the fullest extent of the
provisions of this Article VII with respect to the indemnification and
Advancement of Expenses of directors and officers of the Corporation.
ARTICLE VIII - AMENDMENTS
8.1. AMENDMENTS. Subject always to any limitations imposed by the
Corporation's Certificate of Incorporation, these By-Laws may be altered,
amended, or repealed, or new By-Laws may be adopted, only by (i) the affirmative
vote of the holders of at least sixty-six and two-thirds (66 2/3%) of the
outstanding voting stock of the Corporation (in addition to any separate class
vote that may be required pursuant to the terms of any then outstanding
preferred stock of the Corporation), or (ii) by resolution of the Board of
Directors duly adopted by not less than a majority of the directors then
constituting the full Board of Directors.
<PAGE> 1
EXHIBIT 10.2
EXCHANGE APPLICATIONS, INC.
1996 STOCK INCENTIVE PLAN
1. PURPOSE. This Exchange Applications, Inc. 1996 Stock Incentive Plan
(the "Plan") is intended to provide incentives (a) to the officers and other
employees of Exchange Applications, Inc. (the "Company"), its parent (if any)
and any present or future subsidiaries of the Company (collectively, "Related
Corporations") by providing them with opportunities to purchase stock in the
Company pursuant to options which qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
granted hereunder ("ISO" or "ISOs"); (b) to directors, officers, employees and
consultants of the Company and Related Corporations by providing them with
opportunities to purchase stock in the Company pursuant to options granted
hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified
Options"); and (c) to directors, officers, employees and consultants of the
Company and Related Corporations by providing them with opportunities to make
direct purchases of restricted stock in the Company ("Restricted Stock"). Both
ISOs and Non-Qualified options are referred to hereafter individually as an
"Option" and collectively as "Options." As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation" as those
terms are defined in Section 424 of the Code.
2. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by
the Board of Directors of the Company (the "Board"). The Board may appoint a
Compensation Committee (the "Committee") of two or more of its members to
administer the Plan. Subject to ratification of the grant of each option or
Restricted Stock by the Board (if so required by applicable state law), and
subject to the terms of the Plan, the Committee, if so appointed, shall have the
authority to (i) determine the employees of the Company and Related Corporations
(from among the class of employees eligible under paragraph 3 to receive ISOs)
to whom ISOs may be granted, and to determine (from among the class of
individuals and entities eligible under paragraph 3 to receive Non-Qualified
Options and Restricted Stock) to whom Non-Qualified options or Restricted Stock
may be granted; (ii) determine the time or times at which options or Restricted
Stock may be granted; (iii) determine the option price of shares subject to each
option, which price with respect to ISOs shall not be less than the minimum
specified in paragraph 6, and the purchase price of Restricted Stock; (iv)
determine whether each option granted shall be an ISO or a Non-Qualified option;
(v) determine (subject
<PAGE> 2
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to paragraph 7) the time or times when each option shall become exercisable and
the duration of the exercise period; (vi) determine whether restrictions such as
repurchase options are to be imposed on shares subject to options and to
Restricted Stock, and the nature of such restrictions, if any; and (vii)
interpret the Plan and prescribe and rescind rules and regulations relating to
it. If the Committee determines to issue a Non-Qualified Option, it shall take
whatever actions it deems necessary, under Section 422 of the Code and the
regulations promulgated thereunder, to ensure that such Option is not treated as
an ISO. The interpretation and construction by the Committee of any provisions
of the Plan or of any Option or authorization or agreement for Restricted Stock
granted under it shall be final unless otherwise determined by the Board. The
Committee may from time to time adopt such rules and regulations for carrying
out the Plan as it may deem best. No member of the Board or the Committee shall
be liable for any action or determination made in good faith with respect to the
Plan or any Option or Restricted Stock granted under it.
(b) The Committee may select one of its members as its chairman, and
shall hold meetings at such time and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee. All references in the Plan to the Committee shall mean the Board if
there is no Committee so appointed. From time to time the Board may increase the
size of the Committee and appoint additional members thereof, remove members
(with or without cause), and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and thereafter
directly administer the Plan.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted to any officer or
other employee of the Company or any Related Corporation. Those directors of the
Company who are not employees may not be granted ISOs under the Plan.
Non-Qualified Options and Restricted Stock may be granted to any director
(whether or not an employee), officer, employee or consultant of the Company or
any Related Corporation. The Committee may take into consideration an optionee's
individual circumstances in determining whether to grant an ISO or a
Non-Qualified Option or Restricted Stock. Granting of any Option or Restricted
Stock to any individual or entity shall neither entitle that individual or
entity to, nor disqualify him from, participation in any other grant of Options
or Restricted Stock.
<PAGE> 3
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4. STOCK. The stock subject to options and Restricted Stock shall be
authorized but unissued shares of Common Stock of the Company, $.001 par value
per share (the "Common Stock"), or shares of Common Stock re-acquired by the
Company in any manner. The aggregate number shares which may be issued pursuant
to the Plan is 3,124,963, subject to adjustment as provided in paragraph 13. Any
such shares may be issued as ISOs, Non-Qualified Options or Restricted Stock so
long as the aggregate number of shares so issued does not exceed such number, as
adjusted. If any Option granted under the Plan shall expire, be cancelled or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part, or if any Restricted Stock
shall be reacquired by the Company by exercise of its repurchase option, the
shares subject to such expired, terminated or cancelled Option and reacquired
shares of Restricted Stock shall again be available for grants of Options or
Restricted Stock under the Plan.
5. GRANTS UNDER THE PLAN. Options or Restricted Stock may be granted
under the Plan at any time on or after November 15, 1996 and prior to November
14, 2006. Any such grants of ISOs shall be subject to the receipt, within 12
months of November 15, 1996, of the approval of Stockholders as provided in
paragraph 17. The date of grant of an Option under the Plan will be the date
specified by the Committee at the time it awards the option; provided, however,
that such date shall not be prior to the date of award. The Committee shall have
the right, with the consent of the optionee, to convert an ISO granted under the
Plan to a Non-Qualified Option pursuant to paragraph 15.
6. MINIMUM OPTION PRICE. (a) The price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less than the
fair market value per share of Common Stock on the date of such grant. In the
case of an ISO to be granted to an employee owning stock possessing more than
ten percent of the total combined voting power of all classes of stock of the
Company or any Related Corporation, the price per share specified in the
agreement relating to such ISO shall not be less than 110 percent of the fair
market value of Common Stock on the date of grant.
(b) In no event shall the aggregate fair market value (determined at
the time the option is granted) of Common Stock for which ISOs granted to any
employee are exercisable for the first time by such employee during any calendar
year (under all stock option plans of the Company and any Related Corporation)
exceed $100,000. If the foregoing limitation is exceeded, the balance shall be
non-statutory options.
<PAGE> 4
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(c) If, at the time an Option is granted under the Plan, the Company's
Common Stock is publicly traded, "fair market value" shall be determined as of
the last business day for which the prices or quotes discussed in this sentence
are available prior to the date such Option is granted and shall mean (i) the
average (on that date) of the high and low prices of the Common Stock on the
principal national securities exchange on which the Common Stock is traded, if
such stock is then traded on a national securities exchange; or (ii) the last
reported sale price (on that date) of the Common Stock on the Nasdaq National
Market System, if the Common Stock is not then traded on a national securities
exchange; or (iii) the closing bid price (or average of bid prices) last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq National Market
System or on a national securities exchange. However, if the Common Stock is not
publicly traded at the time an option is granted under the Plan, "fair market
value" shall be deemed to be the fair value of the Common Stock as determined by
the Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of the
Common Stock in private transactions negotiated at arms' length.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10, each Option shall expire on the date specified by the
Committee, but not more than ten years from the date of grant or, in the case of
ISOs granted to an employee owning stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company or any
Related Corporation, not more than five years from date of grant. Subject to
earlier termination as provided in paragraphs 9 and 10, the term of each ISO
shall be the term set forth in the original instrument granting such ISO, except
with respect to any part of such ISO that is converted into a Non-Qualified
option pursuant to paragraph 15.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9
through 12, each option granted under the Plan shall be exercisable as follows:
(a) The Option shall either be fully exercisable on the date of grant
or shall become exercisable thereafter in such installments as the Committee may
specify.
(b) Once an installment becomes exercisable it shall remain exercisable
until expiration or termination of the Option, unless otherwise specified by the
Committee.
<PAGE> 5
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(c) Each Option or installment may be exercised at any time or from
time to time, in whole or in part, for up to the total number of shares with
respect to which it is then exercisable.
(d) The Committee shall have the right to accelerate the date of
exercise of any installment; provided that the Committee shall not accelerate
the exercise date of any installment of any Option granted to any employee as an
ISO (and not previously converted into a Non-Qualified Option pursuant to
paragraph 15) if such acceleration would violate the annual vesting limitation
contained in Section 422(d) of the Code which provides generally that the
aggregate fair market value (determined at the time the option is granted) of
the stock with respect to which ISOs granted to any employee are exercisable for
the first time by such employee during any calendar year (under all plans of the
Company and any Related Corporation) shall not exceed $100,000.
9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed
by the Company or any Related Corporation other than by reason of death or
disability as provided in paragraph 10, no further installments of his ISOs
shall become exercisable, and his ISOs shall terminate after the passage of 60
days from the date of termination of his employment, but in no event later than
on their specified expiration dates except to the extent that such ISOs (or
unexercised installments thereof) have been converted into Non-Qualified Options
pursuant to paragraph 15. Leave of absence with the written approval of the
Committee shall not be considered an interruption of employment under the Plan,
provided that such written approval contractually obligates the Company or any
Related Corporation to continue the employment of the employee after the
approved period of absence. Employment shall also be considered as continuing
uninterrupted during any other bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service) provided
that the period of such leave does not exceed 90 days or, if longer, any period
during which such optionee's right to reemployment is guaranteed by statute.
Nothing in the Plan shall be deemed to give any grantee of any option or
Restricted Stock the right to be retained in employment or other service by the
Company or any Related Corporation for any period of time. ISOs granted under
the Plan shall not be affected by any change of employment within or among the
Company and Related Corporations, so long as the optionee continues to be an
employee of the Company or any Related Corporation. In granting any
Non-Qualified option, the Committee may specify that such Non-Qualified Option
shall be subject to the restrictions set forth herein with respect to ISOs, or
to such other termination or cancellation provisions as the Committee may
determine.
<PAGE> 6
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10. DEATH; DISABILITY; DISSOLUTION. If an optionee ceases to be
employed by the Company and all Related Corporations by reason of his death, any
Option of his may be exercised, to the extent of the number of shares with
respect to which he could have exercised it on the date of his death, by his
estate, personal representative or beneficiary who has acquired the option by
will or by the laws of descent and distribution, at any time prior to the
earlier of the Option's specified expiration date or 180 days from the date of
the optionee's death.
If an optionee ceases to be employed by the Company and all Related
Corporations by reason of his disability, he shall have the right to exercise
any Option held by him on the date of termination of employment, to the extent
of the number of shares with respect to which he could have exercised it on that
date, at any time prior to the earlier of the option's specified expiration date
or 180 days from the date of the termination of the optionee's employment. For
the purposes of the Plan, the term "disability" shall have the meaning assigned
to it in Section 22(e)(3) of the Code or any successor statute.
In the case of a partnership, corporation or other entity holding a
Non-Qualified Option, if such entity is dissolved, liquidated, becomes insolvent
or enters into a merger or acquisition with respect to which such optionee is
not the surviving entity, such Option shall terminate immediately.
11. ASSIGNABILITY. No Option shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the Optionee each Option shall be exercisable only by him.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including transfer and repurchase restrictions applicable to
shares of Common Stock issuable upon exercise of Options. The Committee may from
time to time confer authority and responsibility on one or more of its own
members and/or one or more officers of the Company to execute and deliver such
instruments. The proper officers of the Company are authorized and directed to
take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
<PAGE> 7
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13. ADJUSTMENTS. Upon the happening of any of the following described
events, an optionee's rights with respect to Options granted to him hereunder
shall be adjusted as hereinafter provided:
(a) Subject to any contrary provision contained in any instrument
evidencing an option, in the event shares of Common Stock shall be sub-divided
or combined into a greater or smaller number of shares or if, upon a merger,
consolidation, reorganization, split-up, liquidation, combination,
recapitalization or the like of the Company, the shares of Common Stock shall be
exchanged for other securities of the Company or of another corporation, each
optionee shall be entitled, subject to the conditions herein stated, to purchase
such number of shares of common stock or amount of other securities of the
Company or such other corporation as were exchangeable for the number of shares
of Common Stock which such optionee would have been entitled to purchase except
for such action, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination, or exchange.
(b) In the event the Company shall issue any of its shares as a stock
dividend upon or with respect to the shares of stock of the class which shall at
the time be subject to option hereunder, each optionee upon exercising an Option
shall be entitled to receive (for the purchase price paid upon such exercise)
the shares as to which he is exercising his Option and, in addition thereto (at
no additional cost), such number of shares of the class or classes in which such
stock dividend or dividends were declared or paid, and such amount of cash in
lieu of fractional shares, as he would have received if he had been the holder
of the shares as to which he is exercising his option at all times between the
date of grant of such Option and the date of its exercise.
(c) Notwithstanding the foregoing, any adjustments made pursuant to
subparagraph (a) or (b) shall be made only after the Committee, after consulting
with counsel for the Company, determines whether such adjustments with respect
to ISOs will constitute a "modification" of such ISOs as that term is defined in
Section 424 of the Code, or cause any adverse tax consequences for the holders
of such ISOs. No adjustments shall be made for dividends paid in cash or in
property other than securities of the Company.
(d) No fractional shares shall actually be issued under the Plan. Any
fractional shares which, but for this subparagraph (d), would have been issued
to an optionee pursuant to an Option, shall be deemed to have
<PAGE> 8
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been issued and immediately sold to the Company for their fair market value, and
the optionee shall receive from the Company cash in lieu of such fractional
shares.
(e) Upon the happening of any of the foregoing events described in
subparagraphs (a) or (b) above, the class and aggregate number of shares set
forth in paragraph 4 hereof which are subject to options which previously have
been or subsequently may be granted under the Plan shall also be appropriately
adjusted to reflect the events specified in such subparagraphs. The Committee
shall determine the specific adjustments to be made under this paragraph 13, and
subject to paragraph 2, its determination shall be conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address. Such notice shall identify the option being exercised
and specify the number of shares as to which such Option is being exercised,
accompanied by full payment of the purchase price therefor either (i) in United
States dollars in cash or by check, or (ii) at the discretion of the Committee,
through delivery of shares of Common Stock having fair market value equal as of
the date of the exercise to the cash exercise price of the Option, or (iii) at
the discretion of the Committee, by delivery of the optionee's personal recourse
note bearing interest payable not less than annually at no less than 100% of the
lowest applicable Federal rate, as defined in Section 1274(d) of the Code, or
(iv) at the discretion of the Committee, by any combination of (i), (ii) and
(iii) above. The holder of an Option shall not have the rights of a shareholder
with respect to the shares covered by his option until the date of issuance of a
stock certificate to him for such shares. Except as expressly provided above in
paragraph 13 with respect to change in capitalization and stock dividends, no
adjustment shall be made for dividends or similar rights for which the record
date is before the date such stock certificates is issued.
15. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS: TERMINATION OF ISOs.
The Committee, at the written request of any optionee, may in its discretion
take such actions as may be necessary to convert such optionee's ISOs (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior to the
expiration of such ISOs, regardless of whether the optionee is an employee of
the Company or a Related Corporation at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of the appropriate installments of such Options. At
the time of such conversion, the Committee (with the consent of the optionee)
may impose
<PAGE> 9
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such conditions on the exercise of the resulting Non-Qualified Options as the
Committee in its discretion may determine, provided that such conditions shall
not be inconsistent with the Plan. Nothing in the Plan shall be deemed to give
any optionee the right to have such optionee's ISOs converted into Non-Qualified
Options, and no such conversion shall occur until and unless the Committee takes
appropriate action. The Committee, with the consent of the optionee, may also
terminate any portion of any ISO that has not been exercised at the time of such
termination.
16. RESTRICTED STOCK. Each grant of Restricted Stock under the Plan
shall be evidenced by an instrument (a "Restricted Stock Agreement") in such
form as the Committee shall prescribe from time to time in accordance with the
Plan and shall comply with the following terms and conditions, and with such
other terms and conditions as the Committee, in its discretion, shall establish:
(a) The Committee shall determine the number of shares of Common Stock
to be issued to an eligible person pursuant to the grant of Restricted Stock,
and the extent, if any, to which they shall be issued in exchange for cash,
other consideration, or both.
(b) Shares issued pursuant to a grant of Restricted Stock may not be
sold, assigned, transferred, pledged or otherwise disposed of, except by will or
the laws of descent and distribution, or as otherwise determined by the
Committee in the Restricted Stock Agreement, for such period as the Committee
shall determine, from the date on which the Restricted Stock is granted (the
"Restricted Period"). The Company will have the option to repurchase the Common
Stock at such price as the Committee shall have fixed in the Restricted Stock
Agreement which option will be exercisable (i) if the participant's continuous
employment or performance of services for the Company and the Related
Corporations shall terminate prior to the expiration of the Restricted Period,
(ii) if, on or prior to the expiration of the Restricted Period or the earlier
lapse of such repurchase option, the participant has not paid to the Company an
amount equal to any federal, state, local or foreign income or other taxes which
the Company determines is required to be withheld in respect of such Restricted
Stock, or (iii) under such other circumstances as determined by the Committee in
its discretion. Such repurchase option shall be exercisable on such terms, in
such manner and during such period as shall be determined by the Committee in
the Restricted Stock Agreement. Each certificate for shares issued as Restricted
Stock shall bear an appropriate legend referring to the foregoing repurchase
option and other restrictions; shall be deposited by the stockholder with the
Company, together with a
<PAGE> 10
-10-
stock power endorsed in blank; or shall be evidenced in such other manner
permitted by applicable law as determined by the Committee in its discretion.
Any attempt to dispose of any such shares in contravention of the foregoing
repurchase option and other restrictions shall be null and void and without
effect. If shares issued as Restricted Stock shall be repurchased pursuant to
the repurchase option described above, the stockholder, or in the event of his
death, his estate, personal representative, or beneficiary who has acquired the
Restricted Stock by will or by the laws of descent and distribution, shall
forthwith deliver to the Secretary of the Company the certificates for the
shares, accompanied by such instrument of transfer, if any, as may reasonably be
required by the Secretary of the Company. If the repurchase option described
above is not exercised by the Company, such repurchase option and the
restrictions imposed pursuant to the first sentence of this subparagraph (b)
shall terminate and be of no further force and effect.
(c) If a person who has been in continuous employment or performance of
services for the Company or a Related Corporation since the date on which
Restricted Stock was granted to him shall, while in such employment or
performance of services, die, or terminate such employment or performance of
services by reason of disability or by reason of early, normal or deferred
retirement under an approved retirement program of the Company or a Related
Corporation (or such other plan or arrangement as may be approved by the
Committee in its discretion, for this purpose) and any of such events shall
occur after the date on which the Restricted Stock was granted to him and prior
to the end of the Restricted Period, the Committee may determine to cancel the
repurchase option (and any and all other restrictions) on any or all of the
shares of Restricted Stock; and the repurchase option shall become exercisable
at such time as to the remaining shares, if any.
17. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
November 14, 1996, subject to approval of the Plan by the holders of a majority
of the outstanding voting stock of the Company. The Plan shall expire on
November 14, 2006 (except as to options and Restricted Stock outstanding on that
date). Subject to the provisions of paragraph 5 above, Options and Restricted
Stock may be granted under the Plan by the Committee, prior to the date of
stockholder approval of the Plan. If the approval of stockholders is not
obtained by November 14, 1997, any grants of options or Restricted Stock under
the Plan made prior to that date will be rescinded. The Board may terminate or
amend the Plan in any respect at any time, except that, any amendment that (a)
increases the total number of shares that may be issued under the Plan (except
by adjustment pursuant to paragraph 13), (b) changes the class of
<PAGE> 11
-11-
persons eligible to participate in the Plan, or (c) materially increases the
benefits to participants under the Plan, shall be subject to approval by
stockholders obtained within 12 months before or after the Board adopts a
resolution authorizing any of the foregoing amendments, and shall be null and
void if such approval is not obtained. Except as provided in the fourth sentence
of this paragraph 17, in no event may action of the Board or stockholders alter
or impair the rights of an optionee or purchaser of Restricted Stock without his
consent, under any Option or Restricted Stock previously granted to him.
18. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options and Restricted Stock authorized under the
Plan shall be used for general corporate purposes.
19. GOVERNMENTAL REGULATION. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares.
20. WITHHOLDING OF ADDITIONAL INCOME TAXES. The Company, in accordance
with the Code, may, upon exercise of a Non-Qualified Option or the purchase of
Common Stock for less than its fair market value or the lapse of restrictions on
Restricted Stock or the making of a Disqualifying Disposition (as defined in
paragraph 21) require the employee to pay additional withholding taxes in
respect of the amount that is considered compensation includable in such
person's gross income.
21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee who
receives ISOs shall agree to notify the Company in writing immediately after the
employee makes a disqualifying disposition of any Common Stock received pursuant
to the exercise of an ISO (a "Disqualifying Disposition"). Disqualifying
Disposition means any disposition (including any sale) of such stock before the
later of (a) two years after the employee was granted the ISO under which he
acquired such stock, or (b) one year after the employee acquired such stock by
exercising such ISO. If the employee has died before such stock is sold, these
holding period requirements do not apply and no Disqualifying Disposition will
thereafter occur.
22. GOVERNING LAWS; CONSTRUCTION. The validity and construction of the
Plan and the instruments evidencing options and Restricted Stock shall be
governed by the laws of the State of Nebraska. In construing this Plan, the
singular shall include the plural and the masculine gender shall include the
feminine and neuter, unless the context otherwise requires.
<PAGE> 12
EXCHANGE APPLICATIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
[STANDARD FORM]
INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") by and between
Exchange Applications, Inc., a Delaware corporation (the "Company"), and the
employee of the Company or a subsidiary of the Company (the "Optionee")
specified in Schedule A appended to this Agreement ("Schedule A").
WHEREAS, the Company maintains the Exchange Applications, Inc. 1996
Stock Incentive Plan (the "Plan"); and
WHEREAS, the Optionee renders important services to the Company or a
subsidiary of the Company, and the Company desires to grant a stock option to
the Optionee; and
WHEREAS, the Board of Directors of the Company (the "Board") or the
Compensation Committee of the Board (the "Committee"), acting pursuant to the
Plan, has authorized the grant of this Incentive Stock Option to the Optionee
subject to the terms and conditions of the Plan and the additional terms and
conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Optionee hereby agree as
follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee, and the
Optionee hereby accepts, an Incentive Stock Option (the "Option") to purchase
from the Company that number of shares of the Company's Common Stock (the
"Shares"), specified in Schedule A. This Agreement and the Option hereby granted
to the Optionee are subject to all of the terms and conditions of the Plan which
are incorporated herein by this reference; any term used herein shall have the
meaning assigned thereto in the Plan, unless such term is otherwise specifically
defined herein.
This Option is intended to constitute an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
<PAGE> 13
-2-
2. OPTION PRICE; DATE OF GRANT. This Option may be exercised at the
option price per Share specified in Schedule A, which the Board or Committee has
determined, in accordance with Section 6 of the Plan, is 100% of the fair market
value of a Share on the Date of Grant of this Option. The Date of Grant of this
option is specified in Schedule A.
3. TERM OF OPTION; VESTING AND EMPLOYMENT REQUIREMENTS. This Option
shall expire on the date specified in Schedule A (the "Expiration Date"). This
Option shall be exercisable to the extent of the number of Shares vested as of
the date of exercise, in accordance with the vesting schedule provided in
Schedule A. If exercised in part, the Option may be exercised only once in each
calendar quarter, except with the express written consent of the Company. The
vesting installments provided in Schedule A are cumulative, and this Option will
remain exercisable with respect to all vested but unexercised installments until
the option expires on the Expiration Date, unless the option is sooner
terminated as provided in Section 7 or Section 8 of this Agreement.
4. OTHER CONDITIONS AND LIMITATIONS. The Option shall not be assignable
or transferable by the Optionee otherwise than by will or by the laws of descent
and distribution, and the Option shall be exercisable during the lifetime of the
Optionee by the Optionee only.
5. EXERCISE OF OPTION. Written notice of the exercise of the Option or
any portion thereof shall be given to the Chief Financial Officer of the Company
accompanied by the option price in cash or by check.
6. STOCK DIVIDENDS; STOCK SPLITS; STOCK COMBINATIONS;
RECAPITALIZATIONS. Appropriate adjustment shall be made in the maximum number of
Shares subject to this Option and in the number, kind and option price of Shares
covered by this option to the extent it remains outstanding, to give effect to
any stock dividends, stock splits, stock combinations, recapitalizations and
other similar changes in the capital structure of the Company after the Date of
Grant of this Option, as determined by the Board or Committee in accordance with
Section 13 of the Plan.
7. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. Upon the occurrence of any
of the following events, the Optionee's rights with respect to this option shall
be adjusted as hereinafter provided:
A. ACQUISITION, CONSOLIDATION OR MERGER. If the Company is to
be consolidated with or acquired by another person or entity in a
<PAGE> 14
-3-
merger, sale of stock, sale of all or substantially all of the Company's assets
or otherwise (other than a merger or consolidation of the Company with, or the
sale of all or substantially all of the assets of the Company to, any entity if
50% or more of the aggregate voting power of such entity is held immediately
after such transaction by persons who were stockholders of the Company
immediately prior to such transaction) (an "Acquisition"), the Board or the
Committee or the board of directors of any entity assuming the obligations of
the Company hereunder, shall, as to this Option, either (i) make appropriate
provision for the continuation of this option by substituting on an equitable
basis for the Shares then subject to this Option the consideration payable with
respect to the outstanding shares of Common Stock in connection with the
Acquisition; or (ii) upon written notice to the Optionee, provide that this
Option must be exercised, to the extent exercisable as of the closing of the
Acquisition within a specified number of days of the date of such notice, at the
end of which period this option shall terminate; or (iii) terminate this Option
in exchange for a cash payment equal to the excess of the fair market value of
the Shares subject to this option (to the extent exercisable as of the closing
of the Acquisition) over the exercise price thereof.
B. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than an Acquisition)
pursuant to which securities of the Company or of another corporation are issued
with respect to the outstanding shares of Common Stock, the Optionee upon
exercising this Option shall be entitled to receive for the purchase price paid
upon such exercise the securities he would have received if he had exercised
this option prior to such recapitalization or reorganization.
C. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, this Option will terminate
immediately prior to the consummation of such proposed action or at such other
time and subject to such other conditions as shall be determined by the Board or
the Committee.
D. ISSUANCES OF SECURITIES. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to this Option. No adjustments shall be made for dividends
paid in cash or in property other than securities of the Company.
<PAGE> 15
-4-
8. TERMINATION OF OPTION. In the event that the Optionee
ceases for any reason to be an employee of the Company, or a subsidiary of the
Company, at a time prior to the exercise of this option in full, this Option
shall terminate in accordance with the following provisions:
(a) if the Optionee's employment shall have been terminated by the
Company involuntarily for cause (as defined below), this Option shall terminate
and may no longer be exercised;
(b) if the Optionee's employment shall have been terminated by the
Company involuntarily and without cause, or by the Optionee by resignation or
other voluntary action, the Optionee may at any time within a period of sixty
(60) days after such termination of employment exercise this Option to the
extent it was exercisable on the date of termination of the Optionee's
employment;
(c) if the Optionee's employment shall have been terminated because of
disability within the meaning specified in the Plan, the Optionee may at any
time within a period of one hundred eighty (180) days after such termination of
employment exercise this Option to the extent that the Option was exercisable on
the date of termination of the Optionee's employment; or
(d) if the Optionee's employment shall have been terminated because of
his death, the Option, to the extent that the Optionee was entitled to exercise
it on the date of death, may be exercised within a period of one hundred eighty
(180) days after the Optionee's death by the person or persons to whom the
Optionee's rights under the option shall pass by will or by the laws of descent
and distribution;
provided, however, that this Option may not be exercised to any extent by anyone
after the Expiration Date. For purposes of this Agreement, "cause" shall mean
termination of the Optionee's employment by the Company because of (i) a
determination by the Board of Directors of the Company that (A) the Optionee has
repeatedly and willfully failed or refused to comply with reasonable and
explicit directives from the Company, or (B) the Optionee has willfully and
repeatedly breached or habitually neglected his material duties or
responsibilities as an employee, (ii) the commission by the Optionee of a felony
or the perpetration by the Optionee of a dishonest act or fraud or (iii) breach
by the Optionee of any obligations under the Non-Disclosure and Developments
Agreement or Non-Competition and Non-Solicitation Agreement, if any, between the
Company and the Optionee.
<PAGE> 16
-5-
9. TAX TREATMENT OF OPTION: NOTICE OF DISPOSITION OF SHARES. Although
this option is intended to constitute an "incentive stock option" within the
meaning of Section 422 of the Code, the Company makes no representations as to
the tax treatment of the Optionee upon the receipt or exercise of this Option or
the sale or other disposition of the Shares issued pursuant to this Option. The
Optionee shall notify the Company within seven (7) days after the date the
Optionee sells or otherwise disposes of any Shares acquired by the exercise of
this option within either (a) two (2) years from the Date of Grant or (b) one
(1) year after the exercise of this Option for such Shares.
10. COMPLIANCE WITH SECURITIES LAWS. The Company shall not be obligated
to sell or issue any Shares pursuant to this Option unless the Shares with
respect to which this Option is being exercised are at that time effectively
registered or exempt from registration under the Securities Act of 1933, as
amended (the "Act"), and any applicable state securities or "blue sky" law
("Blue Sky Law"). In the event Shares or other securities shall be issued which
shall not be so registered, the Optionee hereby represents, warrants and agrees
that he will receive such Shares or other securities for investment and not with
a view to the resale or distribution thereof, and will not transfer such Shares
or other securities unless they are effectively registered for such transfer
under the Act and any applicable Blue Sky Law or unless an opinion of counsel
satisfactory to the Company has been received by the Company to the effect that
such registration is not required. The Optionee further agrees that the stock
certificate or certificates evidencing such Shares may bear a legend setting
forth such restrictions on their transferability.
11. RIGHTS AS A STOCKHOLDER; NO OBLIGATION TO CONTINUE EMPLOYMENT. The
Optionee shall have no rights as a stockholder with respect to the Shares
subject to the Option until the exercise of the option and the issuance of a
stock certificate for the Shares with respect to which the Option shall have
been exercised. Nothing herein contained shall impose any obligation on the
Company or any of its subsidiaries or the Optionee with respect to the
Optionee's continued employment by the Company or any of its subsidiaries.
Nothing herein contained shall impose any obligation upon the Optionee to
exercise the Option.
12. RELATIONSHIP TO PLAN. The Option contained in this Agreement has
been granted pursuant to the Plan, and is in all respects subject to the terms,
conditions and definitions of the Plan, as amended from time to time. The
Optionee hereby accepts this option subject to all the terms and provisions of
the Plan and agrees that all decisions under and interpretations of the Plan by
the Board or Committee shall be final,
<PAGE> 17
-6-
binding and conclusive upon the Optionee and his permitted heirs, executors,
administrators, successors and assigns.
13. RESTRICTIONS ON TRANSFER. Any sale or other disposition of any of
the Shares by the Optionee, other than according to the terms of this Section
13, shall be void and transfer no right, title or interest in or to any of such
Shares to the purported transferee. For purposes of this Section 13, the term
"Shares" shall include all shares of capital stock of the Company held by the
Optionee, whether now owned or hereafter acquired. The Optionee agrees to
present the certificates representing the Shares hereafter acquired by him or
her to the Secretary of the Company and cause the Secretary to stamp on the
certificate in a prominent manner the following legend:
"The sale or other disposition of any of the shares represented by this
certificate is restricted by an Incentive Stock Option Agreement, dated
as of _________, between the holder of this certificate and the issuer.
If the Optionee desires to sell, transfer or otherwise dispose of any of the
Shares, or any interest in such Shares, whether voluntarily or by operation of
law, the Optionee shall first deliver written notice (the "Offer") to the
Company specifying (i) the name and address of the party to which the Optionee
proposes to sell or otherwise dispose of the Shares or an interest in the Shares
(the "Offeror"), (ii) the number of Shares the Optionee proposes to sell or
otherwise dispose of, (iii) the consideration per Share to be delivered to the
Optionee for the proposed sale, transfer, or disposition and (iv) all other
material terms and conditions of the proposed transaction.
Upon receipt of the Offer, the Company shall have an option to purchase any or
all of such Shares specified in the Offer, such option to be exercised by
giving, within 15 days after receipt of the offer, a written counter-notice to
Optionee. If the Company elects to purchase any or all of such Shares in
accordance with this Section 13, it shall be obligated to purchase, and the
Optionee shall be obligated to sell to the Company such Shares at the price and
in accordance with the terms indicated in the offer within 60 days from the date
of receipt by the Company of the Offer. The Optionee may sell any or all of such
Shares which the Company has not so elected to purchase during the 30 days
following the expiration of the Offer Period, PROVIDED that such sale is made to
the Offeror and only pursuant to the terms set forth in the Offer and, PROVIDED,
further, that the purchaser thereof shall have executed a writing satisfactory
to the Company, agreeing that such purchaser shall be subject to the
restrictions
<PAGE> 18
-7-
on transfer set forth in this Section 13. If, however, any or all such Shares
are not sold by the Optionee in accordance with the terms set forth in the offer
within such 30 days, the restrictions on transfer set forth in this Section 13
shall again become applicable to such unsold Shares. The provisions of this
Section 13 shall terminate on (i) the effective date of a registration statement
filed by the Company under the Securities Act of 1933, as amended (the "Act"),
with respect to an underwritten public offering of the Common Stock or (ii) the
closing date of a sale of assets or merger of the Company pursuant to which
shareholders of the Company receive securities of a buyer whose shares are
publicly traded.
14. MISCELLANEOUS. In case any one or more of the provisions or part of
any provision contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of this Agreement,
but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision or part of a provision had never been contained herein.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto, and to their respective heirs, executors, administrators, successors and
assigns. This Agreement shall be governed by and construed and administered in
accordance with the laws of The Commonwealth of Massachusetts.
<PAGE> 19
-8-
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the Date of Grant specified in Schedule A.
EXCHANGE APPLICATIONS, INC.
By: ___________________________________
Title: ________________________________
_______________________________________
Optionee
<PAGE> 20
-9-
EXCHANGE APPLICATIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
---------------------
SCHEDULE A
---------------------
This Schedule A sets forth certain information and provisions referred
to in the Incentive Stock Option Agreement to which this Schedule A is appended.
1. The Optionee is ________________________________________.
2. The number of option Shares is __________________________.
3. The option price per Share for such option Shares is $ ____________.
4. The Date of Grant of the Option is ________________________________.
5. The Expiration Date of the Option is [ten years from date of grant].
6. The Option shall become exercisable by the Optionee as follows:
[INSERT VESTING SCHEDULE].
<PAGE> 21
EXCHANGE APPLICATIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
[EXECUTIVE FORM]
INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") by and between
Exchange Applications, Inc., a Delaware corporation (the "Company"), and the
employee of the Company or a subsidiary of the Company (the "Optionee")
specified in Schedule A appended to this Agreement ("Schedule A").
WHEREAS, the Company maintains the Exchange Applications, Inc. 1996
Stock Incentive Plan (the "Plan"); and
WHEREAS, the Optionee renders important services to the Company or a
subsidiary of the Company, and the Company desires to grant a stock option to
the Optionee; and
WHEREAS, the Board of Directors of the Company (the "Board") or the
Compensation Committee of the Board (the "Committee"), acting pursuant to the
Plan, has authorized the grant of this Incentive Stock Option to the Optionee
subject to the terms and conditions of the Plan and the additional terms and
conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Optionee hereby agree as
follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee, and the
Optionee hereby accepts, an Incentive Stock Option (the "Option") to purchase
from the Company that number of shares of the Company's Common Stock (the
"Shares"), specified in Schedule A. This Agreement and the Option hereby granted
to the Optionee are subject to all of the terms and conditions of the Plan which
are incorporated herein by this reference; any term used herein shall have the
meaning assigned thereto in the Plan, unless such term is otherwise specifically
defined herein.
This Option is intended to constitute an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
<PAGE> 22
-2-
2. OPTION PRICE; DATE OF GRANT. This Option may be exercised at the
option price per Share specified in Schedule A, which the Board or Committee has
determined, in accordance with Section 6 of the Plan, is 100% of the fair market
value of a Share on the Date of Grant of this Option. The Date of Grant of this
option is specified in Schedule A.
3. TERM OF OPTION; VESTING AND EMPLOYMENT REQUIREMENTS. This Option
shall expire on the date specified in Schedule A (the "Expiration Date"). This
Option shall be exercisable to the extent of the number of Shares vested as of
the date of exercise, in accordance with the vesting schedule provided in
Schedule A. If exercised in part, the Option may be exercised only once in each
calendar quarter, except with the express written consent of the Company. The
vesting installments provided in Schedule A are cumulative, and this Option will
remain exercisable with respect to all vested but unexercised installments until
the option expires on the Expiration Date, unless the option is sooner
terminated as provided in Section 7 or Section 8 of this Agreement.
Notwithstanding anything to the contrary set forth herein, all unvested
installments shall become immediately vested immediately prior to the closing of
any Acquisition (as defined in Section 7A below); PROVIDED, that (i) the Option
shall not have otherwise terminated pursuant to the terms hereof prior to the
closing of such Acquisition, and (ii) the Optionee's employment shall not have
been terminated (whether voluntarily or involuntarily, with or without cause)
prior to the closing of such Acquisition.
4. OTHER CONDITIONS AND LIMITATIONS. The Option shall not be assignable
or transferable by the Optionee otherwise than by will or by the laws of descent
and distribution, and the Option shall be exercisable during the lifetime of the
Optionee by the Optionee only.
5. EXERCISE OF OPTION. Written notice of the exercise of the Option or
any portion thereof shall be given to the Chief Financial Officer of the Company
accompanied by the option price in cash or by check.
6. STOCK DIVIDENDS; STOCK SPLITS; STOCK COMBINATIONS;
RECAPITALIZATIONS. Appropriate adjustment shall be made in the maximum number of
Shares subject to this Option and in the number, kind and option price of Shares
covered by this option to the extent it remains outstanding, to give effect to
any stock dividends, stock splits, stock combinations, recapitalizations and
other similar changes in the capital structure of the Company after the Date of
Grant of this Option, as
<PAGE> 23
-3-
determined by the Board or Committee in accordance with Section 13 of the Plan.
7. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. Upon the occurrence of any
of the following events, the Optionee's rights with respect to this option shall
be adjusted as hereinafter provided:
A. ACQUISITION, CONSOLIDATION OR MERGER. If the Company is to
be consolidated with or acquired by another person or entity in a merger, sale
of stock, sale of all or substantially all of the Company's assets or otherwise
(other than a merger or consolidation of the Company with, or the sale of all or
substantially all of the assets of the Company to, any entity if 50% or more of
the aggregate voting power of such entity is held immediately after such
transaction by persons who were stockholders of the Company immediately prior to
such transaction) (an "Acquisition"), the Board or the Committee or the board of
directors of any entity assuming the obligations of the Company hereunder,
shall, as to this Option, either (i) make appropriate provision for the
continuation of this option by substituting on an equitable basis for the Shares
then subject to this Option the consideration payable with respect to the
outstanding shares of Common Stock in connection with the Acquisition; or (ii)
upon written notice to the Optionee, provide that this Option must be exercised,
to the extent exercisable as of the closing of the Acquisition (assuming for
this purpose the acceleration of the vesting schedule contemplated by the last
sentence of Section 3) within a specified number of days of the date of such
notice, at the end of which period this option shall terminate; or (iii)
terminate this Option in exchange for a cash payment equal to the excess of the
fair market value of the Shares subject to this option (to the extent
exercisable as of the closing of the Acquisition) over the exercise price
thereof (assuming for this purpose the acceleration of the vesting schedule
contemplated by the last sentence of Section 3).
B. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than an Acquisition)
pursuant to which securities of the Company or of another corporation are issued
with respect to the outstanding shares of Common Stock, the Optionee upon
exercising this Option shall be entitled to receive for the purchase price paid
upon such exercise the securities he would have received if he had exercised
this option prior to such recapitalization or reorganization.
C. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, this Option will terminate
immediately prior to the consummation of such proposed action
<PAGE> 24
-4-
or at such other time and subject to such other conditions as shall be
determined by the Board or the Committee.
D. ISSUANCES OF SECURITIES. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to this Option. No adjustments shall be made for dividends
paid in cash or in property other than securities of the Company.
8. TERMINATION OF OPTION. In the event that the Optionee ceases for
any reason to be an employee of the Company, or a subsidiary of the Company, at
a time prior to the exercise of this option in full, this Option shall
terminate in accordance with the following provisions:
(a) if the Optionee's employment shall have been terminated by the
Company involuntarily for cause (as defined below), this Option shall terminate
and may no longer be exercised;
(b) if the Optionee's employment shall have been terminated by the
Company involuntarily and without cause, or by the Optionee by resignation or
other voluntary action, the Optionee may at any time within a period of sixty
(60) days after such termination of employment exercise this Option to the
extent it was exercisable on the date of termination of the Optionee's
employment;
(c) if the Optionee's employment shall have been terminated because of
disability within the meaning specified in the Plan, the Optionee may at any
time within a period of one hundred eighty (180) days after such termination of
employment exercise this Option to the extent that the Option was exercisable on
the date of termination of the Optionee's employment; or
(d) if the Optionee's employment shall have been terminated because of
his death, the Option, to the extent that the Optionee was entitled to exercise
it on the date of death, may be exercised within a period of one hundred eighty
(180) days after the Optionee's death by the person or persons to whom the
Optionee's rights under the option shall pass by will or by the laws of descent
and distribution;
provided, however, that this Option may not be exercised to any extent by anyone
after the Expiration Date. For purposes of this Agreement, "cause" shall mean
termination of the Optionee's employment by the
<PAGE> 25
-5-
Company because of (i) a determination by the Board of Directors of the Company
that (A) the Optionee has repeatedly and willfully failed or refused to comply
with reasonable and explicit directives from the Company, or (B) the Optionee
has willfully and repeatedly breached or habitually neglected his material
duties or responsibilities as an employee, (ii) the commission by the Optionee
of a felony or the perpetration by the Optionee of a dishonest act or fraud or
(iii) breach by the Optionee of any obligations under the Non-Disclosure and
Developments Agreement or Non-Competition and Non-Solicitation Agreement, if
any, between the Company and the Optionee.
9. TAX TREATMENT OF OPTION: NOTICE OF DISPOSITION OF SHARES. Although
this option is intended to constitute an "incentive stock option" within the
meaning of Section 422 of the Code, the Company makes no representations as to
the tax treatment of the Optionee upon the receipt or exercise of this Option or
the sale or other disposition of the Shares issued pursuant to this Option. The
Optionee shall notify the Company within seven (7) days after the date the
Optionee sells or otherwise disposes of any Shares acquired by the exercise of
this option within either (a) two (2) years from the Date of Grant or (b) one
(1) year after the exercise of this Option for such Shares.
10. COMPLIANCE WITH SECURITIES LAWS. The Company shall not be obligated
to sell or issue any Shares pursuant to this Option unless the Shares with
respect to which this Option is being exercised are at that time effectively
registered or exempt from registration under the Securities Act of 1933, as
amended (the "Act"), and any applicable state securities or "blue sky" law
("Blue Sky Law"). In the event Shares or other securities shall be issued which
shall not be so registered, the Optionee hereby represents, warrants and agrees
that he will receive such Shares or other securities for investment and not with
a view to the resale or distribution thereof, and will not transfer such Shares
or other securities unless they are effectively registered for such transfer
under the Act and any applicable Blue Sky Law or unless an opinion of counsel
satisfactory to the Company has been received by the Company to the effect that
such registration is not required. The Optionee further agrees that the stock
certificate or certificates evidencing such Shares may bear a legend setting
forth such restrictions on their transferability.
11. RIGHTS AS A STOCKHOLDER; NO OBLIGATION TO CONTINUE EMPLOYMENT. The
Optionee shall have no rights as a stockholder with respect to the Shares
subject to the Option until the exercise of the option and the issuance of a
stock certificate for the Shares with respect to which the Option shall have
been exercised. Nothing herein contained shall
<PAGE> 26
-6-
impose any obligation on the Company or any of its subsidiaries or the Optionee
with respect to the Optionee's continued employment by the Company or any of its
subsidiaries. Nothing herein contained shall impose any obligation upon the
Optionee to exercise the Option.
12. RELATIONSHIP TO PLAN. The Option contained in this Agreement has
been granted pursuant to the Plan, and is in all respects subject to the terms,
conditions and definitions of the Plan, as amended from time to time. The
Optionee hereby accepts this option subject to all the terms and provisions of
the Plan and agrees that all decisions under and interpretations of the Plan by
the Board or Committee shall be final, binding and conclusive upon the Optionee
and his permitted heirs, executors, administrators, successors and assigns.
13. RESTRICTIONS ON TRANSFER. Any sale or other disposition of any of
the Shares by the Optionee, other than according to the terms of this Section
13, shall be void and transfer no right, title or interest in or to any of such
Shares to the purported transferee. For purposes of this Section 13, the term
"Shares" shall include all shares of capital stock of the Company held by the
Optionee, whether now owned or hereafter acquired. The Optionee agrees to
present the certificates representing the Shares hereafter acquired by him or
her to the Secretary of the Company and cause the Secretary to stamp on the
certificate in a prominent manner the following legend:
"The sale or other disposition of any of the shares represented by this
certificate is restricted by an Incentive Stock Option Agreement, dated
as of _________, between the holder of this certificate and the issuer.
If the Optionee desires to sell, transfer or otherwise dispose of any of the
Shares, or any interest in such Shares, whether voluntarily or by operation of
law, the Optionee shall first deliver written notice (the "Offer") to the
Company specifying (i) the name and address of the party to which the Optionee
proposes to sell or otherwise dispose of the Shares or an interest in the Shares
(the "Offeror"), (ii) the number of Shares the Optionee proposes to sell or
otherwise dispose of, (iii) the consideration per Share to be delivered to the
Optionee for the proposed sale, transfer, or disposition and (iv) all other
material terms and conditions of the proposed transaction.
Upon receipt of the Offer, the Company shall have an option to purchase any or
all of such Shares specified in the Offer, such option to be exercised by
giving, within 15 days after receipt of the offer, a written counter-
<PAGE> 27
-7-
notice to Optionee. If the Company elects to purchase any or all of such Shares
in accordance with this Section 13, it shall be obligated to purchase, and the
Optionee shall be obligated to sell to the Company such Shares at the price and
in accordance with the terms indicated in the offer within 60 days from the date
of receipt by the Company of the Offer. The Optionee may sell any or all of such
Shares which the Company has not so elected to purchase during the 30 days
following the expiration of the Offer Period, PROVIDED that such sale is made to
the Offeror and only pursuant to the terms set forth in the Offer and, PROVIDED,
further, that the purchaser thereof shall have executed a writing satisfactory
to the Company, agreeing that such purchaser shall be subject to the
restrictions on transfer set forth in this Section 13. If, however, any or all
such Shares are not sold by the Optionee in accordance with the terms set forth
in the offer within such 30 days, the restrictions on transfer set forth in this
Section 13 shall again become applicable to such unsold Shares. The provisions
of this Section 13 shall terminate on (i) the effective date of a registration
statement filed by the Company under the Securities Act of 1933, as amended (the
"Act"), with respect to an underwritten public offering of the Common Stock or
(ii) the closing date of a sale of assets or merger of the Company pursuant to
which shareholders of the Company receive securities of a buyer whose shares are
publicly traded.
14. MISCELLANEOUS. In case any one or more of the provisions or part of
any provision contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of this Agreement,
but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision or part of a provision had never been contained herein.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto, and to their respective heirs, executors, administrators, successors and
assigns. This Agreement shall be governed by and construed and administered in
accordance with the laws of The Commonwealth of Massachusetts.
<PAGE> 28
-8-
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the Date of Grant specified in Schedule A.
EXCHANGE APPLICATIONS, INC.
By: ___________________________________
Title: ________________________________
_______________________________________
Optionee
<PAGE> 29
-9-
EXCHANGE APPLICATIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
---------------------
SCHEDULE A
---------------------
This Schedule A sets forth certain information and provisions referred
to in the Incentive Stock Option Agreement to which this Schedule A is appended.
1. The Optionee is __________________________________________.
2. The number of option Shares is ____________________________.
3. The option price per Share for such option Shares is $ ____________.
4. The Date of Grant of the Option is _________________________.
5. The Expiration Date of the Option is [ten years from date of grant].
6. The Option shall become exercisable by the Optionee as follows:
[INSERT VESTING SCHEDULE].
<PAGE> 30
EXCHANGE APPLICATIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
[PERFORMANCE BASED OPTIONS FORM]
INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") by and between
Exchange Applications, Inc., a Delaware corporation (the "Company"), and the
employee of the Company or a subsidiary of the Company (the "Optionee")
specified in Schedule A appended to this Agreement ("Schedule A").
WHEREAS, the Company maintains the Exchange Applications, Inc. 1996
Stock Incentive Plan (the "Plan"); and
WHEREAS, the Optionee renders important services to the Company or a
subsidiary of the Company, and the Company desires to grant a stock option to
the Optionee; and
WHEREAS, the Board of Directors of the Company (the "Board") or the
Compensation Committee of the Board (the "Committee"), acting pursuant to the
Plan, has authorized the grant of this Incentive Stock Option to the Optionee
subject to the terms and conditions of the Plan and the additional terms and
conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Optionee hereby agree as
follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee, and the
Optionee hereby accepts, an Incentive Stock Option (the "Option") to purchase
from the Company that number of shares of the Company's Common Stock (the
"Shares"), specified in Schedule A. This Agreement and the Option hereby granted
to the Optionee are subject to all of the terms and conditions of the Plan which
are incorporated herein by this reference; any term used herein shall have the
meaning assigned thereto in the Plan, unless such term is otherwise specifically
defined herein.
This Option is intended to constitute an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
<PAGE> 31
-2-
2. OPTION PRICE; DATE OF GRANT. This Option may be exercised at the
option price per Share specified in Schedule A, which the Board or Committee has
determined, in accordance with Section 6 of the Plan, is 100% of the fair market
value of a Share on the Date of Grant of this Option. The Date of Grant of this
option is specified in Schedule A.
3. TERM OF OPTION; VESTING AND EMPLOYMENT REQUIREMENTS. This Option
shall expire on the date specified in Schedule A (the "Expiration Date"). This
Option shall be exercisable to the extent of the number of Shares vested as of
the date of exercise, in accordance with the vesting schedule provided in
Schedule A. If exercised in part, the Option may be exercised only once in each
calendar quarter, except with the express written consent of the Company. The
vesting provisions provided in Schedule A are cumulative, and this Option will
remain exercisable with respect to all vested but unexercised amounts until the
Option expires on the Expiration Date, unless the Option is sooner terminated as
provided in Section 7 or Section 8 of this Agreement.
4. OTHER CONDITIONS AND LIMITATIONS. The Option shall not be assignable
or transferable by the Optionee otherwise than by will or by the laws of descent
and distribution, and the Option shall be exercisable during the lifetime of the
Optionee by the Optionee only.
5. EXERCISE OF OPTION. Written notice of the exercise of the Option or
any portion thereof shall be given to the Chief Financial Officer of the Company
accompanied by the option price in cash or by check.
6. STOCK DIVIDENDS; STOCK SPLITS; STOCK COMBINATIONS;
RECAPITALIZATIONS. Appropriate adjustment shall be made in the maximum number of
Shares subject to this Option and in the number, kind and option price of Shares
covered by this option to the extent it remains outstanding, to give effect to
any stock dividends, stock splits, stock combinations, recapitalizations and
other similar changes in the capital structure of the Company after the Date of
Grant of this Option, as determined by the Board or Committee in accordance with
Section 13 of the Plan.
7. CAPITAL CHANGES AND BUSINESS SUCCESSIONS. Upon the occurrence of any
of the following events, the Optionee's rights with respect to this Option shall
be adjusted as hereinafter provided:
A. ACQUISITION, CONSOLIDATION OR MERGER. If the Company is to
be consolidated with or acquired by another person or entity in a merger, sale
of stock, sale of all or substantially all of the Company's assets or otherwise
(other than a merger or consolidation of the Company
<PAGE> 32
-3-
with, or the sale of all or substantially all of the assets of the Company to,
any entity if 50% or more of the aggregate voting power of such entity is held
immediately after such transaction by persons who were stockholders of the
Company immediately prior to such transaction) (an "Acquisition"), the Board or
the Committee or the board of directors of any entity assuming the obligations
of the Company hereunder, shall, as to this Option, either (i) make appropriate
provision for the continuation of this option by substituting on an equitable
basis for the Shares then subject to this Option the consideration payable with
respect to the outstanding shares of Common Stock in connection with the
Acquisition; or (ii) upon written notice to the Optionee, provide that this
Option must be exercised, to the extent exercisable as of the closing of the
Acquisition within a specified number of days of the date of such notice, at the
end of which period this option shall terminate; or (iii) terminate this Option
in exchange for a cash payment equal to the excess of the fair market value of
the Shares subject to this option (to the extent exercisable as of the closing
of the Acquisition) over the exercise price thereof.
B. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than an Acquisition)
pursuant to which securities of the Company or of another corporation are issued
with respect to the outstanding shares of Common Stock, the Optionee upon
exercising this Option shall be entitled to receive for the purchase price paid
upon such exercise the securities he would have received if he had exercised
this option prior to such recapitalization or reorganization.
C. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, this Option will terminate
immediately prior to the consummation of such proposed action or at such other
time and subject to such other conditions as shall be determined by the Board or
the Committee.
D. ISSUANCES OF SECURITIES. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to this Option. No adjustments shall be made for dividends
paid in cash or in property other than securities of the Company.
8. TERMINATION OF OPTION. In the event that the Optionee ceases for any
reason to be an employee of the Company, or a subsidiary of the
<PAGE> 33
-4-
Company, at a time prior to the exercise of this option in full, this Option
shall terminate in accordance with the following provisions:
(a) if the Optionee's employment shall have been terminated by the
Company involuntarily for cause (as defined below), this Option shall terminate
and may no longer be exercised;
(b) if the Optionee's employment shall have been terminated by the
Company involuntarily and without cause, or by the Optionee by resignation or
other voluntary action, the Optionee may at any time within a period of sixty
(60) days after such termination of employment exercise this Option to the
extent it was exercisable on the date of termination of the Optionee's
employment;
(c) if the Optionee's employment shall have been terminated because of
disability within the meaning specified in the Plan, the Optionee may at any
time within a period of one hundred eighty (180) days after such termination of
employment exercise this Option to the extent that the Option was exercisable on
the date of termination of the Optionee's employment; or
(d) if the Optionee's employment shall have been terminated because of
his death, the Option, to the extent that the Optionee was entitled to exercise
it on the date of death, may be exercised within a period of one hundred eighty
(180) days after the Optionee's death by the person or persons to whom the
Optionee's rights under the option shall pass by will or by the laws of descent
and distribution;
provided, however, that this Option may not be exercised to any extent by anyone
after the Expiration Date. For purposes of this Agreement, "cause" shall mean
termination of the Optionee's employment by the Company because of (i) a
determination by the Board of Directors of the Company that (A) the Optionee has
repeatedly and willfully failed or refused to comply with reasonable and
explicit directives from the Company, or (B) the Optionee has willfully and
repeatedly breached or habitually neglected his material duties or
responsibilities as an employee, (ii) the commission by the Optionee of a felony
or the perpetration by the Optionee of a dishonest act or fraud or (iii) breach
by the Optionee of any obligations under the Non-Disclosure and Developments
Agreement or Non-Competition and Non-Solicitation Agreement, if any, between the
Company and the Optionee.
9. TAX TREATMENT OF OPTION: NOTICE OF DISPOSITION OF SHARES. Although
this option is intended to constitute an "incentive stock option" within the
meaning of Section 422 of the Code, the Company makes no
<PAGE> 34
-5-
representations as to the tax treatment of the Optionee upon the receipt or
exercise of this Option or the sale or other disposition of the Shares issued
pursuant to this Option. The Optionee shall notify the Company within seven (7)
days after the date the Optionee sells or otherwise disposes of any Shares
acquired by the exercise of this option within either (a) two (2) years from the
Date of Grant or (b) one (1) year after the exercise of this Option for such
Shares.
10. COMPLIANCE WITH SECURITIES LAWS. The Company shall not be obligated
to sell or issue any Shares pursuant to this Option unless the Shares with
respect to which this Option is being exercised are at that time effectively
registered or exempt from registration under the Securities Act of 1933, as
amended (the "Act"), and any applicable state securities or "blue sky" law
("Blue Sky Law"). In the event Shares or other securities shall be issued which
shall not be so registered, the Optionee hereby represents, warrants and agrees
that he will receive such Shares or other securities for investment and not with
a view to the resale or distribution thereof, and will not transfer such Shares
or other securities unless they are effectively registered for such transfer
under the Act and any applicable Blue Sky Law or unless an opinion of counsel
satisfactory to the Company has been received by the Company to the effect that
such registration is not required. The Optionee further agrees that the stock
certificate or certificates evidencing such Shares may bear a legend setting
forth such restrictions on their transferability.
11. RIGHTS AS A STOCKHOLDER; NO OBLIGATION TO CONTINUE EMPLOYMENT. The
Optionee shall have no rights as a stockholder with respect to the Shares
subject to the Option until the exercise of the option and the issuance of a
stock certificate for the Shares with respect to which the Option shall have
been exercised. Nothing herein contained shall impose any obligation on the
Company or any of its subsidiaries or the Optionee with respect to the
Optionee's continued employment by the Company or any of its subsidiaries.
Nothing herein contained shall impose any obligation upon the Optionee to
exercise the Option.
12. RELATIONSHIP TO PLAN. The Option contained in this Agreement has
been granted pursuant to the Plan, and is in all respects subject to the terms,
conditions and definitions of the Plan, as amended from time to time. The
Optionee hereby accepts this option subject to all the terms and provisions of
the Plan and agrees that all decisions under and interpretations of the Plan by
the Board or Committee shall be final, binding and conclusive upon the Optionee
and his permitted heirs, executors, administrators, successors and assigns.
<PAGE> 35
-6-
13. RESTRICTIONS ON TRANSFER. Any sale or other disposition of any of
the Shares by the Optionee, other than according to the terms of this Section
13, shall be void and transfer no right, title or interest in or to any of such
Shares to the purported transferee. For purposes of this Section 13, the term
"Shares" shall include all shares of capital stock of the Company held by the
Optionee, whether now owned or hereafter acquired. The Optionee agrees to
present the certificates representing the Shares hereafter acquired by him or
her to the Secretary of the Company and cause the Secretary to stamp on the
certificate in a prominent manner the following legend:
"The sale or other disposition of any of the shares represented by this
certificate is restricted by an Incentive Stock Option Agreement, dated
as of __________, between the holder of this certificate and the
issuer.
If the Optionee desires to sell, transfer or otherwise dispose of any of the
Shares, or any interest in such Shares, whether voluntarily or by operation of
law, the Optionee shall first deliver written notice (the "Offer") to the
Company specifying (i) the name and address of the party to which the Optionee
proposes to sell or otherwise dispose of the Shares or an interest in the Shares
(the "Offeror"), (ii) the number of Shares the Optionee proposes to sell or
otherwise dispose of, (iii) the consideration per Share to be delivered to the
Optionee for the proposed sale, transfer, or disposition and (iv) all other
material terms and conditions of the proposed transaction.
Upon receipt of the Offer, the Company shall have an option to purchase
any or all of such Shares specified in the Offer, such option to be exercised by
giving, within 15 days after receipt of the offer, a written counter-notice to
Optionee. If the Company elects to purchase any or all of such Shares in
accordance with this Section 13, it shall be obligated to purchase, and the
Optionee shall be obligated to sell to the Company such Shares at the price and
in accordance with the terms indicated in the offer within 60 days from the date
of receipt by the Company of the Offer. The Optionee may sell any or all of such
Shares which the Company has not so elected to purchase during the 30 days
following the expiration of the Offer Period, PROVIDED that such sale is made to
the Offeror and only pursuant to the terms set forth in the Offer and, PROVIDED,
further, that the purchaser thereof shall have executed a writing satisfactory
to the Company, agreeing that such purchaser shall be subject to the
restrictions on transfer set forth in this Section 13. If, however, any or all
such Shares are not sold by the Optionee in accordance with the terms set forth
in the offer within such 30 days, the restrictions on transfer set forth in
<PAGE> 36
-7-
this Section 13 shall again become applicable to such unsold Shares. The
provisions of this Section 13 shall terminate on (i) the effective date of a
registration statement filed by the Company under the Securities Act of 1933, as
amended (the "Act"), with respect to an underwritten public offering of the
Common Stock or (ii) the closing date of a sale of assets or merger of the
Company pursuant to which shareholders of the Company receive securities of a
buyer whose shares are publicly traded.
14. MISCELLANEOUS. In case any one or more of the provisions or part of
any provision contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of this Agreement,
but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision or part of a provision had never been contained herein.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto, and to their respective heirs, executors, administrators, successors and
assigns. This Agreement shall be governed by and construed and administered in
accordance with the laws of The Commonwealth of Massachusetts.
<PAGE> 37
-8-
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the Date of Grant specified in Schedule A.
EXCHANGE APPLICATIONS, INC.
By: _____________________________________
Title: __________________________________
_________________________________________
Optionee
<PAGE> 38
-9-
EXCHANGE APPLICATIONS, INC.
INCENTIVE STOCK OPTION AGREEMENT
--------------------------
SCHEDULE A
--------------------------
This Schedule A sets forth certain information and provisions referred
to in the Incentive Stock Option Agreement to which this Schedule A is appended.
1. The Optionee is ____________________________________________.
2. The number of option Shares is ______________________________.
3. The option price per Share for such option Shares is $_____________.
4. The Date of Grant of the Option is ______________________________.
5. The Expiration Date of the Option is [ten years from date of grant].
6. The Option shall become exercisable by the Optionee as follows:
a. All shares governed by the Option shall be vested as
of the ninth anniversary of the Date of Grant.
b. Vesting of 25% of the original number of Shares
governed by the Option may be accelerated and may
become exercisable upon December 31 of any calendar
year, commencing December 31, 1998, upon satisfaction
of Performance Criteria for such calendar year. The
"Performance Criteria" for any calendar year may (at
the discretion of the Board of Directors and the
Chief Executive Officer) be determined for such
calendar year by the Chief Executive Officer and the
Board of Directors on or prior to January 31 of such
calendar year. In the absence of such a determination
and receipt by Optionee of written confirmation of
such determination on or prior to January 31 of any
calendar year, there shall be no Performance Criteria
for that calendar year, and, consequently, there
shall be no
<PAGE> 39
-10-
acceleration of the vesting of any Shares during such
calendar year.
<PAGE> 40
FORM
----
EXCHANGE APPLICATIONS, INC.
EMPLOYEE RESTRICTED STOCK AGREEMENT
EMPLOYEE RESTRICTED STOCK AGREEMENT (this "Agreement"), dated as of
November 15, 1996, by and between EXCHANGE APPLICATIONS, INC., a Delaware
corporation (the "Company"), and _________ (the "Employee") .
W I T N E S S E T H:
WHEREAS, the Company maintains the Exchange Applications, Inc. 1996
Stock Incentive Plan (the "Plan"); and
WHEREAS, the Employee has, since _______________ (the "Date of Hire"),
been an employee of the Company or its predecessor, and the Company intends by
this Agreement to grant the Employee a Restricted Stock Award entitling the
Employee to purchase Common Stock of the Company as authorized by the Plan; and
WHEREAS, the Board of Directors of the Company, acting pursuant to the
Plan, has authorized the grant of this Restricted Stock Award, subject to the
terms of this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Employee hereby agree as
follows:
1. RELATIONSHIP TO PLAN; DEFINED TERMS. This Agreement and the
Restricted Stock Award authorized hereby are subject to all of the terms and
conditions of the Plan, as amended from time to time, which are incorporated
herein by this reference.
2. PURCHASE OF STOCK. The Employee hereby agrees to purchase from the
Company, and the Company hereby agrees to sell to the Employee, on the date
hereof _____________ shares of the Company's Common Stock, $.001 par value per
share (the "Stock"), for a purchase price of $.001 per share of Stock (the
"Issue Price").
<PAGE> 41
-2-
3. PURCHASE OPTIONS. All Stock purchased by the Employee pursuant to
the terms of this Agreement shall be subject to the options of the Company with
respect to the purchase thereof under circumstances set forth in this Section 3.
(a) If the Employee ceases to provide services to the Company either as
a consultant or employee for any reason (including without limitation because of
the Employee's death, disability, retirement or termination by the Company with
or without Cause (as defined below)) at any time prior to the third anniversary
of the Date of Hire, the Company shall have the right, within 60 days after the
date of any such termination, to exercise an option to purchase (the "Purchase
Option") up to the maximum portion of the Stock determined according to the
following table:
<TABLE>
<CAPTION>
If Termination of Employment Portion of the Stock Subject
Occurs: To the Purchase Option:
- ---------------------------- ----------------------------
<S> <C>
Within one year from the Date
of Hire: 75%
From (and including) the first
anniversary of the Date of Hire
to (but excluding) the second
anniversary of the Date of Hire: 50%
From (and including) the second
anniversary of the Date of Hire
to (but excluding) the third
anniversary of the Date of Hire: 25%
On and after the third anniversary
of the Date of Hire: None
</TABLE>
(b) If, at any time, the Employee ceases to provide services to the
Company either as a consultant or employee for any reason (including without
limitation because of the Employee's death, disability or retirement), except
termination by the Company without Cause, the Company shall have the right
within 60 days after the date of any such termination, to exercise an option to
purchase (the "Additional Purchase Option") up to all of the Vested Stock (as
defined below). For purposes hereof, "Cause" shall mean termination of the
Employee's employment by the Company because of (i) the Company's good faith
determination that the Employee has failed to perform any of his duties, (ii)
the commission by the Employee of a felony or the perpetration by the Employee
of a dishonest act or fraud or (iii) any breach by the Employee of an obligation
<PAGE> 42
-3-
under the employment agreement, if any, between the Company and the Employee.
(c) The Purchase Option shall be exercisable by the Company at a price
per share of Stock equal to the lesser of the Issue Price or the fair market
value of the Stock of the Employee, as determined by the Board of Directors in
good faith after taking into account all relevant considerations, including the
options set forth herein (the "Fair Market Value"). The Additional Purchase
Option shall be exercisable by the Company at a price per share equal to the
Fair Market Value. The Company may assign any or all of its rights to exercise a
Purchase Option and/or Additional Purchase Option under this Section 3. If the
Company (or its assignee) shall fail to exercise the Purchase Option with
respect to any part or all of the Stock subject thereto, such Stock may
thereafter be held and transferred by the Employee (or other holder thereof),
subject, however, to any transfer or purchase restrictions applicable thereto
pursuant to the Company's charter or by-laws or any other agreement relating to
the Stock or applicable law. Stock not subject to the Purchase option is herein
referred to as "Vested Stock."
(d) Notwithstanding anything to the contrary in this Agreement, in the
event of a "Change of Control", all Stock held by the Employee that has been
issued under this Agreement, and all securities issued in respect thereof, shall
be deemed Vested Stock and the Purchase Option and Additional Purchase Option
shall immediately terminate and be of no further force and effect. A "Change of
Control" shall mean (i) the direct or indirect acquisition by any person of 50%
or more of the aggregate voting power of the Company or (ii) the sale of all or
substantially all of the assets of the Company (other than a merger or
consolidation of the Company with, or the sale of all or substantially all of
the assets of the Company to, any entity if 50% or more of the aggregate voting
power of such entity is held immediately after such transaction by persons who
were stockholders of the Company immediately prior to such transaction).
4. RESTRICTIONS ON TRANSFER. The Employee shall not sell, transfer,
pledge, hypothecate or otherwise dispose of or encumber (other than to the
Company pursuant to Section 3 above) any of the Stock that is not Vested Stock.
Notwithstanding the foregoing, the Employee may transfer all or any of the Stock
to any member of his immediate family (as defined below) or to any trust for the
benefit of such family member or the Employee, PROVIDED that such transferee
shall agree with the Company in writing, as a condition to such transfer, to be
bound by all of the provisions of this Agreement, and PROVIDED, FURTHER, that
the Employee's employment (rather than an employment of such transferee) shall
<PAGE> 43
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continue to govern for purposes of Section 3. The term "immediate family" shall
mean any parent, spouse, lineal descendant, brother or sister of the Employee.
5. MANNER OF EXERCISE. The Purchase Option and Additional Purchase
Option shall each be exercised by written notice signed by an officer of the
Company and delivered or mailed to the Employee (or to his personal
representative if the Employee is deceased) as provided in Section 14 (a) below.
The price for the Stock upon exercise of the Purchase Option or Additional
Purchase option, as the case may be, shall be payable, at the option of the
Company, by cancellation of all or a portion of any outstanding indebtedness of
the Employee to the Company or in cash (by check), or both.
6. APPLICATION TO OTHER PROPERTY. If from time to time during the term
of this Agreement, there is any stock dividend or liquidating dividend of cash
and/or property, stock split or other change in the character or amount of any
of the outstanding securities of the Company, or if there is any consolidation,
merger or sale of all, or substantially all, of the assets of the Company, then,
in any such event, any and all new, substituted or additional securities or
other property to which the Employee is entitled by reason of his ownership of
any Stock which then remains subject to the Purchase option and/or the
Additional Purchase Option in Section 3 above shall be immediately subject to
the Purchase Option and/or the Additional Purchase Option, as the case may be,
and shall be included in the word "Stock" for all purposes of the Purchase
Option and Additional Purchase Option with the same force and effect as the
Stock which then remains subject to the Purchase Option and Additional Purchase
Option in Section 3 above. While the total Issue Price for such Stock shall
remain the same after each such event, the Issue Price per unit of Stock (or
substituted or additional property) upon exercise of the Purchase Option or
Additional Purchase Option, as the case may be, shall be appropriately adjusted.
7. INVESTMENT REPRESENTATIONS; TRANSFER LEGENDS.
(a) In connection with his purchase of the Stock, the Employee hereby
represents and warrants to the Company as follows:
(i) The Employee is purchasing the Stock solely for his own
account for investment and not with a view to or for sale in connection with any
distribution of the Stock or any portion thereof and not with any present
intention of selling, offering to sell or otherwise disposing of or distributing
the Stock or any portion thereof in any
<PAGE> 44
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transaction other than a transaction exempt from registration under the Act. The
Employee also represents that the entire legal and beneficial interest of the
Stock is being purchased, and will be held, for the Employee's account only, and
neither in whole or in part for any other person. The Employee either has a
pre-existing business or personal relationship with the Company or its officers,
directors or controlling persons or by reason of the Employee's business or
financial experience or the business or financial experience of the Employee's
professional advisors who are unaffiliated with and who are not compensated by
the Company or any affiliate or selling agent of the Company, directly or
indirectly, could be reasonably assumed to have the capacity to evaluate the
merits and risks of an investment in the Company and to protect the Employee's
own interests in connection with this transaction.
(ii) The Employee has heretofore discussed the Company and its
plans, operations and financial condition with the Company's officers and has
heretofore received all such information as the Employee has deemed necessary
and appropriate to enable the Employee to evaluate the financial risk inherent
in making an investment in the Stock, and the Employee has received satisfactory
and complete information concerning the business and financial condition of the
Company in response to all inquiries in respect thereof.
(iii) The Employee realizes that the purchase of the Stock
will be a highly speculative investment and involves a high degree of risk, and
the Employee is able to hold the Stock for an indefinite period of time and
suffer a complete loss on his investment.
(iv) The Employee understands and acknowledges that:
(I) the sale of the Stock has not been registered
under the Securities Act of 1933, as amended (the "Act"), and the Stock must be
held indefinitely unless subsequently registered under said Act or an exemption
from such registration is available and the Company is under no obligation to
register the Stock;
(II) the share certificate(s) representing the Stock
will be stamped with the legends specified in this Section; and
(III) the Company will make a notation in its records
of the aforementioned restrictions on transfer and legends.
(IV) The Employee understands that the Stock
constitutes restricted securities within the meaning of Rule 144
<PAGE> 45
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promulgated under the Act ("Rule 144"); that the exemption from registration
under Rule 144 will not be available in any event for at least two years from
the date of purchase and payment for the Stock, and even then will not be
available unless (I) a public trading market then exists for the Common Stock,
(II) adequate information concerning the Company is then available to the
public, and (III) other terms and conditions of Rule 144 are complied with; and
that any sale of the Stock may be made only in limited amounts in accordance
with such terms and conditions.
(v) Without in any way limiting his representations set forth
above, the Employee further agrees that he shall in no event make any
disposition of all or any portion of the Stock unless and until:
(A)(1) there is then in effect a registration statement under
the Act covering such proposed disposition and such disposition is made in
accordance with said registration statement; or, (2)(a) the Employee shall have
notified the Company of the proposed disposition and shall have furnished the
Company with a detailed statement of the circumstances surrounding the proposed
disposition, (b) the Employee shall have furnished the Company with an opinion
of the Employee's counsel to the effect that such disposition will not require
registration of the Stock under the Act, and (c) such opinion of the Employee's
counsel shall have been concurred in by counsel for the Company and the Company
shall have advised the Employee of such concurrence; and,
(B) The Stock proposed to be transferred is no longer subject
to the purchase options set forth herein.
(b) All certificates representing any Stock subject to the
provisions of this Agreement shall have endorsed thereon legends substantially
in the form set forth below:
(i) "This security may not be sold, assigned, or otherwise
transferred or disposed of except in compliance with the conditions
specified in the Employee Restricted Stock Agreement, dated as of
November __, 1996, between the Corporation and the holder of this
security, as amended from time to time, a copy of which will be
furnished by the Corporation without charge upon written request."
(ii) "The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or any state
securities laws and neither the securities nor any interest therein may
be offered, sold, transferred, pledged or otherwise disposed of except
pursuant to an effective registration statement under
<PAGE> 46
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such Act or such laws or an exemption from registration under said Act
or such laws, which in the opinion of counsel are reasonably
satisfactory to counsel for this Corporation, is available."
(iii) Any legend required to be placed thereon by appropriate
Blue Sky officials.
8. DEPOSIT OF SHARES. As security for the Employee's faithful
performance of the terms of this Agreement and to ensure that the Stock will be
available for delivery upon exercise of the Purchase Option as herein provided,
the Employee agrees to deliver to and deposit with the Secretary of the Company
("Escrow Agent"), as Escrow Agent in this transaction, one stock assignment duly
endorsed (with date and number of shares blank) together with the certificate or
certificates evidencing the Stock. Such documents are to be held by the Escrow
Agent during the term of this Agreement and shall be delivered by the Escrow
Agent to the Company on the written notice by the Company to the Escrow Agent
that the Company has exercised the Purchase Option, or in the event this
Agreement terminates without the exercise by the Company of the Purchase Option
as to all of the Stock, the Company shall instruct the Escrow Agent to deliver
to the Employee the portion of such Stock as to which the Purchase Option was
not exercised.
9. TRANSFERS NOT RECOGNIZED. The Company shall not be required (i) to
transfer on its books any shares of Stock which shall have been transferred in
violation of any of the provisions of this Agreement, or (ii) to treat as owner
of such Stock or to accord the right to vote as such owner or to pay dividends
to any transferee to whom such Stock shall have been transferred.
10. RIGHTS AS STOCKHOLDER. Subject to the provisions of Section 8
above, the Employee shall, during the term of this Agreement, exercise all
rights and privileges of a stockholder of the Company with respect to the Stock,
including without limitation the right to vote and the right to receive any
dividends payable with respect thereto.
11. TAXES. The Employee acknowledges that an amount equal to the fair
market value of the Stock in excess of the Issue Price shall constitute income
received by the Employee for income tax purposes, and that provision must be
made for income taxes to be withheld by the Company with respect to Stock,
whenever and to the extent that the Company's Purchase Option expires pursuant
to Section 3 of this Agreement, or upon the execution of this Agreement if the
Employee
<PAGE> 47
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makes an election pursuant to Section 83(b) of the Internal Revenue
Code. The Employee agrees that he will make appropriate provisions for the
collection and payment of such withholding taxes, in whatever manner is
reasonably determined by the Company, including without limitation payment by
the Employee to the Company of cash in the amount of required withholding taxes
or withholding from other compensation due the Employee.
12. RIGHT OF FIRST REFUSAL.
(a) RIGHT OF FIRST REFUSAL. If the Employee desires to sell all or any
part of the Vested Stock and he has received in writing an irrevocable and
unconditional bona fide offer (a "Bona Fide Offer") for the purchase thereof
from a party (the "Offeror"), the Employee shall give written notice (the "BFO
Option Notice") to the Company setting forth his desire to sell such Vested
Stock, which BFO Option Notice shall be accompanied by a photocopy of the
original executed Bona Fide Offer and shall set forth at least the name and
address of the Offeror and the price and terms of the Bona Fide Offer. Upon
receipt of the BFO Option Notice, the Company shall have an option to purchase
any or all of such Vested Stock specified in the BFO Option Notice, such option
to be exercised by giving, within 15 days after receipt of BFO Option Notice
(the "Offer Period"), a written counter-notice to the Employee.
(b) PURCHASE OF REFUSAL SHARES. If the Company so elects to purchase
any or all of such Stock in accordance with subsection (a) above, it shall be
obligated to purchase, and the Employee shall be obligated to sell to the
Company such Vested stock at the price and in accordance with the terms
indicated in the Bona Fide Offer within 60 days from the date of receipt by the
Company of the BFO Option Notice.
(c) SUBSEQUENT SALE OF SHARES. The Employee may sell any or all of such
Stock which the Company has not so elected to purchase during the 30 days
following the expiration of the Offer Period, PROVIDED that such sale is made
only pursuant to the terms of the Bona Fide offer and, PROVIDED, FURTHER, that
the purchaser thereof shall have executed a writing satisfactory to the Company,
agreeing that such purchase shall be subject to the restrictions on transfer set
forth in this Section. If, however, any or all such Stock is not sold pursuant
to the Bona Fide Offer within such 30 days, the restrictions on transfer set
forth in this Section shall again become applicable to such unsold Stock.
13. TERMINATION OF CERTAIN PROVISIONS. The provisions of Section 12 of
this Agreement shall terminate on the earlier of (i) the effective date
<PAGE> 48
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of a registration statement filed by the Company under the Act, with respect to
an underwritten public offering of the Common Stock or (ii) the closing date of
a sale of assets or merger of the Company pursuant to which shareholders of the
Company receive securities of a buyer whose shares are publicly traded.
14. MISCELLANEOUS. (a) Any notice hereunder shall be in writing
personally delivered by courier or mailed by registered or certified mail,
postage prepaid, and addressed to the Employee at the address appearing in the
records of the Company or to the Company at its principal executive offices, or
at such other address as may be specified by the Employee or the Company to the
other party by notice given in the manner herein provided. A notice shall be
deemed to have been given and received upon the earlier of (i) three business
days after the date on which it is deposited in the U.S. mails or (ii) receipt
by the party to whom such notice is directed.
(b) No waiver by a party hereto of a breach of any provision
of this Agreement shall be deemed to be a waiver of any preceding or subsequent
breach of the same or any other provision thereof.
(c) The Employee acknowledges that the remedy at law for any
breach of this Agreement will be inadequate, and agrees that the Company shall,
in addition to whatever other remedies it may have, be entitled to injunctive
relief.
(d) This Agreement shall be governed by the laws of The
Commonwealth of Massachusetts (without giving effect to principles of conflicts
or choice of laws of Massachusetts or of any other jurisdiction). Subject to the
terms of the Plan, this Agreement sets forth the entire agreement between the
parties concerning the subject matter hereof and supersedes any prior agreements
and understandings relating to the subject matter hereof. No amendment or
modification hereof will be effective unless it is in writing and signed by the
parties.
(e) This Agreement shall bind and benefit the parties hereto
and their respective successors and legal representatives and permitted assigns.
(f) If any provision of this Agreement is unenforceable or
illegal, the remainder of this Agreement shall remain in full force and effect.
If any one or more of the provisions contained in this Agreement shall for any
reason be held to be excessively broad as to duration,
<PAGE> 49
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geographical scope, activity or subject, such provision shall be construed by
limiting and reducing it so as to be enforceable to the extent compatible with
applicable law.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
on the date first above written.
EXCHANGE APPLICATIONS, INC.
By: ___________________________________
Title: ________________________________
_______________________________________
EMPLOYEE
<PAGE> 1
EXHIBIT 10.3
EXCHANGE APPLICATIONS, INC.
1998 DIRECTOR STOCK OPTION PLAN
l. PURPOSE.
The Exchange Applications, Inc. 1998 Director Stock Option Plan (the
"Plan") has been adopted to assist in attracting and retaining non-employee
members of the Corporation's Board of Directors and to foster alignment of their
interests with those of stockholders of the Corporation. This Plan is intended
to satisfy all of the conditions of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended.
2. DEFINITIONS.
As used herein, the following words or terms have the meanings set forth
below:
2.1 "Affiliate" means any business entity that is directly or indirectly
controlled by the Corporation or any entity in which the Corporation
has a significant equity interest, as determined by the senior legal officer of
the Corporation.
2.2 "Board of Directors" means the Board of Directors of the
Corporation
2.3 "Common Stock" means the Common Stock, par value $.001 per share,
of the Corporation.
2.4 "Compensation Committee" means the Compensation Committee of the
Board of Directors.
2.5 "Corporation" means Exchange Applications, Inc., a corporation
established under the laws of the State of Delaware.
2.6 "Effective Date" has the meaning set forth in Section 3.
2.7 "Fair Market Value," in the case of a share of Common Stock on a
particular day, means the closing price of the Common Stock for that day as
reported in the "NASDAQ National Market Issues" section of the Eastern Edition
of THE WALL STREET JOURNAL, or if no prices are quoted for that day, for the
last preceding day on which such prices of Common Stock are so quoted. In the
event "NASDAQ National Market Issues" cease to be reported or the
<PAGE> 2
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Common Stock to be included therein, the Compensation Committee shall select
some other appropriate method for determining Fair Market Value.
2.8 "Grant Date" means the business day immediately following the
annual meeting of stockholders of the Corporation (or special meeting or written
consent in lieu thereof), commencing with the first annual meeting of
stockholders following the end of the Corporation's 1998 fiscal year.
2.9 "Non-Employee Director" means as of any date a person who on such
date is a director of the Corporation and is not an employee of the Corporation
or any Affiliate. A director of the Corporation who is also an employee of the
Corporation or any Affiliate shall become eligible to participate in the Plan
upon termination of such employment.
2.10 "Option" means a nonstatutory option to purchase Shares granted under
the Plan, pursuant to Article 7.
2.11 "Option Agreement" means an agreement between the Corporation and
a Non-Employee Director, setting forth the terms and conditions of an Option,
substantially in the form of Annex A hereto.
2.12 "Option Price" means the price to be paid by an Option holder upon
exercise of an Option.
2.13 "Optionee" means a person eligible to receive an Option to whom an
Option shall have been granted under the Plan, and any permitted transferee of
such Option pursuant to Section 7.4.
2.14 "Shares" means shares of Common Stock.
3. EFFECTIVE DATE.
The Plan shall become effective on ________, 1998 (the "Effective
Date"), provided that the Plan is approved by the stockholders of the
Corporation within one year after that date. Although Options may be granted
before such stockholder approval, no Option may be exercised until such approval
is obtained and any such Options will be null and void if such approval is not
obtained by the first anniversary of the Effective Date.
4. ADMINISTRATION.
4.1 The Plan shall be administered by the Compensation Committee.
Subject to the provisions set forth herein, the Compensation Committee shall
have full authority to construe and interpret the terms of the Plan and to make
all determinations and take all other actions necessary or advisable for the
<PAGE> 3
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administration of the Plan. The Compensation Committee may delegate to one or
more employees of the Corporation or any Affiliate the authority to perform
administrative functions under the Plan.
4.2 Any determinations or actions made or taken by the Compensation
Committee pursuant to this Article shall be binding and final.
5. SHARES AVAILABLE FOR OPTIONS; ANTI-DILUTION ADJUSTMENTS.
5.1 The maximum number of Shares that may be issued under the Plan
shall be 100,000, subject to adjustment in accordance with the provisions of
Section 5.2. Any Shares subject to an Option which for any reason expires or is
terminated unexercised as to such Shares may again be the subject of an Option.
Shares delivered upon exercise of an Option under the Plan may consist in whole
or in part of authorized but unissued Shares or treasury Shares.
5.2 Pro rata adjustment shall be made in the maximum number of Shares
subject to the Plan and to the number of Shares thereafter included in each
Option grant to give effect to any stock dividends, stock splits, stock
combinations, recapitalizations and other similar changes in the capital
structure of the Corporation. Pro rata adjustments shall be made in the number,
kind and price of Shares covered by any outstanding Option hereunder to give
effect to any stock dividends, stock splits, stock combinations,
recapitalizations and similar changes in the capital structure of the
Corporation, or a merger, dissolution or reorganization of the Corporation,
after the date the Option is granted, so that the Optionee is treated in a
manner equivalent to that of holders of the underlying Common Stock.
6. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors, as provided in
Article 7.
7. OPTION GRANTS.
7.1 ANNUAL GRANTS. On each Grant Date, each person who is then a
Non-Employee Director shall receive an Option to purchase such number of Shares
as is determined by the Compensation Committee.
7.2 OPTION PRICE, EXERCISABILITY AND TERM. The Option Price for each
Option shall be the Fair Market Value on the Grant Date. Each Option shall
become exercisable in full on the first anniversary of the Grant Date, PROVIDED,
HOWEVER, that in the event any Optionee ceases to be a director of the
Corporation after the Grant Date of an Option and before such anniversary, by
<PAGE> 4
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reason of death or for any other reason except the resignation of that director
prior to the normal expiration of his or her term (a "Resignation"), such
exercisability shall be accelerated so that such Option shall become exercisable
in full as of the date of such cessation. No Option shall be exercisable later
than ten years after the Grant Date. Each Optionee shall enter into an agreement
with the Corporation with respect thereto substantially in the form of the
Option Agreement.
7.3 TERMINATION OF OPTIONS. Any Option shall terminate and may no
longer be exercised on the tenth anniversary of its Grant Date, or prior thereto
(i) in the event of the Optionee's Resignation before the first anniversary of
the Grant Date, or (ii) if the Optionee dies before such tenth anniversary, in
accordance with the following sentence. If the Optionee dies at a time when he
or she might have exercised an Option, then his or her estate, personal
representative or beneficiary to whom it has been transferred pursuant to
Section 7.4 may at any time prior to the tenth anniversary of its Grant Date and
within a period of one year after the Optionee's death, but not thereafter,
exercise the Option to the extent the Optionee might have exercised it at the
time of death.
7.4 RESTRICTIONS ON TRANSFERABILITY. Options shall be transferable by
the Optionee by will or the laws of descent and distribution. Otherwise, Options
shall be transferable only if such transfer is permitted by the Compensation
Committee in its discretion. The foregoing restriction shall not, however,
preclude the Optionee from effecting "cashless" exercise of an Option, in
accordance with and as described in Section 7.5(ii).
7.5 NOTICE OF EXERCISE AND PAYMENT.
(i) An exercisable Option may be exercised in whole or in part. An
Option shall be exercisable only by delivery of a written notice to the
Corporation's Treasurer or Secretary, specifying the number of Shares for
which it is exercised. If the Shares are not at that time effectively
registered under the Securities Act of 1933, as amended, the Optionee shall
include with such notice a letter, in form and substance satisfactory to
the Corporation, confirming that the Shares are being purchased for the
Optionee's own account for investment and not with a view to distribution.
Payment shall be made in full at the time the Option is exercised, by cash
or check, except as otherwise permitted by Section 7.5(ii) below.
(ii) In lieu of payment by cash or check accompanying the written
notice of exercise as described in Section 7.5(i), an Optionee may, unless
prohibited by applicable law, elect to effect payment by including with the
written notice referred to in Section 7.5(i) irrevocable
<PAGE> 5
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instructions to deliver for sale to a registered securities broker
acceptable to the Corporation a number of the Shares subject to the Option
being exercised sufficient, after brokerage commissions, to cover the
aggregate exercise price of such Option and, if the Optionee further
elects, the Optionee's withholding obligations with respect to such
exercise referred to in Section 7.7, together with irrevocable instructions
to such broker to sell such Shares and to remit directly to the Corporation
such aggregate exercise price and, if the Optionee has so elected, the
amount of such withholding obligation. The Corporation shall not be
required to deliver to such securities broker any stock certificate for
such Shares until it has received from the broker such exercise price and,
if the Optionee has so elected, such withholding obligation amount.
7.6 NO RIGHTS AS SHAREHOLDER. No Optionee shall have any rights as a
shareholder or any claim to dividends paid with respect to any Shares to which
the Option relates until the date such Shares are issued to him or her.
7.7 WITHHOLDING TAXES. The Corporation's obligation to deliver Shares
upon exercise of an Option shall be subject to the Optionee's satisfaction of
all applicable federal, state and local income and employment tax withholding
obligations. The Optionee shall satisfy such obligations by making a payment of
the requisite amount in cash or by check, unless the Optionee has elected to
effect such payment through a "cashless" exercise in accordance with Section
7.5(ii).
8. DURATION
This Plan shall terminate (i) ten years from the Effective Date, (ii) on
December 31, 1998, if the Corporation has not consummated its initial public
offering of Common Stock prior to such time, or (iii) pursuant to Section 9.2,
and no Options shall be granted thereafter.
9. GENERAL PROVISIONS.
9.1 NO RIGHT TO SERVICE. Participating in the Plan does not constitute a
guarantee or contract of service as a director.
9.2 AMENDMENT AND TERMINATION. The Board of Directors may amend,
suspend or terminate the Plan or any portion thereof at any time; PROVIDED,
HOWEVER, that no such amendment, suspension or termination shall adversely
affect or impair any then outstanding Option without the consent of the
Optionee.
<PAGE> 6
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9.3 REGISTRATION OF SHARES. Nothing in the Plan shall be construed to
require the Corporation to register under the Securities Act of 1933, as
amended, any Options or Shares subject to Options.
9.4 GOVERNING LAW. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of The Commonwealth of Massachusetts.
<PAGE> 7
ANNEX A
EXCHANGE APPLICATIONS, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION AGREEMENT
UNDER THE EXCHANGE APPLICATIONS, INC. 1998 DIRECTOR STOCK OPTION PLAN
Exchange Applications, Inc. (the "Company") hereby grants, effective
[__________] (the "Grant Date"), to[ _____________] (the "Optionee") an option
(the "Director Option") to purchase a maximum of ______ shares of its Common
Stock, $.001 par value per share (the "Common Stock"), at a price of $[___] per
share, subject to the following:
1. RELATIONSHIP TO PLAN. This Director Option is granted pursuant to
Section 7 of the Company's 1998 Director Stock Option Plan (the "Plan"), and is
in all respects subject to the terms, conditions and definitions of the Plan,
which shall be administered by the Compensation Committee of the Company's Board
of Directors (the "Compensation Committee") pursuant to the terms of the Plan.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings given to such terms in the Plan. The Optionee hereby accepts this
Director Option subject to all the terms and provisions of the Plan (including,
without limitation, provisions relating to expiration of this Director Option
and adjustment of the number of shares subject to this Director Option and the
exercise price therefor). The Optionee further agrees that all decisions under
and interpretations of the Plan by the Compensation Committee shall be final,
binding and conclusive upon the Optionee and his heirs.
2. VESTING AND TERM. This Director Option shall become exercisable in full
on the one-year anniversary of the Grant Date. This Director Option will remain
exercisable until the tenth (10th) anniversary of the Grant Date, unless the
Director Option has earlier terminated in accordance with the provisions of the
Plan.
3. METHODS OF EXERCISE. This Director Option shall be exercisable by a
written notice in the form described under Section 7.5 of the Plan. The notice
shall be accompanied either by cash, personal check equal to the option price or
instructions as to payment in shares of Common Stock pursuant to Section 7.5(ii)
of the Plan.
4. ADJUSTMENT OF NUMBER OF SHARES. In the event of any stock dividend
payable in Common Stock or any split-up or contraction in the number of shares
of Common Stock occurring after the date of this Agreement and prior to the
exercise in full of this Director Option, the number of shares for which this
<PAGE> 8
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Director Option may thereafter be exercised shall be proportionately adjusted.
In case of any reclassification or change of outstanding shares of Common Stock,
shares of stock or other securities equivalent in kind and value to those shares
which a holder would have received if he or she had held the full number of
shares of Common Stock subject to this Director Option immediately prior to such
reclassification or change and had continued to hold those shares (together with
all other shares, stock and securities thereafter issued in respect thereof) to
the time of exercise of this Director Option shall thereupon be subject to this
Director Option. In case of any consolidation or merger of the Company with or
into another company or in case of any sale or conveyance to another company or
entity of the property of the Company as a whole, this Director Option shall
terminate and, to the extent that the value of the shares of stock, other
securities or cash which a stockholder is entitled to receive for one share of
Common Stock in connection with such transaction exceeds the option price of
this Director Option, the Optionee shall be entitled to receive either cash or
shares of stock or other securities equivalent in kind to the cash or those
shares which a holder would have received if he or she had exercised this
Director Option and held the number of shares of the Common Stock upon such
exercise immediately prior to such consolidation, merger, sale or conveyance and
with a value equal to such excess amount multiplied by the number of shares he
or she would have received if he or she so exercised this Director Option at
such time. Further, upon dissolution or liquidation of the Company, this
Director Option shall terminate, but the Optionee shall have the right,
immediately prior to such dissolution or liquidation, to exercise this Director
Option to the full extent not theretofore exercised. No fraction of a share
shall be purchasable or deliverable, but in the event any adjustment of the
number of shares covered by this Director Option shall cause such number to
include a fraction of a share, such fraction shall be adjusted to the nearest
smaller whole number of shares.
5. GENERAL. This Agreement shall be construed as a contract under seal in
accordance with the laws of The Commonwealth of Massachusetts. It shall bind
and, subject to the terms of the Plan, benefit the parties and their respective
successors, assigns and legal representatives.
<PAGE> 9
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IN WITNESS WHEREOF, the Company and the Optionee have caused this agreement
to be executed on the date first written above.
EXCHANGE APPLICATIONS, INC.
By: ________________________________
____________________________________
Optionee
<PAGE> 1
EXHIBIT 10.4
EXCHANGE APPLICATIONS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
1. DEFINITIONS. As used in this 1998 Employee Stock Purchase Plan of
Exchange Applications, Inc., the following terms shall have the meanings
respectively assigned to them below:
(a) BENEFICIARY means the person designated as beneficiary on the
Optionee's Membership Agreement or, if no such beneficiary is named,
the person to whom the Option is transferred by will or under the
applicable laws of descent and distribution.
(b) CODE means the Internal Revenue Code of 1986, as amended.
(c) COMMITTEE means a committee of the board of directors of the Company
composed exclusively of disinterested directors.
(d) COMPANY means Exchange Applications, Inc., a Delaware corporation.
(e) COMPENSATION means annual compensation, including commissions,
overtime and bonuses, for the most recently completed calendar year.
(f) ELIGIBLE EMPLOYEE means a person who is eligible under the provisions
of Section 7 to receive an Option as of a particular Grant Date.
(g) EXERCISE DATE means a date not more than 27 months after a Grant Date,
as determined by the Committee, on which Options must, if ever, be
executed.
(h) GRANT DATE means a date specified by the Committee on which Options
are to be granted to Eligible Employees.
(j) MARKET VALUE means, as of a particular date, the value as determined
by the Committee in accordance with applicable provisions of the Code
and Treasury Department rulings and regulations thereunder or, if
applicable, the closing price of the Stock reported by NASDAQ in The
Wall Street Journal on such date.
<PAGE> 2
-2-
(k) MEMBERSHIP AGREEMENT means an agreement whereby an Optionee authorizes
the Company to withhold payroll deductions from his or her
Compensation.
(l) OPTION means an option to purchase shares of Stock granted under the
Plan.
(m) OPTIONEE means an Eligible Employee to whom an Option is granted.
(n) PLAN means this 1998 Employee Stock Purchase Plan of the Company.
(o) RELATED CORPORATION means any corporation which is a parent
corporation of the Company, as defined in Section 424(e) of the Code,
and any corporation controlled by that parent corporation or the
Company.
(p) STOCK means common stock, $.001 par value, of the Company.
2. PURPOSE OF THE PLAN. The Plan is intended to encourage ownership of
Stock by employees of the Company and to provide additional incentive for the
employees to promote the success of the business of the Company. It is intended
that the Plan shall be an "employee stock purchase plan" within the meaning of
Section 423 of the Code.
3. TERM OF THE PLAN. The Plan shall become effective on ________ __,
1998. No option shall be granted under the Plan after December 31, 2002.
4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee, which shall determine from time to time whether to grant Options
under the Plan, shall specify which dates shall be Grant Dates and Exercise
Dates, shall determine the Market Value of the Stock, and shall fix the maximum
percentage of each Optionee's Compensation which may be withheld for the purpose
of purchasing shares of Stock. The Committee shall have authority to interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan, to determine the terms of Options granted under the Plan, and to make all
other determinations necessary or advisable for the administration of the Plan.
5. TERMINATION AND AMENDMENT OF PLAN. The Committee may terminate or
amend the Plan at any time; PROVIDED HOWEVER, that the
<PAGE> 3
-3-
Committee may not, without approval by the holders of a majority of the shares
of Stock, increase the maximum number of shares of Stock purchasable under the
Plan, change the description of employees or classes of employees eligible to
receive Options, change the manner of determining the exercise price of Options,
or extend the period during which Options may be granted or exercised. No
termination of or amendment to the Plan may adversely affect the rights of an
Optionee with respect to any Option held by the Optionee as of the date of such
termination or amendment.
6. SHARES OF STOCK SUBJECT TO THE PLAN. No more than an aggregate of
200,000 shares of Stock may be issued or delivered pursuant to the exercise of
Options granted under the Plan, subject to adjustments made in accordance with
Section 9.8. Shares to be delivered upon the exercise of Options may be either
shares of Stock which are authorized but unissued or shares of Stock held by the
Company in its treasury. If an Option expires or terminates for any reason
without having been exercised in full, the unpurchased shares subject to the
Option shall become available for other Options granted under the Plan. The
Company shall, at all items during which Options are outstanding, reserve and
keep available shares of Stock sufficient to satisfy such Options, and shall pay
all fees and expenses incurred by the Company in connection there with. In the
event of any capital change in the outstanding Stock as contemplated by Section
9.8, the number of shares of Stock reserved and kept available by the Company
shall be appropriately adjusted.
7. PERSONS ELIGIBLE TO RECEIVE OPTIONS. Each employee of the Company or
a specified Related Corporation shall be granted an Option on each Grant Date on
which such employee meets all of the following requirements:
(a) The employee is employed by the Company or the Related Corporation for
at least twenty hours per week and for more than five months per
calendar year.
(b) The employee will not, after grant of the Option, own stock possessing
five percent or more of the total combined voting power or value of
all classes of stock of the Company or of any Related Corporation. For
purposes of this paragraph (b), the rules of Section 424(d) of the
Code shall apply in determining the stock ownership of the employee,
and stock which the employee may purchase under outstanding options
shall be treated as stock owned by the employee.
<PAGE> 4
-4-
(c) Upon grant of the Option, the employee's rights to purchase stock
under all employee stock purchase plans (as defined in Section 423(b)
of the Code) of the Company and its Related Corporations will not
accrue at a rate which exceeds $25,000 of fair market value of the
stock (determined as of the Grant Date) for each calendar year in
which such option is outstanding at any time. The accrual of rights to
purchase stock shall be determined in accordance with Section
423(b)(8) of the Code.
8. DATES FOR GRANTING OPTIONS. Options shall be granted on each date
designated by the Committee as a Grant Date.
9. TERMS AND CONDITIONS OF OPTIONS.
9.1 GENERAL. All Options granted on a particular Grant Date shall comply
with the terms and conditions set forth in Section 9.3 through 9.12,
and each Option shall be identical except as to the number of shares
of Stock purchasable under the Option, which shall be determined in
accordance with Section 9.2.
9.2 NUMBER OF SHARES. The maximum number of shares of Stock which an
Optionee shall be permitted to purchase shall be an amount equal to
ten percent of the Optionee's Compensation as of the Grant Date
divided by 85 percent of the Market Value of the Stock as of the Grant
Date.
9.3 PURCHASE PRICE. The purchase price of shares of Stock shall be 85
percent of the lesser of (a) the Market Value of the shares as of the
Grant Date, or (b) the Market Value of the shares as of the Exercise
Date, or such greater percentage as may be set by the Committee from
time to time.
9.4 RESTRICTIONS ON TRANSFER. Options may not be transferred otherwise
than by will or under the laws of descent and distribution. An Option
may not be exercised by anyone other than the Optionee during the
lifetime of the Optionee. Shares of Stock may be sold or otherwise
transferred by the Optionee without restriction subject to the
provisions of Section 9.11 and the Stock Purchase Agreement that will
be signed pursuant to Section 9.10.
9.5 EXPIRATION. Each Option shall expire at the close of business on the
Exercise Date or on such earlier date as may result from the operation
of Section 9.6.
<PAGE> 5
-5-
9.6 TERMINATION OF EMPLOYMENT OF OPTIONEE. If an Optionee ceases for any
reason (other than death or retirement) to be continuously employed by
the Company or a Related Corporation, whether due to voluntary
severance, involuntary severance, transfer, or disaffiliation of the
employer Related Corporation with the Company, his or her Option shall
immediately expire, and the Optionee's accumulated payroll deduction
shall be returned by the Company without interest. For purposes of
this Section 9.6, an Optionee shall be deemed to be employed
throughout any leave of absence for military service, illness or other
bona fide purpose which does not exceed the longer of ninety days or
the period during which the Optionee's reemployment rights are
guaranteed by statute or by contract. If the Optionee does not return
to active employment prior to the termination of such period, his or
her employment shall be deemed to have ended on the ninety-first day
after the date of such leave of absence.
9.7 DEATH OF OPTIONEE. If an Optionee dies, his or her Beneficiary shall
be entitled to withdraw the Optionee's accumulated payroll deductions
without interest or to purchase shares on the Exercise Date to the
extent that the Optionee would be so entitled had he or she continued
to be employed by the Company. The number of shares purchasable shall
be limited by the amount of the Optionee's accumulated payroll
deductions as of the date of his or her death. Accumulated payroll
deductions shall be applied by the Company toward the purchase of
shares only if the Optionee or Beneficiary submits to the Company a
Stock Purchase Agreement pursuant to Section 9.10. Accumulated payroll
deductions not withdrawn or applied to the purchase of shares in
accordance with Section 9.10 shall be delivered by the Company to the
Optionee or Beneficiary without interest within a reasonable time
after the Exercise Date.
9.8 CAPITAL CHANGES AFFECTING THE STOCK. In the event that, between the
Grant Date and the Exercise Date of an Option, a stock dividend is
paid or becomes payable in respect of the Stock or there occurs a
split up or contraction in the number of shares of Stock, the number
of shares for which the Option may thereafter be exercised and the
price to be paid for each such share shall be proportionately
adjusted. In the event that, after the Grant Date, there occurs a
reclassification or change of outstanding shares of the Stock or a
consolidation or merger of the Company
<PAGE> 6
-6-
with or into another corporation or a sale or conveyance,
substantially as a whole, of the property of the Company, the Optionee
shall be entitled on the Exercise Date to receive shares of Stock or
other securities equivalent in kind and value to the shares of stock
he or she would have held if he or she had exercised the Option in
full immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance and had continued to hold
such shares (together with all other shares and securities thereafter
issued in respect thereof) until the Exercise Date. In the event that
there is to occur a recapitalization involving an increase in the par
value exceeding the exercise price under an outstanding Option, the
Company shall notify the Optionee of such proposed recapitalization
immediately upon its being recommended to the Company's shareholders,
after which the Optionee shall have the right to exercise his or her
Option prior to such recapitalization; if the Optionee fails to
exercise the Option prior to recapitalization, the exercise price
under the Option shall be appropriately adjusted. In the event that,
after the Grant Date, there occurs a dissolution or liquidation of the
Company, except pursuant to a transaction to which Section 424(a) of
the Code applies, each Option to purchase Stock of the Company to be
dissolved or liquidated shall terminate, but the Optionee holding such
Option shall have the right to exercise his or her Option prior to
such dissolution or liquidation.
9.9 PAYROLL DEDUCTIONS. An Optionee may receive Options hereunder as of
any Grant Date by completing and returning to the Company, at least
two weeks prior to such Grant Date, a Membership Agreement indicating
the amount of his or her Compensation, not to exceed ten percent,
which is to be withheld each pay period commencing on such Grant Date.
A Membership Agreement may continue from the period following one
Grant Date to the periods following subsequent Grant Dates until
revoked by the Optionee. The Optionee may withdraw any or all of his
or her accumulated payroll deductions without interest on the Exercise
Date or such earlier date as is permitted by the Membership Agreement
by submitting a written request therefor to the Company no later than
two weeks prior to the date on which the withdrawal will be effective.
9.10 EXERCISE OF OPTIONS. On the Exercise Date the Optionee may purchase
the number of shares purchasable by his or her accumulated payroll
deduction, provided that:
<PAGE> 7
-7-
(a) The number of shares of Stock purchasable shall not exceed
the number of shares the Optionee is entitled to purchase
pursuant to Section 9.2.
(b) If the number of shares purchasable includes a fraction,
that number shall be adjusted to the next smaller whole
number and the purchase price shall be adjusted accordingly.
The Optionee shall complete and return to the Company a Stock
Purchase Agreement no later than two weeks prior to the Exercise
Date. If the Company does not receive a Stock Purchase Agreement
from the Optionee by such date, accumulated payroll deductions
will be returned within a reasonable time after the Exercise Date
without interest.
9.11 DELIVERY OF STOCK. Within a reasonable time after the Exercise Date,
the Company shall deliver or cause to be delivered to the Optionee a
certificate or certificates for the number of shares purchased by the
Optionee. At the time of any exercise of any Option, the Company may,
if it shall deem it necessary or desirable for any reason connected
with any law or applicable regulation of the Securities and Exchange
Commission or state securities laws, require the Optionee or a
transferee of the Optionee's rights to represent in writing to the
Company that it is such person's then intention to acquire the Stock
for investment and not with a view to the distribution thereof. Such
representation shall lapse when in the view of the Company it is no
longer necessary under the laws or regulations in existence at the
time. The Company shall have the right to place a legend on all
certificates that the shares represented by such certificates may not
be transferred unless a Registration Statement with respect to these
shares is effective under the Securities Act of 1933, as amended, or
unless the Company shall receive an opinion of counsel satisfactory to
it that transfer will not violate said act or regulations thereunder.
If any law or applicable regulation of the Securities and Exchange
Commission or other body having jurisdiction in the premises shall
require that the Company or the Optionee take any action in connection
with the shares being purchased under the Option, delivery of the
certificate or certificates for such shares shall be postponed until
the necessary action shall have been completed. The Optionee
<PAGE> 8
-8-
shall have no rights as a shareholder in respect of shares for which
he or she has not received a certificate.
9.12 RETURN OF ACCUMULATED PAYROLL DEDUCTIONS. In the event that the
Optionee or the Beneficiary is entitled to the return of accumulated
payroll deductions, whether by reason of voluntary withdrawal,
termination of employment, retirement, death, or in the event that
accumulated payroll deductions exceed the price of share purchased,
such amount shall be returned without interest within a reasonable
time after the Exercise Date or such earlier date as is permitted by
the Membership Agreement. Payroll deductions shall be returned by the
Company to the Optionee or the Beneficiary, as the case may be. An
Optionee's Membership Agreement may specify that amounts exceeding the
purchase price will be carried forward to the next option period under
the Plan.
<PAGE> 1
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EXHIBIT 10.5
SUMMARY PLAN DESCRIPTION
Prepared By:
Trust Consultants, Inc.
THIS DOCUMENT IS MERELY A DRAFT PROTOTYPE SUMMARY PLAN DESCRIPTION.
BEFORE DISTRIBUTING THIS SUMMARY, THE EMPLOYER SHOULD CONSULT WITH A
BENEFITS EXPERT OR ATTORNEY TO ENSURE THAT THIS DOCUMENT CORRECTLY
REFLECTS THE TERMS OF ITS PLAN AND CONTAINS ALL OF THE INFORMATION
NECESSARY TO SATISFY THE SUMMARY PLAN DESCRIPTION REQUIREMENTS FOR ITS
PLAN.
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
Effective Date: JUNE 1, 1998
This document is a description of the Plan.
It is intended that the language be clear and
understandable. The law governing plans is
very complicated. Consequently, the language
in the law and the Plan is very technical and
legal. If this description says something
different from what the Plan says, the Plan
must be followed. A copy of the Plan is
available for inspection by contacting the
Plan Administrator, whose telephone number is
listed under General Information on Page 1.
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SUMMARY PLAN DESCRIPTION
-------------------------------------------------------------------------
EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
TABLE OF CONTENTS
I. GENERAL INFORMATION.............................................1
1. Name of Plan:..............................................1
2 Type of Plan...............................................1
3. Type of Administration:....................................1
4. Plan Year End:.............................................1
5. Plan Administrator:........................................1
6. Trustee(s):................................................1
II. INTRODUCTION....................................................2
III. DESCRIPTION OF PLAN BENEFITS AND REQUIREMENTS...................3
A. Definitions................................................3
B. Eligibility to Participate.................................5
C. Contributions..............................................6
D. Special Tests..............................................11
E. Vesting....................................................12
F. Forfeitures................................................13
G. Distribution of Benefits...................................15
H. Investment of Plan Assets..................................18
I. Withdrawals................................................18
J. Loans......................................................19
K. Top Heavy Rules............................................20
IV. CLAIMS PROCEDURES...............................................21
V. MISCELLANEOUS...................................................22
A. Amendment of the Plan......................................22
B. Termination of the Plan....................................22
C. Inapplicability of PBGC Guarantees.........................22
D. Special Rights Under ERISA.................................22
E. Assignment of Benefits.....................................24
F. No Continued Rights to Employment..........................24
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
I. GENERAL INFORMATION
1. Name of Plan: EXCHANGE APPLICATIONS, INC.
401(k) Retirement Plan
Plan Number: 001
Employer: Exchange Applications, Inc.
Address: 695 Atlantic Avenue, Suite 200
Boston, MA 02111
Telephone: (617) 737-2244
Employer Identification
Number: 04-3338916
2. Type of Plan: 401(k) Retirement Plan
3. Type of Administration: Administration by Employer
4. Plan Year End: December 31
5. Plan Administrator: Exchange Applications, Inc.
Address: 695 Atlantic Avenue, Suite 200
Boston, MA 02111
Telephone: (617) 737-2244
6. Trustee(s): John O'Brien
Kristin Zaepfel
Address: 695 Atlantic Avenue, Suite 200
Boston, MA 02111
Agent for service of legal process: Service of legal process may be made
upon the Plan Administrator or the
Trustee at the addresses shown above.
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
II. INTRODUCTION.
- The Employer is pleased to sponsor the Exchange Applications,
Inc. 401(k) Retirement Plan (the "Plan") to provide retirement
benefits for its employees. The Plan is effective as of
June 1, 1998.
The Plan is a defined contribution plan to which you make
contributions to accounts held in your name in a trust.
Because these assets are held in trust, they are not available
to the Employer or the Employer's creditors. However, in
limited circumstances, certain contributions to the Plan may
be returned to the Employer.
With this type of plan, the benefit you receive from the Plan
depends on the amount contributed to your accounts, the
investment performance of your accounts and your vested
interest in your accounts. The Plan is designed to provide
retirement income to employees who remain with the Employer
until retirement. In addition, if your employment with the
Employer terminates before you retire, you may also receive
benefits,
The Plan features are merely summarized in this Summary Plan
Description (or "Summary" or "SPD"). Not all Plan rules are
described in this Summary because some of the rules apply only
in very limited circumstances. Therefore, if there is any
inconsistency between the Plan as described in this Summary
Plan Description and the Plan document itself, the terms of
the Plan document will govern.
Any questions you may have about the Plan should be referred
to the Plan Administrator. Copies of the Plan document and the
Trust Agreement also are available for your inspection during
regular working hours from the Plan Administrator at:
695 Atlantic Avenue, Suite 200
Boston, MA 02111
Page 2
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
II. DESCRIPTION OF PLAN BENEFITS AND REQUIREMENTS.
A. DEFINITIONS Certain words and terms in this Summary have
special meanings. To help you identify these words
and terms, the first letters of the terms are
capitalized when used within the text.
- ACCOUNT(S). Your separate Account(s) contain
the amount of contributions (adjusted for
distributions and earnings or losses) made to
the Plan on your behalf.
- BENEFICIARY. Your Beneficiary is the person or
persons you name to receive your benefit
distribution in the event of your death. If you
are married and you name someone other than
your spouse as your Beneficiary, you must get
written consent from your spouse.
- BREAK IN SERVICE. A Break in Service occurs if
you perform less than 501 Hours of Service in a
Plan Year. If you are on unpaid leave of
absence because of pregnancy or birth or
adoption of your child, you will receive credit
for up to 501 Hours of Service that you
otherwise would have earned if you had not been
absent. If these Hours of Service are necessary
to prevent a Break in Service in the Plan Year
in which your absence begins, these Hours of
Service will be credited in that Plan Year. If
these Hours of Service are not necessary to
prevent a Break in Service in the Plan Year in
which your absence begins, these Hours of
Service will be credited in the immediately
following Plan Year if needed to prevent a
Break in Service in that Plan Year.
- COMPENSATION is generally the total earnings
during the Plan Year paid to you by the
Employer that are reported in the "Wages, tips,
other compensation" box of Form W-2 for the
Plan Year. Compensation also shall include
amounts which are not includable in
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
your gross income because the amounts were
contributed on a pre-tax basis to a cafeteria
plan, this Plan, a simplified employee pension
plan or a tax deferred annuity plan. If you are
"self-employed", however, Compensation is your
"earned income". Compensation for a Plan Year
is limited to an amount which may be adjusted
each year by the Internal Revenue Service (or
"IRS"). For instance, in 1998, Compensation is
limited to $160,000.
- HIGHLY COMPENSATED EMPLOYEE. Highly Compensated
Employees are employees who (1) own 5% of the
Employer in the Plan Year or the previous Plan
Year or, (2) earned over $80,000 (adjusted
periodically for inflation) in the previous
year and, if elected by the Employer, were in
the top 20% of employees on the basis of
compensation. Certain family members of Highly
Compensated Employees who are employed by the
Employer also are treated as if they are Highly
Compensated Employees.
- HOUR OF SERVICE. An Hour of Service is each
hour for which you are paid or entitled to be
paid by the Employer for rendering services to
the Employer and any other related employer
that must be aggregated with the Employer.
Hours of Service also includes up to 501 Hours
of Service for which you receive pay from the
Employer (or a related employer) while you are
on vacation, sick leave, holiday, layoff, jury
duty, leave of absence or certain military
duty.
- PARTICIPANT. A Participant is an employee of
the Employer who has met the eligibility
requirements for participating in this Plan,
and who has an account balance under the Plan.
You will continue to be a Participant until
your vested Accounts are completely distributed
Plan Year. The Plan Year is the twelve-month
period ending on the date shown as the Plan
Year End in Section I of this Summary.
- TRUST. A fund established under trust law to
hold the assets of the Plan.
- YEAR OF VESTING SERVICE. A Year of Vesting
Service is a Plan Year during which you
complete at least 1,000
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
Hours of Service. Service will be counted
beginning with your date of hire and will
include service rendered for the Employer prior
to the adoption of the Plan.
B. ELIGIBILITY TO PARTICIPATE
The Plan is open to all employees of the Employer except the
following group of Employees:
- nonresident alien employees
If you are in a group of employees eligible to
participate in the Plan, you will be eligible to
become a Participant in the Plan after you have met
the following eligibility requirements:
- You have reached age 18.
The first Entry Date for the Plan is June 1, 1998.
If you are employed by the Employer on the first
Entry Date and you are in a group of eligible
employees, you will be eligible to participate in
the Plan on the first Entry Date even if you have
not met the eligibility requirements. If you are
not employed by the Employer on the first Entry
Date, you will become eligible to participate in
the Plan on the Entry Date occurring on or
immediately after you meet the eligibility
requirements as long as you are in a group of
employees eligible to participate on that Entry
Date.
The Entry Dates are: January 1, April 1, July 1,
October 1.
If you have been working for the Employer in a
group of employees not eligible to join the Plan,
and you transfer into a group of employees eligible
to participate, all of your service with the
Employer will be counted to determine when you will
be eligible to participate. If you have already met
the eligibility requirements when you transfer to
an eligible group and previously would have become
a Participant but for being in an ineligible group
of employees, you will become eligible to
participate in the Plan on the date you transfer.
If you would not have become a Participant until
after the date of your transfer, or if you do not
meet all of the eligibility requirements until a
later date, you will become eligible to participate
on the Entry Date occurring on or immediately after
the date you meet the eligibility requirements as
long as you are still in a group of employees
eligible to participate in the Plan on that Entry
Date.
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
If you are a Participant and transfer to a group of
employees not eligible to participate in the Plan,
your participation will cease until you transfer
back to a group of employees eligible to
participate in the Plan. You will be eligible to
rejoin the Plan immediately upon your transfer to a
group of employees eligible to participate in the
Plan.
If your employment terminates when you are a
Participant and if you are later rehired in a group
of employees eligible to participate in the Plan,
you will be eligible to rejoin the Plan immediately
upon your reemployment. If your employment
terminates when you are a Participant, and if you
are later rehired in a group of employees not
eligible to join the Plan, you may not rejoin the
Plan until you transfer back to a group of
employees eligible to participate in the Plan.
If your employment terminates before you become
eligible to participate in the Plan, and if you are
later rehired by the Employer, your prior period of
service will be counted for purposes of determining
when you will be eligible to participate after you
are rehired.
C. CONTRIBUTIONS
CONTRIBUTIONS AND INDIVIDUAL ACCOUNTS. The following types of
contributions may be made to the Plan by you and the Employer. Each
type of contribution will be allocated to a separate account for you.
- ELECTIVE DEFERRAL CONTRIBUTIONS You may make
Elective Deferral Contributions to the Plan up
to 15% of your Compensation per pay period.
These contributions will be subtracted from
your salary or wages each pay period BEFORE
Federal (and usually state) income taxes are
withheld. Thus, your take home pay will be
reduced by LESS than the amount that is
contributed as your Elective Deferral
Contribution. FICA tax (Social Security and
Medicare) is always withheld from total wages,
including wages before Elective Deferral
Contributions are deducted from your pay.
Example: Suppose John and Carol each earn
$25,000 a year and that each of them saves 6%
of their pay per year (or $1,500) for
retirement. If Carol saves that amount in the
Plan, she has $225 more in spendable income
than John, who saves $1,500 after he receives
his pay.
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
John Carol
After-Pay Elective
Deferral
Savings Contributions
------- -------------
Annual Pay $25,000 $25,000
Elective Deferrals 0 1,500
------- -------
Taxable Pay $25,000 $23,500
Federal Tax* 3,750 3,525
Social Security Tax 1,913 1,913
Conventional Savings 1,500 0
------- -------
Spendable Income $17,837 $18,062
Additional Spendable $0 $225
Income
*Based on a 15% flat federal tax rate. State
and local income taxes are not included.
Your Elective Deferral Contributions will be
credited to your Elective Deferral
Contributions Account.
The tax laws impose a limit on the total amount
of elective deferrals you can contribute to
this Plan and ALL other such plans in any
calendar year. This limit, which is $10,000 in
1998, may be adjusted each year by the Internal
Revenue Service based on cost of living
increases. If you exceed the limit in a
calendar year, the excess deferrals (adjusted
for earnings or losses) should be returned to
you no later than the April 15 following the
calendar year of deferral. These returned
amounts will be included in your income for the
calendar year of deferral (that is, in the year
prior to the year the excess deferrals are
returned to you). If these excess amounts are
not returned to you by that April 15, these
amounts will be included in your income in the
year of the deferral
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
AND in the year they are distributed. If you
want your excess deferrals (adjusted for
earnings or losses) returned to you, you MUST
notify the plan or plans no later than March 1
following the calendar year of the excess
deferral of the amount of your excess deferrals
that the plan (or plans) should return to you.
The plan (or plans) will not automatically
return excess deferrals to you.
- Your election to make Elective Deferral
Contributions will apply only to Compensation
earned after you return the proper election
form to the Plan Administrator and will remain
in effect indefinitely. You may, however,
discontinue, reduce or increase your future
Elective Deferral Contributions by completing
the proper form and giving it to the Plan
Administrator. You should check with the Plan
Administrator for details on how soon after you
return the form to the Plan Administrator that
your change will be effective.
ROLLOVER CONTRIBUTIONS If you have participated
in other qualified retirement plans, you may,
with the approval of the Plan Administrator,
make a Rollover Contribution to the Plan of
certain distributions you may receive from
those other plans. This contribution may be
done by either a direct rollover or by an
indirect rollover and will be credited to your
Rollover Contribution Account. (A direct
rollover occurs when the other plan makes your
distribution check payable to this Plan. An
indirect rollover occurs when the other plan
makes your distribution check payable to you
and then you roll over the distribution to this
Plan no later than 60 days after you receive
the check.)
You may make a Rollover Contribution even if
you are not yet a Participant as long as you
otherwise would be eligible to participate
except for meeting any service requirement for
eligibility to participate. A Rollover
Contribution is the only type of contribution
that may be made to the Plan before you are
eligible to participate in the Plan.
Not all distributions are eligible for rollover
to this Plan, so if you would like to make a
direct or indirect Rollover Contribution to
this Plan, see the Plan Administrator.
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
- DISCRETIONARY EMPLOYER CONTRIBUTIONS
Each Plan Year, the Employer has the option to
make a Discretionary Employer Contribution to
the Plan. The Employer has total discretion
about whether to make this type of contribution
and the amount of the contribution, if any.
Your share of any Discretionary Employer
Contribution will be credited to your
Discretionary Employer Contributions Account
after the end of the Plan Year for which the
contribution is made.
A share of the Discretionary Employer
Contribution for a Plan Year will be allocated
to your Discretionary Employer Contributions
Account if you meet one of the following
criteria in the Plan Year for which the
Discretionary Employer Contribution is made,
even if you did not make any Elective Deferral
Contributions in that Plan Year:
- You completed at least 500 Hours of Service in
that Plan Year; or
- You were employed by the Employer on the last
day of that Plan Year (regardless of your Hours
of Service); or
- Your employment with the Employer terminated
during that Plan Year because of your death,
retirement or total and permanent disability
(regardless of your Hours of Service).
If you are eligible to share in the
Discretionary Employer Contribution for a Plan
Year, the amount of the Discretionary Employer
Contribution that will be allocated to your
Discretionary Employer Contributions Account
will be determined by multiplying the amount of
the Discretionary Employer Contribution for
that Plan Year by a fraction, the numerator of
which is equal to your Compensation for that
Plan Year and the denominator of which is equal
to the total Compensation for that Plan Year
paid to all Participants eligible to share in
the Discretionary Employer Contribution for
that Plan Year. Thus, the Discretionary
Employer Contribution will be allocated to the
Accounts of eligible Participants in proportion
to their Compensation.
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
EXAMPLE. Suppose the Discretionary Employer
Contribution is $3,750 and only John and Carol
are eligible to share in the allocation of that
contribution. Assuming John's Compensation is
$25,000 and Carol's Compensation is $50,000,
the $3,750 Discretionary Employer Contribution
will be allocated as follows:
JOHN:
$25,000
$3,750 x $75,000 = $1,250
CAROL:
$50,000
$3,750 x $75,000 = $2,500
In this example, the Discretionary Employer
Contribution allocated to each of John's and
Carol's Accounts was 5% of their Compensation.
- SPECIAL CONTRIBUTIONS
Each Plan Year, the Plan must pass the Actual
Deferral Percentage ("ADP") nondiscrimination
test. (See the following Section for a more
detailed discussion of this test.) If the Plan
fails to pass this test, the Employer has
several options to pass the test. The Employer
MAY, but is not required to, elect to pass the
test by making one or more of the following
contributions:
- QUALIFIED NONELECTIVE CONTRIBUTIONS
If the Employer elects to make these
contributions for a Plan Year, they will be
allocated to your Qualified Nonelective
Contributions Account if you are not a Highly
Compensated Employee and you meet ONE of the
following criteria for that Plan Year:
- You completed at least 500 Hours of Service in
that Plan Year.
- You were employed by the Employer on the last
day of that Plan Year (regardless of your Hours
of Service).
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
- Your employment with the Employer terminated
during that Plan Year because of your death,
retirement or total and permanent disability
(regardless of your Hours of Service).
If Qualified Nonelective Contributions are
made, they will be allocated to the Qualified
Nonelective Contribution Accounts of eligible
Participants in proportion to their
Compensation. These contributions are always
100% vested and are not available for hardship
withdrawals.
- QUALIFIED MATCHING CONTRIBUTIONS
If the Employer elects to make these
contributions for a Plan Year, they will be
allocated to your Qualified Matching
Contributions Account if you are not a Highly
Compensated Employee and you made Elective
Deferrals during that Plan Year. If Qualified
Matching Contributions are made, they will be
allocated to the Qualified Matching
Contributions Accounts of eligible Participants
in proportion to their Elective Deferral
Contributions for the Plan Year. Qualified
Matching Contributions are always 100% vested
and are NOT available for hardship withdrawals.
All of the preceding accounts will be credited with
earnings and/or losses on the amounts credited to
those Accounts and will be debited by distributions
from the Accounts.
D. SPECIAL TESTS
SPECIAL NONDISCRIMINATION TESTS
The Employer must make sure the Plan passes the ADP
test each Plan Year. This test is meant to insure
that Plan benefits do not discriminate in favor of
Highly Compensated Employees. If the Plan fails the
test in a Plan Year, the Employer may take one or
more of the following actions to make sure the Plan
passes the test:
- Before the end of the Plan Year, the Employer
may stop or reduce the amount of Elective
Deferral Contributions to be made by Highly
Compensated Employees for the rest of the Plan
Year.
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
- The Employer may distribute (and/or forfeit)
certain contributions (adjusted for any income
or loss on such contributions) made on behalf
of Highly Compensated Employees. For instance,
if the Plan fails the ADP test and returns some
of your Elective Deferral Contributions to you
by 2 1/2 months after the Plan Year in which
you made the contribution, you must include the
returned contribution in your taxable income in
the year you made the first contribution for
the Plan Year (generally, this is the year
before the contribution is returned to you). If
the Plan returns some of your Elective
Deferrals Contributions to you more than 2 1/2
months after the Plan Year in which you made
the contribution, you must include the returned
contribution in your taxable income in the year
in which the contribution is returned to you.
If the Employer distributes contributions, the
Employer will notify affected individuals and
give them a more detailed explanation of the
tax consequences of the action.
- The Employer may make a Qualified Nonelective
Contribution or a Qualified Matching
Contribution.
TOTAL CONTRIBUTION LIMITS
In addition to the tests described above, the tax
law limits the total amount of all contributions
(except Rollover Contributions) that can be
allocated to your Accounts in any year. Under this
rule, the maximum amount that may be contributed to
the Plan (and any other defined contribution plan
sponsored by the Employer) on your behalf in any
year is generally limited to the lesser of a
specified amount which may change each year
($30,000 in 1998) or 25% of your taxable
compensation (that is, your compensation after
elective deferral contributions to this and any
other plan). In order to prevent contributions from
exceeding this limit, the Employer may limit the
amount of your Elective Deferral Contributions or
return some of your contributions to you.
E. VESTING Vesting refers to the part of your Accounts that is
yours and that cannot be forfeited.
- You will always have a 100 percent vested
(nonforfeitable) interest in your:
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
- Elective Deferral Contributions Account
- Rollover Contributions Account
- Qualified Non-elective Contributions Account
- Qualified Matching Contributions Account
- You will earn a vested interest in your
Discretionary Employer Contributions Account
based on your Years of Vesting Service in
accordance with the following schedule:
Years of Vesting Service Vested Percentage
------------------------ -----------------
1 year 33.3%
2 years 66.7%
3 or more 100%
For example, if you have 3 Years of Vesting
Service and your employment terminates, you
will be entitled to the entire amount in your
Discretionary Employer Contribution Account.
However, if your employment terminates after
you complete only 2 Years of Vesting Service,
you will be entitled to receive 66.7% of that
Account.
You will also become 100% vested in these Accounts
when you reach your Normal Retirement Age of 65
while employed by the Employer or if you die or
become totally and permanently disabled while
employed by the Employer. For this purpose, total
and permanent disability means you are unable to
work at any job because of an illness which is
expected to end in death or which is expected to
last for at least 12 consecutive months. However,
total and permanent disability does not include
disability caused by certain things such as
alcoholism or drug addiction, service in any armed
forces or participating in a criminal act.
F. FORFEITURES
If your employment terminates when you are
partially vested in some or all of your Accounts
(see E, above) and all of your vested Account
balances are distributed to you before the end of
the second Plan Year after the Plan Year in which
your employment terminated, the nonvested portion
of your Accounts will be forfeited at the end of
the Plan Year in which you receive a distribution
of all of your vested Account balances. If you
return to work for the Employer before you
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
have a five consecutive year Break in Service
(measured from the date immediately after the date
your benefits were distributed), your forfeited
Account balances will be restored to your Accounts
if you repay to the Plan the full amount of your
prior distribution no later than five years after
you return to work. If you make timely repayment,
your previously forfeited benefits (unadjusted for
gains and losses) will be restored to your Accounts
as of the last day of the Plan Year in which you
make the repayment. Forfeited amounts will not be
restored if you return to work after the end of the
five consecutive year Break in Service (measured
from the date immediately after your vested
benefits were distributed) or if you do not timely
repay the full amount of your previous distribution
If you are not vested in any part of your Accounts
when your employment terminates, all of your
Accounts will be forfeited on the date your
employment terminates. If you return to work for
the Employer before you have a five consecutive
year Break in Service (measured from the date your
employment terminated), your forfeited Account
balances (unadjusted for gains and losses) will be
restored to your Accounts as of the end of the Plan
Year in which you return to work.
If your nonvested benefits are not forfeited in
accordance with the preceding rules (because, for
instance, you elect to defer distribution of your
vested benefits), your nonvested Account balances
will be held in suspense and forfeited in the Plan
Year in which you incur a five consecutive year
Break in Service unless you return to work for the
Employer before you incur a five consecutive year
Break in Service. If you return to work for the
Employer after you incur a five consecutive year
Break in Service, your forfeited benefits will NOT
be restored.
Forfeitures will be used in the following order of
priority in the Plan Year in which the forfeitures
take place:
- First, forfeitures will be used to restore
returning Participants' Accounts in accordance
with the rules described above.
- Next, forfeitures will be used to reduce future
contributions that must be made by the
Employer.
- Next, if the Employer elects, forfeitures will
be used to pay reasonable costs of
administering the Plan.
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
- Finally, any remaining forfeitures
- will be treated as Discretionary Employer
Contributions and allocated to Participant
Accounts as if they were Discretionary
Employer Contributions.
G. DISTRIBUTION OF BENEFITS
ELIGIBILITY FOR DISTRIBUTION
- You will be entitled to receive a distribution
of the vested amounts in your Accounts upon any
of the following events:
- Your employment with the Employer terminates
for any reason, including death or total and
permanent disability. (However, because of
certain legal restrictions, if your employment
terminates because of the sale of all or part
of the Employer's business, you may not be
treated as if your employment terminated.)
- You reach age 65. (Age 65 is the Plan's Normal
Retirement Age.)
- Termination of the Plan.
TIMING OF DISTRIBUTIONS
You will begin receiving benefit distributions in
accordance with the following rules:
- Generally, distribution of your vested Account
balances will begin within a reasonable period
of time after your employment terminates and
you submit completed distribution forms to the
Plan Administrator.
- If he total value of all of your vested
Accounts is more than $5,000 (or, at the time
of any prior distribution, was more than
$5,000), you may delay distribution of your
benefits; however, your benefits must start no
later than the April 1 following the year in
which you reach age 70 1/2. (If you reached age
70 1/2 before
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
January 1, 1988, special rules apply to
determine when your distributions must begin.)
- If the total value of all of your vested
Accounts is $5,000 or less (and, at the time of
all prior distributions, was $5,000 or less),
your entire vested Accounts will be distributed
to you in a lump sum payment of cash within a
reasonable period of time after your employment
terminates. You may NOT elect to delay
distribution of your benefits.
FORMS OF DISTRIBUTION
The following forms of distribution are available
if the total value of all of your vested Accounts
is greater than $5,000 (or, at the time of any
prior distribution, was greater than $5,000):
- In a lump sum payment of cash of all or part of
your vested Accounts.
- In substantially equal monthly, quarterly or
annual installment payments of cash over a
period of years not longer than your life
expectancy or the joint and last survivor life
expectancies of you and your Beneficiary.
(Under this method of payment, your payment for
a year is determined by dividing your account
balance at the end of the previous year by the
appropriate life expectancy. In the first year
of payment, the appropriate life expectancy is
determined from IRS tables based on your age
(and the age of your beneficiary if you elect
the joint life expectancy method of payment).
In each of the following years, that
appropriate life expectancy is reduced by one.
For instance, if life expectancy in the first
year is 20, life expectancy in the second year
is 19, life expectancy in the third year is 18,
etc., so that all payments are made by the end
of 20 years.)
Most lump sum distributions from the Plan will qualify
as "eligible rollover distributions." If your
distribution qualifies as an eligible rollover
distribution, 20% of the distribution will be withheld
for prepayment of your federal taxes unless the
distribution is directly rolled over to an individual
retirement account (IRA) or another qualified plan. In
addition, if you receive your vested Accounts before
you reach age 59 1/2, you may be subject to a penalty
tax.
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
Before you receive a distribution, the Plan
Administrator will supply you with a detailed
description of the withholding and direct rollover
rules and will give you the forms you must complete to
make your distribution election. Before you decide how
to receive your benefits, you should consult with a tax
adviser, such as an attorney or an accountant, to
consider your choices and determine the tax
consequences in your particular circumstances.
If your employment terminates and you return to work
for the Employer before you reach age 65, your future
benefit payments, if any, will stop while you are
employed by the Employer.
DEATH BENEFITS
You may designate one or more Beneficiaries to receive
any vested benefits you are entitled to receive from
the Plan when you die. However, if you are married on
the date of your death, your surviving spouse must be
your only Beneficiary unless (1) you designate another
Beneficiary, (2) your spouse specifically consents in
writing to that Beneficiary, and (3) your spouse's
consent is witnessed by the Plan Administrator or a
notary public. You may change your Beneficiary
designation at any time but if you are married, you
must have your spouse's consent as described in the
preceding sentence. In any event, all Beneficiary
designations must be made on a form which is available
from the Plan Administrator. If you fail to designate a
Beneficiary or if none of your Beneficiaries survive
you, the Plan Administrator will designate
Beneficiaries in the following order:
1. Your surviving spouse.
2. Your children, per stirpes. (This means that if
all of your children survive you, they will share
equally in any survivor benefits. However, if one
of your children dies before you, but his
children survive you, the share that your
deceased child would have received will be
divided equally among the children of your
deceased child.)
3. Your brothers and sisters, per stirpes.
4. Your parents, in equal shares.
5. Your estate.
If you die after benefit payments have begun but before
you have received all of your vested benefits, payments
will continue to your Beneficiary. If desired, your
Beneficiary may receive the payments on a faster
schedule or in one lump sum payment.
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SUMMARY PLAN DESCRIPTION
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
If you die before payment of your benefits begins, your
vested interest in your Accounts will be paid to your
Beneficiary. The Plan Administrator will give your
Beneficiary additional information on the death benefit
choices. In general, your entire vested Account balance
must be distributed by the end of the fifth year
following the year in which you die unless your
Beneficiary elects to receive your vested benefits in
substantially equal installments over his or her life
expectancy beginning by the end of the year following
the year in which you die. However, if your Beneficiary
is your surviving spouse, the installments do not have
to begin until the later of (1) the first anniversary
of your death, or (2) the date you would have reached
age 70 1/2 if you had not died. Your surviving spouse
must make an election of when benefits will begin by
the earlier of (1) the end of the fifth year following
the year in which you died, or (2) the later of the
first anniversary of your death or the date you would
have reached age 70 1/2 if you had not died.
H. INVESTMENT OF PLAN ASSETS
All contributions to the Plan are kept in the Trust. A
separate Account, including all of the Accounts
described in the Contributions Section, is maintained
for you within the Trust. The assets of the Trust may
be invested only in the T. Rowe Price mutual funds
selected by the Employer as investment options under
the Plan.
You must tell the Plan Administrator how to invest the
amounts in all of your Accounts. See the Plan
Administrator for a description of the Price mutual
funds that are available under the Plan and an
explanation of how often you may change your choices
and other rules that apply to your investment options.
Read each mutual fund prospectus carefully before you
decide how to invest.
I. WITHDRAWALS You may make the following types of withdrawals from
your Accounts while you are still employed by the
Employer.
- You may make a hardship withdrawal of contributions
to (but not earnings on) your Elective Deferral
Contribution Account only if you have an immediate
and heavy financial need and you do not have other
resources to meet the need. The following
circumstances will qualify as an immediate and
heavy financial need:
- Medical expenses incurred by you, your spouse
or your dependents that would qualify as
deductible on an individual tax return;
- The purchase of your primary residence;
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
- Payment of tuition and related educational fees
for the next year for post-secondary education
for you, your spouse, children or dependents;
or
- The need to prevent eviction from, or
foreclosure on the mortgage of, your primary
residence.
Before you can take a hardship withdrawal, you must
first obtain all other forms of withdrawal, including
loans, available under this Plan and all other plans
maintained by the Employer.
All hardship withdrawal requests must be submitted in
writing to the Plan Administrator and are subject to
approval by the Plan Administrator. The amount
withdrawn may not exceed the sum of the actual expense
incurred because of the hardship and estimated taxes
and penalties on the hardship withdrawal. In addition,
if you make a hardship withdrawal, (1) you may not make
any type of contributions to this Plan or any other
plan maintained by the Employer for one year after you
receive this withdrawal, and (2) the maximum amount of
Elective Deferral Contributions you may make in the
calendar year following the year of your withdrawal
will be reduced by the amount of Elective Deferral
Contributions you made your with in the year of the
withdrawal.
J. LOANS This Plan contains provisions that permit you to borrow
from your vested Account balance. However, you should
be aware that the amount of your loan, when added to
the total of all outstanding loans to you (if any) from
all pension and profit sharing plans of the Employer,
may not be greater than the lesser of (1) $50,000
reduced by your highest outstanding plan loan balances
during the year preceding the date of the loan, or (2)
50% of the value of your vested interest in your
Accounts.
The Plan Administrator will determine the terms of all
loans. The maximum payment term for any loan generally
will be five years. The minimum loan is $ 1,000. Plan
loans must be repaid by salary deduction in equal
payments each pay period.
1. The person or group authorized to administer the
loan program is the Plan Administrator.
2. The procedure for applying for loans is the
completion of a loan application you obtain from
the Plan Administrator. It will be necessary to
obtain your spouse's consent in writing as part of
the loan application.
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
3. The basis on which loans are approved or denied is
a non-discriminatory basis, uniformly applicable to
all Participants.
4. The limitations on the types and amounts of loans
offered will be determined by the Plan
Administrator and described to you separately.
5. The reasonable rate of interest will be determined
as follows:
The interest rate will be the prevailing rate found
by the Plan Administrator. It will be the average
of the rate used for similar personal loan
transactions used by several commercial banks in
the general geographic area of the Plan
6. Collateral to secure repayment of a loan will be
50% of your vested Account balance.
7. In the event you terminate employment, all
remaining payments on the loan shall be'
immediately due and payable.
8. The following are the procedures which will be
followed in the event of a default on your loan. In
the event of your future failure to repay the loan,
the Plan Administrator will declare your loan in
default. If you default on your loan, all remaining
payments on the loan shall be immediately due and
payable. If you do not pay off the loan, the
outstanding amount will be deducted from your
Account balance upon its distribution to you. The
amount of the loan balance would then be a taxable
distribution from the Plan and may also be subject
to a 10% early distribution penalty if you are not
at least age 59 1/2. Your Employer will be required
to withhold 20% of the amount of your loan in
default for payment of Federal Income Taxes. This
withholding will be paid from your remaining vested
Account balance at the time of distribution. You
should consult a tax advisor if this occurs to
determine its effect on your taxes. Note that if
the loan is deemed to be distributed as taxable
income to you, and you are not otherwise entitled
to receive a distribution, the loan will remain
part of your Account balance.
K. TOP HEAVY RULES
To ensure that the majority of benefits under the
Plan are not being provided primarily to key
employees of the Employer, a determination is made
each Plan Year as to whether the Plan is "top
heavy". Key employees are officers of the Employer
who earn over a specified annually adjusted amount
($65,000 in 1998) and employees who own one of the
10 largest interests in the Employer and earn over
a certain annually adjusted
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
amount ($30,000 in 1998). Employees who own at
least five percent of the Employer and employees
who own at least one percent of the Employer and
receive annual compensation of more than $150,000
from the Employer are also considered key
employees.
The Plan will be deemed to be "top heavy" in any
Plan Year in which the total Account balances of
key employees under this Plan (and any plan which
must be aggregated with this Plan to make such a
determination) exceed 60% of the total amount of
the Account balances for all Participants.
For any Plan Year in which the Plan is top heavy,
if you are not a key employee and you are employed
by the Employer on the last day of the Plan Year,
the Employer must make for you a minimum top-heavy
contribution that is equal to the lesser of (1) 3%
of your Compensation for that Plan Year, or (2) the
highest contribution percentage made on behalf of a
key employee in that Plan Year. However, in any
Plan Year the Plan is top-heavy, if the top heavy
minimum contribution requirement is met in another
plan of the Employer, no top-heavy minimum
contribution will be made to this Plan.
IV. CLAIMS PROCEDURES.
The Plan Administrator has the sole responsibility
to interpret the provisions of the Plan, including,
but not limited to, the responsibility to determine
eligibility for participation and benefits, to
resolve benefit claims, and to take all other
actions necessary to administer the Plan. Any
action taken or decision made by the Plan
Administrator shall be final, conclusive and
binding on all parties.
You or your Beneficiary may file a written claim
for benefits under this Plan with the Plan
Administrator at any time. If you or your
Beneficiary want to dispute a decision or action of
the Plan Administrator, you or your Beneficiary
must submit a written claim to the Plan
Administrator within 60 days, or within a longer
period if special circumstances are involved, after
you or your Beneficiary receive notice of the Plan
Administrator's decision or action. If your claim
is denied to any extent by the Plan Administrator,
a written notification must be sent to you within
90 days (or within a longer period if special
circumstances apply) after the Plan Administrator
receives your claim. The Plan Administrator's
notice will state the reason why your claim was
denied, give reference to the specific provisions
of the Plan on which the decision was reached,
describe any additional material you should give to
the Plan Administrator if you decide to appeal the
decision and
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EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
explain the appeal procedure described in the
following paragraph.
If you or your Beneficiary choose to appeal the
Plan Administrator's decision, you or your
Beneficiary must make a request for review in
writing to the Plan Administrator within 60 days
after you receive written notification of the
decision. You may inspect documents relating to
your claim, and you may submit written arguments
and documents to support your claim. Within 60 days
after your appeal is filed with the Plan
Administrator, or within 120 days, if there are
special circumstances involved, the Plan
Administrator will issue you a written notice that
includes specific reasons for its decision on
appeal.
You (or your Beneficiary) must exhaust all of your
rights under this claims procedure before filing an
action in any court.
V. MISCELLANEOUS.
A. AMENDMENT OF THE PLAN
The Employer reserves the right to amend the Plan
at any time. T. Rowe Price Trust Company, as
sponsor of the prototype plan document, also
reserves the right to amend the prototype plan
document at any time. No amendment to the Plan can
reduce your Account balances. (Obviously, however,
your Account balance can be reduced by investment
losses or distribution of all or part of your
Accounts.) You will be kept informed of any
material amendments to the Plan by updates to this
Summary Plan Description.
B. TERMINATION OF THE PLAN
The Employer intends to continue this Plan
indefinitely. However, the Employer reserves the
right to terminate the Plan at any time. If a
termination takes place, or if the Employer
permanently discontinues making contributions to
the Plan, you will have a 100% nonforfeitable
interest in all of your Accounts.
C. INAPPLICABILITY OF PBGC GUARANTEES
Because this Plan is a defined contribution plan,
benefits under the Plan are NOT insured by the
Pension Benefit Guaranty Corporation.
D. SPECIAL RIGHTS UNDER ERISA
Page 22
================================================================================
<PAGE> 26
================================================================================
SUMMARY PLAN DESCRIPTION
-------------------------------------------------------------------------
EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
As a Participant in the Plan, you are entitled to
certain rights and protections under the Employee
Retirement Income Security Act of 1974 (ERISA).
ERISA provides that all Plan Participants shall be
entitled to:
- Examine, without charge, at the Plan
Administrator's office and at other specified
locations, such as worksites and union halls,
all Plan documents, including insurance
contracts, collective bargaining agreements and
copies of all documents filed by the Plan with
the U.S. Department of Labor, such as detailed
annual reports and Summary Plan Descriptions.
- Obtain copies of all Plan documents and other
Plan information upon written request to the
Plan Administrator. The Plan Administrator may
make a reasonable charge for the copies.
- Receive a summary of the Plan's annual
financial report. The Plan Administrator is
required by law to furnish each Participant
with a copy of this summary annual report.
- Obtain a statement telling you whether you have
the right to receive a benefit at your Normal
Retirement Date and if so, what your benefits
under the Plan would be on the Normal
Retirement Date if you stop working now. If you
do not have a right to a benefit, the statement
will tell you how many more years you have to
work for a right to a benefit. This statement
must - be requested in writing and is not
required to be given more than once a year. The
Plan must provide the statement free of charge.
In addition to creating rights for Plan
Participants, ERISA imposes duties upon the people
who are responsible for the operation of the Plan.
The people who operate the Plan, called
"fiduciaries" of the Plan, have a duty to do so
prudently and in the interest of you and other Plan
Participants and Beneficiaries. No one, including
the Employer, your union or any other person, may
fire you or otherwise discriminate against you in
any way to prevent you from obtaining a retirement
benefit or exercising your rights under ERISA. If
your claim for a benefit is denied in whole or in
part, you must receive a written explanation of the
reason for the denial. You have the right to have
the Plan Administrator review and reconsider your
claim.
Page 23
================================================================================
<PAGE> 27
================================================================================
SUMMARY PLAN DESCRIPTION
-------------------------------------------------------------------------
EXCHANGE APPLICATIONS, INC.
401(K) RETIREMENT PLAN
Under ERISA, there are steps you can take to
enforce the above rights. For instance, if you
request materials from the Plan Administrator and
do not receive them within 30 days, you may file
suit in a federal court. In such a case, the court
may require the Plan Administrator to provide the
materials and pay you up to $110 a day until you
receive the materials, unless the materials were
not sent because of reasons beyond the control of
the Plan Administrator. If you have a claim for
benefits which is denied or ignored, in whole or in
part, you may file suit in a state or federal
court.
If it should happen that Plan fiduciaries misuse
the Plan's money, or if you are discriminated
against for asserting your rights, you may seek
assistance from the U.S. Department of Labor, or
you may file suit in a federal court. The court
will decide who should pay court costs and legal
fees. If you are successful, the court may order
the person you have sued to pay these costs and
fees. If you lose, the court may order you to pay
these costs and fees if, for example, the court
finds your claim is frivolous. If you have any
questions about the Plan, you should contact the
Plan Administrator. If you have any questions about
this statement or about your rights under ERISA,
you should contact the nearest Area Office of the
U.S. Labor-Management Services Administration,
Department of Labor.
E. ASSIGNMENT OF BENEFITS
Benefits under the Plan are intended only for you
(or if you die, your Beneficiary). Neither you nor
your Beneficiary can transfer, assign or pledge any
of your Plan benefits except as a security for a
Plan loan. In addition, no other person can have
access to your Accounts held in the Plan except as
may be required under (1) an IRS lien for back
taxes, or (2) what is called a "qualified domestic
relations order." Under a "qualified domestic
relations order," a court may enter an order that
awards all or part of your vested Account balances
to another person or persons.
F. NO CONTINUED RIGHTS TO EMPLOYMENT
No provision of the Plan or this Summary Plan
Description (1) gives you any right to continued
employment, (2) prohibits changes in the terms of
your employment, or (3) prohibits the termination
of your employment.
Page 24
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<PAGE> 28
SIMPLIFIED 401(k) PROTOTYPE PLAN
ADOPTION AGREEMENT #001
This is the Adoption Agreement for defined contribution plan #001 of basic
plan document #07, which is a combined prototype Section 401(k)/profit sharing
defined contribution plan. This Adoption Agreement may be used only in
conjunction with basic plan document #07.
NOTE: Before executing this Adoption Agreement, the Employer should consult
with a tax adviser or attorney. Failure to properly complete this Adoption
Agreement may result in Plan disqualification.
The Employer hereby establishes a Section 401(k) plan and a trust for such
plan upon the respective terms and conditions contained in the Section 401(k)
prototype plan (the "Plan"), and the Trust Agreement to the Plan and appoints as
Trustee of such trust the person(s) who has (have) executed this Adoption
Agreement evidencing his/her/its (their) acceptance of such appointment. The
Plan and the Trust Agreement shall be supplemented and modified by the terms and
conditions contained in this Adoption Agreement and shall be effective on the
Effective Date, as specified herein.
After the Employer has notified T. Rowe Price Trust Company in writing that
it has adopted the Plan, T. Rowe Price Trust Company shall inform the Employer
of any amendments made to the prototype plan or the discontinuance or
abandonment of the prototype plan after T. Rowe Price Trust Company receives
such notice and until the Employer notifies T. Rowe Price Trust Company it has
ceased to use this prototype plan or the Employer no longer meets the
requirements of the prototype (e.g., plan assets are not invested solely in
Shares).
I. SPONSOR DATA
T.Rowe Price Trust Company
4555 Painters Mill Road
Owings Mills, MD 21117-4903
1-800-492-7670
II. EMPLOYER DATA
A. Name: Exchange Applications, Inc.
----------------------------------------------------------------
B. Tax Identification Number (TIN): 04-3338916
-------------------------------------
C. Address: 695 Atlantic Avenue, Suite 200
----------------------------------------------------------
Boston, MA 02111
----------------------------------------------------------
----------------------------------------------------------
D. Telephone Number: (617) 737-2244
--------------------------------------------------
E. Employer's Taxable Year End: December 31
--------------------------------------
F. Employer is: [X] a corporate entity
<PAGE> 29
[ ] a non-corporate entity
[ ] a corporate entity electing Subchapter S treatment.
III. PLAN DATA (Complete A or B)
A. New Plan.
1. Name of Plan and Trust: Exchange Applications, Inc.
----------------------------------------
401(k) Retirement Plan
-----------------------------------------------------------------
2. Effective Date of Plan and Trust: June 1, 1998
------------------------------
(Usually the first day of the Plan Year in which the Plan is
adopted)
3. Plan Year End: December 31
--------------------------------------------------
B. Amended and Restated Plan.
1. Name of Plan and Trust:
----------------------------------------
-----------------------------------------------------------------
2. Initial Effective Date:
----------------------------------------
3. Effective Date of Amended Plan
----------------------------------
(Usually the first day of a Plan Year)
4. Plan Year End:
--------------------------------------------------
IV. ELIGIBILITY
A. All Employees shall be eligible to participate in this Plan in
accordance with the provisions of Article III of the Plan, EXCEPT the
following:
[X] Employees who have not attained age 18 (cannot exceed 21);
[ ] Employees who have not completed _________ (cannot exceed one)
Year of Eligibility Service. (If the year of eligibility service
selected is a fractional year, an Employee will not be required
to complete any specified number of hours of service to receive
credit for such fractional year.)
[ ] Employees included in a unit of Employees covered by a collective
bargaining agreement, if retirement benefits were the subject of
good faith bargaining between the Employer and Employee
representatives. Employee representatives do not include any
organization more than half of whose members are Employees who
are owners, officers or executives of the Employer;
[X] Any eligible Employee who is employed by the Employer on the
Effective Date of the Plan shall be eligible to participate on
the Effective Date regardless of his or her age or Years of
Eligibility Service.
-2-
<PAGE> 30
B. The Entry Dates shall be the Effective Date of the Plan and thereafter
(Complete 1 or 2)
1. [ ] The first day of each Plan Year and the first day of the
seventh month in each Plan Year;
2. [X] The first day of each Plan Year and the first day of each
quarter in the Plan Year.
V. CONTRIBUTIONS
A. Elective Deferrals.
A Participant may elect to defer an amount not in excess of 15 % of
his or her compensation per pay period in accordance with a salary
reduction agreement signed by the Participant.
B. Employer Matching Contributions.
1. Matching Employer Contributions
a. [ ] shall be made to the Plan.
b. [X] shall not be made to the Plan. (If this subsection b is
elected, do not complete the following section 2.)
2. For a Plan Year, the Employer shall contribute and allocate to
the Matching Contributions Account of each Participant who made
Elective Deferrals during the Plan Year an amount equal to ____%
of the Participant's Elective Deferrals for each pay period in
the Plan Year; provided that for purposes of calculating such
Matching Contributions, the Participant's Elective Deferrals
shall be treated as not exceeding ____% of the Participant's
Compensation for each such pay period.
Notwithstanding the foregoing, the Employer Matching Contribution
made on behalf of an eligible Participant for the Plan Year shall
not exceed $________. (If this section is not completed, only the
percentage limit will apply to Employer Matching Contributions.)
C. Discretionary Employer Contributions
1. [X] may be made to the Plan each year as determined by the
Employer.
2. [ ] shall not be made to the Plan.
VI. VESTING
If a Participant terminates employment for reasons other than retirement,
death or total and permanent disability, the vested portion of his or her
Accounts (other than his or her Salary
-3-
<PAGE> 31
Deferral and Rollover Contribution Accounts, which are always 100% vested)
shall be determined in accordance with the following schedule (Choose A, B
or C):
A. [X] YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
1 year 33.3%
-----
2 years 66.7%
-----
3 or more years 100 %
B. [ ] YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
1 year %
-----
2 years % (at least 20%)
-----
3 years % (at least 40%)
-----
4 years % (at least 60%)
-----
5 years % (at least 80%)
-----
6 or more years 100 %
C. [ ] 100% full and immediate.
VII. OPTIONAL FEATURES
A. Loans to Participants (Choose 1 or 2):
1. [ ] will not be permitted.
2. [X] will be permitted not exceeding 50% (not more than 50%) of
the present value of the Participant's vested accrued
benefit.
B. Hardship withdrawals (Choose 1 or 2):
1. [ ] will not be permitted.
2. [ ] will be permitted.
VIII. TOP-HEAVY PROVISIONS
If the Employer maintains or has ever maintained a defined benefit plan,
then for purposes of determining the present value of defined benefit
plans' accrued benefits required to be aggregated with this Plan to compute
the top-heavy ratio, any benefit shall be discounted only for mortality and
interest based on the following:
Interest rate: _____________________ Mortality table: ____________________
IX. ALLOCATION LIMITATION
If any Participant in this Plan is or has ever been a participant in a
defined benefit plan maintained by the Employer, give an explanation below
of the method under which the plan
-4-
<PAGE> 32
involved will satisfy the 1.0 limitation of section 415(e) of the Code in a
manner that precludes Employer discretion:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
X. THE TRUSTEE(S)
The Employer hereby appoints the following to serve as Trustee(s):
Name: John O'Brien
---------------------------------------------------------------------
Address: 695 Atlantic Avenue, Suite 200
------------------------------------------------------------------
Boston, MA 02111
---------------------------------------------------------------------------
/s/ [signature illegible] /s/ John O'Brien
--------------------------------------- -------------------------------
Witness [Signature of] Trustee
Dated: /s/ [illegible] 6/9/98
-----------------------
Name: Kristin Zaepfel
---------------------------------------------------------------------
Address: 695 Atlantic Avenue, Suite 200
------------------------------------------------------------------
Boston, MA 02111
---------------------------------------------------------------------------
/s/ [signature illegible] /s/ Kristin Zaepfel
--------------------------------------- -------------------------------
Witness [Signature of] Trustee
Dated:
-------------------------------
Name:
---------------------------------------------------------------------
Address:
------------------------------------------------------------------
---------------------------------------------------------------------------
------------------------------------- -------------------------------
Witness [Signature of] Trustee
Dated:
-------------------------------
XI. SUPPLEMENTS
If additional space is required to specify an elective feature or to amend
the Plan in accordance with Section 13.2 of the Plan, please attach
additional pages as needed. Each additional page
-5-
<PAGE> 33
must reference the Section of the Adoption Agreement or the Plan to which
the addition applies and must be signed (or initialed) by the Employer and
the Trustee(s). In addition, each supplementary page should be numbered,
and the total number of pages in the Adoption Agreement and additional
pages indicated in the following Section.
XII. EMPLOYER SIGNATURE
The Employer acknowledges receipt of the current prospectus of each of the
investment options designated by the Employer for its initial choice of
investments available under the Plan and represents that it has delivered a
copy thereof to each Participant in the Plan, and that it will deliver to
each Participant making contributions and each new Participant, a copy of
the then current prospectus of such investment options. The Employer
further represents that the information in this Adoption Agreement shall
become effective only when approved and countersigned by the Trustee(s).
The right to reject this Adoption Agreement for any reason is reserved.
Note: An Employer who has ever maintained or who later adopts any plan
(including a welfare benefit fund, as defined in Code section 419(e),
which provides post-retirement medical benefits allocated to separate
accounts for Key Employees, as described in Code section 419A(d)(3),
or an individual medical account as defined in Code section
415(1)(2)), in addition to this Plan may not rely on the opinion
letter issued by the National Office of the Internal Revenue Service
as evidence that this Plan is qualified under Code section 401(a). If
the Employer who adopts or maintains multiple plans wishes to obtain
reliance that the plans are qualified, application for a
determination letter should be made to the appropriate Key District
Director of Internal Revenue.
The Employer may not rely on the opinion letter issued by the
National Office of the Internal Revenue Service as evidence that this
Plan is qualified under Code section 401 unless the terms of the
Plan, as herein adopted or amended, that pertain to the requirements
of Code sections 401(a)(4), 401(a)(17), 401(1), 401(a)(5), 410 (b)
and 414(s), as amended by the Tax reform Act of 1986, or later laws,
(a) are made effective retroactively to the first day of the first
Plan Year beginning after December 31, 1988 (or such later date on
which these requirements first become effective with respect to this
Plan); or (b) are made effective no later than the first day on which
the Employer is no longer entitled, under regulations, to rely on a
reasonable, good faith interpretation of these requirements, and the
prior provisions of the plan constitute such an interpretation.
This Adoption Agreement consists of 6 pages.
---
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be
executed by its duly authorized officers this 9th day of June, 1998.
--- -----------
Exchange Applications, Inc.
----------------------------------------
[Name of] Employer
By: /s/ John O'Brien
----------------------------------------
Name and Title: John O'Brien, VP/CFO
------------------------------------
(please print)
-6-
<PAGE> 34
================================================================================
T. ROWE PRICE TRUST COMPANY
SIMPLIFIED 401(K) PROTOTYPE PLAN
BASIC DOCUMENT #07
================================================================================
7
<PAGE> 35
T. ROWE PRICE TRUST COMPANY
SIMPLIFIED 401(k) PROTOTYPE PLAN
TABLE OF CONTENTS
ARTICLE 1. GENERAL
1.1 Purpose ...........................................13
1.2 Trust .............................................13
ARTICLE 2. DEFINITIONS
2.1 Account ...........................................13
2.2 Adoption Agreement ................................13
2.3 Affiliated Employers ..............................13
2.4 Beneficiary .......................................13
2.5 Break in Service ..................................13
2.6 Code ..............................................13
2.7 Compensation ......................................13
2.8 Earned Income .....................................14
2.9 Effective Date ....................................14
2.10 Elective Deferrals ................................14
2.11 Employee ..........................................14
2.12 Employee After-Tax Contributions ..................14
2.13 Employer ..........................................14
2.14 Employer Discretionary Contributions ..............14
2.15 Entry Dates .......................................14
2.16 ERISA .............................................14
2.17 Family Members ....................................14
2.18 Five Percent Owner ................................14
2.19 Highly Compensated Employee .......................14
2.20 Hour of Service ...................................15
2.21 Leased Employee ...................................15
2.22 Matching Contributions ............................16
2.23 Non-Highly Compensation Employee ..................16
2.24 Normal Retirement Age .............................16
2.25 Owner-Employee ....................................16
2.26 Participant .......................................16
2.27 Plan ..............................................16
2.28 Plan Administrator ................................16
2.29 Plan Year .........................................16
2.30 Section 415 Compensation ..........................16
2.31 Self-Employed Individual ..........................16
2.32 Shares ............................................16
2.33 Sponsor ...........................................16
2.34 Total Compensation ................................16
2.35 Total and Permanent Disability ....................17
2.36 Trust .............................................17
2.37 Trust Agreement ...................................17
2.38 Trustee ...........................................17
2.39 Valuation Date ....................................17
2.40 Year of Eligibility Service .......................17
2.41 Year of Vesting Service ...........................17
ARTICLE 3 ELIGIBILITY AND YEARS OF SERVICE
3.1 Eligibility Requirements ..........................17
(a) General Rule ..................................17
(b) Excludable Employees ..........................17
(c) Change in Status ..............................17
3.2 Participation and Service Upon Reemployment .......17
(a) Participation .................................17
(b) Credit for Prior Service ......................17
3.3 Predecessor Employers .............................17
ARTICLE 4. TRUST FUND
4.1 Receipt of Contributions by Trustee ...............18
4.2 Investment Responsibility .........................18
(a) Investment Choices ............................18
(b) Participant Direction .........................18
(c) Change in Investment Choices ..................18
4.3 Investment Limitations ............................18
ARTICLE 5. CONTRIBUTIONS
5.1 Payment ...........................................18
5.2 Employee Contributions ............................18
(a) After-Tax Contributions .......................18
(b) Employee Elective Deferrals ...................18
(c) Rollovers .....................................18
(d) Plan-to-Plan Transfers ........................18
5.3 Employer Contributions ............................18
(a) Matching Contributions ........................18
(b) Discretionary Contributions ...................19
(c) Contribution Limitation .......................19
5.4 Excess Elective Deferrals .........................19
(a) General .......................................19
(b) Calculation of Income or Loss .................19
(c) Tax Treatment .................................19
(d) Forfeiture of Certain Matching Contributions ..19
5.5 Actual Deferral Percentage Test ...................19
(a) General Test ..................................19
(b) Special Rules .................................19
5.6 Average Contribution Percentage Test ..............20
(a) General Test ..................................20
(b) Special Rules .................................20
5.7 Prevention or Cure of ADP Test Failures ...........20
5.8 Prevention or Cure of ACP Test Failures ...........20
5.9 Distribution of Excess Contributions
to Cure ADP Test Failure ..........................21
(a) General Rule ..................................21
(b) Calculation of Income or Loss .................21
(c) Method of Distribution ........................21
(d) Forfeiture of Certain Matching Contributions ..21
5.10 Qualified Nonelective Contributions to
Cure ADP and/or ACP Test Failure ..................21
5.11 Qualified Matching Contribution to
Cure ADP and/or ACP Test Failure ..................21
5.12 Forfeiture and/or Distribution of Excess
Aggregate Contributions ...........................21
5.13 Definitions .......................................21
(a) Actual Deferral Percentage ....................21
(b) Aggregated Limit ..............................22
(c) Average Contribution Percentage ...............22
(d) Contribution Percentage .......................22
================================================================================
9
<PAGE> 36
================================================================================
(e) Contribution Percentage Amounts ...............22
(f) Excess Aggregate Contributions ................22
(g) Excess Contribution ...........................22
(h) Excess Elective Deferrals .....................22
(i) Qualified Matching Contributions ..............22
(j) Qualified Nonelective Contributions ...........22
ARTICLE 6. ALLOCATIONS
6.1 Individual Accounts ...............................23
(a) Elective Deferrals ............................23
(b) Rollovers .....................................23
(c) After-Tax Contributions .......................23
(d) Matching Contributions ........................23
(e) Discretionary Contributions ...................23
(f) Qualified Nonelective Contributions ...........23
(g) Qualified Matching Contributions ..............23
6.2 Allocation of Contributions .......................23
(a) Elective Deferrals, Matching Contributions
and Rollover Contributions ....................23
(b) Qualified Nonelective and Qualified
Matching Contributions ........................23
(c) Employer Discretionary Contributions ..........23
6.3 Minimum Top-Heavy Allocation ......................23
(a) General Rule ..................................23
(b) Special Rule If Other Plans Satisfy
Top-Heavy Minimum .............................23
6.4 Allocation of Forfeitures .........................24
6.5 Withdrawals and Distributions .....................24
6.6 Determination of Value of Trust Fund and
of Net Earnings or Losses .........................24
6.7 Allocation of Net Earnings or Losses ..............24
(a) Specific Participant Account Allocations ......24
(b) Common Account Allocations ....................24
6.8 Responsibilities of the Plan Administrator ........24
6.9 Definitions .......................................24
(a) Determination Date ............................24
(b) Integration Level .............................24
(c) Key Employee ..................................24
(d) Maximum Profit Sharing Disparity Rate .........25
(e) Non-Key Employee ..............................25
(f) Permissive Aggregation Group ..................25
(g) Present Value .................................25
(h) Required Aggregation Group ....................25
(i) Top-Heavy .....................................25
(j) Top-Heavy Ratio ...............................25
(k) Taxable Wage Base (or "TWB") ..................26
ARTICLE 7. LIMITATIONS ON ALLOCATIONS
7.1 Limitations on Annual Additions to
Qualified Defined Contribution Plans ..............26
7.2 Employers Who, In Addition To This Plan,
Maintain A Qualified Defined Benefit Plan .........26
7.3 Definitions .......................................26
(a) Annual Additions ..............................26
(b) Defined Benefit Fraction ......................27
(c) Defined Contribution Fraction .................27
(d) Excess Amount .................................27
(e) Limitation Year ...............................27
(f) Maximum Permissible Amount ....................27
(g) Projected Annual Benefit ......................27
ARTICLE 8. VESTING
8.1 Employee After-Tax Contributions, Elective
Deferral Contributions, Rollover Contributions,
Qualified Nonelective Contributions and Qualified
Matching Contributions ............................28
8.2 Employer Discretionary Contributions and
Matching Contributions ............................28
(a) General .......................................28
(b) In-Service Distributions When Not Fully
Vested ........................................28
8.3 Amendments to Vesting Schedule ....................28
(a) Participants' Election Rights .................28
(b) Election Period ...............................28
(c) Prohibition Against Reducing
Accrued Benefits ..............................28
8.4 Determination of Years of Vesting Service .........28
8.5 Forfeiture of Nonvested Amounts ...................28
(a) Distribution in Full ..........................28
(b) Partial Distributions .........................29
8.6 Reinstatement of Benefit ..........................29
ARTICLE 9. LOANS
9.1 General Provisions ................................29
(a) Eligibility of Loans ..........................29
(b) Spousal Consent Rules .........................29
9.2 Amount of Loan ....................................29
9.3 Manner of Making Loans ............................29
9.4 Terms of Loan .....................................30
9.5 Security of Loan ..................................30
9.6 Segregated Investment .............................30
9.7 Repayment of Loan .................................30
9.8 Default on Loan ...................................30
ARTICLE 10. WITHDRAWALS
10.1 Withdrawal of Employee After-Tax
Contributions .....................................30
10.2 Hardship Withdrawals ..............................30
(a) General Rule ..................................30
(b) Needs Considered Immediate and Heavy ..........30
(c) Necessary to Satisfy Need .....................30
10.3 Manner of Making Withdrawals ......................30
10.4 Limitations on Withdrawals ........................31
10.5 Special Circumstances .............................31
(a) Plan Termination ..............................31
(b) Disposition of Assets .........................31
(c) Disposition of Subsidiary .....................31
ARTICLE 11. DISTRIBUTION PROVISIONS
11.1 Retirement Distributions ..........................31
(a) Deferred Retirement ...........................31
(b) Participant Status after Retirement ...........31
11.2 Death Benefits ....................................31
(a) Death of Former Employee ......................31
(b) Proof of Death ................................31
(c) Beneficiary Designation .......................31
11.3 Permanent Disability Benefits .....................32
================================================================================
10
<PAGE> 37
================================================================================
11.4 Termination of Employment Prior to Retirement,
Death or Total and Permanent Disability ..........32
11.5 Commencement of Lifetime Distributions ...........32
(a) Upon Retirement ..............................32
(b) Upon Termination of Employment Other
Than Retirement ...............................32
(c) Statutory Requirements .......................32
(d) In-Service Distributions .....................32
(e) Required Beginning Date ......................32
11.6 Commencement of Death Benefits ...................33
(a) Non-Spouse Beneficiary .......................33
(b) Spouse Beneficiary ...........................33
(c) Election Period ..............................33
11.7 Methods of Distribution ..........................33
(a) General Rule .................................33
(b) Direct Rollover ..............................33
11.8 Minimum Required Distributions ...................33
(a) Individual Account ............................33
(b) Other Forms ...................................34
(c) Definitions ...................................34
(d) Participant's Benefit .........................34
11.9 Joint and Survivor Annuity Requirements ...........34
(a) Qualified Joint and Survivor Annuity ..........34
(b) Qualified Pre-Retirement Survivor Annuity .....35
(c) Special Rules ................................36
11.10 Reemployment .....................................36
11.11 Valuation of Benefits ............................36
ARTICLE 12. ADMINISTRATION
12.1 Duties and Responsibilities of Fiduciaries;
Allocation of Fiduciary Responsibility ............36
12.2 Powers and Responsibilities of the Plan
Administrator .....................................36
(a) Administration of the Plan ....................36
(b) Records and Reports ...........................36
(c) Furnishing Trustee with Instructions ..........36
(d) Rules and Decisions ...........................36
(e) Application and Forms for Benefits ............37
(f) Facility of Payment ...........................37
12.3 Allocation of Duties and Responsibilities .........37
12.4 Expenses ..........................................37
12.5 Liabilities .......................................37
12.6 Claims Procedure ..................................37
(a) Filing a Claim ................................37
(b) Notice of Denial of Claim .....................37
(c) Right of Review ...............................37
(d) Decision on Review ............................37
(e) Court Action ..................................37
ARTICLE 13. AMENDMENT, TERMINATION AND MERGER
13.1 Sponsor's Power to Amend ..........................38
13.2 Amendment by Adopting Employer ....................38
13.3 Termination .......................................38
13.4 Vesting Upon Complete Discontinuance of
Contributions .....................................38
13.5 Maintenance of Benefits Upon Merger ...............38
ARTICLE 14. MISCELLANEOUS
14.1 Exclusive Benefit of Participants and
Beneficiaries .....................................38
(a) General Rule ..................................38
(b) Special Rules .................................38
14.2 Nonguarantee of Employment ........................38
14.3 Rights to Trust Assets ............................38
14.4 Nonalienation of Benefits .........................38
14.5 Failure of Qualification ..........................38
14.6 Applicable Law ....................................38
14.7 Reference to Federal Law ..........................39
14.8 Construction ......................................39
14.9 Headings ..........................................39
14.10 Priority of Adoption Agreement ....................39
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TRUST AGREEMENT
ARTICLE I. TRUST FUND
1.1 Trust .............................................39
1.2 Delegation of Authority ...........................39
1.3 Limitations of Trustee's Duties ...................39
ARTICLE II. ACCOUNTS
2.1 Establishing Accounts .............................39
2.2 Charges Against Accounts ..........................39
ARTICLE III. INVESTMENT OF TRUST ASSETS
3.1 Investment of Trust Assets ........................39
3.2 Written Instruction ...............................40
3.3 Participant Directed Investments ..................40
3.4 Employer Directed Investments .....................40
3.5 Trustee's Liability with Respect to Employer or
Participant Directed Accounts .....................40
3.6 Limitations on Investments ........................40
3.7 "Knowledge" of Trustee ............................40
ARTICLE IV. DUTIES OF THE TRUSTEE
4.1 Duties of the Trustee ............................41
4.2 General Powers ...................................41
4.3 Valuation of Trust ...............................41
4.4 Trust Records ....................................41
4.5 Distributions ....................................41
4.6 Trustee's Fees ...................................41
4.7 Duties not Assigned ..............................41
4.8 Standards for the Trustee's Powers ...............41
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ARTICLE V. DUTIES OF THE EMPLOYER
5.1 Duties of the Employer ............................41
5.2 Bonding ...........................................42
5.3 Information and Data to be Furnished to the
Trustee ...........................................42
5.4 Limitation of Duties ..............................42
ARTICLE VI. TERMINATION OF TRUST
6.1 Resignation or Removal of Trustee .................42
6.2 Termination of the Trust ..........................42
6.3 Termination of the Trust by the Trustee ...........42
ARTICLE VII. MISCELLANEOUS
7.1 Purpose ...........................................42
7.2 Indemnification ...................................42
7.3 Construction ......................................42
7.4 Headings ..........................................42
7.5 Severability ......................................42
7.6 Return of Contributions ...........................42
7.7 Voting ............................................43
7.8 Nonalienation of Benefits .........................43
7.9 Amendments ........................................43
7.10 Inspection of Plan Records by Employer ............43
7.11 Law Governing .....................................43
7.12 Merger, Consolidation or Transfer .................43
7.13 Trustee as Successor Trustee ......................43
7.14 Successors and Assigns ............................43
7.15 Notices ...........................................43
7.16 Effective Date ....................................43
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ARTICLE 1. GENERAL
1.1 PURPOSE. The Employer hereby establishes this Plan to provide retirement,
death and disability benefits for eligible Employees and their
Beneficiaries. This Plan is a prototype defined contribution profit
sharing plan. The provisions herein and the selections made by the
Employer by execution of the Adoption Agreement shall constitute the
Plan. It is intended that the Plan and Trust qualify under sections 401
and 501 of the Internal Revenue Code of 1986, as amended, and that it
comply with the provisions of the Employee Retirement Income Security Act
of 1974, as amended.
1.2 TRUST. The Employer has simultaneously adopted a Trust to receive, invest
and distribute funds in accordance with the Plan.
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ARTICLE 2. DEFINITIONS
2.1 ACCOUNT. The aggregate of the individual bookkeeping subaccounts
established for each Participant, as provided in Section 6.1.
2.2 ADOPTION AGREEMENT. The written agreement of the Employer and the Trustee
by which the Employer establishes this Plan and adopts the Trust
Agreement forming a part hereof, as the same may be amended from time to
time. The Adoption Agreement contains all the options that may be
selected by the Employer. The information set forth in the Adoption
Agreement executed by the Employer shall be deemed to be a part of this
Plan as if set forth in full herein.
2.3 AFFILIATED EMPLOYERS. The Employer and any corporation which is a member
of a controlled group of corporations (as defined in section 414(b) of
the Code) which includes the Employer, any trade or business (whether or
not incorporated) which is under common control (as defined in section
414(c) of the Code) with the Employer, or any service organization
(whether or not incorporated) which is a member of an affiliated service
group (as defined in section 414(m) or (o) of the Code) which includes
the Employer or any other entity (whether or not incorporated) which is
aggregated with the Employer under section 414(o) of the Code.
2.4 BENEFICIARY. The person or persons (natural or otherwise) designated by a
Participant in accordance with Section 11.2(c) to receive any
undistributed vested amounts credited to the Participant's Account under
the Plan at the time of the Participant's death.
2.5 BREAK IN SERVICE. A Plan Year in which an Employee fails to complete more
than 500 Hours of Service.
2.6 CODE. The Internal Revenue Code of 1986, as amended from time to time, or
any successor statute.
2.7 COMPENSATION. Except for such amounts as the Employer may elect to
exclude in the Adoption Agreement, Compensation shall be defined as
follows:
(a) Compensation will mean the information required to be reported
under sections 6041 and 6051 of the Code. (Wages, Tips and Other
Compensation Box on Form W-2.) Compensation is defined as wages
within the meaning of section 3401(a) of the Code and all other
payments of compensation to an Employee by the Employer (in the
course of the Employer's trade or business) for which the Employer
is required to furnish the Employee a written statement under
sections 6041(d) and 6051(a)(3) of the Code. Compensation must be
determined without regard to any rules under section 3401(a) of
the Code that limit the remuneration included in wages based on
the nature or location of the employment or the services performed
(such as the exception for agricultural labor in section
3401(a)(2) of the Code). Compensation shall include any amount
which is contributed to a plan by the Employer pursuant to a
salary reduction agreement and which is not includible in the
gross income of the Employee under sections 125, 402(a)(8), 402(h)
or 403(b) of the Code.
(b) For any self-employed individual covered under the Plan,
Compensation will mean Earned Income.
(c) For Plan Years beginning after December 31, 1988, the annual
compensation of each Participant taken into account for
determining all benefits provided under the Plan for any year
shall not exceed $200,000, as adjusted by the Secretary at the
same time and in the same manner as under section 415(d) of the
Code. If, during the first Plan Year or the last Plan Year, the
Plan Year is less than 12 months, the $200,000 limit, as adjusted,
shall be equal to such limit for such Plan Year multiplied by a
fraction the numerator of which is the number of full months in
such Plan Year and the denominator of which is 12. In determining
the Compensation of a Participant for purposes of this limitation,
the rules of section 414(q)(6) of the Code shall apply; except in
applying such rules, the term "family" shall include only the
spouse of the Participant and any lineal descendants of the
Participant who have not attained age 19 before the close of the
year. If, as a result of the application of such rules, the
adjusted $200,000 limitation is exceeded, then the limitation
shall be prorated among the affected individuals in proportion to
each such individual's Compensation as determined under this
Section prior to the application of this limitation. This
subsection shall be effective in Plan Years beginning on or after
January 1,1989.
(d) In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the
contrary, for Plan Years beginning on or after January 1,1994, the
annual compensation of each Employee taken into account under the
Plan shall not exceed the OBRA '93 annual compensation limit. The
OBRA '93 annual compensation limit is $150,000 as adjusted by the
Commissioner for increases in the cost of living in accordance
with section 401(a)(17)(B) of the Internal Revenue Code. The
cost-of-living adjustment in effect for a calendar year applies to
any period, not exceeding 12 months, over which Compensation is
determined (determination period) beginning in such calendar year.
If a determination period consists of fewer that 12 months, the
OBRA '93 annual compensation limit will be multiplied by a
fraction, the numerator of which is the number of months in the
determination period, and the denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any
reference in this Plan to the limitation under section 401(a)(17)
of the Code shall mean the OBRA '93 annual compensation limit set
forth in this provision.
If Compensation for any prior determination period is taken into
account in determining an Employee's benefits accruing in the
current Plan Year, the Compensation for that prior determination
period is subject to the OBRA '93 annual compensation limit in
effect for that prior determination period. For this purpose, for
determination periods beginning before the first day of the first
Plan Year beginning on or after January 1,1994, the OBRA '93
annual compensation limit is $150,000.
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2.8 EARNED INCOME. The net earnings from self-employment in the trade or
business with respect to which the Plan is established, for which
personal services of the individual are a material income-producing
factor. Net earnings will be determined without regard to items not
included in gross income and the deductions allocable to such items. Net
earnings are reduced by contributions to a qualified plan to the extent
deductible under section 404 of the Code. Net earnings shall be
determined with regard to the deduction allowed to the Employer by
section 164(f) of the Code for taxable years beginning after
December 31, 1989.
2.9 EFFECTIVE DATE. The day on which the Plan is effective as specified in
the Adoption Agreement. If the Employer is adopting this Plan as an
amendment and restatement of an existing plan, the provisions of the
existing plan shall apply prior to the Effective Date unless an earlier
date is specified herein.
2.10 ELECTIVE DEFERRALS. Any employer contributions made to the Plan at the
election of the Participant, in lieu of cash Compensation, pursuant to a
salary reduction agreement or other deferral mechanism. With respect to
any taxable year, a Participant's Elective Deferral is the sum of all
such employer contributions made on behalf of such Participant pursuant
to an election to defer under any qualified cash or deferred arrangement
as described in section 401(k) of the Code, any simplified employee
pension cash or deferred arrangement as described in section
402(h)(1)(B) of the Code, any eligible deferred compensation plan under
section 457 of the Code, any plan as described in section 501(c)(18) of
the Code and any employer contributions made on behalf of a Participant
pursuant to a salary reduction agreement for the purchase of an annuity
contract under section 403(b) of the Code. Elective Deferrals shall not
include any deferrals properly distributed as excess Annual Additions as
described in Section 7.1.
2.11 EMPLOYEE. Any person, including a Self-Employed Individual, who is
employed by the Employer maintaining the Plan or any other employer
required to be aggregated with such Employer under section 414(b), (c),
(m) or (o) of the Code. The term "Employee" shall also include any
Leased Employee.
2.12 EMPLOYEE AFTER-TAX CONTRIBUTIONS. Any contribution made to the Plan by
or on behalf of a Participant before the Plan Year in which the Employer
adopted this Plan that was included in the Participant's gross income in
the year in which made and that is maintained under a separate
subaccount to which earnings and losses are allocated. Employee
After-Tax Contributions shall not be allowed in or after the Plan Year
in which this Plan is adopted by the Employer.
2.13 EMPLOYER. The corporation, proprietorship, partnership or other
organization that adopts the Plan by execution of an Adoption Agreement.
2.14 EMPLOYER DISCRETIONARY CONTRIBUTIONS. The contributions of the employer
to the Plan and Trust as set forth in Section 5.3(b) and the Adoption
Agreement.
2.15 ENTRY DATES. The Entry Dates shall be the dates specified in the
Adoption Agreement.
2.16 ERISA. The Employee Retirement Income Security Act of 1974, as amended.
2.17 FAMILY MEMBERS. The spouse, lineal ascendants and descendants of a
Highly Compensated Employee and the spouses of such lineal ascendants
and descendants.
2.18 FIVE PERCENT OWNER. Any person who owns (or is considered to own within
the meaning of section 318 of the Code) more than 5% of the interests in
the Employer.
2.19 HIGHLY COMPENSATED EMPLOYEE.
(a) The term "Highly Compensated Employee" shall include highly
compensated active Employees and highly-compensated for
Employees.
(b) A highly-compensated active Employee includes any Employee who
performs service for the Employer during the determination year
and who, during the look-back year.
(i) received Compensation from the Employer in excess of
$75,000 (as adjusted pursuant to section 415(d) of the
Code);
(ii) received Compensation from the Employer in excess of
$50,000 (as adjusted pursuant to section 415(d) of the
Code) and was a member of the top-paid group for such
year; or
(iii) was an officer of the Employer and received Compensation
during such year that is greater than 50% of the dollar
limitation in effect under section 415(b)(1)(A) of the
Code.
(c) The term "Highly Compensated Employee" also includes:
(i) Employees who are both described in the preceding
subsection if the term "determination year" is
substituted for the term "look-back year" and the
Employee is one of the 100 Employees who received the
most Compensation from the Employer during the
determination year; and
(ii) Employees who are Five Percent Owners at any time during
the look-back year or determinations year.
(d) (i) If no officer has satisfied the Compensation requirement
of subsection (b)(iii) above during either a determined
year or look-back-year, the highest paid officer for
such year shall be treated as a Highly Compensation
Employee.
(ii) For this purpose, the determination year shall be the
Plan Year. The look-back year shall be the twelve
month period immediately preceding the determination
year.
(e) A highly-compensated former Employee includes any Employee who
separated from service (or was deemed to have separated from
service) prior to the determination year, performs no service
for the Employer during the determination year, and was a
highly-compensated active Employee for either the separation
year or any determination year ending on or after the Employee's
55th birthday.
(f) If an Employee is, during a determination year or
look-back year, a Family Member of either a Five Percent Owner
who is an active or former Employee or a Highly Compensated
Employee who is one of the ten most Highly Compensated Employees
ranked on the basis of compensation paid by the Employer during
such year, then the Family Member and Five Percent Owner or top
ten Highly Compensated Employee shall be aggregated. In such
case, the Family Member and Five Percent Owner or top ten Highly
Compensated Employees shall be treated as a single Employee
receiving Compensation and Plan contributions or benefits equal
to the sum of such Compensation and contributions of benefits of
the Family Member and Five Percent Owner or top ten Highly
Compensated Employee.
(g) For purpose of this Section, "compensation" shall include
Section 415 Compensation plus any amount which is contributed to
a plan by the Employer pursuant to a salary reduction agreement
and which is not included in the gross income of
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the Employee under section 125, 402(a)(8), 402(h) or 403(b) of the
Code.
(h) The determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of
Employees in the top-paid group, the top 100 Employees, the number
of Employees treated as officers and the Compensation that is
considered, will be made in accordance with section 414(q) of the
Code and the regulations thereunder.
2.20 HOUR OF SERVICE.
(a) Each hour for which an Employee is paid, or entitled to payment,
for the performance of duties for the Employer. These hours shall
be credited to the Employee only for the computation period or
periods in which the duties are performed; and
(b) Each hour for which an Employee is paid, or entitled to payment,
by the Employer on account of a period of time during which no
duties are performed (irrespective of whether the employment
relationship has terminated) due to vacation, holiday, illness,
incapacity (including disability), layoff, jury duty, military
duty or leave of absence. No more than 501 Hours of Service shall
be credited under this paragraph to an Employee on account of any
single, continuous period during which the Employee performs no
duties (whether or not such period occurs in a single computation
period). Hours under this paragraph will be calculated and
credited pursuant to section 2530.200b-2 of the Department of
Labor regulations which are incorporated herein by this reference.
(c) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the Employer. The same
Hours of Service shall not be credited both under paragraph (a) or
paragraph (b), as the case may be, and under this paragraph (c);
These hours shall be credited to the Employee for the computation
period or periods to which the award or agreement pertains rather
than the computation period in which the award, agreement or
payment is made.
(d) Solely for purposes of determining whether an Employee has a Break
in Service, Hours of Service shall also include an uncompensated
authorized leave of absence not in excess of two years, or
military leave while the Employee's reemployment rights are
protected by law or such additional or other periods as granted by
the Employer as military leave (credited on the basis of 40 Hours
of Service per week or eight Hours of Service per working day),
provided the Employee returns to employment at the end of his
leave of absence or within 90 days of the end of his military
leave, whichever is applicable.
(e) Hours of Service will be credited for employment with other
members of an affiliated service group (under section 414(m) of
the Code), a controlled group of corporations (under section
414(b) of the Code), or a group of trades or businesses under
common control (under section 414(c) of the Code) of which the
adopting Employer is a member, and any other entity required to be
aggregated with the Employer pursuant to section 414(o) of the
Code and the regulations thereunder. Hours of Service will also be
credited for any individual considered an Employee for purposes of
this Plan under section 414(n) or (o) of the Code and the
regulations thereunder.
(f) Solely for purposes of determining whether an Employee has a Break
in Service, Hours of Service shall also include absence from work
for maternity or paternity reasons, if the absence begins on or
after the first day of the first Plan Year beginning after 1984.
During this absence, the Employee shall be credited with the Hours
of Service which would have been credited but for the absence, or,
if such hours cannot be determined, with eight (8) hours per day.
An absence from work for maternity or paternity reasons means an
absence:
(i) by reason of the pregnancy, of an Employee;
(ii) by reason of the birth of a child of the Employee;
(iii) by reason of the placement of a child with the Employee in
connection with adoption; or
(iv) for purposes of caring for such a child for a period
immediately following such birth or placement.
These Hours of Service shall be credited in the computation period
following the computation period in which the absence begins, except as
necessary to prevent a Break in Service in the computation period in
which the absence begins. However, no more than 501 Hours of Service will
be credited for purposes of any such maternity or paternity absence from
work.
(g) Hours of Service will be determined on the actual hours for which
an Employee is paid or entitled payment.
(h) If the Employer amends the method of crediting service from the
elapsed time method described in section 1.410(a)-7 of the
Treasury regulations to the Hours of Service computation method by
the adoption of this Plan, or an Employee transfers from a plan
under which service is determined on the basis of elapsed time,
the following rules shall apply for purposes of determining the
Employee's service under this Plan up to the time of amendment or
transfer:
(i) The Employee shall receive credit, as of the date of
amendment or transfer, for a number of Years of Eligibility
Service and Years of Vesting Service equal to the number of
one year periods of eligibility service and vesting
service, respectively, credited to the Employee as of this
date of the amendment or transfer; and
(ii) The Employee shall receive credit in the applicable
computation period which includes the date of amendment or
transfer for a number of Hours of Service determined in
accordance with paragraph (g).
2.21 LEASED EMPLOYEE.
(a) Any person (other than an Employee of any of the Affiliated
Employers) who, pursuant to an agreement between any of the
Affiliated Employers and any other person ("leasing
organization"), has performed service for any of the Affiliated
Employers (or for any of the Affiliated Employers and related
persons determined in accordance with section 414(n)(6) of the
Code) on a substantially full-time basis for a period of at least
one year and such services are of a type historically performed by
employees in the Affiliated Employer's business field.
Contributions or benefits provided a Leased Employee by the
leasing organization which are attributable to services performed
for the Affiliated Employer shall be treated as provided by the
Affiliated Employer.
(b) A Leased Employee shall not be considered an Employee of an
Affiliated Employer if:
(i) such employee is covered by a money purchase pension plan
providing:
(A) a nonintegrated employer contribution rate of at
least 10% of Section 415 Compensation but including
amounts contributed pursuant to a salary reduction
agreement which are excludable from the
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Employee's gross income under section 125, 402(a)(8), 402(h)
or 403(b) of the Code;
(B) immediate participation; and
(C) full and immediate vesting.
and
(ii) Leased Employees do not constitute more than 20% of the
Affiliated Employer's non-highly compensated workforce.
(c) The determination of whether a person is a Leased Employee will be
made pursuant to section 414(n) of the Code and the regulations
thereunder.
2.22 MATCHING CONTRIBUTIONS. A contribution by the Employer made to this or any
other defined contribution plan on behalf of a Participant on account of a
Participant's Elective Deferral or on account of a Participant's voluntary
contributions under a plan maintained by the Employer. Matching
Contributions to this Plan shall be made as set forth in Section 5.3(a) and
the Adoption Agreement.
2.23 NON-HIGHLY COMPENSATION EMPLOYEE. An Employer who is neither a Highly
Compensated Employee nor a Family Member of a Highly Compensated Employee.
2.24 NORMAL RETIREMENT AGE. Unless otherwise specified in the Adoption
Agreement, Normal Retirement Age shall be 65.
2.25 OWNER EMPLOYEE. An individual who is a sole proprietor or who is a partner
owning more than 10% of either the capital or profits interest of a
partnership.
If this Plan provides contributions or benefits for one or more
Owner-Employees who control both the business for which this Plan is
established for the other trades or businesses must, when looked at as a
single Plan, satisfy section 401(a) and (d) of the Code for the Employees
of this and all such other trades or businesses. If the Plan provides
contributions or benefits for one or more Owner-Employees who control one
or more other trades or businesses, the employees of the other trades or
businesses must be included in a plan which satisfies section 401(a) and
(d) of the Code and which provides contributions and benefits not less
favorable than provided for Owner Employees under this Plan. If an
individual is covered as an Owner-Employee under the plans of two or more
trades or businesses which are not controlled and the individual controls a
trade or business, then the contributions or benefits of the employees
under the plan of the trades or businesses which are controlled must be as
favorable as those provided for him under the most favorable plan of the
trade or business which is not controlled.
For purposes of the preceding paragraphs, an Owner-Employee, or two or more
Owner-Employees, will be considered to control a trade or business if the
Owner-Employee, or two or more Owner-Employees together:
(a) own the entire interest in an unincorporated trade or business, or
(b) in the case of a partnership, own more than 50% of either the capital
interest or the profits interest in the partnership.
For purposes of the preceding sentence, an Owner-Employee, or two or more
Owner-Employees shall be treated as owning any interest in a partnership
which is owned, directly or indirectly, by a partnership which such
Owner-Employee, or such two or more Owner-Employees, are considered to
control within the meaning of the preceding sentence.
2.26 PARTICIPANT. A person who has met the eligibility requirements of
Section 3.1 and whose Account hereunder has been neither completely
forfeited nor completely distributed.
2.27 PLAN. This 401(k) prototype plan, as amended from time to time, and the
Adoption Agreement executed by the Employer and Trustee.
2.28 PLAN ADMINISTRATOR. The Employer.
2.29 PLAN YEAR. Unless otherwise specified in the Adoption Agreement, the Plan
Year shall be the calendar year.
2.30 SECTION 415 COMPENSATION. A Participant's Earned Income, wages, salaries
and fees for professional services and other amounts received (without
regard to whether an amount is paid in cash) or made available for personal
services actually rendered in the course of employment with the Employer
maintaining the Plan (including, but not limited to, commissions paid
salesman, compensation for services on the basis of a percentage of
profits, commissions on insurance premiums, tips, bonuses and
reimbursements or other expense allowances under a nonaccountable plan (as
described in Code regulation 1.62-2(c)), but excluding the following:
(a) Employer contributions to a plan of deferred compensation which are
not includable in the Employee's gross income for the taxable year in
which contributed, or Employer contributions under a simplified
employee pension plan to the extent such contributions are excluded
from the Employee's gross income, or any distributions from a plan of
deferred compensation;
(b) Amounts realized from the exercise of a nonqualified stock option, or
when restricted stock (or property) held by the Employee either
becomes freely transferable or is no longer subject to a substantial
risk of forfeiture;
(c) Amounts realized from the sale, exchange or other disposition of stock
acquired under a qualified stock option; and
(d) Other amounts which received special tax benefits, or contributions
made by the Employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity contract described in
section 403(b) of the Code (whether or not the contributions are
actually excludable from the gross income of the Employee).
For Plan Years beginning after December 31, 1988, Section 415 Compensation
for any Plan Year shall be limited as provided in Section 2.7(c).
2.31 SELF-EMPLOYED INDIVIDUAL. An individual who has Earned Income for the
taxable year from the trade or business for which the Plan is established,
or an individual who would have had Earned Income for the taxable year but
for the fact that the trade or business had no net profits for the taxable
year.
2.32 SHARES. Shares of stock in any regulated investment company registered
under the Investment Company Act of 1940, the investment advisor of which
is T. Rowe Price Associates, Inc., or units in any common trust fund or
collective investment fund of the Sponsor qualified under sections 401 and
501 of the Code, that are made available by the Sponsor for investment
purposes as an investment option under this plan.
2.33 SPONSOR. T. Rowe Price Trust Company.
2.34 TOTAL COMPENSATION. Compensation plus any amount the Employer elected to
exclude from the definition of Compensation in the Adoption Agreement.
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2.35 TOTAL AND PERMANENT DISABILITY. The inability of the Participant to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment, which condition, in the
opinion of a physician chosen by the Plan Administrator, can be expected
to result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve months; provided, however, that
Total and Permanent Disability shall not include an illness or injury
caused by or connected with a Participant's service in the armed forces
of any country, or his alcoholism or addiction to narcotics or other
drugs, or his engaging in a criminal act, or resulting from his effort to
bring about the illness, injury, or death of himself or any other person.
2.36 TRUST. The fund maintained by the Trustee for the investment of Plan
assets in accordance with the terms and conditions of the Trust
Agreement.
2.37 TRUST AGREEMENT. The agreement between the Employer and the Trustee under
which the assets of the Plan are held, administered and managed. The
provisions of the Trust Agreement shall be considered an integral part of
this Plan as if set forth fully herein.
2.38 TRUSTEE. The individual or corporate Trustee or Trustees under the Trust
Agreement as they may be named from time to time in the Adoption
Agreement.
2.39 VALUATION DATE. Each day of the Plan Year.
2.40 YEAR OF ELIGIBILITY SERVICE. Except as provided below, a Year of
Eligibility Service is an eligibility computation period during which an
Employee completes at least 1,000 Hours of Service. For this purpose, the
initial eligibility computation period shall be the twelve consecutive
month period beginning with the day the Employee first performs an Hour
of Service for the Employer. Successive eligibility computation periods
shall commence on the first day of each Plan Year beginning after the
date on which the Employee first completes an Hour of Service for the
Employer. An Employee who is credited with 1,000 Hours of Service in both
the initial eligibility computation period and the Plan Year beginning
immediately after the date on which the Employee first completes an Hour
of Service for the Employer will be credited with two Years of
Eligibility Service
Notwithstanding the foregoing, if the Employer selects a Year of Service
in the Adoption Agreement that is a fraction of a Year of Service, an
Employee shall not be required to complete any specified number of Hours
of Service to receive credit for such fractional year.
2.41 YEAR OF VESTING SERVICE. A Plan Year during which an Employee completes
at least 1,000 Hours of Service.
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ARTICLE 3. ELIGIBILITY AND YEARS OF SERVICE
3.1 ELIGIBILITY REQUIREMENTS.
(a) GENERAL RULE. Subject to subsection (b) below and any contrary
designation made by the Employer in the Adoption Agreement, each
Employee of the Affiliated Employers shall become a Participant in
the Plan as of the first Entry Date after the date on which the
Employee has satisfied the minimum age and service requirements,
if any, specified in the Adoption Agreement. Notwithstanding the
foregoing, nonresident aliens (within the meaning of section
7701(b)(1)(B) of the Code) who receive no earned income (within
the meaning of section 911 (d)(2) of the Code) from the Employer
which constitutes income from sources within the United States
(within the meaning of section 861(a)(3) of the Code) shall not be
eligible to participate in the Plan.
(b) EXCLUDABLE EMPLOYEES. The Employer may elect in the Adoption
Agreement to exclude from participation Employees included in a
unit of employees covered by a collective bargaining agreement
between the Employer and employee representatives, if retirement
benefits were the subject of good faith bargaining. For this
purpose, the term "employee representatives" does not include any
organization more than half of whose members are employees who are
owners, officers or executives of the Employer.
(c) CHANGE IN STATUS. In the event an Employee who is not a member of
an eligible class of Employees becomes a member of an eligible
class, such Employee will participate immediately if such Employee
has satisfied the minimum age and service requirements specified
in the Adoption Agreement and otherwise would have previously
become a Participant. In the event a Participant is no longer a
member of an eligible class of Employees and becomes ineligible to
participate, such Employee will participate immediately upon
returning to an eligible class of Employees.
3.2 PARTICIPATION AND SERVICE UPON REEMPLOYMENT. Upon the reemployment of any
Employee, the following rules shall determine his eligibility to
participate in the Plan and his credit for prior service.
(a) PARTICIPATION. If the reemployed Employee was a Participant in the
Plan during his prior period of employment, he shall be eligible
upon reemployment to resume participation in the Plan if he is in
a class of eligible Employees. If he is not a member of an
eligible class upon reemployment, such Employee will participate
immediately upon returning to a class of eligible Employees. If
the reemployed Employee was not a Participant in the Plan, he
shall be considered a new Employee and required to meet the
requirements of Section 3.1 in order to be eligible to participate
in the Plan.
(b) CREDIT FOR PRIOR SERVICE. In the case of any Employee who is
reemployed before or after incurring a Break in Service, any Hour
of Service and Year of Eligibility Service credited to the
Employee at the end of his prior period of employment shall be
reinstated as of the date of his reemployment.
3.3 PREDECESSOR EMPLOYERS. No credit will be given for service with a
predecessor employer, except that if this Plan is a continuation of a
predecessor plan, service under the predecessor plan must be counted.
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ARTICLE 4. TRUST FUND
4.1 RECEIPT OF CONTRIBUTIONS BY TRUSTEE. All contributions to the Trust that
are received by the Trustee, together with any earnings thereon, shall be
held, managed and administered by the Trustee in accordance with the terms
and conditions of the Trust Agreement and the Plan. The Trustee shall be
subject to the proper directions of the Employer made in accordance with
the terms of the Plan and ERISA.
4.2 INVESTMENT RESPONSIBILITY.
(a) INVESTMENT CHOICES. The selection of the investments in which assets of
the Trust may be invested shall be the responsibility of the Employer.
(b) PARTICIPANT DIRECTION. Subject to such reasonable restrictions as may
be imposed by the Employer, each Participant or Beneficiary shall be
permitted to select the investments in his Account. The Employer must
complete and forward to the Trustee a schedule of Participant
designations. No person, including the Trustee and the Plan
Administrator, shall be liable for any loss or for any breach of
fiduciary duty which results from a Participant's or Beneficiary's
exercise of control. All investment related expenses, including
administrative fees charged by brokerage houses, will be charged
against the Accounts of the Participants.
(c) CHANGE IN INVESTMENT CHOICES. The Employer may at any time change the
selection of investments in which the assets of the Trust may be
invested, or subject to such reasonable restrictions as may be imposed
by the Sponsor for administrative convenience, may submit an amended
schedule of Participant designations to the Trustee. Such amended
documents may provide for a variance in the percentages of
contributions to any particular investment or a request that Shares in
the Trust be reinvested in whole or in part in other Shares.
4.3 INVESTMENT LIMITATIONS. All Trust assets must be invested in Shares.
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ARTICLE 5. CONTRIBUTIONS
5.1 PAYMENT. All contributions, including rollover contributions, to the Plan
must be made in U.S. currency, by check, wire transfer or ACH credit. All
Employer contributions to the Trust for any Plan Year shall be made either
in one lump-sum or in installments within the time prescribed by law,
including extensions granted by the Internal Revenue Service, for filing
the Employer's federal income tax return for the taxable year with or
within which such Plan Year ends.
5.2 EMPLOYEE CONTRIBUTIONS.
(a) AFTER-TAX CONTRIBUTIONS. Beginning with the Plan Year in which this
Plan is adopted by the Employer, no Participant shall be permitted to
make Employee After-Tax Contributions to the Plan.
(b) EMPLOYEE ELECTIVE DEFERRALS.
(i) If the adoption Agreement so provides and the Employer elects, a
Participant may make Elective Deferrals to the Trust in amounts
not to exceed the limitations specified in the Adoption
Agreement or any other limitations specified in this Plan. A
Participant's Elective Deferrals shall be made by direct
reduction of Compensations, with such reduction to be
accomplished through regular payroll reduction.
(ii) The Elective Deferrals of a Participant shall be limited in
accordance with the provisions of this subsection,
Sections 5.7(a), 5.8(a), 7.1 and 10.2(c) and any other
applicable provisions of the Plan. No Participant shall be
permitted to have Elective Deferrals made under this Plan, or
any other qualified plan maintained by the Employer, during any
taxable year, in excess of the dollar limitation contained in
section 402(g) of the Code in effect at the beginning of such
taxable year.
(iii) Participants may elect to commence Elective Deferrals at least
once each Plan Year during a period established by the Employer.
Such election may not be made retroactively and the election
must remain in effect until modified or terminated. Participants
may terminate the election or change the amounts designated to
be deducted at any time and such changes will become effective
on the next payroll period following by at least ten days the
submission of such change of designation to the Plan
Administrator, unless a shorter period is agreed to by the Plan
Administrator.
(iv) No contributions or benefits (other than Matching Contributions
or Qualified Matching Contributions) may be conditioned upon an
Employee's Elective Deferrals.
(c) ROLLOVERS. Subject to the approval of the Plan Administrator, a
Participant, or an Employee who would otherwise be eligible to
participate in the Plan but for the failure to satisfy any service
condition for eligibility to participate, who has participated in any
other qualified plan described in section 401(a) of the Code or in a
qualified annuity plan described in section 403(a) of the Code shall be
permitted to make a rollover (or direct rollover) contribution to the
Trustee of all or part of an amount received by such individual that is
attributable to participation in such other plan (reduced by any
nondeductible voluntary contributions he made to the plan), provided
that the rollover contribution complies with all requirements of
section 402(a)(5), 403(a)(4) or 408(d)(3)(A)(ii) of the Code, whichever
is applicable. Before approving such a rollover, the Plan Administrator
may request from the individual or the sponsor of such other plan any
documents that the Plan Administrator, in its discretion, deems
necessary to determine that such rollover meets the preceding
requirements.
(d) PLAN-TO-PLAN TRANSFERS. Beginning with the Plan Year in which this Plan
is adopted by the Employer, no Participant shall be permitted to make a
direct plan-to-plan transfer of all or part of his benefits in any
other plan.
5.3 EMPLOYER CONTRIBUTIONS.
(a) MATCHING CONTRIBUTIONS. If the Employer elects in the Adoption
Agreement to make Matching Contributions, for each Plan Year the
Employer shall contribute to the Trust an amount that shall be
determined by the Employer in accordance with the matching
contribution formula specified in the Adoption
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Agreement. Subject to the minimum top-heavy allocation rules of
Section 6.3 and the exclusions specified in this Section, Matching
Contributions shall be made on behalf of those Participants
specified by the Employer in the Adoption Agreement.
(b) DISCRETIONARY CONTRIBUTIONS. If the Employer elects in the
Adoption Agreement to make Discretionary Contributions, the
Employer may contribute to the Trust an amount as may be
determined by the Employer for each Plan Year. Subject to the
minimum top-heavy allocation rules of Section 6.3 and the
exclusions specified in this Section, each Participant (i) who
completes at least 500 Hours of Service during the Plan Year, (ii)
who is employed by the Employer on the last day of the Plan Year
(regardless of his Hours of Service), or (iii) whose employment
with the Employer terminates during the Plan Year by reason of
death, retirement on or after Normal Retirement Age or Total and
Permanent Disability (regardless of his Hours of Service) shall be
eligible to share in the Employer Discretionary Contribution for
such Plan Year.
(c) CONTRIBUTION LIMITATION. In no event shall any Employer
contribution (plus any Elective Deferrals) exceed the maximum
amount deductible from the Employer's income under section 404 of
the Code or the maximum limitations under section 415 of the Code
provided in Article 7.
5.4 EXCESS ELECTIVE DEFERRALS.
(a) GENERAL. A Participant may assign to this Plan any Excess Elective
Deferrals made during a taxable year of the Participant by
notifying the Plan Administrator on or before March 1 following
the close of the Participant's taxable year of the Excess Elective
Deferrals to be assigned to the Plan. (A Participant is deemed to
notify the Plan Administrator of any Excess Elective Deferrals
that arise by taking into account only those Elective Deferrals
made to this Plan and any other plans of this Employer.)
Notwithstanding any other provision of the Plan, Excess Elective
Deferrals, plus any income and minus any loss allocable thereto,
shall be distributed after the preceding taxable year and no later
than April 15 following the close of the preceding taxable year to
any Participant to whose Account Excess Elective Deferrals were
assigned for the preceding year and who claims Excess Elective
Deferrals for such taxable year.
(b) CALCULATION OF INCOME OR LOSS. The income or loss allocable to
Excess Elective Deferrals is equal to the amount of income or loss
allocable to the Participant's Elective Deferral subaccount for
the taxable year multiplied by a fraction, the numerator of which
is such Participant's Excess Elective Deferrals for the year and
the denominator of which is the Participant's account balance
attributable to Elective Deferrals without regard to any income or
loss occurring during such taxable year.
(c) TAX TREATMENT. Excess Elective Deferrals that are distributed
after April 15 are includible in the Participant's gross income in
both the taxable year in which deferred and the taxable year in
which distributed.
(d) FORFEITURE OF CERTAIN MATCHING CONTRIBUTIONS. All Matching
Contributions (whether or not vested) that were made on account of
an Excess Elective Deferral that has been distributed in
accordance with this Section 5.4 shall be forfeited before the
last day of the twelve-month period immediately following the
close of taxable year in which such Excess Elective Deferrals were
made.
5.5 ACTUAL DEFERRAL PERCENTAGE TEST.
(a) GENERAL TEST. The Actual Deferral Percentage (hereinafter "ADP")
for Participants who are Highly Compensated Employees for each
Plan Year and the ADP for Participants who are Non-Highly
Compensated Employees for the same Plan Year must satisfy one of
the following tests:
(i) The ADP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed 125% of the
ADP for Participants who are Non-Highly Compensated
Employees for the same Plan Year; or
(ii) The ADP for Participants who are Highly Compensated
Employees for the Plan Year shall not exceed 200% of the
ADP for Participants who are Non-Highly Compensated
Employees for the same Plan Year, provided that the ADP for
Participants who are Highly Compensated Employees does not
exceed the ADP for Participants who are Non-Highly
Compensated Employees by more than two percentage points.
(b) SPECIAL RULES.
(i) The ADP for any Participant who is a Highly Compensated
Employee for the Plan Year, and who is eligible to have
Elective Deferrals (and Qualified Nonelective Contributions
or Qualified Matching Contributions, or both, if treated as
Elective Deferrals for purposes of the ADP test) allocated
to his Accounts under two or more cash or deferred
arrangements described in section 401(k) of the Code that
are maintained by the Employer, shall be determined as if
such Elective Deferrals (and, if applicable, such Qualified
Nonelective Contributions or Qualified Matching
Contributions, or both) were made under a single
arrangement. If a Highly Compensated Employee participates
in two or more cash or deferred arrangements that have
different plan years, all cash or deferred arrangements
ending with or within the same calendar year shall be
treated as a single arrangement. Notwithstanding the
foregoing, certain plans shall be treated as separate if
mandatorily disaggregated under regulations under section
401(k) of the Code.
(ii) In the event that this Plan satisfies the requirements of
section 401(k), 401(a)(4) or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more
other plans satisfy the requirements of such sections of
the Code only if aggregated with this Plan, then this
Section shall be applied by determining the ADP of
Employees as if all such plans were a single plan. Plans
may be aggregated in order to satisfy section 401(k) of the
Code only if they have the same plan year.
(iii) For purposes of determining the ADP of a Participant who is
a Five Percent Owner or one of the ten most highly-paid
Highly Compensated Employees, the Elective Deferrals (and
Qualified Nonelective Contributions or Qualified Matching
Contributions, or both, if treated as Elective Deferrals
for purposes of the ADP test) and Total Compensation of
such Participant shall include the Elective Deferrals (and,
if applicable, Qualified Nonelective Contributions and
Qualified Matching Contributions) and Total Compensation
for the Plan Year of Family Members. Family Members, with
respect to such Highly Compensated Employees, shall be
disregarded as separate Employees in determining the ADP
both for Participants who are Non-Highly Compensated
Employees and for Participants who are Highly Compensated
Employees.
(iv) For purposes of applying the ADP test, Elective Deferrals,
Qualified Nonelective Contributions and Qualified Matching
Contributions must be made before the last day of the
twelve-month period immediately following the Plan Year to
which contributions relate.
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(v) The Employer shall maintain records sufficient to demonstrate
satisfaction of the ADP test and the amount of Qualified
Nonelective Contributions or Qualified Matching Contributions,
or both, used in such test.
(vi) The determination and treatment of the ADP amounts of any
Participant shall satisfy such other requirements as may be
prescribed by the Secretary of the Treasury.
5.6 AVERAGE CONTRIBUTION PERCENTAGE TEST.
(a) GENERAL TEST. The Average Contribution Percentage (hereinafter "ACP")
for Participants who are Highly Compensated Employees for each Plan
Year and the ACP for Participant's who are Non-Highly Compensated
Employees for the same Plan Year must satisfy one of the following
tests:
(i) The ACP for Participants who are Highly Compensated Employees
for the Plan Year shall not exceed the ACP for Participants who
are Non-Highly Compensated Employees for the same Plan Year
multiplied by 1.25; or
(ii) The ACP for Participants who are Highly Compensated Employees
for the Plan Year shall not exceed 200% of the ACP for
Participants who are Non-Highly Compensated Employees for the
same Plan Year, provided that the ACP for Participants who are
Highly Compensated Employees does not exceed the ACP for
Participants who are Non-Highly Compensated Employees by more
than two percentage points.
(b) SPECIAL RULES.
(i) The Contribution Percentage for any Participant who is a Highly
Compensated Employee and who is eligible to have Contribution
Percentage Amounts allocated to his or her Account under two or
more plans described in section 401(a) of the Code, or cash or
deferred arrangements described in section 401(k) of the Code,
that are maintained by the Employer shall be determined as if
the total of such Contribution Percentage Amounts was made under
each plan. If a Highly Compensated Employee participates in two
or more cash or deferred arrangements that have different plan
years, all cash or deferred arrangements ending with or within
the same calendar year shall be treated as a single arrangement.
Notwithstanding the foregoing, certain plans shall be treated as
separate if mandatorily disaggregated under regulations under
section 401(m) of the Code.
(ii) In the event that this Plan satisfies the requirements of
section 401(m), 401(a)(4) or 410(b) of the Code only if
aggregated with one or more other plans, or if one or more other
plans satisfy the requirements of such sections of the Code only
if aggregated with this Plan, then this Section shall be applied
by determining the Contribution Percentage of Employees as if
all such plans were a single plan. Plans may be aggregated in
order to satisfy section 401(m) of the Code only if they have
the same plan year.
(iii) For purposes of determining the Contribution Percentage of a
Participant who is a Five Percent Owner or one of the ten most
highly-paid Highly Compensated Employees, the Contribution
Percentage Amounts and Total Compensation of such Participant
shall include the Contribution Percentage Amounts and Total
Compensation for the Plan Year of Family Members. Family
Members, with respect to Highly Compensated Employees, shall be
disregarded as separate Employees in determining the
Contribution Percentage both for Participants who are Non-Highly
Compensated Employees and for Participants who are Highly
Compensated Employees.
(iv) For purposes of applying the ACP test, Matching Contributions
and Qualified Nonelective Contributions will be considered made
for a Plan Year if made no later than the end of the
twelve-month period beginning on the day after the close of the
Plan Year.
(v) If one or more Highly Compensated Employees participate in both
a cash or deferred arrangement and a plan subject to the ACP
test maintained by the Employer and the sum of the ADP and ACP
of those Highly Compensated Employees subject to either or both
tests exceeds the Aggregate Limit, then the ACP of those Highly
Compensated Employees who also participate in a cash or deferred
arrangement will be reduced (beginning with such Highly
Compensated Employee whose ACP is the highest) so that the limit
is not exceeded. The amount by which each Highly Compensated
Employee's Contribution Percentage Amounts is reduced shall be
treated as an Excess Aggregate Contribution. The ADP and ACP of
the Highly Compensated Employees are determined after any
corrections required to meet the ADP and ACP tests.
Impermissible multiple use does not occur if either the ADP or
ACP of the Highly Compensated Employees does not exceed 1.25
multiplied by the APD and ACP of the Non-Highly Compensated
Employees.
(vi) The Employer shall maintain records sufficient to demonstrate
satisfaction of the ACP test and the amount of Elective
Deferrals, Qualified Nonelective Contributions or Qualified
Matching Contributions used in such test.
(vii) The determination and treatment of the Contribution percentage
of any Participant shall satisfy such requirements as may be
prescribed by the Secretary of the Treasury.
5.7 PREVENTION OR CURE OF ADP TEST FAILURES. The Plan Administrator may, in its
sole discretion, use any one or a combination of the following methods to
prevent or cure any ADP test failure in accordance with section 401(k) of
the Code and the regulations thereunder.
(a) The Plan Administrator may refuse to accept any or all prospective
Elective Deferrals to be contributed by a Highly Compensated Employee.
(b) The Plan Administrator may distribute any or all Excess Contributions
in accordance with the provisions of Section 5.9.
(c) The Employer may, in its sole discretion, elect to contribute a
Qualified Nonelective Contribution in accordance with the provisions of
Section 5.10.
(d) Subject to the requirements of Section 5.11, the Employer may, in its
sole discretion, elect to treat Qualified Matching Contributions as if
they were Elective Deferrals for purposes of the ADP test.
5.8 PREVENTION OR CURE OF ACP TEST FAILURES. The Plan Administrator may, in its
sole discretion, use any one or a combination of the following methods to
prevent or cure any ACP test failure in accordance with section 401(m) of
the Code and the regulations thereunder.
(a) The Plan Administrator may refuse to accept any prospective Elective
Deferrals to be contributed by a Highly Compensated Employee.
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(b) The Plan Administrator may elect to contribute a Qualified
Matching Contribution in accordance with the provisions of
Section 5.11.
(c) The Plan Administrator may forfeit, if forfeitable, or distribute,
if not forfeitable, Excess Aggregate Contributions in accordance
with Section 5.12.
(d) The Plan Administrator may elect to treat Qualified Nonelective
Contributions or Elective Deferrals, or both, as if they were
Matching Contributions for purposes of the ACP test, subject to
the requirements of Section 5.13(e).
5.9 DISTRIBUTION OF EXCESS CONTRIBUTIONS TO CURE ADP TEST FAILURE.
(a) GENERAL RULE. Notwithstanding any other provision of this Plan,
Excess Contributions for a Plan Year, plus any income and minus
any loss allocable thereto, shall be distributed after the close
of such Plan Year and no later than twelve months after the close
of such Plan Year to Participants to whose Accounts such Excess
Contributions were allocated. (If such excess amounts are
distributed more than 2 1/2 months after the last day of the Plan
Year in which such excess amounts arose, a 10% excise tax on such
amounts will be imposed on the Employer.) Such distributions shall
be made to Highly Compensated Employees on the basis of the
respective portions of the Excess Contributions attributable to
each of such Employees. Excess Contributions of Participants who
are subject to the Family Member aggregation rules shall be
allocated among the Family Members in proportion to the Elective
Deferrals (and amounts treated as Elective Deferrals) of each
Family Member that is combined to determine the combined ADP.
(b) CALCULATION OF INCOME OR LOSS. The income or loss allocable to
Excess Contributions is equal to the amount of income or loss
allocable to the Participant's Elective Deferral subaccount (and,
if applicable, the Qualified Nonelective Contribution subaccount
or the Qualified Matching Contributions subaccount, or both) for
the Plan Year multiplied by a fraction, the numerator of which is
such Participant's Excess Contributions for the Plan Year and the
denominator of which is the Participant's account balance
attributable to Elective Deferrals (and Qualified Nonelective
Contributions or Qualified Matching Contributions, or both, if any
of such contributions are included in the ADP test) without regard
to any income or loss occurring during such Plan Year.
(c) METHOD OF DISTRIBUTION. Excess Contributions shall be distributed
from the Participant's Elective Deferral subaccount and Qualified
Matching Contribution subaccount (if applicable) in proportion to
the Participant's Elective Deferrals and Qualified Matching
Contributions (to the extent used in the ADP test) for the Plan
Year. Excess Contributions shall be distributed from the
Participant's Qualified Nonelective Contribution subaccount only
to the extent that such Excess Contributions exceed the balance in
the Participant's Elective Deferral subaccount and Qualified
Matching Contribution subaccount.
(d) FORFEITURE OF CERTAIN MATCHING CONTRIBUTIONS. Any Matching
Contribution (whether or not vested) that was made on account of
an Excess Contribution that has been distributed in accordance
with this Section 5.9 shall be forfeited no later than twelve
months after the close of the Plan Year in which such Excess
Contribution occurred.
5.10 QUALIFIED NONELECTIVE CONTRIBUTIONS TO CURE ADP AND/OR ACP TEST FAILURE.
The Employer may, in its sole discretion, elect to contribute a Qualified
Nonelective Contribution in an amount necessary to cure any ADP and/or
ACP test failure for a Plan Year within twelve months after the close of
such Plan Year. Qualified Nonelective Contributions for a Plan Year shall
be allocated to the Accounts of Participants who are not Highly
Compensated Employees and who would be eligible for an allocation of
Employer Discretionary Contributions in accordance with Section 5.3(b) in
the ratio in which each such Participant's Compensation for such Plan
Year bears to the Total Compensation of all such Participants for such
Plan Year.
5.11 QUALIFIED MATCHING CONTRIBUTION TO CURE ADP AND/OR ACP TEST FAILURE. The
Employer may, in its sole discretion, elect to contribute a Qualified
Matching Contribution in an amount necessary to cure any ADP and/or ACP
test failure for a Plan Year within twelve months after the close of such
Plan Year. Qualified Matching Contributions for a Plan Year shall be
allocated to the Accounts of Participants who are not Highly Compensated
Employees and who would be eligible for an allocation of Matching
Contributions in accordance with Section 5.3(a) in the ratio in which
each such Participant's Elective Deferrals for such Plan Year bear to the
total Elective Deferrals of all such Participants for such Plan Year.
5.12 FORFEITURE AND/OR DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS.
Notwithstanding any other provision of this Plan, Excess Aggregate
Contributions for a Plan Year, plus any income and minus any loss
allocable thereto, may be forfeited, if forfeitable, or distributed, if
not forfeitable, no later than twelve months after the close of such Plan
Year to Participants to whose Accounts such Excess Aggregate
Contributions were allocated for such Plan Year. Excess Aggregate.
Contributions of Participants who are subject to the Family Member
aggregation rules shall be allocated among the Family Members in
proportion to the Matching Contributions (or amounts treated as Matching
Contributions) of each Family Member that is combined to determine the
combined ACP. Excess Aggregate Contributions shall be forfeited, if
forfeitable, or distributed on a pro rata basis from the Participant's
Matching Contribution subaccount, and Qualified Matching Contribution
subaccount (and, if applicable, the Participant's Qualified Nonelective
Contribution subaccount or Elective Deferral subaccount, or both).
The income or loss allocable to Excess Aggregate Contributions
distributed or forfeited is equal to the amount of income or loss
allocable to the Participant's Matching Contribution subaccount,
Qualified Matching Contribution subaccount (if any, and if all amounts
therein are not used in the ADP test) and, if applicable, Qualified
Nonelective Contribution subaccount and Elective Deferral subaccount for
the Plan Year multiplied by a fraction, the numerator of which is such
Participant's Excess Aggregate Contributions for the year and the
denominator of which is the Participant's account balance(s) attributable
to Contribution Percentage Amounts without regard to income or loss
occurring during such Plan Year.
Any Matching Contribution (whether or not vested) that was made on
account of an Excess Aggregate Contribution that has been distributed in
accordance with this Section 5.12 shall be forfeited no later than twelve
months after the close of the Plan Year in which such Excess Aggregate
Contribution occurred.
5.13 DEFINITIONS.
(a) ACTUAL DEFERRAL PERCENTAGE. For a specified group of Participants
for a Plan Year, the average of the ratios (calculated separately
for each Participant in such group) of (i) the amount of Employer
deferral contributions actually paid over to the Plan on behalf of
such Participant for the Plan Year to (ii) the Participant's Total
Compensation for such Plan Year. Employer deferral contributions
on behalf of any Participant shall include: (i) any Elective
Deferrals made pursuant to the Participant's deferral elective
(including Excess Elective Deferrals of Highly
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Compensated Employees), but excluding (A) Excess Elective Deferrals of
Non-Highly Compensated Employees that arise solely from Elective
Deferrals made under the plan or plans of this Employer, and (B)
Elective Deferrals that are taken into account in the ADP test (provided
the ADP test is satisfied both with and without exclusion of these
Elective Deferrals); and (ii) at the elections of the Employer,
Qualified Nonelective Contributions and Qualified Matching
Contributions. For purposes of computing Actual Deferral Percentages, an
Employee who would be a Participant but for the failure to make Elective
Deferrals shall be treated as a Participant on whose behalf no Elective
Deferrals are made.
(b) AGGREGATE LIMIT. The sum of (i) 125% of the greater of the ADP of the
Non-Highly Compensated Employees for the Plan Year or the ACP of
Non-Highly Compensated Employees under the Plan subject to
section 401(m) of the Code for the Plan Year beginning with or within
the Plan Year of the cash of deferred arrangement, and (ii) the lesser
of 200% or two plus the lesser of such ADP or ACP. "Lesser" is
substituted for "greater" in "(i)", above, and "greater" is substituted
for "lesser" after "two plus the" in "(ii)" if it would result in a
larger Aggregate Limit.
(c) AVERAGE CONTRIBUTION PERCENTAGE. The average of the Contribution
Percentages of the eligible Participants in a group.
(d) CONTRIBUTION PERCENTAGE. The ratio (expressed as a percentage) of an
eligible Participant's Contribution Percentage Amounts to such eligible
Participant's Total Compensation for the Plan Year.
(e) CONTRIBUTION PERCENTAGE AMOUNTS. The sum of the Matching Contributions
and Qualified Matching Contributions (to the extent not taken into
account for purposes of the ADP test) made under the Plan on behalf of
the Participant for the Plan Year. Such Contribution Percentage Amounts
shall not include Matching Contributions that are forfeited either to
correct Excess Aggregate Contributions or because the contributions to
which they relate are excess Elective Deferrals, Excess Contributions or
Excess Aggregate Contributions. The Plan Administrator may include
Qualified Nonelective Contributions in the Contribution Percentage
Amounts. The Plan Administrator also may elect to use Elective Deferrals
in the Contribution Percentage Amounts so long as the ADP test is met
before the Elective Deferrals are used in the ACP test and continues to
be met following the exclusion of those Elective Deferrals that are used
to meet the ACP test.
(f) EXCESS AGGREGATE CONTRIBUTIONS. With respect to any Plan Year, the
excess of the aggregate Contribution Percentage Amounts taken into
account in computing the numerator of the Contribution Percentage
actually made on behalf of Highly Compensated Employees for such Plan
Year, over the maximum Contribution Percentage Amounts permitted by the
ACP test (determined by reducing contributions made on behalf of Highly
Compensated Employees in order of their Contribution Percentages
beginning with the highest of such percentages).
Such determination shall be made after first determining Excess Elective
Deferrals pursuant to Section 5.13(h) and then determining Excess
Contributions pursuant to Section 5.13(h).
(g) EXCESS CONTRIBUTION. With respect to a Plan Year, the excess of the
Elective Deferrals (including any Qualified Nonelective Contributions
and Qualified Matching Contributions that are treated as Elective
Deferrals under sections 401(k)(2) and 401(k)(3) of the Code) on behalf
of eligible Highly Compensated Employees for the Plan Year over the
maximum amount of such contributions permitted under sections 401(k)(2)
and 401(k)(3) of the Code.
The amount of Excess Contributions for a Highly Compensated Employee for
a Plan Year is to be determined by the following leveling method under
which the Actual Deferral Percentage of the Highly Compensated Employee
with the highest Actual Deferrals Percentage is reduced to the extent
required to:
(i) Enable the Plan to satisfy Section 5.5; or
(ii) Cause such Highly Compensated Employee's Actual Deferral
Percentage to equal the Actual Deferral Percentage. This process
is repeated until the Plan satisfies Section 5.5. For each
Highly Compensated Employee, the amount of Excess Contributions
is equal to the total Elective Deferrals (plus Qualified
Nonelective Contributions and Qualified Matching Contributions
treated as Elective Deferrals) on behalf of the Participant
(determined prior to the application of this paragraph) minus
the amount determined by multiplying the Participant's Actual
Deferral Percentage (determined after application of this
paragraph) by his Total Compensation used in determining such
Actual Deferral Percentage.
(h) EXCESS ELECTIVE DEFERRALS. Those Elective Deferrals that are includible
in a Participant's gross income under section 402(g) of the Code to the
extent such Participant's Elective Deferrals for a taxable year exceed
the dollar limitation under such Code section.
(i) QUALIFIED MATCHING CONTRIBUTIONS. Matching Contributions that are made
to this Plan or another arrangement described in section 401(k) of the
Code that is maintained by the Employer that are subject to the
distribution and nonforfeitability requirement of section 401(k) of the
Code when made.
(j) QUALIFIED NONELECTIVE CONTRIBUTIONS. Contributions (other than Matching
Contributions or Qualified Matching Contributions) made by the Employer
and allocated to Participants' Accounts that the Participants may not
elect to receive in cash until distributed from the Plan; that are
nonforfeitable when made; that are distributable only in accordance
with distribution provisions that are applicable to Elective Deferrals.
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ARTICLE 6. ALLOCATIONS
6.1 INDIVIDUAL ACCOUNTS. The Plan Administrator shall establish and maintain
an Account in the name of each Participant. Each Participant's Account
shall contain the following subaccounts:
(a) ELECTIVE DEFERRALS. An Elective Deferral subaccount to which shall
be credited (or debited, as the case may be) (i) such
Participant's Elective Deferrals made under Section 5.2(b); (ii)
the net earnings or net losses on the investment of the assets of
the subaccount; and (iii) distributions from such subaccount.
(b) ROLLOVERS. A rollover subaccount to which shall be credited (or
debited, as the case may be) (i) rollover contributions made by
such Participant to the Trust under Section 5.2(c); (ii) the net
earnings or net losses on the investment of the assets of such
subaccount; and (iii) distributions from such subaccount.
(c) AFTER-TAX CONTRIBUTIONS. A nondeductible voluntary contribution
subaccount to which shall be credited (or debited, as the case may
be) (i) Employee After-Tax Contributions made by the Participant
before the Plan Year in which this Plan was adopted by the
Employer; (ii) the net earnings or net losses on the investment of
the assets of such subaccount; and (iii) distributions from such
subaccount.
(d) MATCHING CONTRIBUTIONS. A Matching Contribution subaccount to
which shall be credited (or debited, as the case may be) (i) such
Participant's Matching Contributions made under Section 5.3(a);
(ii) the net earnings or net losses on the investment of the
assets of such subaccount; and (iii) distributions from such
subaccount.
(e) DISCRETIONARY CONTRIBUTIONS. An Employer Discretionary
Contribution subaccount to which shall be credited (or debited, as
the case may be) (i) the Participant's share of Employer
Discretionary Contributions under Section 5.3(b); (ii) the net
earnings or net losses on the investment of the assets of such
subaccount; and (iii) distributions from such subaccount.
(f) QUALIFIED NONELECTIVE CONTRIBUTIONS. A Qualified Nonelective
Contribution subaccount to which shall be credited (or debited, as
the case may be) (i) such Participant's Qualified Nonelective
Contributions made under Section 5.10; (ii) the net earnings or
net losses on the investment of the assets of the
subaccount;and(iii) distributions from such subaccount.
(g) QUALIFIED MATCHING CONTRIBUTIONS. A Qualified Matching
Contribution subaccount to which shall be credited (or debited, as
the case may be) (i) the Participant's Qualified Matching
Contributions made under Section 5.11; (ii) the net earnings or
net losses on the investment of assets in such subaccount; and
(iii) distributions from such subaccount.
6.2 ALLOCATION OF CONTRIBUTIONS.
(a) ELECTIVE DEFERRALS, MATCHING CONTRIBUTIONS AND ROLLOVER
CONTRIBUTIONS. All Elective Deferrals, Matching Contributions and
rollover contributions shall be allocated to the Account of the
Participant on whose behalf such contributions were made.
(b) QUALIFIED NONELECTIVE AND QUALIFIED MATCHING CONTRIBUTIONS. All
Qualified Nonelective Contributions and Qualified Matching
Contributions shall be allocated as provided in Sections 5.10 and
5.11, respectively.
(c) EMPLOYER DISCRETIONARY CONTRIBUTIONS. All Employer Discretionary
Contributions shall be allocated to the Account of each
Participant eligible for such an allocation, as provided in
Section 5.3(b), in the ratio that such Participant's Compensation
bears to the Compensation of all such Participants. However, if
the Discretionary Employer Contribution formula selected in the
Adoption Agreement is allocated under the permitted disparity
rules, Discretionary Employer Contributions for the Plan Year
shall be allocated to the Accounts of Participants eligible for
such an allocation as follows:
If the Plan is Top-Heavy (as defined below) for the Plan Year,
begin at Step One; if the Plan is not Top-Heavy for the Plan Year,
begin at Step Three.
(i) STEP ONE. Contributions will be allocated to each
Participant's Account in the ratio that each Participant's
Compensation bears to all such Participants' Compensation,
but not in excess of 3% of each Participant's Compensation.
(ii) STEP TWO. Any contributions remaining after the allocation
in Step One will be allocated to each Participant's Account
in the ratio that each Participant's Compensation for the
Plan Year in excess of the Integration Level (hereinafter
"Excess Compensation") bears to the Excess Compensation of
all Participants, but not in excess of 3% of Compensation.
(iii) STEP THREE. Any contributions (remaining after the
allocation in Step Two if the Plan is Top-Heavy) will be
allocated to each Participant's Account in the ratio that
the sum of each Participant's Compensation and Excess
Compensation bears to the sum of all Participants'
Compensation and Excess Compensation, but not in excess of
the Maximum Profit Sharing Disparity Rate.
(iv) STEP FOUR. Any remaining contributions will be allocated to
each Participant's Account in the ratio that each
Participant's Compensation for the Plan Year bears to the
total of all Participants' Compensation for that year.
If the Employer maintains any other plan that provides for
permitted disparity, and if any Participant in this Plan is
eligible to participate in such other plan, this Plan may not
provide for permitted disparity.
6.3 MINIMUM TOP-HEAVY ALLOCATION.
(a) GENERAL RULE. Notwithstanding any other provision of this Plan to
the contrary, during any Plan Year that this Plan is Top-Heavy,
the Matching Contributions, Employer Discretionary Contributions
and forfeitures allocated on behalf of any Participant who is not
a Key Employee and who has not separated from service with the
Employer before the end of such Plan Year shall not be less than
the lesser of 3% of such Participant's Section 415 Compensation
or, in the case where the Employer has no defined benefit plan
which designates this Plan to satisfy section 401 of the Code, the
largest percentage of Employer contributions and forfeitures, as a
percentage of the first $200,000 of the Key Employee's Section 415
Compensation, allocated on behalf of any Key Employee for that
year. The minimum allocation is determined without regard to any
Social Security contribution. For purposes of this subsection,
all defined contribution plans required to be included in an
aggregation group under section 416(g)(2)(A)(i) of the Code shall
be treated as a single plan.
(b) SPECIAL RULE IF OTHER PLANS SATISFY TOP-HEAVY MINIMUM. The
provision in subsection (a) above shall not apply to any
Participant to the extent the Participant is covered under any
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other plan or plans of the Employer and any other plan or plans
of the Employer provide that the minimum allocation or benefit
requirement applicable to Top-Heavy plans will be met in the
other plan or plans.
6.4 ALLOCATION OF FORFEITURES. Any forfeitures arising under the Plan,
including forfeitures of excess Aggregate Contributions, shall be
allocated in the following order of priority in the Plan in which
forfeitures occur.
(a) First, forfeitures shall be used to the extent necessary to
restore a returning Participant's Account as provided in
Section 8.5(a) and to restore in a formerly unlocatable
Participant's Account as provided in Section 8.6;
(b) Next, forfeitures shall be treated as an Employer contribution,
shall be used to reduce the Employer Matching Contribution as
required by Section 5.3(a) and shall be allocated to the
Matching Contribution subaccounts of the Participants on whose
behalf such contributions are to be made;
(c) Next, forfeitures shall be treated as Employer contributions and
shall be allocated to Participants' Accounts to the extent
necessary to satisfy the minimum allocation provisions of
Section 6.3;
(d) Next, to the extent elected by the Plan Administrator,
forfeitures shall be treated as a Qualified Nonelective
Contribution or a Qualified Matching Contribution and shall be
allocated as provided in Section 5.10 and 5.11;
(e) Next, to the extent elected by the Plan Administrator,
forfeitures shall be used to pay reasonable costs of
administering the Plan;
(f) Any remaining forfeitures shall be treated as Employer
contributions and allocated as follows:
(i) If the Employer has elected in the Adoption Agreement
that it may make Employer Discretionary Contributions to
the Plan, such forfeitures shall be treated as Employer
Discretionary Contributions and allocated in accordance
with the provisions of Section 6.2(c);
(ii) If the Employer has not elected in the Adoption
Agreement that it may make Employer Discretionary
Contributions to the Plan, such forfeitures shall be
allocated to each Participant's Matching Contribution
subaccount in the ratio that each Participant's Elective
Deferrals for the Plan Year bear to the total of all
Participant's Elective Deferrals for the Plan Year.
6.5 WITHDRAWALS AND DISTRIBUTIONS. Any distribution to a Participant or his
Beneficiary, any amount directly rolled over from a Participant's
Account directly to the trustee of any other qualified plan described in
section 401(a) of the Code, to a qualified annuity plan described in
section 403(a) of the Code, to an individual retirement account
described in section 408(a) of the Code or to an individual retirement
account described in section 408(a) of the Code or to an individual
retirement annuity described in section 408(b) of the Code, or any
withdrawal by a participant shall be charged to the appropriate
subaccount(s) of the Participant as of the date of the distribution or
the withdrawal.
6.6 DETERMINATION OF VALUE OF TRUST FUND AND OF NET EARNINGS OR LOSSES. As
of each Valuation Date, the Trustee shall determine for the period then
ended the sum of the net earnings or losses of the Trust which shall
reflect accrued but unpaid interest, dividends, gains or losses realized
from the sale, exchange or collection of assets, other income received,
appreciation in the fair market value of assets, depreciation in the
fair market value of assets, administration expenses, and taxes and
other expenses paid. Gains or losses realized and adjustments for a
appreciation or depreciation in fair market value shall be computed with
respect to the difference between such value as of the preceding
Valuation Date or date of purchase, whichever is applicable, and the
value of the date disposition or the current Valuation Date, whichever
is applicable.
6.7 ALLOCATION OF NET EARNINGS OR LOSSES.
(a) SPECIFIC PARTICIPANT ACCOUNT ALLOCATIONS. To the extent that
Shares and other assets are specifically allocated to a specific
Participant's Account or subaccount, earnings, dividends,
capital gain distributions, appreciation, depreciation, losses
and accrued but unpaid interest and any other earnings or losses
from Shares and any other assets in such Account or subaccount
shall be allocated to such Account or subaccount.
(b) COMMON ACCOUNT ALLOCATIONS. As of each Valuation Date, the net
earnings or losses of the Trust (excluding gains or losses on
assets specifically allocated to a specific Participant's
Account or subaccount, all of which shall be allocated to such
Account or subaccount) for the valuation period then ending
shall be allocated to the Accounts of all Participants (or
Beneficiaries) (excluding the Accounts to which are allocated
assets of specific Participants) having assets in the Trust both
on such date and on the immediately preceding Valuation Date.
Such allocation shall be made by the application of a fraction,
the numerator of which is the value of the Account of a specific
Participant (or Beneficiary) as of the immediately preceding
Valuation Date, reduced by any distributions therefrom since
such preceding Valuation Date, and the denominator of which is
the total value of all such Accounts as of that preceding
Valuation Date, reduced by any distributions therefrom since
such preceding Valuation Date.
6.8 RESPONSIBILITIES OF THE PLAN ADMINISTRATOR. The Plan Administrator shall
maintain accurate records with respect to the contributions made by or
on behalf of Participants under the Plan and shall furnish the Trustee
with written instructions directing the Trustee to allocate all Plan
contributions to the Trust among the separate Accounts and subaccounts
of Participants in accordance with Section 6.1 above. In making any such
allocation, the Trustee shall be fully entitled to rely on the
instructions furnished by the Plan Administrator and shall be under no
duty to make any inquiry or investigation with respect thereto.
6.9 DEFINITIONS.
(a) DETERMINATION DATE. For the first Plan Year of the Plan, the
last day of the Plan Year. With respect to any Plan Year
subsequent to the first Plan Year, the last day of the preceding
Plan Year.
(b) INTEGRATION LEVEL. The Taxable Wage Base or such lesser amount
(or percentage of Taxable Wage Base) elected by the Employer in
the Adoption Agreement.
(c) KEY EMPLOYEE.
(i) Any Employee or former Employee (and the Beneficiaries
of such Employee) who at any time during the
determination period was an officer of the Employer if
such individual's annual compensation exceeds 50% of the
dollar limitation under section 415(b)(1)(A) of the
Code; an owner (or considered an owner under section 318
of the Code) of one of the ten largest interests in the
Employer if such individual's compensation exceed 100%
of the dollar limitation under section 415(c)(1)(A) of
the Code; a Five Percent Owner of the Employer; or the
owner of the Employer who has annual compensations more
than $150,000.
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(ii) For purposes of this Section, annual compensation means
Section 415 Compensation, but including amounts contributed
by the Employer pursuant to a salary, reduction agreement
which are excludable from the Employee's gross income under
section 125, 402(a)(8), 402(h) or 403(b) of the Code.
(iii) For purposes of this Section, the determination period is
the Plan Year containing the Determination Date and the
four preceding Plan Years.
(d) MAXIMUM PROFIT SHARING DISPARITY RATE. The lesser of:
(i) 2.7% (5.7% if the Plan is not Top-Heavy);
(ii) The applicable percentage determined in accordance with the
table below:
If the Integration Level is
The Applicable
More Than But Not More Than Percentage Is:
--------- ----------------- --------------
Top-Heavy Not Top-Heavy
--------- -------------
$0 X 2.7% 5.7%
X */of TWB 80% of TWB 1.3% 4.3%
80% of TWB Y **/ 2.4% 5.4%
*X = the greater of $10,000 or 20% of TWB.
**Y = any amount more than 80% of the TWB but less than 100% of TWB.
If the Integration Level is equal to TWB, the applicable percentage is
2.7% (5.7% if the Plan is not Top-Heavy).
(e) NON-KEY EMPLOYEE. Any Employee or former Employee who is not a Key
Employee. In addition, any Beneficiary of a Non-Key Employee shall
be treated as a Non-Key Employee.
(f) PERMISSIVE AGGREGATION GROUP. The Required Aggregation Group of
plans plus any other plan or plans of the Employer which, when
considered as a group with the Required Aggregation Group, would
continue to satisfy the requirements of sections 401(a)(4) and 410
of the Code.
(g) PRESENT VALUE. Present Value shall be based only on the interest
and mortality rates specified in the Adoption Agreement.
(h) REQUIRED AGGREGATION GROUP. (A) Each qualified plan of the
Employer in which at least one Key Employee participates or
participated at any time during the determination period
(regardless of whether the plan has terminated), and (B) any other
qualified plan of the Employer which enables a plan described in
(A) to meet the requirements of section 401(a)(4) or 410 of the
Code.
(i) TOP-HEAVY. For any Plan Year beginning after December 31, 1983,
this Plan is Top-Heavy if any of the following conditions exists:
(i) If the Top-Heavy Ratio for this Plan exceeds 60% and this
Plan is not part of any Required Aggregation Group or
Permissive Aggregation Group of plans,
(ii) If this Plan is a part of a Required Aggregation Group of
plans but not part of a Permissive Aggregation Group and
the Top-Heavy Ratio for the group of plans exceeds 60%.
(iii) If this Plan is a part of a Required Aggregation Group and
part of a Permissive Aggregation Group of plans and the
Top-Heavy Ratio for the Permissive Aggregation Group
exceeds 60%.
(j) TOP-HEAVY RATIO.
(i) If the Employer maintains one or more defined contribution
plans (including any Simplified Employee Pension Plan) and
the Employer has not maintained any defined benefit plan
which during the 5-year period ending on the Determination
Date(s) has or has had accrued benefits, the Top-Heavy
Ratio for this Plan alone or for the Required or Permissive
Aggregation Group, as appropriate, is a fraction, the
numerator of which is the sum of the account balances of
all Key Employees as of the Determination Date(s)
(including any part of any account balance distributed in
the 5-year period ending on the Determination Date(s)), and
the denominator of which is the sum of all account balances
(including any part of any account balance distributed in
the 5-year period ending on the Determination Date(s)),
both computed in accordance with section 416 of the Code
and the regulations thereunder. Both the numerator and
denominator of the Top-Heavy Ratio are increased to reflect
any contribution not actually made as of the Determination
Date but which is required to be taken into account on that
date under section 416 of the Code and the regulations
thereunder.
(ii) If the Employer maintains one or more defined contribution
plans (including any Simplified Employee Pension Plan) and
the Employer maintains or has maintained one or more
defined benefit plans which during the 5-year period ending
on the Determination Date(s) has or has had any accrued
benefits, the Top-Heavy Ratio for any Required or
Permissive Aggregation Group, as appropriate, is a
fraction, the numerator of which is the sum of account
balances under the aggregated defined contribution plan or
plans for all Key Employees, determined in accordance with
(i) above, and the Present Value of accrued benefits under
the aggregated defined benefit plan or plans for all Key
Employees as of-the Determination Date(s), and the
denominator of which is the sum of the account balances
under the aggregated defined contribution plan or plans for
all Participants, determined in accordance with (i) above,
and the Present Value of accrued benefits under the defined
benefit plan or plans for all Participants as of the
Determination Date(s), all determined in accordance with
section 416 of the Code and the regulations thereunder. The
accrued benefits under a defined benefit plan in both the
numerator and denominator of the Top-Heavy Ratio are
increased for any distribution of an accrued benefit made
in the 5- year period ending on the Determination Date.
(iii) For purposes of (i) and (ii) above, the value of account
balances and the Present Value of accrued benefits will be
determined as of the most recent Valuation Date that falls
within or ends with the 12-month period ending on the
Determination Date, except as provided in section 416 of
the Code and the regulations thereunder for the first and
second plan years of a defined benefit plan. The account
balances and accrued benefits of a Participant (A) who is
not a Key Employee but who was a Key Employee in a prior
year, or (B) who has not been credited with at least one
Hour of Service with any Employer maintaining the Plan at
any time during the 5-year period ending on the
Determination Date will be disregarded. The calculation of
the Top-Heavy Ratio, and the extent to which distributions,
rollovers and transfers are taken into account will be made
in accordance with section 416 of the Code and the
regulations thereunder. Deductible employee contributions
will not be taken into account for purposes of computing
the Top-Heavy Ratio. When aggregating
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plans, the value of account balances and accrued benefits will be
calculated with reference to the Determination Dates that fall within
the same calendar year.
The accrued benefit of a Participant other than a Key Employee shall be
determined under (A) the method, if any, that uniformly applies of
accrued purposes under all defined benefit plans maintained by the
Employer, or (B) if there is no such method, as if such benefit accrued
not more rapidly than the slowest accrual rate permitted under the
fractional rule of section 411(b)(1)(C) of the Code.
(k) TAXABLE WAGE BASE (or "TWB"). The contribution and benefit base in
effect under section 230 of the Social Security Act on the first day of
the Plan Year.
ARTICLE 7. LIMITATIONS ON ALLOCATIONS
7.1 LIMITATIONS ON ANNUAL ADDITIONS TO QUALIFIED DEFINED CONTRIBUTION PLANS.
Notwithstanding any other provision of this Plan to the contrary, the
amount of Annual Additions that may be credited to the Participant's
Account for any Limitation Year may not exceed the Maximum Permissible
Amount reduced by the sum of the Annual Additions to his Account under
all other defined contribution plans now or hereafter maintained by the
Employer or affiliated Employers, except that in determining whether any
entity is part of the controlled group of corporations or trades or
businesses including the Employer, "more than 50%" shall be substituted
for "at least 80%" in the tests under section 414(b) and (c) of the
Code. If the Employer contribution that would otherwise be contributed
or allocated to the Participant's Account would cause the Annual
Additions for the Limitation Year to exceed the preceding limitation,
the amount contributed or allocated under this Plan will be reduced so
that the Annual Additions for the Limitation Year to all defined
contribution plans maintained by the Employer will equal the Maximum
Permissible Amount. If, as a result of the allocation of forfeitures, a
reasonable error in determining a Participant's Compensation or other
limited facts and circumstances, there is an Excess Amount, the Excess
Amount will be deemed to consist of the Annual Additions last allocated,
except that Annual Additions attributable to a Simplified Employee
Pension Plan will be deemed allocated first followed by Annual Additions
to a welfare benefit fund or individual medical account regardless of
the actual allocation date. If an Excess Amount was allocated to a
Participant on an allocation date of this Plan, which coincides with an
allocation date of another plan, the Excess Amount attributed to this
Plan will be the product of:
(a) the total Excess Amount allocated as of such date, times
(b) the ratio of (i) the Annual Additional allocated to the
Participant for the Limitation Year as of such date under this
Plan to (ii) the total Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
and all the other qualified master or prototype defined
contributions plans.
Any Excess Amount allocated to this Plan will be disposed of as follows:
(a) Any elective Deferrals, and any income attributable thereto, to
the extent they would reduce the Excess Amount, will be returned
to the Participant;
(b) If, after the application of subsection (a), an Excess Amount
still exists, and the Participant is covered by the Plan at the
end of the Limitation Year, the Excess Amount in the
Participant's Account will be used to reduce Employer
contributions (including any allocation of forfeitures) for such
Participant in the next Limitation Year, and each succeeding
Limitation Year if necessary;
(c) If, after the application of subsection (a), an Excess Amount
still exists, and the Participant is not covered by the Plan at
the end of the Limitation Year, the Excess Amount will be held
unallocated in a suspense account. The suspense account will be
applied to reduced future Employer contributions (including
allocation of any forfeitures) for all remaining Participants in
the next Limitation Year, and each succeeding Limitation Year if
necessary;
(d) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of
the Trust's investment gains and losses. If a suspense account
is in existence at any time during a particular Limitation Year,
all amounts in the suspense account must be allocated and
reallocated to Participant's Accounts before any Employer or any
Employee contributions may be made to the Plan for that
Limitation Year. Excess Amounts may not be distributed to
Participants or former participants.
7.2 EMPLOYERS WHO, IN ADDITION TO THIS PLAN, MAINTAIN A QUALIFIED DEFINED
BENEFIT PLAN. If the Employer or Affiliated Employers maintain, or at
any time maintained, a qualified defined benefit plan covering any
Participant in this Plan, the sum of the Participant Defined Benefit
Fraction and Defined Contribution Fraction will not exceed 1.0 in any
Limitation Year. The Annual Additions which may be credited to such a
Participant's Account under this Plan for any Limitation Year will be
limited in accordance with the terms of the Adoption Agreement.
7.3 DEFINITIONS
(a) ANNUAL ADDITIONS. Effective on the first day of the Plan Year
beginning after December 31, 1986, the sum of the following
amounts credited to a Participant's Account for the Limitation
Year.
(i) Employer contributions (including Excess Elective
Deferrals (as defined in Section 5.13) not distributed
to the Participant on or before the April 15 following
the close of the taxable year of such Excess Effective
Deferrals, Excess Contributions and Excess Aggregate
Contributions, both as defined in Section 5.13);
(ii) for Plan Years beginning on and after January 1, 1987,
Employee After-Tax Contributions;
(iii) forfeitures;
(iv) amounts allocated after March 31, 1984 to an individual
medical account as defined in section 415(1)(2) of the
Code, that is part of a pension or annuity plan
maintained by the Employer, are treated as Annual
Additions to a defined contribution plan. Also, amounts
derived from contributions paid or accrued after
December 31, 1985 in taxable years ending after such
date that are attributable to post-retirement medical
benefits allocated to the separate account of a
Key-Employee, as defined in section
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26
<PAGE> 53
419A(d)(3) of the Code, under a welfare benefit fund, as
defined in section 419(e) of the Code maintained by the
Employer, are treated as Annual Additions to a defined
contribution plan; and
(v) allocations under a Simplified Employee Pension Plan.
For this purpose, any Excess Amount applied in the Limitation Year to reduce
Employer contributions will be considered Annual Additions for such Limitation
Year.
(b) DEFINED BENEFIT FRACTION. A fraction, the numerator of which is
the sum of the Participant's projected annual benefits under all
defined benefit plans (whether or not terminated) maintained by
the Employer, and the denominator of which is the lesser of 100%
of the dollar limitation determined for the Limitation Year under
section 415(b) and (d) of the Code or 140% of his average Section
415 Compensation for the three consecutive calendar years that
produces the highest average, including any adjustments under
section 415(b) of the Code.
Notwithstanding the above, if the Participant was a Participant as
of the first day of the first Limitation Year beginning after
December 31, 1986, in one or more defined benefit plans maintained
by the Employer which were in existence on May 6, 1986, the
denominator of this fraction will not be less than 125% of the sum
of the annual benefits under such plans which the Participant had
accrued as of the close of the last Limitation Year beginning
before January 1, 1987, disregarding any changes in the terms and
conditions of the plan after May 5, 1986. The preceding sentence
applies only if the defined benefit plans individually and in the
aggregate satisfied the requirements of section 415 of the Code
for all Limitation Years beginning before January 1, 1987.
(c) DEFINED CONTRIBUTION FRACTION. A fraction, the numerator of which
is the sum of the Annual Additions to the Participant's Accounts
under all the defined contribution plans (whether or not
terminated) maintained by the Employer for the current and all
prior Limitation Years (including the Annual Additions
attributable to the Participant's voluntary nondeductible
contributions to all defined benefit plans, whether or not
terminated, maintained by the Employer, and the Annual Additions
attributable to all welfare benefit funds as defined in
section 419(e) of the Code and individual medical accounts as
defined in section 415(1)(2) of the Code, and simplified employee
pensions maintained by the Employer), and the denominator of
which is the sum of the maximum aggregate amounts for the current
and all prior Limitation Years of service with the Employer
(regardless of whether a defined contribution plan was maintained
by the Employer). The maximum aggregate amount in any Limitation
Year is the lesser of 100% of the dollar limitation in effect
under section 415(c)(1)(A) of the Code or 35% of the Participant's
Compensation for such year.
If the Participant was a Participant as of the end of the first
day of the first Limitation Year beginning after December 31,
1986, in one or more defined contribution plans maintained by the
Employer which were in existence on May 6, 1986, the numerator of
this fraction will be adjusted if the sum of this fraction and the
Defined Benefit Fraction would otherwise exceed 1.0 under the
terms of this Plan. Under the adjustment, an amount equal to the
product of (1) the excess of the sum of the fractions over 1.0,
and (2) the denominator of this fraction, will be permanently
subtracted from the numerator of this fraction. The adjustment is
calculated using the fractions as they would be computed as of the
end of the last Limitation Year beginning before January, 1, 1987,
and disregarding any changes in the terms and conditions of the
plan made after May 5, 1986, but using the section 415 of the Code
limitation applicable to the first Limitation Year beginning on or
after January 1, 1987. The Annual Addition for any Limitation
Year beginning before January 1, 1987, shall not be recomputed to
treat all Employee contributions as Annual Additions.
(d) EXCESS AMOUNT. The excess of the Participant's Annual Addition for
the Limitation Year over the Maximum Permissible Amount.
(e) LIMITATION YEAR. The Plan Year.
(f) MAXIMUM PERMISSIBLE AMOUNT. The maximum Annual Addition that may
be contributed or allocated to a Participant's Account under the
Plan for any Limitation Year shall not exceed the lesser of:
(i) $30,000 or, if greater, 25% of the section 415(b)(1) of the
Code limitation for such year; or
(ii) 25% of the Participant's Section 415 Compensation actually
paid or includible in gross income during the Limitation
Year.
The limitation referred to in (ii) shall not apply to any
contribution for medical benefits (within the meaning of section
401(h) or 419A(f)(2) of the Code) which is otherwise treated as an
Annual Addition under section 415(I)(1) or 419A(d)(2) of the Code.
If a Limitation Year less than 12 consecutive months is created
because of an amendment changing the Plan Year, the Maximum
Permissible Amount shall be equal to the limit for such Limitation
Year under paragraph (i) multiplied by a fraction, the numerator
of which is the number of months in such short Limitation Year and
the denominator of which is 12.
(g) PROJECTED ANNUAL BENEFIT. The annual retirement benefit (adjusted
to an actuarially equivalent straight life annuity if such benefit
is expressed in a form other than a straight life annuity or
qualified joint and survivor annuity) to which the Participant
would be entitled under the terms of all defined benefit plans
assuming:
(i) the Participant will continue employment until Normal
Retirement Age under the Plan (or current age, if later),
and
(ii) the Participant's Section 415 Compensation for the current
Limitation Year and all other relevant factors used to
determine benefits under the Plan will remain constant for
all future Limitation Years.
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ARTICLE 8. VESTING
8.1 EMPLOYEE AFTER-TAX CONTRIBUTIONS, ELECTIVE DEFERRAL CONTRIBUTIONS, ROLLOVER
CONTRIBUTIONS, QUALIFIED NONELECTIVE CONTRIBUTIONS AND QUALIFIED MATCHING
CONTRIBUTIONS. A Participant's Employee After-Tax Contribution subaccount,
Elective Deferral subaccount, Rollover subaccount and Qualified Matching
Contribution subaccount and Qualified Matching Contribution subaccount
shall be fully vested and nonforfeitable at all times.
8.2 EMPLOYER DISCRETIONARY CONTRIBUTIONS AND MATCHING CONTRIBUTIONS.
(a) GENERAL. Notwithstanding the vesting schedule selected by the Employer
in the Adoption Agreement, the Participant's Employee Discretionary
Contribution subaccount shall be fully vested and nonforfeitable upon
the Participant's death. Total and Permanent Disability or attainment
of Normal Retirement Age while employed by the Employer. In the
absence of any of the preceding events, and subject to the provisions
of Sections 5.4(d), 5.9(d) and 5.12, the Participant's Employer
Discretionary Contribution subaccount and Matching Contribution
subaccount shall be vested in accordance with the vesting schedule
specified in the Adoption Agreement. The schedule must be at least as
favorable to Participants as either schedule (i) or (ii) below.
(i) Graduated vesting according to the following schedule:
Years of Vesting Service Percent Vested
------------------------ --------------
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
(ii) Full 100% vesting after three Years of Vesting Service.
(b) IN SERVICE DISTRIBUTIONS WHEN NOT FULLY VESTED. If a distribution is
made from a Participant's Employer Discretionary Contribution
subaccount or Matching Contribution subaccount at a time when the
Participant is not 100% vested in such subaccount and the
participant's employment with the Employer has not terminated, then;
(i) A separate remainder subaccount will be established for the
Participant's interest in such Employer Discretionary
Contribution subaccount or Matching Contribution subaccount at
the time of distribution, and
(ii) At any subsequent time, the Participant's vested portion of such
separate subaccount will be equal to an amount "x" determined
under the formula:
X = P(AB + (R x D)) - (R x D)
where
P = the Participant's vested percentage determined under
subsection (a) at the relevant time.
AB = the amount in such separate subaccount at the relevant time.
R = the ratio of AB to the amount in the subaccount prior to the
distribution.
D = the amount of the distribution.
8.3 AMENDMENTS TO VESTING SCHEDULE.
(a) PARTICIPANT'S ELECTION RIGHTS. If the Plan's vesting schedule is
amended, or the Plan is amended in any way that directly or indirectly
affects the computation of the Participant's nonforfeitable
percentage, each Participant with at least three years of service with
the Employer may elect, within a reasonable period after the adoption
of the amendment or change, to have the nonforfeitable percentage
computed under the Plan without regard to such amendment or change.
For any Participants who do not have at least one Hour of Service in
any Plan Year beginning after December 31, 1988, the preceding
sentence shall be applied by substituting "five years of service"
where such language appears.
(b) ELECTION PERIOD. The period during which the selection may be made
shall commence with the date the amendment is adopted or deemed to be
made and shall end on the latest of:
(i) 60 days after the amendment is adopted;
(ii) 60 days after the amendment becomes effective; or
(iii) 60 days after the Participant is issued written notice of the
amendment by the Employer or Plan Administrator.
(c) PROHIBITION AGAINST REDUCING ACCRUED BENEFITS. No amendment to the
Plan shall be effective to the extent that it has the effect of
decreasing a Participant's accrued benefit. Notwithstanding the
preceding sentence, a Participant's account balance may be reduced to
the extent permitted under section 412(c)(8) of the Code. For purposes
of this subsection, a Plan amendment which has the effect of
decreasing a Participant's Account balance or eliminating an optional
form of benefit, with respect to benefits attributable to service
before the amendment shall be treated as reducing an accrued benefit.
Furthermore, if the vesting schedule of a Plan is amended, in the case
of an Employee who is a Participant as of the date such amendment is
adopted or the date it becomes effective, the nonforfeitable
percentage (determined as of such date) of such Employee's right to
his Employer-derived accrued benefit will not be less than his
percentage computed under the Plan without regard to such amendment.
8.4 DETERMINATION OF YEARS OF VESTING SERVICE. For purposes of determining
the vested and nonforfeitable percentage of the Participant's Employer
Discretionary Contribution and Matching Contribution subaccounts, all
of the Participant's Years of Vesting Service with the Employer or an
Affiliated Employer shall be taken into account. If Employer
maintains the plan of a predecessor employer, Years of Vesting
Service with such employer will be treated as service with the
Employer.
8.5 FORFEITURE OF NONVESTED AMOUNTS. For Plan Years beginning before
1985, any portion of a Participant's Account that is not vested shall
be forfeited by him as of the last day of the Plan Year in which he
incurs a Break in Service. For Plan Years beginning after 1984, any
portion of a Participant's Account that is not vested shall be
forfeited in accordance with the following rules:
(a) DISTRIBUTION IN FULL. If a Participant's service with the
Employer terminated and if the entire vested portion of the
Participant's Account is distributed to him at any time before
the end of second Plan Year following the Plan Year in which his
employment terminated, the remaining portion of the Participant's
Account shall be forfeited as of the end of the Plan Year in
which such distribution occurs, as long as the Participant
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has not resumed employment with the Employer by such date.
However, if the Participant has no vested interest in his Account
at the time of his termination of employment, the Plan
Administrator nonetheless shall treat the Participant as if he had
received a distribution on the date his employment terminated and
shall forfeit the Participant's entire Account on the date his
employment terminated. If the Participant returns as an Employee
before the end of five consecutive Breaks in Service measured from
the day immediately after the date of his distribution (or
measured from the date his employment terminated in the case of a
Participant who had no vested interest in his Account), and if he
repays to the Trustee the full amount of the distribution (if any)
paid to him by reason of his termination of employment no later
than the fifth anniversary of the date of his reemployment, then
his Account (determined as of the date of the distribution of his
vested interest, unadjusted by subsequent gains and losses) shall
be fully restored to him as of the end of the Plan Year in which
such repayment occurs (or in the case of a Participant who had no
vested interest in his Account, such Account shall be restored as
of the end of the Plan Year in which he is reemployed). In such
case, the Participant's Account shall be restored first out of
such Participant's repayment (if any is required), next out of the
forfeitures for such Plan Year and, if such forfeitures are
insufficient to restore such Account, the Employer shall make a
special contribution to the Trustee to the extent necessary so
that the Participant's Account is fully restored.
(b) PARTIAL DISTRIBUTIONS. If a Participant's service with the
Employer terminates and if his entire vested interest in his
Account is not distributed to him before the end of the second
Plan Year following the Plan Year in which his employment
terminated, a separate remainder subaccount shall be established
for that portion of the Participant's Account that is not vested
and such separate subaccount shall be forfeited at the end of the
Plan Year in which the Participant incurs five consecutive Breaks
in Service. If all or any portion of such a Participant's vested
benefits are distributed before a forfeiture is permitted and if
the Participant returns to work as an Employee after the
distribution and before he incurs five consecutive Breaks in
Service, his vested interest in such separate subaccount at any
time shall be determined by applying the formula in
Section 8.2(b)(ii).
8.6 REINSTATEMENT OF BENEFIT. If a vested benefit is forfeited because the
Participant or Beneficiary cannot be found, such benefit will be
reinstated if a claim is made by the Participant or Beneficiary.
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ARTICLE 9. LOANS
9.1 GENERAL PROVISIONS.
(a) ELIGIBILITY FOR LOANS. If the Employer so elects in the Adoption
Agreement, loans shall be made available to any Participant or
Beneficiary who is a party-in-interest (as defined in section
3(14) of ERISA) on a reasonably equivalent basis. Loans will not
be made to any shareholder-employee, Owner-Employee or Participant
or Beneficiary who is not a party-in-interest (as defined in
section 3(14) of ERISA). For purposes of this requirement, a
shareholder-employee means an Employee or officer of an electing
small business (subchapter S) corporation who owns (or is
considered as owning within the meaning of section 318(a)(1) of
the Code), on any day during the taxable year of such corporation,
more than 5% of the outstanding stock of the corporation.
(b) SPOUSAL CONSENT RULES.
(i) If Section 11.9 is applicable to a Participant, the
Participant must obtain the consent of his or her spouse,
if any, to use his or her account balance as security for
the loan. Spousal consent shall be obtained no earlier than
the beginning of the 90 day period that ends on the date on
which the loan is to be so secured. The consent must be in
writing, must acknowledge the effect of the loan, and must
be witnessed by a Plan representative or notary public.
Such consent shall thereafter be binding with respect to
the consenting spouse or any subsequent spouse with respect
to that loan. A new consent shall be required if the vested
account balance is used for renegotiation, extension,
renewal or other revision of the loan.
(ii) If Section 11.9 is applicable to a Participant and a valid
spousal consent has been obtained in accordance with
subsection (b)(i), then, notwithstanding any other
provision of this Plan, the portion of the Participant's
vested Account used as a security interest held by the Plan
by reason of a loan outstanding to the Participant shall be
taken into account for purposes of determining the amount
of the Account payable at the time of death or
distribution, but only if the reduction is used as
repayment of the loan. If less than 100% of the
Participant's vested Account (determined without regard to
the preceding sentence) is payable to the Participant's
surviving spouse, then the vested Account shall be adjusted
by first reducing the vested Account by the amount of the
security used-as repayment of the loan, and then
determining the benefit payable to the surviving spouse.
9.2 AMOUNT OF LOAN. Loans shall not be made available to Highly-Compensated
Employees in an amount greater than the amount made available to other
Employees. Loans to any Participant or Beneficiary will not be made to
the extent that such loan, when added to the outstanding balance of all
other loans to the Participant or Beneficiary, would exceed the lesser
of:
(a) $50,000 reduced by the excess (if any) of the highest outstanding
balance of loans during the one year period ending on the day
before the loan is made, over the outstanding balance of loans
from the Plan on the date the loan is made; or
(b) one-half the present value of the vested Account of the
Participant.
For the purpose of the above limitation, all loans from all plans of the
Employer and other members of a group of employers described in sections
414(b), 414(c) and 414(m) of the Code are aggregated.
9.3 MANNER OF MAKING LOANS. The Plan's loan program will be administered by
the Plan Administrator. A request by a Participant for a loan shall be
made in writing to the Plan Administrator and shall specify the amount of
the loan, and the subaccount(s) or investments of the Participant from
which the loan should be made. The terms and conditions on which the Plan
Administrator shall approve loans under the Plan shall be applied on a
uniform and nondiscriminatory basis with respect to all Participants. If
a Participant's request for a loan is approved by the Plan Administrator,
the Plan Administrator shall furnish the Trustee with written
instructions directing the Trustee to make the loan in a lump-sum payment
of cash to the Participant. In making any loan
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payment under this Article, the Trustee shall be fully entitled to rely on
the instructions furnished by the Plan Administrator and shall be under no
duty to make any inquiry or investigation with respect thereto.
9.4 TERMS OF LOAN. Loans shall be made on such terms and subject to such
limitations as the Plan Administrator may prescribe. Furthermore, any loan
shall, by its terms, require that repayment (principal and interest) be
amortized in level payments, not less frequently than quarterly, over a
period not extending beyond five years from the date of the loan, unless
such loan is used to acquire a dwelling unit which, within a reasonable
time (determined at the time the loan is made), will be used as the
principal residence of the Participant. The rate of interest to be charged
shall be determined by the Plan Administrator in accordance with the rates
quoted by representative financial institutions in the local area for
similar loans.
9.5 SECURITY FOR LOAN. Any loan to a Participant under the Plan shall be
secured by the pledge of no more than 50% of the Participant's vested
interest in his Account. Such pledge shall be evidenced by the execution of
promissory note by the Participant which shall provide that, in the event
of any default by the Participant on a loan repayment, the Plan
Administrator shall be authorized (to the extent permitted by law) to take
any and all other actions necessary and appropriate to enforce collection
of the unpaid loan. An assignment or pledge of any portion of the
Participant's interest in the Plan will be treated as a loan under this
Article.
9.6 SEGREGATED INVESTMENT. Loans shall be considered a Participant directed
investment and, for the purposes of allocating earnings and losses pursuant
to Article 6, shall not be considered a part of the common fund under the
Trust.
9.7 REPAYMENT OF LOAN. The Plan Administrator shall have the sole
responsibility for ensuring that a Participant timely makes all loan
repayments and for notifying the Trustee in the event of any default by the
Participant on the loan. Each loan repayment shall be paid to the Trustee
and shall be accompanied by written instructions from the Plan
Administrator that identify the Participant on whose behalf the loan
repayment is being made.
9.8 DEFAULT ON LOAN. In the event of a termination of the Participant's
employment with the Affiliated Employees or a default by a Participant on a
loan repayment, all remaining payments on the loan shall be immediately due
and payable. The Plan Administrator shall take any and all actions
necessary and appropriate to enforce collection of the unpaid loan.
However, attachment of the Participant's Account pledged as security will
not occur until a distributable event occurs under the Plan.
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ARTICLE 10. WITHDRAWALS
10.1 WITHDRAWAL OF EMPLOYEE AFTER-TAX CONTRIBUTIONS. Subject to the requirements
of Sections 10.3 and 11.9, any Participant who has made Employee After-Tax
Contributions may, upon 30 days notice in writing filed with the Plan
Administrator, have paid to him all or any portion of the value of his
Employee After-Tax Contribution subaccount.
10.2 HARDSHIP WITHDRAWALS.
(a) GENERAL RULE. Subject to Section 10.3 and 11.9 and if the Employer so
elects in the Adoption Agreement, distribution of Elective Deferrals
(and earnings thereon accrued as of December 31, 1988) may be made to a
Participant in the event of hardship. For the purposes of this Section,
hardship is defined as an immediate and heavy financial need of the
Participant where such Participant lacks other available resources.
(b) NEEDS CONSIDERED IMMEDIATE AND HEAVY. The only financial needs
considered immediate and heavy are the following:
(i) deductible medical expenses (within the meaning of
section 213(d) of the Code) of the Employee, the Employee's
spouse, children or dependents;
(ii) the purchase (excluding mortgage payments) of a principal
residence for the Employee;
(iii) payment of tuition and related educational fees for the next
twelve months of post-secondary education for the Employee, the
Employee's spouse, children or dependents; or
(iv) the need to prevent the eviction of the Employee from, or a
foreclosure on the mortgage of, the Employee's principal
residence.
(c) NECESSARY TO SATISFY NEED. A distribution will be considered as
necessary to satisfy an immediate and heavy financial need of the
Employee only if:
(i) the Employee has obtained all distributions, other than hardship
distributions, and all nontaxable loans under all plans
maintained by the Employer;
(ii) all plans maintained by the Employer provide that the Employee's
Elective Deferrals (and Employee contributions) will be
suspended for twelve months after the receipt of the hardship
distribution;
(iii) the distribution is not excess of the amount of an immediate and
heavy financial need (including amounts necessary to pay any
federal, state or local income taxes or penalties reasonably
anticipated to result from the distribution); and
(iv) all plans maintained by the Employer provide that the Employee
may not make Elective Deferrals for the Employee's taxable year
immediately following the taxable year of the hardship
distribution in excess of the applicable limit under section
402(g) of the Code for such taxable year less the amount of such
Employee's Elective Deferrals for the taxable year of the
hardship distribution.
10.3 MANNER OF MAKING WITHDRAWALS. Any withdrawal by a Participant under the
Plan shall be made only after the Participant files a written request with
the Plan Administrator specifying the nature of the withdrawal (and the
reasons therefor, if a hardship withdrawal) and the amount of funds
requested to be withdrawn and, if applicable, including the spousal consent
required under Section 11.9. Upon approving any withdrawal, the Plan
Administrator shall furnish the Trustee with written instructions
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directing the Trustee to make the withdrawal in a lump-sum payment of
cash to the Participant. In making any withdrawal payment, the Trustee
shall be fully entitled to rely on the instructions furnished by the Plan
Administrator, and shall be under no duty to make any inquiry or
investigation with respect thereto.
10.4 LIMITATIONS ON WITHDRAWALS. The Plan Administrator may prescribe uniform
and nondiscriminatory rules and procedures limiting the number of times a
Participant may make a withdrawal under the Plan during any Plan Year,
and the minimum amount a Participant may withdraw on any single occasion.
10.5 SPECIAL CIRCUMSTANCES. Elective Deferral, Qualified Nonelective
Contribution and Qualified Matching Contribution subaccounts may be
distributed upon:
(a) PLAN TERMINATION. Termination of the Plan without the
establishment of another defined contribution plan, other than an
employee stock ownership plan (as defined in section 4975(e) or
section 409 of the Code) or a Simplified Employee Pension Plan as
defined in section 408(k) of the Code.
(b) DISPOSITION OF ASSETS. The disposition by a corporation to an
unrelated corporation of substantially all of the assets (within
the meaning of section 409(d)(2) of the Code) used in a trade of
business of such corporation if such corporation continues to
maintain this plan after the disposition, but only with respect to
Employees who continue employment with the corporation acquiring
such assets.
(c) DISPOSITION OF SUBSIDIARY. The disposition by a corporation to an
unrelated entity of such corporation's interest in a subsidiary,
(within the meaning of section 409(d)(3) of the Code) if such
corporation continues to maintain this Plan, but only with respect
to Employees who continue employment with such subsidiary.
All distributions that may be made pursuant to one or more of the foregoing
distributable events are subject to the spousal and participant consent
requirements (if applicable) contained in sections 411(a)(11) and 417 of the
Code. In addition, distributions after March 31, 1988, that are triggered by any
of the foregoing events must be made in a lump sum.
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ARTICLE 11. DISTRIBUTION PROVISIONS
11.1 RETIREMENT DISTRIBUTIONS. If a Participant's Normal Retirement Age should
occur prior to the termination of his employment with the Employer, all
amounts then credited to such Participant's Account shall become 100%
vested regardless of the number of the Participant's Years of Vesting
Service. If a Participant's employment is terminated on or after his
Normal Retirement Age, such termination shall be deemed "Retirement," and
the Plan Administrator shall direct the Trustee to take such action as
may be necessary to distribute to such Participant, in one of the methods
provided in Section 11.7, the value of his Account.
(a) DEFERRED RETIREMENT. If a Participant's employment continues after
his Normal Retirement Age, his participation in the Plan shall
continue and, subject to Section 11.8, the distribution of his
benefits shall be postponed until the earlier of (i) the date on
which his Retirement becomes effective, which shall be his
Deferred Retirement Date, or (ii) the date the Participant elects
to receive his benefits.
(b) PARTICIPANT STATUS AFTER RETIREMENT. Upon a Participant's
Retirement, his participation as an active Participant hereunder
shall cease, subject to his right to share in contributions made
with respect to the Plan Year of his Retirement if he otherwise
qualifies for such contributions in such Plan Year.
11.2 DEATH BENEFITS. Upon the death of a Participant before retirement or
before other termination of employment with the Employer, all amounts
then credited to his Account shall become 100% vested, regardless of the
number of his Years of Vesting Service. The Plan Administrator shall
direct the Trustee to distribute the value of the Participant's Account,
in one of the methods provided in Section 11.7, and at the time provided
in Section 11.6, to any surviving Beneficiary designated by the
Participant in accordance with the provisions of subsection (c) below.
(a) DEATH OF FORMER EMPLOYEE. Upon the death of a former Employee
before distribution of his vested interest in his Account has
begun, the Trustee, in accordance with the instructions of the
Plan Administrator and in accordance with the provisions of this
Article, shall take such action as may be necessary to distribute
his vested interest in his Account, in one of the methods provided
in Section 11.7 hereof and commencing at such time provided in
Section 11.6, to any surviving Beneficiary. designated in
accordance with the provisions of subsection (c) below. Upon the
death of a former Participant after distribution of his benefits
has begun and before the entire vested interest in his Account has
been distributed to him, the Plan Administrator shall direct the
Trustee to distribute the remaining portion of such interest to
any surviving Beneficiary designated in accordance with the
provisions of subsection (c) below at least as rapidly as under
the method of distribution being used as of the date of the
Participant's death.
(b) PROOF OF DEATH. The Plan Administrator may require such proper
proof of death and such evidence of the right of any person to
receive payment of the vested interest of a deceased Participant
or former Participant as it may deem desirable. The Plan
Administrator's determination of death and of the right of any
person to receive payment shall be conclusive.
(c) BENEFICIARY DESIGNATION. Each Participant may designate one or
more primary Beneficiaries and one or more secondary Beneficiaries
by filing written notice with the Plan Administrator on a form
acceptable to the Plan Administrator. However, in the case of a
married Participant, the Participant shall be deemed to have
designated his surviving spouse as his sole primary Beneficiary,
notwithstanding any contrary written notice, unless such spouse
filed a written voluntary consent with the Plan Administrator
irrevocably consenting to the Participant's designation of a
non-spouse Beneficiary, which consent shall be notarized or
witnessed by the Plan Administrator, and shall acknowledge the
effect of the Participant's designation of Beneficiary. A married
Participant may not subsequently change the designated non-spouse
Beneficiary unless his spouse's voluntary consent acknowledges
that the spouse has a right to consent to a specific beneficiary
and expressly permits designations by the Participant without
further spousal consent or his spouse has filed a written consent
with the Plan Administrator, irrevocably consenting to such
change, which consent shall be notarized or witnessed by the Plan
Administrator, and shall acknowledge the effect of the change.
Subject to the two preceding sentences, a Participant may change
any designated Beneficiary by filing written notice of the change
with the Plan Administrator. If any Participant
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fails to designate a Beneficiary, or if his designated Beneficiary or
Beneficiaries do not survive the Participant, the Plan Administrator
shall designate a Beneficiary or Beneficiaries on his behalf, in the
following order:
(i) The Participant's spouse, if living at the time of the
Participant's death.
(ii) The Participant's issue, per stirpes.
(iii) The Participant's brothers and sisters, per stirpes.
(iv) The Participant's parents.
(v) The estate of the Participant.
11.3 PERMANENT DISABILITY BENEFITS. If, prior to his Retirement or other
termination of employment with the Employer, a Participant incurs a Total
and Permanent Disability, he shall be deemed to have retired by reason of
Permanent Disability, and his Account shall become 100% vested, regardless
of the number of his Years of Vesting Service. The Plan Administrator shall
determine the date as of which such Retirement shall become effective. The
Trustee, in accordance with the instructions of the Plan Administrator and
in accordance with the provisions of this Article, shall take such action
as may be necessary to distribute the value of the Participant's Account(s)
to the Participant commencing at such time, and in one of the methods,
provided in Section 11.5 through 11.7 hereof.
11.4 TERMINATION OF EMPLOYMENT PRIOR TO RETIREMENT, DEATH OR TOTAL AND PERMANENT
DISABILITY. If a Participant's employment with the Employer terminates for
any reason other than Retirement, Total and Permanent Disability or death,
the Plan Administrator shall direct the Trustee to take such action as may
be needed to distribute to such Participant the vested portion of his
Account, as determined in accordance with Article 8. Such distribution
shall be made commencing at such time, and in one of the methods, provided
in Section 11.5 through 11.7 hereof.
11.5 COMMENCEMENT OF LIFETIME DISTRIBUTIONS.
(a) UPON RETIREMENT. The distribution of benefits payable to a Participant
who retires by reason of Retirement or Total and Permanent Disability
shall commence as soon as is administratively feasible after a date on
or after the Participant's Retirement as he elects, but in no event
later than his required beginning date. Notwithstanding the foregoing
provisions of this subsection (a), if such a Participant's total vested
benefits do not exceed $3,500, his vested benefits shall be distributed
to him in a lump sum payment as soon as administratively feasible after
his Retirement.
(b) UPON TERMINATION OF EMPLOYMENT OTHER THAN RETIREMENT. The distribution
of the vested interest of a Participant whose employment terminated for
any reason other than Retirement, Total and Permanent Disability or
death shall commence as soon as is administratively feasible after a
date elected by the Participant that follows the date his employment
terminated. Notwithstanding the foregoing provisions of this subsection
(b),
(i) If a Participant's total vested benefits do not exceed (or at
the time of any prior distribution did not exceed) $3,500, his
vested benefits shall be distributed to him in a lump sum
payment as soon as administratively feasible after the date on
which his employment terminated, as long as he has not returned
as an Employee on the date of such distribution, and
(ii) Distributions shall begin no later than the Participant's
required beginning date.
(c) STATUTORY REQUIREMENTS. If a Participant does not elect to defer
payment of his benefits in accordance with subsections (a) or (b)
above, distribution of his benefits shall commence during the sixty day
period immediately following the Plan Year in which occurs the latest
of:
(i) the Participant's Normal Retirement Age,
(ii) the 10-year anniversary of the date on which the Participant
commenced participation in the Plan, and
(iii) the date the Participant's employment with the Employer
terminated.
(d) IN-SERVICE DISTRIBUTIONS. The distribution of a Participant's vested
benefits shall not commence prior to the time his employment with the
Employer terminates, except in the following circumstances:
(i) Withdrawals made in accordance with the provisions of Article
10, or
(ii) Payments to an alternate payee pursuant to qualified domestic
relations order as described in section 414(p) of the Code may
be made at any time, or
(iii) Minimum required distributions made on and after his required
beginning date, or
(iv) Distributions made in accordance with the provisions of
Section 11.1(a).
(e) REQUIRED BEGINNING DATE. The required beginning date of a Participant
is the first day of April of the calendar year following the calendar
year in which the Participant attains age 70 1/2 Notwithstanding the
foregoing:
(i) The required beginning date of a Participant who attains age
70 1/2 before January 1, 1988, shall be determined in accordance
with (A) or (B) below:
(A) The required beginning date of a Participant who is not a
Five Percent Owner is the first day of April of the calendar
year following the calendar year in which the later of
retirement or attainment of age 70 1/2 occurs. (A
Participant is treated as a Five Percent Owner for purpose
of this subsection if such Participant is a Five Percent
Owner at any time during the Plan Year ending with or within
the calendar year in which such owner attains age 66 1/2 or
any subsequent Plan Year.)
(B) The required beginning date of a Participant who is a Five
Percent Owner during any year beginning after December 31,
1979, is the first date of April following the later of:
(1) the calendar year in which the Participant attains age
70 1/2, or
(2) the earlier of the calendar year with or within which
ends the Plan Year in which the Participant become a
Five Percent Owner, or the calendar year in which the
Participant retires.
(ii) The required beginning date of a Participant who is not a Five
Percent Owner who attains age 70 1/2 during 1988 and who has not
retired as of January 1, 1989, is April 1, 1990
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11.6 COMMENCEMENT OF DEATH BENEFITS. Subject to Section 11.9, if a Participant
dies before his benefit payments have commenced, his death benefits, if
any, shall be payable beginning at such reasonable time after the
Participant's death as his Beneficiary elects, subject to and in
accordance with the following provisions:
(a) NON-SPOUSE BENEFICIARY. In the case of a Beneficiary other than
the Participant's surviving spouse, benefits must commence no
later than the December 31 that coincides with or immediately
follows the fifth anniversary of the Participant's death. If the
beginning date of such benefits is after the December 31 that
coincides with or immediately follows the first anniversary of the
Participant's death, the Beneficiary's entire interest in the
Participant's death benefits must be distributed no later than the
December 31 that coincides with or immediately follows the fifth
anniversary of the Participant's death.
(b) SPOUSE BENEFICIARY. If the Participant's Beneficiary is the
Participant's surviving spouse, the surviving spouse may elect to
defer the commencement of benefits to the December 31 that
coincides with or immediately follows the later of (i) the first
anniversary of the Participant's death, or (ii) the date on which
the Participant would have attained age 70 1/2. If the
Participant's Beneficiary is his surviving spouse, and if his
surviving spouse dies after the Participant dies but prior to the
time the Participant's death benefits have commenced, the
provisions of this Article 11 shall apply as if the surviving
spouse were the Participant, except that the surviving spouse of
the deceased Participant's surviving spouse shall not qualify as a
surviving spouse.
(c) ELECTION PERIOD. Any election made by a Beneficiary under this
Section must be made no later than the December 31 that coincides
with or immediately follows the first anniversary of the
Participant's death and must be irrevocable as of such date,
except that if the Participant's Beneficiary is the Participant's
surviving spouse, the surviving spouse may defer making such
election to the earlier of (i) the December 31 that coincides with
or immediately follows the fifth anniversary of the Participant's
death, or (ii) the last date on which the surviving spouse could
defer the commencement of benefits under subsection (b). If a
Beneficiary fails to make a proper election hereunder, the
Beneficiary's interest in the Participant's death benefits shall
be distributed in full no later than the December 31 that
coincides with or immediately follows the fifth anniversary of the
Participant's death.
11.7 METHODS OF DISTRIBUTION.
(a) GENERAL RULE. Subject to Section 11.9, all benefits shall be
distributed in accordance with one of the following methods as the
Participant or Beneficiary, as the case may be, may elect in
writing during the 90-day period before the date benefits
commence:
(i) In equal monthly, quarterly or annual installments over a
period certain not to exceed the life expectancy of the
Participant (or Beneficiary in the case of a Participant
who dies prior to the time his benefits commenced) or the
joint and last survivor life expectancy of the Participant
and his Beneficiary so that the amount distributed in each
Plan Year equals the amount determined by dividing the
Participant's vested account balance on the last day of the
immediately preceding Plan Year by the period certain
determined in accordance with this paragraph (i) which
shall be reduced by one for each Plan Year after the Plan
Year in which the Participant's benefits commence.
(ii) Payment to the Participant or Beneficiary of all or part of
such benefits in one lump sum.
(b) DIRECT ROLLOVER. Notwithstanding any provision of the Plan to the
contrary that would otherwise limit a distributee's election
under this Article 11, for all distributions made on or after
January 1,1993, a distributee may elect, at the time and in the
manner prescribed by the Plan Administrator, to have any portion
of an eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct rollover.
For purposes of this subsection, the following definitions shall
apply:
(i) An "eligible rollover distribution" is any distribution of
all or a portion of the balance to the credit of the
distributee, except that an eligible rollover distribution
does not include: any distribution that is one of a series
of substantially equal periodic payments (not less
frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or
joint life expectancies) of the distributee and the
distributee's designated Beneficiary, or for a specified
period of ten years or more; any distribution to the extent
such distribution is required under section 401(a)(9) of
the Code; and the portion of any distribution that is not
includible in gross income (determined without regard to
the exclusion for net unrealized appreciation with respect
to employer securities).
(ii) An "eligible retirement plan" is an individual retirement
account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b)
of the Code, an annuity plan described in section 403(a) of
the Code, or a qualified trust described in section 401(a)
of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an eligible
rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or
individual retirement annuity.
(iii) A "distributee" includes an Employee or former Employee. In
addition, the Employee's or former Employee's surviving
spouse and the Employee's or former Employee's spouse or
former spouse who is the alternate payee under a qualified
domestic retirement order, as described the section 414(p)
of the Code, are distributees with regard to the interest
of the spouse or former spouse.
(iv) A "direct rollover" is a payment by the Plan to the
eligible retirement plan specified by the distributee.
11.8 MINIMUM REQUIRED DISTRIBUTIONS. If the Participant's interest is to be
distributed in other than a single sum, the following minimum
distribution rules shall apply on or after the required beginning date:
(a) INDIVIDUAL ACCOUNT.
(i) If a Participant's benefit is to be distributed over (A) a
Period not extending beyond the life expectancy of the
Participant or the joint life and last survivor expectancy
of the Participant and the Participant's designated
Beneficiary or (B) a period not extending beyond the life
expectancy of the designated Beneficiary, the amount
required to be distributed for each calendar year,
beginning with distributions for the first distribution
calendar year, must at least equal the quotient obtained by
dividing the Participant's benefit by the applicable life
expectancy.
(ii) For calendar years beginning before January 1, 1989, if the
Participant's spouse is not the designated Beneficiary, the
method of distribution selected must assure that at least
50% of the present value of the amount available for
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distribution is paid within the life expectancy of the
Participant.
(iii) For calendar years beginning after December 31, 1988, the amount
to be distributed each year, beginning with distributions for
the first distribution calendar year shall not be less than the
quotient obtained by dividing the Participant's benefit by the
lesser of (A) the applicable life expectancy or (B) if the
Participant's spouse is not the designated Beneficiary, the
applicable divisor determined from the table set forth in Q&A-4
of section 1.401(a)(9)-2 of the proposed regulations.
Distributions after the death of the Participant shall be
distributed using the applicable life expectancy in paragraph
(i) above as the relevant divisor without regard to Proposed
Regulations section 1.401(a)(9)-2.
(iv) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the
Participant's required beginning date. The minimum distribution
for other calendar years, including the minimum distribution for
the distribution calendar year in which the Employee's required
beginning dated occurs, must be made on or before December 31
of the distribution calendar year.
(b) OTHER FORMS. If the Participant's benefit is distributed in the form of
an annuity purchased from an insurance company, distributions
thereunder shall be made in accordance with the requirements of
section 401(a)(9) of the Code and the proposed regulations thereunder.
For purposes of this Section 11.8, any amount paid to a child of the
Participant will be treated as if it had been paid to the surviving
spouse if the amount becomes payable to the surviving spouse when the
child reaches the age of majority.
For the purposes of this Section 11.8, distribution of a Participant's
interest is considered to begin on the Participant's required beginning
date (or, if Section 11.6 is applicable, the date distribution is
required to begin to the surviving spouse pursuant to section 11.6(b)).
If distribution in the form of an annuity irrevocably commences to the
Participant before the required beginning date, the date distribution
is considered to begin is the date distribution actually commences.
(c) DEFINITIONS.
(i) Applicable life expectancy. The life expectancy (or joint and
last survivor expectancy) calculated using the attained age of
the Participant (or designated Beneficiary) as of the
Participant's (or designated Beneficiary's ) birthday in the
applicable calendar year reduced by one for each calendar year
which has elapsed since the date life expectancy was first
calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so
recalculated. The applicable calendar year shall be the first
distribution calendar year and, if life expectancy is being
recalculated, such succeeding calendar year. If annuity
payments commence before the required beginning date, the
applicable calendar year is the year such payments commence. If
distribution is in the form of an immediate annuity purchased
after the Participant's death with the Participant's remaining
interest, the applicable calendar year is the year of purchase.
(ii) Designated Beneficiary. The individual who is designated as the
Beneficiary under the Plan in accordance with section 401(a)(9)
of the Code and the proposed regulations thereunder.
(iii) Distribution calendar year. A calendar year for which a minimum
distribution is required. For distributions beginning before the
Participant's death, the first distribution calendar year is the
calendar year immediately preceding the calendar year which
contains the Participant's required beginning date. For
distributions beginning after the Participant's death, the first
distribution calendar year is the calendar year in which
distributions are required to begin pursuant to Section 11.6
above.
(iv) Life Expectancy. Life expectancy and joint and last survivor
expectancy are computed by use of the expected return multiples
in Table V and VI of section 1.72-9 of the Income Tax
Regulations. Unless otherwise elected by the Participant (or
spouse, in the case of distributions described in
Section 11.6(b)) by the time distributions are required to
begin, life expectancies shall not be recalculated. Such
election shall be irrevocable as to the Participant (or spouse)
and shall apply to all subsequent years. The life expectancy of
a non-spouse beneficiary may not be recalculated.
(d) PARTICIPANT'S BENEFIT. The account balance as of the last valuation
date in the calendar year immediately preceding the distribution
calendar year (valuation calendar year) increased by the amount of any
contributions or forfeitures allocated to the account balance as of
dates in the valuation calendar year after the valuation calendar year
after the valuation date. Notwithstanding the foregoing, if any portion
of the minimum distribution of the first distribution calendar year is
made in the second distribution calendar year on or before the required
beginning date, the amount of the minimum distribution made in the
second distribution calendar year shall be treated as if it had been
made in the immediately preceding distribution calendar year.
11.9 JOINT AND SURVIVOR ANNUITY REQUIREMENTS. Notwithstanding the foregoing
provisions of this Article 11, if the Plan is a direct or indirect
transferee of a Participant's interest in a defined benefit plan, money
purchase plan, a target benefit plan, stock bonus or profit-sharing plan
which is subject to the survivor annuity requirements of
section 401(a)(11) and 417 of the Code, then the following provisions
shall apply to distributions to such Participant:
(a) QUALIFIED JOINT AND SURVIVOR ANNUITY. All benefit distributions to such
a Participant in the Plan shall be in the form of a "Qualified Joint
and Survivor Annuity," subject to the following rules:
(i) For the purposes of this subsection (a) and of subsection (b),
(A) in the case of a Participant who is married on the date his
benefit payments commence, the term "Qualified Joint and
Survivor Annuity" shall mean an immediate nontransferable
annuity policy which complies with the provisions of this Plan,
purchased with the Participant's total vested interest in his
Account, payable to the Participant for life with a survivor
annuity payable to his spouse at the time of the purchase of the
policy, for the life of that spouse, which is equal to 50% of
the amount of the annuity payable during the joint lives of the
Participant and his spouse, (B) in the case of a Participant who
is not married on the date his benefit payments commence, the
term "Qualified Joint and Survivor Annuity" shall mean an
annuity policy, purchased with the Participant's total vested
interest in his Account, payable to the Participant for his
life, and (C) the term "Annuity Starting Date" shall mean the
first day of the first period for which an amount is to be paid
to the Participant or Beneficiary as an annuity,
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or, in the case of a benefit not payable in the form of an
annuity, the first day on which all events have occurred
which entitle the Participant or Beneficiary to such
benefit.
(ii) Written notice explaining the Qualified Joint and Survivor
Annuity and optional forms of benefit, the right of the
Participant to elect to waive the Qualified Joint and
Survivor Annuity, the right of the spouse to consent to
such waiver, the effect of a waiver and the effect of a
consent to a waiver, the right of the Participant to revoke
an election to waive, and the inability of the spouse to
revoke his or her consent shall be given to the Participant
no less than 30 days and no more than 90 days prior to his
Annuity Starting Date.
If a distribution is one to which sections 401(a)(11) and 417 of
the Code do not apply, such distribution may commence less than 30
days after the notice required under section 1.411(a)11 (c) of the
Income Tax Regulations is given, provided that (a) the Plan
Administrator clearly informs the Participant that the Participant
has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a
distribution (and, if applicable, a particular distribution
option), and (b) the Participant, after receiving the notice,
affirmatively elects a distribution.
(iii) A Qualified Joint and Survivor Annuity shall not be paid to
a Participant if, during the 90-day period ending on the
Annuity Starting Date, (A) the Participant has filed a
written election with the Plan Administrator waiving the
Qualified Joint and Survivor Annuity, and (B) in the case
of a married Participant, his spouse has filed a written
consent with the Plan Administrator irrevocably consenting
to such waiver, which consent shall be notarized or
witnessed by the Plan Administrator, and shall acknowledge
the effect of the waiver. The written election waiving the
Qualified Joint and Survivor Annuity shall state the
specific non-spouse Beneficiary and/or the alternative form
of benefit. A married Participant may not subsequently
change the non-spouse Beneficiary and/or alternative form
of benefit elected unless his spouse's consent expressly
permits designations by the Participant without any further
spousal consent or his spouse has filed a written consent
with the Plan Administrator irrevocably consenting to such
change, which consent shall be notarized or witnessed by
the Plan Administrator, and shall acknowledge the effect of
the change. Notwithstanding the preceding sentence, a
married Participant may revoke his election waiving the
Qualified Joint and Survivor Annuity at any time and any
number of times on or before the Annuity Starting Date
without the consent of his spouse.
(iv) Even if a Participant does not waive the Qualified Joint
and Survivor Annuity in accordance with paragraph (iii)
above, the Plan Administrator will not be required to
direct the Trustee to distribute a Participant's or former
Participant's benefits in the form of a Qualified Joint and
Survivor Annuity if the value of the Participant's vested
Account on the Annuity Starting Date does not exceed $3,500
and if such Account is distributed to the Participant in a
single lump sum payment of cash, provided that no such
distribution shall be made after the Annuity Starting Date
without the written consent of the Participant and his
spouse.
(b) QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY. In the case of a
Participant with a vested interest under this Plan who dies prior
to his Annuity Starting Date, and who is married on the date of
his death, all death benefits under the money purchase pension
plan shall be distributed to his surviving spouse in the form of a
"Qualified Pre-Retirement Survivor Annuity," in accordance with
the following rules:
(i) For the purposes hereof, the term "Qualified Pre-Retirement
Survivor Annuity" shall mean a non-transferable annuity
which complies with the provisions of this Plan for the
life of the Participant's surviving spouse, in such amount
as may be purchased with an amount equal to 100% of the
value of the Participant's total vested interest in his
Account.
(ii) Written notice explaining the Qualified Pre-Retirement
Survivor Annuity, the right of the Participant to elect to
waive the Qualified Pre-Retirement Survivor Annuity, the
right of the spouse to consent to such waiver, the effect
of a waiver and the effect of a consent to a waiver, the
right of the Participant to revoke an election to waive,
and the inability of the spouse to revoke his or her
consent shall the given to the Participant during the
two-year period ending on (A) the first anniversary of the
date he became a Participant, and (B) the first anniversary
of the date his employment terminates. If, in accordance
with clause (A) of the preceding sentence, written notice
is given to the Participant prior to the last day of the
Plan Year in which he attains age 31, a second notice,
similar to the initial notice, shall be given to the
Participant within whichever of the following periods ends
first: (A) the one-year period after his employment with
the Employer terminates, or (B) the period beginning with
the first day of the Plan Year in which he attains age 32
and ending with the last day of Plan Year in which he
attains age 34.
(iii) A Qualified Pre-Retirement Survivor Annuity shall not be
paid to the surviving spouse of a deceased Participant if,
during the period beginning on the day on which the
Participant first became a Participant in the Plan and
ending on the date of his death, (A) the Participant has
filed a written election with the Plan Administrator
waiving such Qualified Pre-Retirement Survivor Annuity, and
(B) his spouse has filed a written consent with the Plan
Administrator, irrevocably consenting to such waiver, which
consent shall be notarized or witnessed by the Plan
Administrator, and shall acknowledge the effect of the
waiver. The written election waiving the Qualified
Pre-Retirement Survivor Annuity shall state the specific
non-spouse Beneficiary. A Participant may not subsequently
change the designated non-spouse Beneficiary unless his
spouse's voluntary consent acknowledges that the spouse has
the right to limit consent to a specific beneficiary, and a
specific form of benefit where applicable, and expressly
permits designations by the Participant without further
spousal consent or his spouse has filed a written consent
with the Plan Administrator, irrevocably consenting to such
change, which consent shall be notarized or witnessed by
the Plan Administrator, and shall acknowledge the effect of
the change. Notwithstanding the preceding sentence, a
Participant may revoke his election waiving the Qualified
Pre-Retirement Survivor Annuity at any time and any number
of times without the consent of his spouse.
(iv) Notwithstanding the first sentence of paragraph (iii), if
the Participant waives the Qualified Pre-Retirement
Survivor Annuity prior to the first day of the Plan Year in
which he attains age 35, such waiver shall be invalid upon
the beginning of the Plan Year in which he attains age 35
until the Participant, during the period beginning on the
earlier of the first day of the Plan Year in which he
attains age 35 or the date on which his employment with the
Employer terminates and ending on the date of his death,
again waives the Qualified Pre-Retirement Survivor
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Annuity in accordance with the preceding sentence.
Qualified Pre-Retirement Survivor Annuity coverage
automatically will be reinstated as of the first day of
the Plan Year in which the Participant attains age 35.
Provided, however, that a Participant who (A) terminates
his employment with the Employer prior to the first day
of the Plan Year in which he attains age 35, and (B) on
or after that date waives the Qualified Pre-Retirement
Survivor Annuity, need not again waive the Qualified
Pre-Retirement Survivor Annuity.
(v) Even if a Participant does not waive the Qualified
Pre-Retirement Survivor Annuity in accordance with
paragraphs (iii) or (iv) above, the Plan Administrator
will not be required to direct the Trustee to distribute
a Participant's total vested interest in all of his
Accounts in the form of a Qualified Pre-Retirement
Survivor Annuity if (A) the Participant's surviving
spouse files a written consent with the Plan
Administrator consenting to the distribution of such
vested benefits in one of the methods described in
Section 11.7 hereof, or (B) the value of the
Participant's total vested interest in his Account does
not exceed $3,500 and such Account is distributed to the
surviving spouse in a single lump sum payment of cash;
provided that no such distribution shall be made after
the Annuity Starting Date without the written consent of
the Participant's or former Participant's surviving
spouse.
(c) SPECIAL RULES. For purposes of this Section 11.9:
(i) A former spouse of a Participant will be treated as a
Participant's spouse or surviving spouse to the extent
provided under a qualified domestic relations order as
described in section 414(p) of the Code.
(ii) If the Plan Administrator determines that a Participant
has no spouse or the Participant's spouse cannot be
located, no spouse consent shall be necessary.
(iii) A spouse's consent (or determination that the consent of
a spouse cannot be obtained) hereunder shall be
effective only with respect to such spouse.
11.10 REEMPLOYMENT. If a former Employee who has begun to receive benefit
payments hereunder should be reemployed by the Employer prior to his
Normal Retirement Age, his benefit payments shall cease.
11.11 VALUATION OF BENEFITS. All distributions made in the form of a lump sum
shall be based upon the value of the Participant's Account(s) determined
as of the Valuation Date which coincides with or immediately precedes
the date on which the distribution is being made, reduced by withdrawals
and distributions made from such Account(s) after such Valuation Date
and increased by allocations to the Participant's Account made after
such Valuation Date.
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ARTICLE 12. ADMINISTRATION
12.1 DUTIES AND RESPONSIBILITIES OF FIDUCIARIES; ALLOCATION OF
FIDUCIARY RESPONSIBILITY. A fiduciary of the Plan shall have only those
specific powers, duties, responsibilities and obligations as are
explicitly given him under the Plan and Trust Agreement. In general, the
Employer shall have the sole responsibility for marking contributions to
the Plan required under Article 5, appointing the Trustee, and
determining the funds available for investment under the Plan. The Plan
Administrator shall have the sole responsibility for the administration
of the Plan, as more fully described in Section 12.2. It is intended
that each fiduciary shall be responsible only for the proper exercise of
his own powers, duties, responsibilities and obligations under the Plan
and Trust Agreement and shall not be responsible for any act or failure
to act of another fiduciary. A fiduciary may serve in more than one
fiduciary capacity with respect to the Plan.
12.2 POWERS AND RESPONSIBILITIES OF THE PLAN ADMINISTRATOR.
(a) ADMINISTRATION OF THE PLAN. The Plan Administrator shall be
charged with the full power and the responsibility for
administering the Plan in all its details. The Plan
Administrator shall have all powers necessary to administer the
Plan, including the power to construe and interpret the Plan
documents; to decide all questions relating to an individual's
eligibility to participate in the Plan; to determine the amount,
manner and timing of any distribution of benefits or withdrawal
under the Plan; to approve and ensure the repayment of any loan
to a Participant under the Plan; to resolve any claim for
benefits in accordance with Section 12.6; and to appoint or
employ advisors, including legal counsel, to render advice with
respect to any of the Plan Administrator's responsibilities
under the Plan. Any construction, interpretation or application
of the Plan by the Plan Administrator shall be final, conclusive
and binding. All actions by the Plan Administrator shall be
taken pursuant to uniform standards applied to all persons
similarly situated. The Plan Administrator shall have no power
to add to, subtract from or modify any of the terms of the
Plan, or to change or add to any benefits provided by the Plan,
or to waive or fail to apply any requirements of eligibility
for a benefit under the Plan.
(b) RECORDS AND REPORTS. The Plan Administrator shall be responsible
for maintaining sufficient records to reflect the periods in
which an Employee is credited with one or more Years of
Eligibility Service or Years of Vesting Service for purposes of
determining his eligibility to participate and his vesting,
respectively, in the Plan, and the Compensation of each
Participant for purposes of determining the amount of
contributions that may be made by or on behalf of the
Participant under the Plan. The Plan Administrator shall be
responsible for submitting all required reports and
notifications relating to the Plan to Participants or their
Beneficiaries, the Internal Revenue Service and the Department
of Labor.
(c) FURNISHING TRUSTEE WITH INSTRUCTIONS. The Plan Administrator
shall be responsible for furnishing the Trustee with written
instructions regarding all contributions to the Trust, all
distributions to Participants in accordance with Article 11, all
withdrawals by Participants in accordance with Article 10 and
all loans to Participants in accordance with Article 9. In
addition, the Plan Administrator shall be responsible for
furnishing the Trustee with any further information regarding
the Plan which the Trustee may request for the performance of
its duties or for the purpose of making any returns to the
Internal Revenue Service or Department of Labor as may be
required of the Trustee.
(d) RULES AND DECISIONS. The Plan Administrator may adopt such rules
as it deems necessary, desirable or appropriate in the
administration of the Plan. All rules and decisions of the Plan
Administrator shall be applied uniformly and consistently to
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all Participants in similar circumstances. When making a
determination or calculation, the Plan Administrator shall be
entitled to rely upon information furnished by a Participant or
Beneficiary, the Employer, the legal counsel of the Employer or
the Trustee.
(e) APPLICATION AND FORMS FOR BENEFITS. The Plan Administrator may
require a Participant or Beneficiary to complete and file with it
an application for a benefit and to furnish all pertinent
information requested by it. The Plan Administrator may rely upon
all such information so furnished to it, including the
Participant's or Beneficiary's current mailing address.
(f) FACILITY OF PAYMENT. Whenever, in the Plan Administrator's
opinion, a person entitled to receive a payment of a benefit or
installment thereof is under a legal disability or is
incapacitated in any way so as to be unable to manage his
financial affairs, as determined by a court of competent
jurisdiction, it may direct the Trustee to make payments to such
person or to the legal representative or to a relative or friend
of such person for that person's benefit, or it may direct the
Trustee to apply the payment for the benefit of such person in
such manner as it considers advisable.
12.3 ALLOCATION OF DUTIES AND RESPONSIBILITIES. The Plan Administrator may, by
written instrument, allocate among its Employees any of its duties and
responsibilities not already allocated under the Plan or may designate
persons other than Employees to carry out any of the Plan Administrator's
duties and responsibilities under the Plan. Any such duties or
responsibilities thus allocated must be described in the written
instrument. If a person other than an Employee of the Employer is so
designated, such person must acknowledge in writing his acceptance of the
duties and responsibilities allocated to him.
12.4 EXPENSES. The Employer shall pay all expenses authorized and incurred by
the Plan Administrator in the administration of the Plan except to the
extent such expenses are paid from the Trust.
12.5 LIABILITIES. The Plan Administrator and each person to whom duties and
responsibilities have been allocated pursuant to Section 12.3 may be
indemnified and held harmless by the Employer with respect to any alleged
breach of responsibilities performed or to be performed hereunder. The
Employer and each Affiliated Employer shall indemnify and hold harmless
the Sponsor against all claims, liabilities, fines, penalties and all
expenses reasonably incurred by or imposed upon it (including, but not
limited to, reasonable attorney's fees) which arise as a result of
actions or failure to act in connection with the operation and
administration of the Plan.
12.6 CLAIMS PROCEDURE.
(a) FILING A CLAIM. Any Participant or Beneficiary under the Plan may
file a written claim for a Plan benefit with the Plan
Administrator or with a person named by the Plan Administrator to
receive claims under the Plan.
(b) NOTICE OF DENIAL OF CLAIM. In the event of a denial or limitation
of any benefit or payment due to or requested by any Participant
or Beneficiary under the Plan ("claimant"), claimant shall be
given a written notification containing specific reasons for the
denial or limitation of his benefit. The written notification
shall contain specific reference to the pertinent Plan provisions
on which the denial or limitation of his benefit is based. In
addition, it shall contain a description of any other material or
information necessary for the claimant to perfect a claim, and an
explanation of why such material or information is necessary. The
notification shall further provide appropriate information as to
the steps to be taken if the claimant wishes to submit his claim
for review. This written notification shall be given to a claimant
within 90 days after receipt of his claim by the Plan
Administrator unless special circumstances require an extension of
time for processing the claim. If such an extension of time for
processing is required, written notice of the extension shall be
furnished to the claimant prior to the termination of said 90 day
period, and such notice shall indicate the special circumstances
which make the postponement appropriate.
(c) RIGHT OF REVIEW. In the event of a denial or limitation of his
benefit, the claimant or his duly authorized representative shall
be permitted to review pertinent documents and to submit to the
Plan Administrator issues and comments in writing. In addition,
the claimant or his duly authorized representative may make a
written request for a full and fair review of his claim and its
denial by the Plan Administrator; provided, however, that such
written request must be received by the Plan Administrator (or its
delegate to receive such requests) within 60 days after receipt by
the claimant of written notification of the denial or limitation
of the claim. The 60 day requirement may be waived by the Plan
Administrator (or its delegate) in appropriate cases.
(d) DECISION ON REVIEW. A decision shall be rendered by the Plan
Administrator within 60 days after it receives the request for
review, provided that where special circumstances require an
extension of time for processing the decision, it may be postponed
on written notice to the claimant (prior to the expiration of the
initial 60 day period) for an additional 60 days, but in no event
shall the decision be rendered more than 120 days after the
receipt of such request for review. Any decision by the Plan
Administrator shall be furnished to the claimant in writing and
shall set forth the specific reasons for the decision and the
specific Plan provisions on which the decision is based.
(e) COURT ACTION. No Participant or Beneficiary shall have the right
to seek judicial review of a denial of benefits, or to bring any
action in any court to enforce a claim for benefits prior to
filing a claim for benefits or exhausting his rights to review
under this Section.
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ARTICLE 13. AMENDMENT, TERMINATION AND MERGER
13.1 SPONSOR'S POWER TO AMEND. The Sponsor may amend any part of the Plan. If
the Sponsor amends or terminates the Plan, it shall give notice of such
amendment or termination to each adopting Employer which has notified the
Sponsor it has adopted, but not yet ceased to use, this prototype Plan and
which has all Plan assets invested in Shares at the time of such amendment or
termination.
13.2 AMENDMENT BY ADOPTING EMPLOYER. The Employer may:
(a) change the choice of options in the Adoption Agreement;
(b) add overriding language in the Adoption Agreement when such language is
necessary to (i) satisfy section 415 or 416 of the Code because of the
required aggregation of multiple plans, or (ii) preserve benefits protected
under section 411(d)(6) of the Code; and
(c) add certain model amendments published by the Internal Revenue Service
which specifically provide that their adoption will not cause the Plan to
be treated as individually designed.
An Employer that amends the Plan for any other reason, including a waiver of
the minimum funding requirement under section 412(d) of the Code, will no
longer participate in this prototype plan and will be considered to have an
individually designed plan.
13.3 TERMINATION. The Employer is not and shall not be under obligation to
continue its contributions to, or to maintain, them for any length of time. The
Employer may, in its sole discretion, completely discontinue its contributions
to or terminate the Plan and Trust in accordance with the provisions of the Plan
in effect at the time of discontinuance of contributions or termination. In the
event of the termination or partial termination of the Plan, the account balance
of each affected participant will be nonforfeitable.
13.4 VESTING UPON COMPLETE DISCONTINUANCE OF CONTRIBUTIONS. In the event of a
complete discontinuance of contributions under the Plan, the account balance of
each affected participant will be nonforfeitable.
13.5 MAINTENANCE OF BENEFITS UPON MERGER. In the event of a merger or
consolidation with, or transfer of assets to any other plan, each participant
will receive a benefit immediately after such merger, consolidation or transfer
(if the Plan then terminated) which is at least equal to the benefit the
Participant was entitled to immediately before such merger, consolidation or
transfer (if the Plan had been terminated).
ARTICLE 14. MISCELLANEOUS
14.1 EXCLUSIVE BENEFIT OF PARTICIPANTS AND BENEFICIARIES.
(a) GENERAL RULE. All assets of the Trust shall be retained for the
exclusive benefit of Participants and their Beneficiaries, and shall be
used only to pay benefits to such persons or to pay the fees and expenses
of the Trust. The assets of the Trust shall not revert to the benefit of
the Employer, except as otherwise specifically provided in subsection (b)
below.
(b) SPECIAL RULES. To the extent permitted or required by ERISA and the
Code, contributions to the Trust under this Plan are subject to the
following conditions:
(i) If a contribution or any part thereof is made to the Trust by the
Employer under a mistake of fact, such contribution or part thereof
shall be returned to the Employer within one year after the date the
contribution is made;
(ii) In the event the Plan is determined not to meet the initial
qualification requirements of section 401 of the Code, contributions
made in respect of any period for which such requirements are not met
shall be returned to the Employer within one year after the Plan is
determined not to meet such requirements, but only if the application
for the qualification is made by the time prescribed by law for filing
the Employer's return for the taxable year in which the Plan is adopted
or such later date as the Secretary of the Treasury may prescribe.
(iii) Contributions to the Trust are specifically conditioned on their
deductibility under the Code and, to the extent a deduction is
disallowed for any such contribution, such amount shall be returned to
the Employer within one year after the date of the disallowance of the
deduction.
14.2 NONGUARANTEE OF EMPLOYMENT. Nothing contained in this Plan shall be
construed as a contract of employment between Employer and any Employee or as a
right of any Employee to be continued in the employment of the Employer or as a
limitation of the right of the Employer to discharge any of its Employees, with
or without cause.
14.3 RIGHTS TO TRUST ASSETS. No Employee, Participant or Beneficiary shall have
any right to, or interest in, any assets of the Trust upon termination of
employment or otherwise, except as provided under the Plan. All payment of
benefits under the Plan shall be made solely out of the assets of the Trust.
14.4 NONALIENATION OF BENEFITS. No benefit or interest available hereunder will
be subject to assignment or alienation, either voluntarily or involuntarily.
The preceding sentence shall also apply to the creation, assignment or
recognition of a right to any benefit payable with respect to a participant
pursuant to a domestic relations order, unless such order is determined to be
a qualified domestic relations order, as defined in section 414(p) of the Code,
or any domestic relations order entered before January 1, 1985.
14.5. FAILURE OF QUALIFICATION. If the Employer's plan fails to attain or
retain qualification, such plan will no longer participate in this prototype
plan and will be considered an individually designed plan.
14.6 APPLICABLE LAW. Except to the extent otherwise required by ERISA, as
amended, this Plan shall be construed and enforced in accordance with the laws
of the state in which the Employer's principal place of business is located, as
specified in the Adoption Agreement.
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14.7 REFERENCE TO FEDERAL LAW. All references in this Plan to sections of the
Internal Revenue Code or ERISA and any regulations or ruling thereunder
shall be deemed to refer to such sections (and any regulation or ruling
thereunder) as they subsequently may be modified, amended, replaced or
amplified by any successor federal statute, regulation or ruling of
similar application and import.
14.8 CONSTRUCTION. Whenever used in this Plan, unless the context indicates
otherwise, the singular shall include the plural, the plural shall
include the singular and the male gender shall include the female gender.
14.9 HEADINGS. Headings in this Plan are inserted solely for convenience of
reference and shall neither constitute a part of this Plan nor affect its
meaning, construction or intent.
14.10 PRIORITY OF ADOPTION AGREEMENT. The Adoption Agreement has the function
of amending the terms of this document where necessary or appropriate. If
there is any conflict between the terms of this document and the terms of
the Adoption Agreement, the terms of the Adoption Agreement shall
prevail.
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SIMPLIFIED 401(k) PROTOTYPE
TRUST AGREEMENT
Unless the context of this Trust Agreement clearly indicates otherwise,
the terms defined in Article 2 of the Plan entered into by the Employer
of which this Trust Agreement forms a part shall, when used herein, have
the same meaning as in the Plan.
ARTICLE I - TRUST FUND
1.1 TRUST.
The Employer hereby establishes with the Trustee a trust account or
accounts ("Accounts") consisting of such sums of U.S. currency and such
other property acceptable to the Trustee as shall from time to time be
contributed, paid or delivered to the Trustee pursuant to this Trust
Agreement at the address specified by the Trustee. All such money and
property, all investments and reinvestments made therewith and proceeds
thereof, less any payments or distributions made by the Trustee pursuant
to the terms of this Trust Agreement, are referred to herein as the
"TRUST." The Trust shall be held by the Trustee in accordance with the
express provisions of this instrument and the requirements of law.
1.2 DELEGATION OF AUTHORITY.
The Trustee may delegate to a custodian or other agent the custodianship
of all or part of the assets of the Trust. The Trustee and the Employer
may, by mutual agreement, arrange for the delegation by the Trustee to
the Plan Administrator or any agent of the Employer of any powers or
functions of the Trustee hereunder other than the custody of the Trust
assets. The Trustee shall not be responsible for any act or omission of
such person or persons arising from any such delegation, except to the
extent provided in Section 4.8.
1.3 LIMITATIONS OF TRUSTEE'S DUTIES.
With respect to its duties hereunder, the Trustee is a non-discretionary
trustee and shall have no duty to: (a) determine or enforce payment of
any contribution due under the Plan; (b) inquire into the accuracy of any
contribution; (c) determine the adequacy of the funding policy adopted by
the Employer to meet its obligations under the Plan; (d) look into the
propriety of any investment or distribution made under the Plan; or (e)
ensure the qualification of the Plan under the Code. The Trustee shall
not be deemed to be the administrator, the Plan sponsor or a "named
fiduciary" of the Plan as defined in sections 3(16)(A), 3(16)(B) and
402(a)(2), respectively, of ERISA.
ARTICLE II - ACCOUNTS
2.1 ESTABLISHING ACCOUNTS. The Trustee shall open and maintain a Trust
Account for the Plan. Upon receipt of written instructions from the
Employer, the Trustee also shall open and maintain such Participant
Accounts and subaccounts as the Employer may direct. The Trustee shall
also open and maintain such other subaccounts as may be appropriate or
desirable to aid in the administration of the Plan. The Employer shall
give written instructions to the Trustee specifying the Participants'
Accounts and subaccounts to which contributions and forfeitures are to be
credited, and the amounts of such contributions and forfeitures which are
to be credited to such Accounts and subaccounts.
2.2 CHARGES AGAINST ACCOUNTS. Upon receipt of written instructions from the
Employer, the Trustee shall charge the appropriate Account or subaccount
of a Participant for any withdrawals or distributions made under the
Plan, for any forfeiture which may be required under the Plan of unvested
interests attributable to Employer contributions and for any fees which
may be charged against the Trust assets.
ARTICLE III - INVESTMENT OF TRUST ASSETS
3.1 INVESTMENT OF TRUST ASSETS.
The Trustee shall not have any discretion, and is specifically prohibited
from having or exercising any discretion, with respect to the investment
of Trust assets. Except as provided in Section 3.3 (Participant Directed
Investments) hereof, the Employer shall be solely responsible for giving
the Trustee directions as to the investment and disposition of the Trust
assets. Assets of the Trust may be invested in shares of stock in any
regulated investment company registered under the Investment Company Act
of 1940, the investment advisor of which is T. Rowe Price Associates,
Inc. or any of its affiliates. Trust assets may also be invested in units
in any common, collective or group trust fund sponsored by T. Rowe Price
Trust Company and qualified under sections 401 and 501 of the Code, that
is made available for investment purposes as an investment option under
the T. Rowe Price Simplified 401(k) Prototype Plan (the instrument of
trust creating any such qualified common, collective or group trust fund
being adopted hereby).
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3.2 WRITTEN INSTRUCTION.
Any action of the Employer pursuant to any provisions of this Trust
Agreement shall be in wring from the Employer, and the Trustee shall be
fully protected in relying upon such written notification as actions of the
Employer. The term "Employer," as used throughout this Trust Agreement,
includes any duly authorized designee of the Employer, such as a Plan
Administrator, or any individual having apparent authority as such. If
written instructions are not received by the Trustee, or if such
instructions are received but are deemed by the Trustee to be unclear, upon
notice to the Employer, the Trustee may elect to hold all or part of any
such contribution in cash, without liability for rising security prices or
distributions made, pending receipt by it from the Employer of written
instructions or other clarification. If any contributions received by the
Trustee from the Employer are less than any minimum which a directed
investment requires, the Trustee may hold the specified portion of such
contributions in cash, without interest, until such time as the proper
amount has been contributed so that the directed investment may be made.
The Trustee shall receive all directions or instructions in writing
provided that the Trustee may accept oral directions for purchases or sales
from the Employer or Participant with subsequent written confirmation.
3.3 PARTICIPANT DIRECTED INVESTMENTS.
When so instructed by the Employer, the Trustee shall invest all or any
portion of the individual Accounts of any Participant as directed by said
Participant. Such directed investments shall be accounted for separately
for each Participant. The Employer shall have the duty to select and
monitor all investment options made available to Participants under the
Plan. The Employer shall ensure that all Participants who are entitled to
direct the investment of assets in their Accounts previously received or
receive a copy, of all material describing such investment options that is
required by law. Delivery of investment directions by the Employer in
accordance with the instructions of a Participant or by the Participant
directly to the Trustee shall entitle the Trustee to assume that the
Participant has received all such descriptive material. Each Participant
who directs the investment of his Accounts shall be solely and absolutely
responsible for the investment or reinvestment of any such directed Plan
investment held on his behalf in the Trust, and, except as otherwise
provided herein, the Trustee shall not question any such direction, review
any securities or other such assets, or make suggestions with respect to
the investment, reinvestment, retention or disposition of any such assets.
The Trustee shall not have any liability or responsibility for
diversification of such assets or for any loss to or depreciation of such
assets because of the purchase, retention or sale of assets in accordance
with a Participant's direction. The Participant shall have sole
responsibility for the overall diversification, liquidity and prudence of
the investments of his Accounts. If a Participant fails to direct the
investments of his Accounts, the Trustee shall invest his Accounts in
accordance with the written directions of the Employer.
3.4 EMPLOYER DIRECTED INVESTMENTS.
The Employer, by written direction to the Trustee, is authorized to
designate all or a portion of the Trust assets of which the Employer will
direct investments, and the Trustee may segregate such assets into one or
more separate accounts or administer the Trust as one account. In the
event the Employer shall employ or appoint an investment advisor to direct
the Trustee with respect to a portion of the Trust, the Employer will
notify the Trustee in writing of the appointment of the investment advisor,
including his name and address. Whether or not the Trust is segregated into
separate accounts, the Trustee shall invest such portion of the Trust as
directed by the Employer or its duly appointed investment advisor only to
the extent that such instruction is consistent with ERISA and any other
applicable legal authority. The Trustee shall have no duty to question any
action or direction of the Employer or investment advisor or any failure
of the Employer or investment advisor to give directions, or to review the
securities or other investments, which are held pursuant to the Employer's
or investment advisor's directions, or to make suggestions to the Employer
or investment advisor as to the investment, reinvestment, retention or
disposition of any such assets. The Trustee shall not have any liability or
responsibility for diversification of such assets, or for any loss to or
depreciation of such assets because of the purchase, retention or sale of
assets in accordance with the Employer's or investment advisor's direction.
The Employer shall have responsibility for the overall diversification of
the Trust.
3.5 TRUSTEE'S LIABILITY WITH RESPECT TO EMPLOYER OR PARTICIPANT DIRECTED
ACCOUNTS.
The Trustee shall not be liable for, and the Employer will indemnify and
hold harmless the Trustee (including its employees, affiliates,
representatives and agents) from and against, any liability or expense
(including counsel fees) because of: (a) any investment action taken
omitted by the Trustee in accordance with any direction of the Employer or
a Participant, or (b) any investment inaction in the absence of investment
directions from the Employer or a Participant.
3.6 LIMITATIONS ON INVESTMENTS.
Notwithstanding any other provision of this Trust Document to the
contrary:
(a) The Trustee may establish such reasonable rules and regulations,
applied on a uniform basis to all Participants, with respect to the
requirements for, and the form and manner of, effecting any
transaction with respect to Participant directed investments to the
Trustee shall determine to be consistent with the purposes of the
Plan. Any such rules and regulations shall be binding upon all
persons interested in the Trust.
(b) In no event shall the Trustee engage in any transaction that would be
prohibited under ERISA.
3.7 "KNOWLEDGE" OF TRUSTEE.
It is understood that although, when the Trustee is subject to the
direction of the Employer or a Participant, the Trustee will perform
certain ministerial duties ("Ministerial Duties") with respect to the
portion of the Trust subject to such direction, such duties do not involve
the exercise of any discretionary authority to manage or control Trust
assets. Such Ministerial Duties will be performed in the normal course of
business by employees of the Trustee, its affiliates or agents who may be
unfamiliar with investment management. It is agreed that the Trustee is not
undertaking any duty or obligation, express or implied, to review, and will
not be deemed to have any knowledge of or responsibility with respect to,
any Transaction involving the investment of the Trust as a result of the
performance of these Ministerial Duties. Therefore, in the event that
"Knowledge" of the Trustee shall be a prerequisite to imposing a duty upon
or determining liability of the Trustee under the Plan, this Trust
Agreement or any law regulating the conduct of directed trustees with
respect to the investment of trust assets, as a result of any act or
omission on of the Employer or any Participant, or as the result of any
transaction engaged in by any of them, then the receipt and processing of
investment orders and other documents relating to Trust assets by an
employee of the Trustee or its affiliates or agents engaged in the
performance of purely Ministerial Duties shall not constitute "knowledge"
of the Trustee.
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ARTICLE IV - DUTIES OF THE TRUSTEE
4.1 DUTIES OF THE TRUSTEE.
The Trustee is authorized and empowered with respect to the Trust:
(a) To make, execute, acknowledge and deliver any and all documents of
transfer and conveyance and any and all other instruments that may
be necessary or appropriate to carry out the powers herein
granted.
(b) To register any investment held in the Trust in the name of the
Trustee or in the name of a nominee, and to hold any investment in
bearer form, but the books and records of the Trustee shall at all
times show that all such investments are part of the Trust.
(c) To employ suitable agents and counsel (who may also be agents
and/or counsel for the Employer) and to pay their reasonable
expenses and compensation.
(d) To borrow or raise monies for the purpose of the Trust from any
source and, for any sum borrowed, to issue its promissory note as
Trustee and to secure the repayment thereof by pledging all or any
part of the Trust, but nothing contained herein shall obligate the
Trustee to render itself liable individually for the amount of any
such borrowing; and no person loaning money to the Trustee shall
be bound to see to the application of money loaned or to inquire
into the validity or propriety of any such borrowing.
Each and all of the foregoing powers may be exercised without a court
order or approval. No one dealing with the Trustee need inquire
concerning the validity or propriety of anything that is done by the
Trustee or need to see the application of any money paid or property
transferred to or upon the order of the Trustee.
4.2 GENERAL POWERS.
The Trustee shall have all of the powers necessary or desirable to do all
acts and exercise all such rights and privileges, whether or not
expressly authorized herein, which it may deem necessary or proper for
the protection of the Trust and to accomplish any action provided for in
this Trust Agreement.
4.3 VALUATION OF TRUST.
The Trustee, as of the valuation date, and at such other time or times as
is necessary, shall determine the net worth of the assets of the Trust.
The Trustee may adopt such methods of valuation as it deems advisable.
4.4 TRUST RECORDS.
The Trustee shall keep accurate and detailed records of all receipts,
investments, disbursements and other transactions required to be
performed hereunder with respect to the Trust. The Trustee agrees to
treat as confidential all records and other information relative to the
Trust. The Trustee shall not disclose such records and other information
to parties, other than the Employer except to the extent required by law
or as requested in writing by the Employer.
4.5 DISTRIBUTIONS.
At the direction of the Employer, the Trustee shall mail distributions
from the Trust to the Employer for the benefit of the Participants and,
to the extent agreed to by the Trustee, shall make distributions directly
to the Participants. The Trustee shall not be liable or responsible for
any errors made by the Employer with respect to distributions. The
Trustee shall be entitled to rely conclusively upon the Employer's
directions. Notwithstanding any other provision of the Trust Agreement,
the Trustee may condition its delivery, transfer or distribution of any
Trust assets upon the Trustee's receiving satisfactory assurances that
the approval of appropriate governmental agencies or other authorities
has been secured and that all notice and other procedures required by
applicable law have been satisfied.
4.6 TRUSTEE'S FEES.
The Trustee's fees for performing its duties hereunder shall be such
reasonable amounts as shall be established by it from time to time. The
Trustee shall furnish to the Employer its current schedule of fees and
give written notice to the Employer whenever its fees are changed or
revised. Such fees, any taxes of any kind whatsoever which may be levied
or assessed upon the Trust, and any expenses incurred by the Trustee in
the performance of its duties, including fees for legal services rendered
to the Trustee, shall, unless paid by the Employer, be paid from the
Trust.
4.7 DUTIES NOT ASSIGNED.
The duties of the Trustee with respect to the Trust are limited to those
assumed by the Trustee under the terms of this Trust Agreement. The
Trustee shall not be responsible for filing reports, returns or
disclosures with any government agency except as may otherwise be
required by its duties as Trustee under applicable law.
4.8 STANDARDS FOR THE TRUSTEE'S POWERS.
Notwithstanding any other provision of this Trust Agreement, the Trustee
shall discharge its duties hereunder solely in the interest of the
Participants and for the exclusive purpose of providing benefits to the
Participants and defraying reasonable expenses of administering the
Trust, with the skill, care, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. The Trustee shall
perform its duties in accordance with this Trust Agreement insofar as
this Trust Agreement is consistent with the provisions of ERISA. To the
extent not prohibited by ERISA, the Trustee shall not be responsible in
any way for any action or omission of the Employer with respect to the
performance of its duties and obligations set forth in this Trust
Agreement and in the Plan. The Trustee may rely upon such information,
direction, action or inaction of the Employer as being proper under the
Plan or the Trust Agreement and is not required to inquire into the
propriety of any such information, direction, action or inaction. To the
extent not prohibited by ERISA, the Trustee shall not be responsible for
any action or omission of any of its agents or with respect to reliance
upon advice of its counsel (whether or not such counsel is also counsel
to the Employer), provided that such agents or counsel were prudently
chosen by the Trustee and that the Trustee relied in good faith upon the
action of such agent or the advice of such counsel.
ARTICLE V - DUTIES OF THE EMPLOYER
5.1 DUTIES OF THE EMPLOYER.
It is understood that the Employer shall be responsible for the
performance of the following functions with respect to the Trust:
(a) Transmitting all Trust contributions made by or on behalf of each
Participant in accordance with the instructions of each
Participant to the Trustee at such times and in such manner as is
mutually agreed between the Employer and the Trustee.
(b) Providing to the Trustee, on a timely basis, a copy of the Plan
document including all amendments and restatements.
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(c) Determining that the contributions made by or on the behalf of each
Participant are in accordance with any applicable Federal
(d) Asses that the Plan maintains qualified status under applicable
provisions of the Code.
(e) If applicable, asses that the Plan complies with section 404(c) of
ERISA and any regulations issued thereunder.
5.2 BONDING.
The Employer agrees to obtain and maintain a fiduciary bond and to include
as those coveted by such bond the Employees of the Employer, the Plan
Administrator and the Trustee, including any of the Trustee's employees,
officers and agents required by law to be so covered. The cost of any such
bond shall be paid by the Employer.
5.3 INFORMATION AND DATA TO BE FURNISHED TO THE TRUSTEE,
The Employer shall furnish the Trustee with such information and data
relevant to the Plan as is necessary for the Trustee to properly perform
its duties assumed hereunder, including but not limited to, a copy of the
Plan's qualification letter from the Internal Revenue Service.
5.4 LIMITATION OF DUTIES.
Neither the Trustee nor any of its officers, directors, partners or agents
shall have any duties or obligations with respect to this Trust Agreement,
except those expressly set forth herein, in the Plan and in ERISA.
ARTICLE VI - TERMINATION OF TRUST
6.1 RESIGNATION OR REMOVAL OF TRUSTEE.
The Trustee may resign at any time upon thirty days' prior written notice
to the Employer and may be removed by the Employer at any time upon thirty
days' prior written notice to the Trustee. Upon resignation or removal of
the Trustee, the Employer shall appoint a successor trustee. Upon receipt
by the Trustee of written acceptance of such appointment by the successor
trustee, the Trustee shall transfer and pay over to the successor the
assets of the Trust and all records (or copies) pertaining thereto. The
Trustee is authorized, however, to reserve such sum of money or property as
it may deem or for payment of any liabilities constituting a charge on or
against the assets of the Trust or on or against the Trustee, with any
balance of such reserve remaining after payment of all such items to be
paid over to the successor trustee. Upon the assignment, transfer and
payment over of the assets of the Trust, and obtaining a receipt thereof
from the successor trustee, the Trustee shall be released and discharged
from any and all claims, demands, duties and obligations arising out of the
Trust and its management thereof, excepting claims based only upon the
Trustee's willful misconduct or gross negligence. The successor trustee
shall hold the assets paid over to it under the terms similar to those of
this Trust Agreement under a trust that will qualify under section 401(a)
of the Code. If on the date upon which the Trustee's resignation or removal
is effective, the Employer has not appointed a successor trustee which has
accepted such appointment, the Trustee shall, unless it elects to terminate
the Trust pursuant to Section 6.3 hereof, appoint such successor itself.
6.2 TERMINATION OF THE TRUST.
Subject to the right of the Trustee to terminate the Trust in accordance
with Section 6.3 hereof, this Trust shall continue as to the Employer so
long as the Plan is in full force and effect. If the Plan ceases to be in
full force and effect, this Trust shall thereupon terminate unless
expressly extended by the Employer.
6.3 TERMINATION OF THE TRUST BY THE TRUSTEE.
The Trustee may elect to terminate the Trust if on the date upon which the
Trustee's resignation or removal is effective, the Employer has not
appointed a successor trustee which has accepted such appointment.
Termination of the Trust shall be effected by distribution of all assets
thereof to the Participants or other persons entitled thereto pursuant to
the directions of the Employer (or, in the absence of such direction, as
determined by the Trustee), subject to the Trustee's fight to reserve funds
as provided in Section 6.1 hereof. Upon the completion of such
distribution, the Trustee shall be relieved from all further liability with
respect to all amounts so paid, other than any liability arising out of the
Trustee's willful misconduct or gross negligence.
ARTICLE VII - MISCELLANEOUS
7.1 PURPOSE.
This Trust has been established for the exclusive benefit of the Plan's
Participants. Except as provided herein, it shall be impossible at any time
prior to the satisfaction of all liabilities to the Participants for any
part of the principal or income of the Trust, other than such part as is
required to pay taxes, administrative expenses or refund contributions as
provided herein, to be paid or diverted to the Employer or to be used for
any purpose whatsoever other than for the exclusive benefit of the
Participants.
7.2 INDEMNIFICATION.
The Employer shall indemnify and hold harmless the Trustee (including its
affiliates, employees, representatives and agents from and against any
liability, cost or other expense, including, but not limited to, the
payment of attorneys' fees which the Trustee may incur in connection with
the Trust or the Plan unless such liability, cost or expense arises from
the Trustee's own willful misconduct or gross negligence. The Trustee shall
not be obligated or expected to commence or defend any legal action or
proceeding in connection with the Trust unless agreed upon in writing by
the Trustee and Employer and unless the Trustee is fully indemnified for
doing so to its satisfaction.
7.3 CONSTRUCTION.
Whenever used in this Trust Agreement, unless the context indicates
otherwise, the singular shah include the plural, the plural shall include
the singular, and the male sender shall include the female sender.
7.4 HEADINGS.
Headings in this Trust Agreement are inserted solely for convenience of
reference and shall neither constitute a part of this Trust Agreement, nor
affect its meaning, construction or intent.
7.5 SEVERABILITY.
If any provision of this Trust Agreement is held invalid or unenforceable,
such invalidity or unenforceability shall not affect any other provision,
and this Trust Agreement shall be construed and enforced as if such
provision had not been included.
7.6 RETURN OF CONTRIBUTIONS.
Contributions are conditioned on initial qualification of the Plan under
section 401(a) of the Code, and if the Plan and Trust do not
================================================================================
42
<PAGE> 69
================================================================================
qualify, the Trustee may return such contributions to the Employer upon
the Employer's written direction. The Trustee may also return amounts to
the Employer upon the Employer's written direction due to a "mistake of
fact" as described in section 403(c) of ERISA. Contributions made by the
Employer by "mistake of fact" may revert and be paid to the Employer
within one year after the payment of such mistaken contributions. In
making such a return of assets to the Employer, the Trustee may accept
the Employer's written direction as its warranty that such payment is
provided for in the Plan and complies with such plan provision and
section 403(c) of ERISA, and the Trustee need make no further
investigation.
7.7 VOTING.
The Employer shall direct the Trustee how to vote any Trust assets for
which the Trust has voting rights. The Employer may not appoint the
Trustee as its designee for purposes of this Section unless the Trustee
agrees to such a designation in writing.
7.8 NONALIENATION OF BENEFITS.
No rights or claims to any of the monies or other assets of the Trust
shall be assignable, nor shall such rights or claims be subject to
garnishment, attachment, execution or levy of any kind; and any attempt
to transfer, assign or pledge the same, except as specifically permitted
by law, shall not be recognized by the Trustee.
7.9 AMENDMENTS
The Employer and the Trustee may amend this Agreement at any time by a
written agreement between them; provided, however, that no such amendment
shall make it possible for any part of the corpus or income of the Trust
to be used or diverted to purposes other than the exclusive benefit of
Participants and defraying reasonable expenses of administering the Plan
and Trust.
7.10 INSPECTION OF PLAN RECORDS BY EMPLOYER.
The Trustee agrees to permit the Employer to inspect the records of the
Trust maintained by the Trustee during regular business hours and to
permit the Employer to audit the same upon the giving of reasonable
notice to the Trustee. The Trustee further agrees that it will provide
the Employer with information and records that the Employer may
reasonably require in order to perform audits of said records.
7.11 LAW GOVERNING.
This Agreement shall be administered, construed and enforced according to
the laws of the state of the principal place of business of the Trustee
and applicable Federal law.
7.12 MERGER, CONSOLIDATION OR TRANSFER.
In the event of the merger, consolidation or transfer of any portion of
the Trust to a trust fund held under any other plan, the Trustee shall
dispose of all or part, as the case may be, of the Trust, in accordance
with the written directions of the Employer, subject to the right of the
Trustee to reserve funds as provided in Section 6.1 hereof.
7.13 TRUSTEE AS SUCCESSOR TRUSTEE.
If the Trustee is acting as a successor trustee with respect to the
Trust, the Employer shall indemnify the Trustee against all liabilities
with respect to the Trust arising prior to the appointment of the Trustee
and its acceptance thereof.
7.14 SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon the successor and assigns of the
parties hereto.
7.15 NOTICES.
Any notice from the Trustee to the Employer or from the Employer to the
Trustee provided for in the Plan or in this Trust Agreement shall be
effective if sent by first class mail to their respective last addresses
of record.
7.16 EFFECTIVE DATE.
The effective date of this Trust shall be the date on which the Trustee
has executed the Adoption Agreement unless specified otherwise in that
agreement.
================================================================================
43
<PAGE> 70
================================================================================
<TABLE>
<S> <C> <C> <C> <C>
INTERNAL REVENUE SERVICE Department of the Treasury
PLAN DESCRIPTION: PROTOTYPE STANDARDIZED PROFIT SHARING PLAN WITH CODA
FFN: 50236500007 - 001 CASE: 9307665 EIN: 52-1309931
Washington, DC 20224
BPD: 07 PLAN: 001 LETTER SERIAL NO.: D261637a
Person to Contact: Mr. Dua
Telephone Number: (202) 622-8380
T. Rowe Price Trust Co.
100 East Pratt Street Refer Reply to: CP:E:EP:Q:3
Baltimore MD 21202 Date: 12/20/93
</TABLE>
Dear Applicant:
In our opinion, the form of the plan identified above is
acceptable under section 401 to the Internal Revenue Code for use by
employers for the benefit of their employees. This opinion relates only
to the acceptability of the form of the plan under the Internal Revenue
Code. It is not an opinion of the effect of other Federal or local
statutes.
You must furnish a copy of this letter to each employer who
adopts this plan. You are also required to send a copy of the approved
form of the plan, any approved amendments and related documents to each
Key District Director of Internal Revenue Service in whose jurisdiction
there are adopting employers.
Our opinion on the acceptability of the form of the plan is not a
ruling or determination as to whether an employer's plan qualifies
under Code section 401(a). An employer who adopts this plan will be
considered to have a plan qualified under Code section 401(a) provided
all the terms of the plan are followed, and the eligibility
requirements and the contribution or benefit provisions are not more
favorable for highly compensated employees than for other employees.
Except as stated below, the Key District Director will not issue a
determination letter with regard to this plan.
Our opinion does not apply to the form of the plan for purposes
of Code section 401(a)(16) if: (1) an employer ever maintained another
qualified plan for one or more employees who are covered by this plan,
other than a specified paired plan within the meaning of section 7 of
the Rev. Proc. 89-9,1989-1 C.B. 780; or (2) after December 31, 1985,
the employer maintains a welfare benefit fund defined in Code section
419(e), which provides postretirement medical benefits allocated to
separate accounts for key employees as cleaned in Code section
419A(d)(3).
An employer that has adopted a standardized plan may not rely on
this opinion letter with respect to: (1) whether any amendment or
series of amendments to the plan satisfies the nondiscrimination
requirements of section 1.401(a)(4)-5(a) of the regulations, except
with respect to plan amendments granting past service that meet the
safe harbor described in section 1.401(a)(4)-5(a)(5) and are not part
of a pattern of amendments that significantly discriminates in favor of
highly compensated employees; or (2) whether the plan satisfies the
effective availability requirement of section 1.401(a)(4)-4(c) of the
regulations with respect to any benefit, right or feature.
An employer that has adopted a standardized plan as an amendment
to a plan other than a standardized plan may not rely on this opinion
letter with respect to whether a benefit, right or other feature that
is prospectively eliminated satisfies the current availability
requirements of section 1.401(a)-4 of the regulations.
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44
<PAGE> 71
================================================================================
The employer may request a determination (1) as to whether the plan,
considered with all related qualified plans and, if appropriate, welfare benefit
funds, satisfies the requirements of Code section 401(a)(16) as to limitations
on benefits and contributions in Code section 415; (2) regarding the
nondiscriminatory effect of grants of past service; and (3) with respect to
whether a prospectively eliminated benefit, right or feature satisfies the
current availability requirements.
Our opinion does not apply to the form of the plan for the purposes of
section 401(a) of the Code unless the terms of the plan, as adopted or amended,
that pertain to the requirements of sections 401(a)(4), 401(a)(5),
401(a)(17), 401(i), 410(b) and 414(s) of the Code, as amended by the Tax Reform
Act of 1986 or subsequent legislation, (a) are made effective retroactively to
the first day of the first plan year beginning after December 31, 1988 (or such
other date on which these requirements first became effective with respect to
this plan); or (b) are made effective no later than the first day on which the
employer is no longer entitled, under regulations, to rely on a reasonable, good
faith interpretation of these requirements, and the prior provisions of the plan
constitute such an interpretation.
Because you submitted this plan for approval after March 31, 1991, the
continued, interim and extended reliance provisions of sections 13 and 17.03 of
Rev. Proc. 89-9, 1989-1 C.B. 780, are not applicable.
If you, the sponsoring organization, have any questions concerning the IRS
processing of this case, please call the above telephone number. This number is
only for use of the sponsoring organization. Individual participants and/or
adopting employers with questions concerning the plan should contact the
sponsoring organization. The plan's adoption agreement must include the
sponsoring organization's address and telephone number for inquiries by adopting
employers.
If you write to the IRS regarding this plan, please provide your telephone
number and the most convenient time for us to call in case we need more
information. Whether you call or write, please refer to the Letter Serial Number
and File Folder Number shown in the heading of this letter.
You should keep this letter as a permanent record. Please notify us if you
modify or discontinue sponsorship of this plan.
Sincerely yours,
/s/ John Swim
Chief, Employee Plans and Qualifications Branch
================================================================================
45
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement"), made as of the 15th day of
November, 1996, is entered into by Exchange Applications, Inc., a Delaware
corporation with its principal place of business at 695 Atlantic Avenue, Boston,
MA 02111 (the "Company"), and Andrew J. Frawley, an individual residing at 50
York Road, Wayland, MA 01778 (the "Employee").
The Company desires to employ the Employee, and the Employee desires to
be employed by the Company. In consideration of the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties hereto,
the parties agree as follows:
1. "AT WILL" EMPLOYMENT. The Company hereby agrees to employ the
Employee, and the Employee hereby accepts employment with the Company, on an "at
will" basis and upon the other terms set forth in this Agreement. The period of
time during which the Employee is employed by the Company hereunder is hereafter
referred to as the "Employment Period".
2. CAPACITY. The Employee shall serve as an executive of the Company,
subject to the general direction and control of the Company's Board of Directors
(the "Board") or its designee.
The Employee hereby accepts such employment and agrees to undertake
faithfully, diligently and to the best of his ability such executive duties and
responsibilities as the Board or its designee shall from time to time assign to
him. The Employee agrees to devote his entire business time, attention and
energies to the business and interests of the Company during the Employment
Period. The Employee agrees to abide by the rules, regulations, instructions,
personnel practices and policies of the Company and any changes therein which
may be adopted from time to time by the Company.
3. COMPENSATION AND BENEFITS.
3.1 SALARY. The Company shall pay the Employee, in bi-weekly
installments, an annual base salary of $200,000 during the Employment Period.
3.2 BONUSES. The Employee shall be entitled to a bonus in
respect of each calendar year during the Employment Period, commencing with
1996. The maximum amount of such annual bonus shall be $100,000, commencing with
1996. The actual amount of the bonus in respect of any calendar year will be
equal to X($50,000) + Y($50,000) where X represents the percentage associated
with the
<PAGE> 2
grade assigned to the Employee for his corporate citizenship performance for the
year by the Board, and where Y represents the percentage associated with the
profitability of the Company for the year. The Employee's corporate citizenship
performance will be benchmarked against an assessment model under which the
Employee will be given a grade of H, M or L corresponding to 100%, 65% and 35%,
respectively. The profitability of the Company will be benchmarked against the
Company's financial plan for the year as approved by the Board. If the Company's
profit for the year equals or exceeds 100% of the-profit goal set forth in the
plan (the "Profit Goal"), Y equals 100%; if the Company's profit for the year
equals or exceeds 85% of the Profit Goal but is less than 100% of the Profit
Goal, Y equals 65%; and if the Company's profit for the year is less than 85% of
the Profit Goal, Y equals 35%. The Company will provide the Employee with a
written six-month performance evaluation by July 15 of each year during the
Employment Period. A bonus due with respect to a given calendar year will be
paid by February 15 of the following year.
3.3 REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as the Company may request, provided that the amount
available for such travel, entertainment and other expenses may be fixed in
advance by the Board.
3.4 EQUITY. As additional consideration for his provision of
services hereunder, the Company will grant the Employee 848,800 shares of the
Company's common stock, $.001 par value per share, pursuant to a Restricted
Stock Agreement of even date herewith.
4. EMPLOYMENT TERMINATION. The Company shall have the right to terminate
the Employee's employment hereunder at any time with or without cause, subject
to the requirements of applicable law. Upon termination of this Agreement and
the Employee's employment by the Company, the Employee shall not be entitled to
any severance benefits other than as may be required by applicable law.
5. NONDISCLOSURE AND DEVELOPMENTS AGREEMENT; MUTUAL RELEASE.
Concurrently with the execution and delivery of this Agreement, the Employee
agrees to execute and deliver to the Company a Nondisclosure and Developments
Agreement in the form attached as EXHIBIT 1 hereto (the "Nondisclosure
Agreement") and the Mutual Release in the form of EXHIBIT 2 hereto (the
"Release"). The provisions of the Nondisclosure Agreement, the Release and
Section 6 of this Agreement shall survive the termination of this Agreement.
-2-
<PAGE> 3
6. NON-COMPETITION COVENANTS.
6.1 NON-COMPETITION COVENANTS. The Employee agrees that he
will not, during the Non-Competition Period, compete directly or indirectly with
the business of the Company. The phrase "compete directly or indirectly with the
business of the Company" shall be deemed to include, without limiting the
generality thereof, (1) engaging or having a material interest, directly or
indirectly, as owner, employee, officer, director, partner, sales
representative, stockholder, capital investor, lessor, renderer of consultation
services or advice, either alone or in association with others, in the operation
of any aspect of a business or enterprise which is competitive with the business
in which the Company was engaged during the course of the Employee's employment
by the Company; (2) soliciting any employee of the Company to leave the employ
of the Company; (3) soliciting any of the employees of the Company to become
employees of any other person or entity; or (4) soliciting any customer of the
Company with respect to the business of the Company. The phrase "compete
directly or indirectly with the business of the Company", as used in this
Agreement, shall be deemed not to include any ownership interest as an inactive
investor. The phrase "ownership interest as an inactive investor" for purposes
of this Agreement shall mean the beneficial ownership of less than two (2%)
percent of the outstanding shares of any series or class of securities of any
competitor of the business of the Company, which securities of such series or
class are publicly traded in the securities markets.
6.2 NON-COMPETITION PERIOD. For the purposes of this Section
6, "Non-Competition Period" shall mean (i) the period during which the Employee
is employed by the Company, and (ii) if the Non-Competition option (referred to
in Section 6.3 below) is exercised by the Company, the Post-Employment
Non-Competition Period.
6.3 NON-COMPETITION OPTION. Upon the termination of the
Employee's employment with the Company, for whatever reason, the Company shall
have the option (the "Non-Competition Option") to extend the non-competition
covenants set forth in subsection 6.1 above for up to two (2) years following
the date of such termination (the "Termination Date"). To exercise the
Non-Competition Option, the Company shall be required to give written notice to
the Employee of its intent to do so within thirty (30) days after the
Termination Date, such notice to specify the period following the Termination
Date during which the Employee shall continue to be bound by the non-competition
covenants set forth in subsection 6.1 above (the "Post-Employment
Non-Competition Period"). If the Company exercises the Non-Competition Option,
the Employee will continue to be bound by the provisions of subsection 6.1 for
the Post-Employment Non-Competition Period, provided that the Company pays the
Employee on or before the fifteenth day of each month during such period an
amount equal to 75% of the Employee's monthly base salary from the Company at
the time of his employment termination.
-3-
<PAGE> 4
7. INJUNCTIVE AND OTHER EQUITABLE RELIEF.
7.1 The Employee acknowledges that the services to be rendered
by him under the terms of this Agreement are of a special, unique and
extraordinary character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law.
By reason of this, the Employee consents and agrees that if he violates any of
the provisions of Section 6 hereof, the Company shall be entitled, in addition
to any other remedies it may have at law, to the remedies of injunction,
specific performance and other equitable relief for a breach by the Employee of
Section 6 of this Agreement. This Section 7 shall not, however, be construed as
a waiver of any of the rights which the Company may have for damages or
otherwise.
7.2 Any waiver by the Company of a breach of any provision of
Section 6 hereof shall not operate or be construed as a waiver of any subsequent
breach of such provision or any other provision hereof.
7.3 The Employee agrees that each provision of Section 6 shall
be treated as a separate and independent clause, and the unenforceability of any
one clause shall in no way impair the enforceability of any of the other clauses
herein. Moreover, if one or more of the provisions contained in Section 6 shall
for any reason be held to be excessively broad as to scope, activity or subject
so as to be unenforceable at law, such provision or provisions shall be
construed by the appropriate judicial body by limiting and reducing it or them
so as to be enforceable to the maximum extent compatible with the applicable law
as it shall then appear.
8. OTHER AGREEMENTS. Employee hereby represents and warrants that he is
not bound by the terms of any agreement with any previous employer or other
party to refrain from using or disclosing any trade secret or confidential or
proprietary information in the course of his employment with the Company or to
refrain from competing, directly or indirectly, with the business of such
previous employer or any other party. Employee further represents and warrants
that his performance of all the terms of this Agreement and the Nondisclosure
Agreement does not and will not breach any agreement to keep in confidence
proprietary information, knowledge or data acquired by him in confidence or in
trust prior to his employment with the Company.
9. NOTICES. All notices required or permitted under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address shown above, or at
such other address or addresses as either party shall designate to the other in
accordance with this Section 9.
10. PRONOUNS. Whenever the context may require, any pronouns used in
-4-
<PAGE> 5
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.
11. INTEGRATION. This Agreement, the Restricted Stock Agreement
referred to in Section 3.4, the Stockholders' Agreement of even date herewith
among the Company, the Employee and certain other stockholders of the Company,
the Nondisclosure Agreement and the Release constitute the entire agreement
between the Employee, on the one hand, and the Company, Alan Grant, Cyrk, Inc.,
the officers and directors of Cyrk, Inc., Grant & Partners Limited Partnership
and Grant & Partners, Inc., on the other, and supersedes all prior agreements
and understandings, whether written or oral, between such parties.
12. AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Employee.
13. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which or into which the Company may be
merged or which may succeed to its assets or business, provided, however, that
the obligations of the Employee are personal and shall not be assigned by him.
15. MISCELLANEOUS.
15.1 No delay or omission by the Company in exercising any
right under this Agreement shall operate as a waiver of that or any other right.
A waiver or consent given by the Company on any one occasion shall be effective
only in that instance and shall not be construed as a bar or waiver of any right
on any other occasion.
15.2 The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
15.3 In case any provision of this Agreement shall be invalid,
illegal or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
EXCHANGE APPLICATIONS, INC.
By: /s/ Michael J. Feldman
------------------------------
Michael J. Feldman
Title: Vice President
----------------------------------
EMPLOYEE
/s/ Andrew J. Frawley
----------------------------------
Andrew J. Frawley
-6-
<PAGE> 1
EXHIBIT 10.7
EXCHANGE APPLICATIONS, INC.
FOUNDER RESTRICTED STOCK AGREEMENT
RESTRICTED STOCK AGREEMENT (this "Agreement"), dated as of November
8th, 1996, by and between EXCHANGE APPLICATIONS, INC., a Delaware corporation
(the "Company"), and Andrew J. Frawley (the "Employee").
W I T N E S S E T H:
WHEREAS, the company and Grant & Partners Limited Partnership have
entered into an Assignment and Assumption Agreement of even date herewith (the
"Assignment Agreement");
WHEREAS, in connection with the consummation of the assignment and
assumption provided in the Assignment Agreement, the Company has agreed to issue
shares of its Common Stock to the Employee upon the terms and subject to the
conditions hereof; and
WHEREAS, the Board of Directors of the Company has authorized the
purchase of Common Stock by the Employee subject to the terms of this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Employee hereby agree as
follows:
1. PURCHASE OF STOCK. The Employee hereby agrees to purchase from the
Company and the Company hereby agrees to sell to the Employee, on the date
hereof 848,800 shares of its Common Stock, $.001 par value per share (the
"Stock"), for a purchase price of $.001 per share of Stock (the "Issue Price").
2. PURCHASE OPTION. All Stock purchased by the Employee pursuant to the
terms of this Agreement shall be subject to the option of the Company with
respect to the purchase thereof (the "Purchase Option") under circumstances set
forth in this Section 2.
(a) If the employment of the Employee by the Company is terminated (i)
voluntarily by the Employee or (ii) by the Company for "cause" at any time prior
to the dates set forth below, the Company shall have the right, within 60 days
after the date of any such termination, to
<PAGE> 2
-2-
exercise the Purchase Option as to the maximum portion of the Stock determined
according to the following table:
<TABLE>
<CAPTION>
If Termination of Employment Portion of the Stock Subject
Occurs to the Purchase Option:
- ---------------------------- ----------------------------
<S> <C>
Prior to 12/31/96: 50%
From (and including) 12/31/96
to (but excluding) 12/31/97: 33.33%
From (and including) 12/31/97
to (but excluding) 12/31/98: 16.67%
On and after 12/31/98: None
</TABLE>
(b) The Purchase Option shall be exercisable by the Company at a price
per share of Stock equal to the lesser of the Issue Price or the fair market
value of the Stock as determined by the Board of Directors in accordance with
the Plan. The Company may assign any or all of its rights to exercise a Purchase
Option under this Section 2. If the Company (or its assignee) shall fail to
exercise the Purchase Option with respect to any part or all of the Stock
subject thereto, such Stock may thereafter be held and transferred by the
Employee (or other holder thereof), subject, however, to any transfer or
purchase restrictions applicable thereto pursuant to the Company's charter or
by-laws or any other agreement relating to the Stock or applicable law. Stock
not subject to the Purchase Option is herein referred to as "Vested Stock."
(c) Notwithstanding anything to the contrary in this Agreement, in the
event of a "Change of Control", all Stock held by the Employee issued under this
Agreement, and securities issued in respect thereof, shall be deemed Vested
Stock and the Purchase Option shall immediately terminate and be of no further
force and effect. A "Change of Control" shall mean (i) the direct or indirect
acquisition by any person of 50% or more of the aggregate voting power of the
Company, (ii) the sale of all or substantially all of the assets of the Company
(other than a merger or consolidation of the Company with, or the sale of all or
substantially all of the assets of the Company to, any entity if 50% or more of
the aggregate voting power of such entity is held immediately after such
transaction by persons who were stockholders of the Company immediately prior to
such transaction).
(d) For purposes hereof, "cause" shall mean the Employee's (i) failure
to devote his full time and efforts to the business of the Company, (ii)
commission of any act of embezzlement, fraud, larceny or theft or other willful
misconduct injurious to the Company or (iii) breach of his
<PAGE> 3
-3-
obligations under the Employment Agreement of even date herewith to which he is
a party with the Company.
3. RESTRICTIONS ON TRANSFER. The Employee shall not sell, transfer,
pledge, hypothecate or otherwise dispose of or encumber (other than to the
Company pursuant to Section 2 above) any of the Stock that is not Vested Stock.
Notwithstanding the foregoing, the Employee may transfer all or any of the Stock
to any member of his immediate family (as defined below) or to any trust for the
benefit of such family member or the Employee, PROVIDED that such transferee
shall agree with the Company in writing, as a condition to such transfer, to be
bound by all of the provisions of this Agreement, and PROVIDED, FURTHER, that
the Employee's employment (rather than an employment of such transferee) shall
continue to govern for purposes of Section 2. The term "immediate family" shall
mean any parent, spouse, lineal descendant, brother or sister of the Employee.
4. MANNER OF EXERCISE. The Purchase Option shall be exercised by
written notice signed by an officer of the Company and delivered or mailed to
the Employee (or to his personal representative if the Employee is deceased) as
provided in Section 12(a) below. The price for the Stock upon exercise of the
Purchase Option shall be payable, at the option of the Company, by cancellation
of all or a portion of any outstanding indebtedness of the Employee to the
Company or in cash (by check), or both.
5. APPLICATION TO OTHER PROPERTY. If from time to time during the term
of this Agreement, there is any stock dividend or liquidating dividend of cash
and/or property, stock split or other change in the character or amount of any
of the outstanding securities of the Company, or if there is any consolidation,
merger or sale of all, or substantially all, of the assets of the Company, then,
in any such event, any and all new, substituted or additional securities or
other property to which the Employee is entitled by reason of his ownership of
any Stock which then remains subject to the Purchase Option in Section 2 above
shall be immediately subject to the Purchase Option and shall be included in the
word "Stock" for all purposes of the Purchase Option with the same force and
effect as the Stock which then remains subject to the Purchase Option in Section
2 above. While the total Issue Price for such Stock shall remain the same after
each such event, the Issue Price per unit of Stock (or substituted or additional
property) upon exercise of the Purchase Option shall be appropriately adjusted.
<PAGE> 4
-4-
6. INVESTMENT REPRESENTATIONS; TRANSFER LEGENDS.
(a) In connection with his purchase of the Stock, the Employee hereby
represents and warrants to the Company as follows:
(i) The Employee is purchasing the Stock solely for his own
account for investment and not with a view to or for sale in connection with any
distribution of the Stock or any portion thereof and not with any present
intention of selling, offering to sell or otherwise disposing of or distributing
the Stock or any portion thereof in any transaction other than a transaction
exempt from registration under the Act. The Employee also represents that the
entire legal and beneficial interest of the Stock is being purchased, and will
be held, for the Employee's account only, and neither in whole or in part for
any other person. The Employee either has a pre-existing business or personal
relationship with the Company or its officers, directors or controlling persons
or by reason of the Employee's business or financial experience or the business
or financial experience of the Employee's professional advisors who are
unaffiliated with and who are not compensated by the Company or any affiliate or
selling agent of the Company, directly or indirectly, could be reasonably
assumed to have the capacity to evaluate the merits and risks of an investment
in the Company and to protect the Employee's own interests in connection with
this transaction.
(ii) The Employee has heretofore discussed the Company and its
plans, operations and financial condition with the Company's officers and has
heretofore received all such information as the Employee has deemed necessary
and appropriate to enable the Employee to evaluate the financial risk inherent
in making an investment in the Stock, and the Employee has received satisfactory
and complete information concerning the business and financial condition of the
Company in response to all inquiries in respect thereof.
(iii) The Employee realizes that the purchase of the Stock
will be a highly speculative investment and involves a high degree of risk, and
the Employee is able to hold the Stock for an indefinite period of time and
suffer a complete loss on his investment.
(iv) The Employee understands and acknowledges that:
(I) the sale of the Stock has not been registered
under the Securities Act of 1933 (the "Act"), and the Stock must be held
indefinitely unless subsequently registered under said Act or an
<PAGE> 5
-5-
exemption from such registration is available and the Company is under no
obligation to register the Stock;
(II) the share certificate(s) representing the
Stock will be stamped with the legends specified in this Section; and
(III) the Company will make a notation in its
records of the aforementioned restrictions on transfer and legends.
(IV) The Employee understands that the Stock
constitutes restricted securities within the meaning of Rule 144 promulgated
under the Act; that the exemption from registration under Rule 144 will not be
available in any event for at least two years from the date of purchase and
payment for the Stock, and even then will not be available unless (I) a public
trading market then exists for the Common Stock, (II) adequate information
concerning the Company is then available to the public, and (III) other terms
and conditions of Rule 144 are complied with; and that any sale of the Stock may
be made only in limited amounts in accordance with such terms and conditions.
(v) Without in any way limiting his representations set forth
above, the Employee further agrees that he shall in no event make any
disposition of all or any portion of the Stock unless and until:
(A)(1) there is then in effect a registration statement under
the Act covering such proposed disposition and such disposition is made in
accordance with said registration statement; or, (2)(a) the Employee shall have
notified the Company of the proposed disposition and shall have furnished the
Company with a detailed statement of the circumstances surrounding the proposed
disposition, (b) the Employee shall have furnished the Company with an opinion
of the Employee's counsel to the effect that such disposition will not require
registration of the Stock under the Act, and (c) such opinion of the Employee's
counsel shall have been concurred in by counsel for the Company and the Company
shall have advised the Employee of such concurrence; and,
(B) The Stock proposed to be transferred is no longer subject
to the purchase options set forth herein.
(b) All certificates representing any Stock subject to the
provisions of this Agreement shall have endorsed thereon the following legends:
<PAGE> 6
-6-
(i) "This security may not be sold, assigned, or otherwise
transferred or disposed of except in compliance with the conditions
specified in the Founder Restricted Stock Agreement, dated as of
November 15, 1996, between the Corporation and the holder of this
security, as amended from time to time, a copy of which will be
furnished by the Corporation without charge upon written request."
(ii) "The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or any state
securities laws and neither the securities nor any interest therein may
be offered, sold, transferred, pledged or otherwise disposed of except
pursuant to an effective registration statement under such Act or such
laws or an exemption from registration under said Act or such laws,
which in the opinion of counsel are reasonably satisfactory to counsel
for this corporation, is available."
(iii) Any legend required to be placed thereon by appropriate
Blue Sky officials.
7. DEPOSIT OF SHARES. As security for the Employee's faithful
performance of the terms of this Agreement and to ensure that the Stock will be
available for delivery upon exercise of the Purchase Option as herein provided,
the Employee agrees to deliver to and deposit with the Secretary of the Company
("Escrow Agent"), as Escrow Agent in this transaction, one stock assignment duly
endorsed (with date and number of shares blank) together with the certificate or
certificates evidencing the Stock. Such documents are to be held by the Escrow
Agent during the term of this Agreement and shall be delivered by the Escrow
Agent to the Company on the written notice by the Company to the Escrow Agent
that the Company has exercised the Purchase Option, or in the event this
Agreement terminates without the exercise by the Company of the Purchase Option
as to all of the Stock, the Company shall instruct the Escrow Agent to deliver
to the Employee the portion of such Stock as to which the Purchase Option was
not exercised.
8. TRANSFERS NOT RECOGNIZED. The Company shall not be required (i) to
transfer on its books any shares of Stock which shall have been transferred in
violation of any of the provisions of this Agreement, or (ii) to treat as owner
of such Stock or to accord the right to vote as such owner or to pay dividends
to any transferee to whom such Stock shall have been transferred.
9. RIGHTS AS STOCKHOLDER. Subject to the provisions of Section 7 above,
the Employee shall, during the term of this Agreement, exercise all
<PAGE> 7
-7-
rights and privileges of a stockholder of the Company with respect to the Stock,
including without limitation the right to vote and the right to receive any
dividends payable with respect thereto.
10. TAXES. The Employee acknowledges that an amount equal to the fair
market value of the Stock in excess of the Issue Price shall constitute income
received by the Employee for income tax purposes, and that provision must be
made for income taxes to be withheld by the Company with respect to Stock,
whenever and to the extent that the Company's Purchase Option expires pursuant
to Section 3 of this Agreement, or upon the execution of this Agreement if the
Employee makes an election pursuant to Section 83(b) of the Internal Revenue
Code. The Employee agrees that he will make appropriate provisions for the
collection and payment of such withholding taxes, in whatever manner is
reasonably determined by the Company, including without limitation payment by
the Employee to the Company of cash in the amount of required withholding taxes
or withholding from other compensation due the Employee.
11. MISCELLANEOUS. (a) Any notice hereunder shall be in writing
personally delivered by courier or mailed by registered or certified mail,
postage prepaid, and addressed to the Employee at the address appearing in the
records of the Company or to the Company at its principal executive offices, or
at such other address as may be specified by the Employee or the Company to the
other party by notice given in the manner herein provided. A notice shall be
deemed to have been given and received upon the earlier of (i) three business
days after the date on which it is deposited in the U.S. mails or (ii) receipt
by the party to whom such notice is directed.
(b) No waiver by a party hereto of a breach of any provision
of this Agreement shall be deemed to be a waiver of any preceding or subsequent
breach of the same or any other provision thereof.
(c) The Employee acknowledges that the remedy at law for any
breach of this Agreement will be inadequate, and agrees that the Company shall,
in addition to whatever other remedies it may have, be entitled to injunctive
relief.
(d) This Agreement shall be governed by the laws of The
Commonwealth of Massachusetts (without giving effect to principles of conflicts
or choice of laws of Massachusetts or of any other jurisdiction). Subject to the
terms of the Plan, this Agreement sets forth the entire
<PAGE> 8
-8-
agreement between the parties concerning the subject matter hereof and
supersedes any prior agreements and understandings relating to the subject
matter hereof. No amendment or modification hereof will be effective unless it
is in writing and signed by the parties.
(e) This Agreement shall bind and benefit the parties hereto
and their respective successors and legal representatives and permitted assigns.
(f) If any provision of this Agreement is unenforceable or
illegal, the remainder of this Agreement shall remain in full force and effect.
If any one or more of the provisions contained in this Agreement shall for any
reason be held to be excessively broad as to duration, geographical scope,
activity or subject, such provision shall be construed by limiting and reducing
it so as to be enforceable to the extent compatible with applicable law.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
on the date first above written.
EXCHANGE APPLICATIONS, INC.
By: /s/ Michael J. Feldman
------------------------------
Title: Vice President
-------------------------
/S/ Andrew J. Frawley
---------------------------------
Name of Employee
<PAGE> 1
EXHIBIT 10.8
CONSULTING AGREEMENT
CONSULTING AGREEMENT dated as of March 18, 1997 between Exchange
Applications, Inc., a Delaware corporation (the "COMPANY"), and Exchange
Marketing Group, LLC, a Massachusetts limited liability company ("EMG").
RECITALS
The Company has engaged in the business of, among other things,
providing database marketing strategy and marketing program implementation
consulting services to third parties. The Company is discontinuing such
business. The members and employees of EMG were formerly employees of the
Company that provided such consulting services to third parties on behalf of the
Company. The Company wishes to hereby engage EMG to continue to provide such
consulting services to the Company's existing clients in order to complete the
consulting assignments that the Company has heretofore been engaged by such
persons to provide. EMG is willing to provide such services to such of the
Company's existing clients on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the parties agree as follows:
1. PROVISION OF CONSULTING SERVICES; COMPENSATION.
(a) The Company hereby engages EMG to provide to the persons listed
on SCHEDULE 1 hereto (such persons being collectively referred to as the
"EXISTING CLIENTS") on the Company's behalf, and EMG hereby agrees to provide to
the Existing Clients on the Company's behalf, the database marketing strategy
and marketing program implementation consulting services (database marketing
strategy and marketing program implementation consulting services being referred
to herein as "CONSULTING SERVICES") of the type and scope as the Company has
heretofore been engaged by such persons to provide. The Company shall
concurrently herewith transfer and deliver to EMG all of the Company's records,
files, data and other information and materials with respect to the Existing
Clients that is necessary in connection with EMG's providing Consulting Services
to the Existing Clients as contemplated hereby.
(b) In consideration for providing Consulting Services hereunder, the
Company shall pay to EMG the following amounts:
(i) The sum of $71,400 concurrently herewith, such sum to be
delivered to EMG by the Company on the date hereof in immediately
available funds;
(ii) The sum of $10,000, such sum or portions thereof to be
delivered to EMG by the Company in immediately available funds at such
times and in such portions as the Company shall receive payment of
amounts due from Invesco Funds, Inc. on account of Consulting Services
heretofore provided by the Company to Invesco Funds, Inc.;
<PAGE> 2
(iii) An amount equal to the payments received from each of the
Existing Clients listed on SCHEDULE 1 up to the amount set forth next to
each such Existing Client's name on SCHEDULE 1, plus in each case (i)
additional fees arising from the extension of any of the projects
referenced on SCHEDULE 1 and (ii) an additional amount equal to the
out-of-pocket expenses that EMG incurs in providing Consulting Services
hereunder to such Existing Clients on behalf of the Company, all such
amounts or portions thereof to be delivered to EMG by the Company in
immediately available funds at such times and in such portions as the
Company shall receive such payments.
(c) The Company shall from time to time hereafter promptly upon EMG's
request prepare and send to each of the Existing Clients an invoice in such form
as EMG shall request billing the Existing Clients for the Consulting Services
provided by EMG in accordance with this Agreement up to the amounts set forth on
SCHEDULE 1 and for the out-of-pocket expenses incurred by EMG in providing such
Consulting Services.
(d) The Company shall use its reasonably diligent efforts consistent
with past practices to collect the amounts described in Section 1(a)(iii) from
the Existing Clients and (ii) the $10,000 due to the Company from Invesco Funds,
Inc. as described in Section 1(a)(ii). If the Company is for any reason unable
to collect any such amounts within 90 days of the date of the invoice therefor,
EMG shall have the right, as the Company's agent, to undertake to collect such
amounts in a commercially reasonable manner.
(e) EMG shall reimburse the Company for any out-of-pocket costs and
expenses incurred by the Company in connection with the collection efforts
required by paragraph (d). EMG acknowledges and agrees that EMG shall bear the
risk of non-collection of payments from any Existing Clients or Invesco Funds,
Inc., and that EMG shall not look to the Company for any reimbursement or
indemnification of amounts that Invesco Funds, Inc. or any Existing Client fail
to pay.
2. INDEMNIFICATION.
(a) EMG hereby agrees to indemnify and hold the Company and each of
its directors, officers, agents and representatives harmless from and against
any and all liabilities, demands, claims, losses, actions or causes of action,
suits, amounts paid in settlement actually and reasonably incurred, assessments,
damages, fines, taxes, penalties, costs and expenses, including, without
limitation, reasonable attorney's fees, incurred or suffered by the Company or
any of its directors, officers, agents and representatives arising in connection
with or resulting from any third party claim naming the Company or any of its
directors, officers, agents or representatives as a party and relating to (i)
Consulting Services heretofore or hereafter rendered to the Existing Clients by
or on behalf of the Company with respect to the projects described on SCHEDULE 1
or (ii) any Consulting Services rendered to any person by EMG at any time after
the date hereof.
(b) The Company hereby agrees to indemnify and hold EMG and its
managers, agents and representatives harmless from and against any and all
liabilities, demands, claims, losses, actions or causes of action, suits,
amounts paid in settlement actually and reasonably
-2-
<PAGE> 3
incurred, assessments, damages, fines, taxes, penalties, costs and expenses,
including, without limitation, reasonable attorney's fees, incurred or suffered
by EMG, its managers, agents and representatives, arising in connection with or
resulting from any third party claim naming EMG or any of its managers, agent or
representatives as a party and relating to (i) the Company's products,
including, without limitation, the development, marketing, sale and installation
thereof, and (ii) systems integration and other services (except for Consulting
Services heretofore rendered to the Existing Clients by the Departing Persons
(as hereafter defined) on behalf of the Company with respect to the projects
described on SCHEDULE 1) that the Company has heretofore rendered or may
hereafter render to third parties, including, without limitation, the Existing
Clients.
3. NON-COMPETITION.
(a) EMG hereby covenants and agrees that it will not during the three
year period ending on the third anniversary of the date of this Agreement (such
period being referred to as the "NON-COMPETE PERIOD") compete directly or
indirectly with the Company in the business of developing database marketing
software ("SOFTWARE") or of providing systems integration services (such
businesses being referred to as "COMPANY BUSINESSES") anywhere in the United
States or Canada. Without limiting the generality of the foregoing, EMG shall
not during the Non-Compete Period (1) engage in or have any interest, directly
or indirectly, as owner, partner, member, manager, sales representative,
stockholder, capital investor, lender, lessor, renderer of consultation services
or advice, either alone or in association with others, in Company Businesses,
(2) solicit any Company employees to leave the employ of the Company, (3)
solicit any Company employees to become employees of any other person or entity,
or (4) solicit any customer of the Company with respect to the Company
Businesses. Notwithstanding the foregoing, EMG shall not be prohibited from
holding legally or beneficially up to two percent (2%) of the outstanding shares
of any series or class of securities of any person that engages in Company
Businesses, which securities of such series or class are publicly traded in the
securities markets. Nothing herein shall be deemed to prohibit EMG from
providing Consulting Services to third parties who are engaged in Company
Businesses (such third parties being referred to as "COMPANY COMPETITORS") or
from providing Consulting Services to persons in association with Company
Competitors that are selling to such persons Software or providing to such
persons systems integration services, provided that EMG does not violate Section
4 below. The Company acknowledges that there may be some limited amount of
activity engaged in by EMG incidental to EMG providing Consulting Services that
could be characterized as being part of the Company Businesses, and that such
activities of such scope shall not be prohibited by this Section 3(a).
(b) The Company hereby covenants and agrees that it will not during
the Non-Compete Period compete directly or indirectly with EMG in the business
of providing Consulting Services anywhere in the United States or Canada.
Without limiting the generality of the foregoing, the Company shall not during
the Non-Compete Period (1) engage in or have any interest, directly or
indirectly, as owner, partner, member, manager, sales representative,
stockholder, capital investor, lender, lessor, renderer of consultation services
or advice, either alone or in association with others, in the business of
providing Consulting Services, (2) solicit
-3-
<PAGE> 4
any member or employee of EMG to withdraw as a member of, or leave the employ
of, EMG, (3) solicit any of the members or employees of EMG to become employees
of any other person or entity, or (4) solicit any customer of EMG with respect
to the provision of Consulting Services. Notwithstanding the foregoing, the
Company shall not be prohibited by this Agreement from holding legally or
beneficially up to two percent (2%) of the outstanding shares of any series or
class of securities of any person that engages in the business of providing
Consulting Services, which securities of such series or class are publicly
traded in the securities markets. Nothing herein shall be deemed to prohibit the
Company from selling Software or providing systems integration services to third
parties who are engaged in the business of providing Consulting Services (such
third parties being referred to as "EMG COMPETITORS") or from selling Software
or providing systems integration services to persons in association with EMG
Competitors that are providing Consulting Services to such persons. EMG
acknowledges that there will necessarily be some limited amount of Consulting
Services provided by the Company incidental to the Company Businesses, and that
providing Consulting Services of such scope shall not be prohibited by the
foregoing this Section 3(b).
4. NON-DISCLOSURE. EMG acknowledges that some of its employees have
had access to certain confidential and proprietary information belonging to the
Company relating to the Company Businesses, including inventions, products,
processes, methods, techniques, projects, developments, plans, research data and
computer programs, relating to the following:
- improvements and enhancements to the Value Exchange Business
Model and supporting materials;
- improvements and enhancements to the Customer and Employee Value
Optimization Processes and supporting materials;
- improvements and enhancements to the Segment Investment
Management Workstation concept and ValEx prototype developed by
the Company or Grant & Partners, Inc. ("GPI") and various
supporting materials and proprietary developments of such concept
and prototype developed by the Company;
- the Company's Business Model Benchmarking Survey methodology, all
best practices data and supporting materials;
- reports, presentations, training programs, and software developed
by the Company or improvements and enhancements to such as has
been developed by GIP for its clients or prospects, or for
internal or external publication; and
- the Company's financial data, personnel data, customer and
supplier lists.
All such information shall be referred to herein as "PROPRIETARY
INFORMATION".
-4-
<PAGE> 5
EMG will not disclose any Proprietary Information to others or use the
same for any unauthorized purpose without the written approval of the Company,
unless and until such Proprietary Information has become public knowledge
without fault of EMG or any of its employees. Notwithstanding the foregoing, in
no event shall EMG be prohibited from using any Proprietary Information that has
historically been used by the Departing Persons in engaging in any business
other than Company Businesses.
5. OFFICE SERVICES.
(a) From and after the date hereof, the Company shall make available
to EMG for EMG's use that portion of the Company's office space located at 695
Atlantic Avenue, Boston, Massachusetts together with all associated furnishings,
computer and other equipment that is presently utilized by EMG's members and
employees whom the Company formerly employed (the "DEPARTING PERSONS") and
otherwise commonly designated as the "marketing area", and furnish to EMG in
connection therewith office supplies, telephony, facsimile, e-mail and other
telecommunications services, postage, photocopying facilities and accounting,
receptionist, computer maintenance and clerical services to the same extent that
the Departing Persons have heretofore been furnished such supplies, facilities
and services by the Company in connection with their employment by the Company.
(b) In consideration for the Company's making available to EMG the
office space, furnishings, equipment, supplies, facilities and services
described in Section 4(a) (collectively, all of the foregoing is referred to as
the "OFFICE SERVICES"), EMG shall pay to the Company $10,000 for each calendar
month that EMG shall utilize the Office Services, such amount to be PRO RATED
for any partial month during which EMG shall utilize the Office Services. EMG
shall pay such amount to the Company on the last business day of each calendar
month during which EMG shall utilize the Office Services, with the first such
payment to be made on March 31, 1997 and on the date on which such utilization
ceases.
(c) EMG agrees to utilize the Office Services through December 31,
1997; provided that the Company may terminate the Office Services by giving EMG
not less than 120 days prior written notice of such termination. After December
31, 1997, EMG may cease utilizing the Office Services, or the Company may
terminate the Office Services, by giving the other party not less than 120 days'
prior written notice. The Company and EMG shall share equally the moving costs
incurred by EMG upon EMG's ceasing to utilize the Office Services for any
reason, such costs to include only the actual packing and shipping costs
reasonably incurred in physically transporting EMG's tangible personal property
from the Company's offices to EMG's new location.
6. EFFECTIVE DATE. To the extent not prohibited by applicable law,
this Agreement shall be deemed effective for all tax, accounting and reporting
purposes as of March 1, 1997.
7. LEGAL FEES. The Company shall pay up to $30,000 of the amount of
all legal fees and expenses owing to Edwards & Angell in connection with this
Agreement and the transactions contemplated hereby and related matters.
-5-
<PAGE> 6
8. NOTICES.
(a) All notices, requests, consents and other communications
hereunder shall be in writing and (i) during such time as EMG shall be utilizing
the Office Services, shall be personally delivered to the office of Andrew J.
Frawley, in the case of communications to the Company, and to the office of
Michael J. Feldman, in the case of communications to EMG, and (ii) following
such time as EMG shall cease utilizing the Office Services, shall be personally
delivered or sent by facsimile machine, commercial or U.S. Postal Service
overnight delivery service (provided the sender is able to obtain a receipt upon
delivery thereof) or mailed first-class, registered or certified mail, postage
prepaid:
(i) If to the Company, to it at the following address:
Andrew J. Frawley, President
Exchange Applications, Inc.
695 Atlantic Avenue
Boston, MA 02111
Facsimile No. (617) 443-9143
(ii) If to EMG, to it at the address or facsimile number
provided to the Company for such purpose.
(b) Notices shall be deemed given upon the earlier to occur of the
following: (i) receipt by the party to whom such notice is directed, (ii) if
sent by facsimile machine, at 5 o'clock p.m. eastern time of the day (other than
a Saturday, Sunday or legal holiday in the jurisdiction in which the recipient
of the notice resides) on which such notice is sent, (iii) on the next day
(other than a Saturday, Sunday or legal holiday in the jurisdiction in which the
recipient of the notice resides), if sent by overnight delivery service, or (iv)
on the third day following deposit thereof with the U.S. Postal Service, as
registered mail (return receipt requested) as aforesaid. Each party, by notice
duly given in accordance herewith, may specify a different address for the
giving of any notice hereunder.
-6-
<PAGE> 7
9. WAIVER, AMENDMENT, REMEDIES.
(a) No delay on the part of either party in the exercise of any right,
power, privilege or remedy hereunder shall operate as a waiver thereof, nor
shall any exercise or partial exercise of any such right, power, privilege, or
remedy preclude any further exercise thereof or the exercise of any other right,
power, privilege or remedy.
(b) No amendment to or waiver of any provision of this Agreement, and no
consent to any departure by either party therefrom, shall be effective in any
event unless the same shall be in writing and signed by the party sought to be
charged therewith, and then such amendment, waiver, or consent shall be
effective only in the specific instance, and for the purpose, for which given.
10. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding among the parties hereto and supersedes all prior agreements
and understandings relating to the subject matter hereof.
11. PARTIES IN INTEREST. This Agreement shall inure to the benefit of
and shall be binding upon the parties hereto and their respective successors and
assigns; PROVIDED, HOWEVER, that the provisions of Section 3 shall terminate and
be of no further force or effect upon either (i) the sale of the Company or EMG,
whether by merger, sale of assets, issuance or sale of stock or membership
interests, as the case may be, or otherwise, such that one or more persons
(whether or not they are Company Competitors or EMG Competitors) who are not as
of the date hereof stockholders of the Company or members of EMG hereafter
obtain 50% or more of the voting power or power to direct the management and
disposition of the Company or EMG or (ii) the initial public offering by the
Company of any class or series of its capital stock. No person other than the
parties hereto is intended to be benefited hereby or is entitled to rely hereon.
There are no third-party beneficiaries of this Agreement.
12. ENFORCEABILITY. If any term or provision of this Agreement, or
the application thereof to any person or entity or circumstance, shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or
application to other persons or entities or circumstances, shall not be affected
thereby, and each term and provision hereof shall be enforced to the fullest
extent permitted by law. Without limitation of the foregoing if one or more of
the provisions contained in Section 3 shall for any reason be held to be
excessively broad as to scope, activity or subject so as to be unenforceable at
law, such provision or provisions shall be construed by a court of competent
jurisdiction by limiting and reducing it or them so as to be enforceable to the
maximum extent compatible with the applicable law as it shall then appear.
13. COUNTERPARTS. This Agreement may be executed simultaneously in
one or more counterparts hereof, each of which shall be deemed an original but
all of which together shall constitute one and the same agreement.
14. GOVERNING LAW. This Agreement shall be deemed to be a contract
made under seal and shall be construed in accordance with and governed by the
laws of the Commonwealth
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<PAGE> 8
of Massachusetts (without giving effect to any conflicts or choice of laws
provisions which would cause the application of the domestic substantive laws of
any other jurisdiction).
15. CONSENT TO JURISDICTION (a) THE COMPANY AND EMG EACH HEREBY
CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS AND THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF
MASSACHUSETTS, AS WELL AS TO THE JURISDICTION OF ALL COURTS TO WHICH AN APPEAL
MAY BE TAKEN FROM SUCH COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER
PROCEEDING ARISING OUT OF ANY OF ITS DUTIES ARISING HEREUNDER OR WITH RESPECT TO
THE TRANSACTIONS CONTEMPLATED HEREBY. THE COMPANY AND EMG EACH HEREBY EXPRESSLY
WAIVE ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE, INCLUDING, WITHOUT
LIMITATION, THE INCONVENIENCE OF SUCH FORUM, IN ANY OF SUCH COURTS. IN ADDITION,
THE COMPANY AND EMG EACH CONSENT TO THE SERVICE OF PROCESS BY PERSONAL SERVICE
OR U.S. CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO
SUCH PARTY AT THE ADDRESS PROVIDED HEREIN.
16. WAIVER OF JURY TRIAL.
THE COMPANY AND EMG EACH HEREBY VOLUNTARILY AND IRREVOCABLY WAIVE THEIR
RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION BROUGHT ON OR IN CONNECTION
WITH THIS AGREEMENT OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY.
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<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as of
the day and year first above written.
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
----------------------------------------
Andrew J. Frawley, President
EXCHANGE MARKETING GROUP, LLC
By: /s/ Michael J. Feldman
----------------------------------------
Michael J. Feldman, Manager
-9-
<PAGE> 1
EXHIBIT 10.9
EXECUTION COPY
================================================================================
EXCHANGE APPLICATIONS, INC.
-------------------------------------------------
SECURITIES PURCHASE AGREEMENT
-------------------------------------------------
March 18, 1997
================================================================================
<PAGE> 2
SECURITIES PURCHASE AGREEMENT dated
as March 18, 1997, by and among EXCHANGE
APPLICATIONS, INC., a Delaware corporation
(the "CORPORATION"), GRANT & PARTNERS
LIMITED PARTNERSHIP, a Delaware limited
partnership ("GPLP"), CYRK, INC., a Delaware
corporation ("CYRK"; and together with GPLP,
the "EXISTING INVESTORS"), INSIGHT VENTURE
PARTNERS I, L.P., a Delaware limited
partnership ("IVP I"), GAP COINVESTMENT
PARTNERS, L.P., a New York limited
partnership ("GCP"), WEXFORD INSIGHT LLC, a
Delaware limited liability company
("WEXFORD"; and together with IVP I and GCP,
the "INSIGHT INVESTORS"; and together with
the Existing Investors, the "INVESTORS").
The Corporation desires to sell to each Insight Investor, and each
Insight Investor desires to purchase from the Corporation, shares of the capital
stock of the Corporation, on the terms and subject to the conditions set forth
herein. In addition, the Corporation desires to repurchase from the Existing
Investors, and the Existing Investors desire to sell to the Corporation, the
Subject Indebtedness (as defined below). The Corporation and the Investors are
referred to herein collectively as the "PARTIES."
ACCORDINGLY, in consideration of the representations, warranties,
agreements, covenants and conditions contained in this Agreement, the Parties
hereby agree as follows:
SECTION 1. FILING OF THE CERTIFICATES.
(a) Prior to the Closing (as defined below), the Corporation
shall file with the Secretary of State of the State of Delaware a Certificate of
Amendment, in the form of EXHIBIT A hereto (the "CERTIFICATE OF AMENDMENT"),
pursuant to which its Certificate of Incorporation as in force and effect
immediately prior thereto shall then be amended such that the Conversion Price
(as defined therein) applicable to any outstanding shares of the Corporation's
Series A Convertible Preferred Stock, $.001 par value (the "OLD PREFERRED
STOCK"), shall be fixed at $3.01333.
(b) Prior to the Closing, but after making the filing
described in SECTION 1(a), the Corporation shall file with the Secretary of
State of the State of Delaware an Amended and
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Restated Certificate of Incorporation, in the form of EXHIBIT B hereto (the
"AMENDED AND RESTATED CERTIFICATE"), that, among other things, (i) authorizes
10,544,444 shares of Common Stock, $.001 par value (the "COMMON STOCK"), (ii)
authorizes 5,455,556 shares of Preferred Stock, $.001 par value (the "PREFERRED
STOCK"), of which (A) 2,900,000 shares shall be designated Series A Preferred
Stock (the "SERIES A PREFERRED STOCK"), and (B) 2,555,556 shares shall be
designated Series B Convertible Preferred Stock (the "SERIES B PREFERRED
STOCK"), and (iii) sets forth the terms, designations, powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions, of the Common Stock and the
Preferred Stock.
SECTION 2. AUTHORIZATION AND RESERVATION; ISSUANCE AND SALE;
REPURCHASE; CLOSING.
2.1. AUTHORIZATION AND RESERVATION.
Subject to the terms and conditions hereof, the Corporation has
authorized (i) the issuance of 2,900,000 shares of Series A Preferred Stock (the
"CYRK/GPLP PREFERRED SHARES") to the Existing Investors at the Closing, (ii) the
issuance and sale of 2,555,556 shares of Series B Preferred Stock (the "INSIGHT
PREFERRED SHARES") to the Insight Investors at the Closing, and (iii) the
reservation of an aggregate of 2,555,556 shares of Common Stock (the "RESERVED
SHARES") for issuance upon the conversion of the Insight Preferred Shares.
2.2. ISSUANCE AND SALE OF THE INSIGHT PREFERRED SHARES.
(a) At the Closing, on and subject to the terms and conditions
contained herein, the Corporation shall issue, sell and deliver to IVP I, and
IVP I shall purchase from the Corporation, upon the terms and subject to the
conditions hereinafter set forth, 1,154,775 Insight Preferred Shares for an
aggregate purchase price of $1,807,222.88 in cash (or a purchase price of $1.565
per share).
(b) At the Closing, on and subject to the terms and conditions
contained herein, the Corporation shall issue, sell and deliver to GCP, and GCP
shall purchase from the Corporation, upon the terms and subject to the
conditions hereinafter set forth, 246,006 Insight Preferred Shares for an
aggregate purchase price of $384,999.39 in cash (or a purchase price of $1.565
per share).
(c) At the Closing, on and subject to the terms and conditions
contained herein, the Corporation shall issue, sell and deliver to Wexford, and
Wexford shall purchase from the Corporation, upon the terms and subject to the
conditions hereinafter set forth, 1,154,775 Insight Preferred Shares for an
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aggregate purchase price of $1,807,222.88 in cash (or a purchase price of $1.565
per share).
2.3. REPURCHASE OF THE SUBJECT INDEBTEDNESS
(a) The Parties acknowledge that the aggregate outstanding
indebtedness of the Corporation to the Existing Investors as of the date hereof,
together with accrued interest thereon, is set forth on SCHEDULE 2.3 hereto (the
"SUBJECT INDEBTEDNESS"), which consists of (i) the indebtedness assumed by the
Corporation pursuant to Section 2(b) of the Assignment and Assumption Agreement
dated as of November 15, 1996, between the Corporation and GPLP, (ii) the
indebtedness evidenced by two promissory notes issued by the Corporation to
CYRK, one dated November 15, 1996 and the other dated December 13, 1996 and each
in the original principal amount of $200,000 (collectively, the "CYRK NOTES"),
and (iii) the indebtedness evidenced by a promissory note issued by the
Corporation to GPLP dated November 15, 1996 and in the original principal amount
of $301,260 (the "GPLP NOTE").
(b) At the Closing, on and subject to the terms and conditions
contained herein, the Corporation shall repurchase from GPLP, and GPLP shall
sell to the Corporation, all of the Subject Indebtedness set forth on SCHEDULE
2.3 as being owed to GPLP by the Corporation, in exchange for the issuance and
delivery by the Corporation to GPLP, and the receipt by GPLP from the
Corporation, of 377,408 CYRK/GPLP Preferred Shares.
(c) At the Closing, on and subject to the terms and conditions
contained herein, (i) the Corporation shall pay to CYRK in cash $1,000,000 to be
applied (A) FIRST, against the accrued and unpaid interest constituting the
amount of the Subject Indebtedness set forth on SCHEDULE 2.3 as being owed to
CYRK by the Corporation, and (B) SECOND, against the outstanding principal
amount of the Subject Indebtedness set forth on SCHEDULE 2.3 as being owed CYRK
by the Corporation and (ii) the Corporation shall repurchase from CYRK, and CYRK
shall sell to the Corporation, all of the remaining Subject Indebtedness set
forth on SCHEDULE 2.3 as being owed to CYRK by the Corporation, in exchange for
the issuance and delivery by the Corporation to CYRK, and the receipt by CYRK
from the Corporation, of 2,522,592 CYRK/GPLP Preferred Shares.
(d) The Corporation's payment of $1,000,000 to CYRK as
described in SECTION 2.3(c)(i) and its issuance and delivery of the CYRK/GPLP
Preferred Shares to the Existing Investors, in each case at the Closing pursuant
to this SECTION 2, shall be in full satisfaction and payment of any and all
obligations or liabilities of the Corporation with respect to the Subject
Indebtedness and, upon such issuance, delivery and payment, the Subject
Indebtedness shall be deemed to be discharged and satisfied in full.
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<PAGE> 5
2.4. DELIVERIES AT CLOSING.
(a) At the Closing, the Corporation shall deliver to each
Insight Investor stock certificates representing the Insight Preferred Shares
being acquired by such Insight Investor at the Closing, registered in the name
of such Insight Investor, against receipt by the Corporation of a certified or
official bank check payable to the Corporation or a wire transfer of immediately
available funds to an account designated by the Corporation in an aggregate
amount equal to the purchase price for the Insight Preferred Shares being
purchased by such Insight Investor hereunder.
(b) At the Closing, (i) the Existing Investors shall (A)
deliver to the Corporation the CYRK Notes and the GPLP Note, each of which shall
have been marked "PAID IN FULL" prior to such delivery, and (B) execute and
deliver to the Corporation the Pay-off Agreement dated as of the Closing Date by
and among the Corporation, GPLP and CYRK (the "PAY-OFF AGREEMENT"),
substantially in the form of EXHIBIT C hereto, against (ii) receipt by (A) the
Existing Investors of stock certificates delivered by the Corporation
representing the CYRK/GPLP Preferred Shares being acquired by the Existing
Investors at the Closing and (B) CYRK of certified or official bank checks or
wire transfers of immediately available funds to an account designated by CYRK
in the aggregate amount of $1,000,000.
2.5. CLOSING.
The closing (the "CLOSING") hereunder with respect to the issuance,
sale and delivery of the Insight Preferred Shares and the issuance and delivery
of the CYRK/GPLP Preferred Shares and the consummation of the related
transactions contemplated by this Agreement and the Related Agreements shall,
subject to the satisfaction or waiver of the conditions set forth in SECTIONS 6
and 7, take place at the offices of O'Sullivan Graev & Karabell, LLP, 30
Rockefeller Plaza, New York, New York 10112 on a business day (the "CLOSING
DATE") designated by the Corporation, IVP I and CYRK, which date shall be no
later than five Business Days after the date on which all such conditions shall
have been satisfied to the satisfaction of, or otherwise waived by, the Parties
whose obligations are subject thereto. As used in this Agreement, the term
"BUSINESS DAY" means any day that is not a Saturday, Sunday, legal holiday or
other day on which banks are required to be closed in New York, New York or
Boston, Massachusetts.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.
The Corporation hereby represents and warrants to the Investors as set
forth in the following SECTIONS 3.1 through 3.5 and to the Insight Investors as
set forth in the following SECTIONS 3.6 through 3.25:
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<PAGE> 6
3.1. ORGANIZATION; GOOD STANDING; QUALIFICATIONS.
(a) The Corporation is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Delaware and has
all requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business as now being conducted. The
Corporation has all requisite corporate power and authority to enter into this
Agreement and the Related Agreements to which it is a party, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The Corporation is duly qualified and in good
standing to do business in the Commonwealth of Massachusetts and every
jurisdiction in which such qualification is necessary because of the nature of
the property owned, leased or operated by it or the nature of the business
conducted by it therein, except where the failure to so qualify would not have a
material adverse effect (a "MATERIAL ADVERSE EFFECT") on the business,
operations, assets, condition (financial or otherwise), operating results,
liabilities, employee relations or business prospects of the Corporation and its
Subsidiaries (if any) taken as a whole (each of which jurisdictions is listed on
SCHEDULE 3.1 hereto). The Corporation has not conducted its business under any
fictitious or other names except those names listed on SCHEDULE 3.1. True and
complete copies of the Corporation's Certificate of Incorporation and By-Laws,
in each case as amended to and in effect on the date hereof, are attached hereto
as SCHEDULE 3.1.1 hereto and SCHEDULE 3.1.2 hereto, respectively. The
Corporation has in all material respects performed all of the obligations
required to be performed by it to date under its Certificate of Incorporation
and By-Laws, in each case as amended to and in effect on the date hereof, and
there exists no default, or any event which upon the giving of notice or the
passage of time, or both, would give rise to a claim of a default in the
performance by the Corporation of its obligations thereunder.
(b) As used herein, the term "GOVERNMENTAL AUTHORITY" means
any court, department, commission, board, bureau, agency or commission or other
governmental authority or instrumentality, domestic or foreign, federal, state
or local; the term "ORDER" means any judgments, writs, decrees, injunctions,
orders, compliance agreements or settlement agreements of any Governmental
Authority; and the term "LAWS" means federal, state, local or foreign laws,
statutes, rules, directives, ordinances requirements, regulations and Orders of
any Governmental Authority.
3.2. AUTHORITY OF THE CORPORATION.
(a) The execution, delivery and performance of this Agreement
and the Related Agreements to which the Corporation is a party and the
consummation by the Corporation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary action on the
part of the
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<PAGE> 7
Corporation and its stockholders, and this Agreement and the Related Agreements
to which the Corporation is a party have been duly and validly executed by the
Corporation and are valid and binding obligations of the Corporation,
enforceable in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
similar Laws now or hereafter in effect, public policy and general principles of
equity. The execution, delivery and performance of this Agreement and the
Related Agreements to which the Corporation is a party, the consummation by the
Corporation of the transactions contemplated hereby and thereby, including the
reservation, issuance, sale and delivery, as the case may be, of the GPLP Common
Shares (as defined below), CYRK/GPLP Preferred Shares, the Insight Preferred
Shares and the Reserved Shares, and the compliance by the Corporation with all
of the provisions hereof and thereof shall not (i) conflict with or result in a
breach of any provision of the Certificate of Incorporation or By-Laws of the
Corporation, in each case as amended to and in effect on the date hereof, (ii)
cause a default or give rise to any right of termination, cancellation or
acceleration (whether upon the giving of notice or the lapse of time or both)
under any of the terms, conditions or provisions of any note, bond, lease,
mortgage, indenture, license or other instrument or agreement to which the
Corporation is a party or by which the Corporation or any of its properties or
assets is or may be bound or affected, except where such defaults, terminations,
cancellations or accelerations taken as a whole would not have a Material
Adverse Effect on the Corporation and its Subsidiaries (if any) taken as a
whole, or (iii) violate any Law applicable to the Corporation or any of its
properties or assets. As used herein, the term "PERSON" shall be construed
broadly and shall include an individual, corporation, association, partnership,
joint venture or entity, organization or Governmental Authority; and the term
"SUBSIDIARY" means any Person (other than a natural Person) with respect to
which a specified Person (or a Subsidiary thereof) has the power to vote or
direct the voting of sufficient securities to elect a majority of the board of
directors or similar governing body.
3.3. AUTHORIZATION OF PREFERRED SHARES AND RESERVED SHARES.
The reservation, issuance, sale and delivery, as the case may be, of
the GPLP Common Shares, the CYRK/GPLP Preferred Shares, the Insight Preferred
Shares and the Reserved Shares have been duly authorized by all requisite board,
stockholder and other corporate action on the part of the Corporation. As of the
Closing, the GPLP Common Shares, the CYRK/GPLP Preferred Shares and the Insight
Preferred Shares, and, upon their issuance in accordance with the Amended and
Restated Certificate, the Reserved Shares, shall be validly issued and
outstanding, fully paid and nonassessable, with no personal liability attaching
to the ownership thereof, and, except as contemplated by the Related Agreements,
not subject to any Encumbrances or any preemptive
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<PAGE> 8
rights, rights of first refusal or other similar rights of the stockholders of
the Corporation.
3.4. NO CONSENT OR APPROVAL REQUIRED.
No consent or approval by, or any notification of or filing with, any
Person (governmental or private) is required in connection with the execution,
delivery and performance by the Corporation of this Agreement and the Related
Agreements to which the Corporation is a party or the consummation by the
Corporation of the transactions contemplated hereby and thereby, including the
valid reservation, issuance, sale and delivery, as the case may be, of the GPLP
Common Shares, the CYRK/GPLP Preferred Shares, the Insight Preferred Shares and
the Reserved Shares, except for stockholder approval of the filings of the
Certificate of Amendment and the Amended and Restated Certificate as described
in SECTION 1, the filing of any notices subsequent to the Closing that may be
required under applicable Federal or state securities Laws (which notices shall
be filed on a timely basis following the Closing as so required) and those other
consents, approvals, notifications and filings set forth on SCHEDULE 3.4 hereto,
which, except as otherwise set forth on SCHEDULE 3.4, have been made or will be
obtained prior to the Closing.
3.5. CAPITALIZATION.
(a) Immediately upon the consummation at the Closing of
the transactions contemplated by this Agreement, the authorized capital stock of
the Corporation shall consist of:
(i) 10,544,444 shares of Common Stock, of which:
(A) 3,867,750 shares shall be validly issued
and outstanding, fully paid and nonassessable, with no personal
liability attaching to the ownership thereof;
(B) 2,555,556 shares shall be duly reserved
for issuance upon conversion of the Series B Preferred Stock; and
(C) 1,848,388 shares shall be duly reserved
for issuance upon the grant of such shares, or the exercise of options
granted therefor, pursuant to the 1996 Stock Incentive Plan of the
Corporation, as amended to and in effect on the Closing Date; and
(ii) 5,455,556 shares of Preferred Stock, of
which:
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(A) 2,900,000 shall have been duly
designated as Series A Preferred Stock, all of which shares shall have
been validly issued and shall be outstanding, fully paid and
nonassessable, with no personal liability attaching to the ownership
thereof; and
(B) 2,555,556 shares shall have been duly
designated as Series B Preferred Stock, all of which shares shall have
been validly issued and shall be outstanding, fully paid and
nonassessable, with no personal liability attaching to the ownership
thereof; and
all such outstanding shares in each case being owned of record by the Persons
identified on SCHEDULE 3.5 hereto in the amounts set forth thereon.
(b) SCHEDULE 3.5 contains a list, as of the date hereof and
assuming the consummation at the Closing of all transactions contemplated by
this Agreement and the Related Agreements, of all outstanding warrants, options,
agreements, convertible securities or other commitments pursuant to which the
Corporation or, to the Best Knowledge of the Corporation, any stockholder
thereof is or may become obligated to issue, sell or otherwise transfer any
shares of capital stock or other securities of the Corporation, which list names
all Persons entitled to receive such shares or other securities, indicates
whether or not such securities are entitled to any anti-dilution or similar
adjustments upon the issuance of additional securities of the Corporation or
otherwise and sets forth the shares of capital stock or other securities
required to be issued thereunder (calculated after giving effect to all such
anti-dilution and other similar adjustments resulting from the issuance of the
GPLP Common Shares, the CYRK/GPLP Preferred Shares and the Insight Preferred
Shares and the consummation of the transactions contemplated by this Agreement
and the Related Agreements).
(c) Except as set forth on SCHEDULE 3.5 or as contemplated by
the Related Agreements, immediately upon consummation at the Closing of the
transactions contemplated by this Agreement and the Related Agreements,
including the delivery of each of the instruments described in SECTIONS 6 and 7,
there shall be, (i) no preemptive or similar rights to purchase or otherwise
acquire any shares of the capital stock or other securities of the Corporation
pursuant to any provision of Law, the Corporation's Certificate of Incorporation
or By-Laws, in each case as amended to and in effect on the date hereof, or any
agreement to which the Corporation or, to the Best Knowledge of the Corporation,
any stockholder thereof is a party; and (ii) with respect to the sale or voting
of any shares of capital stock or other securities of the Corporation (whether
outstanding or issuable upon the conversion, exercise or exchange of outstanding
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securities), no Encumbrance or other restriction (such as a right of first
refusal, right of first offer, proxy, voting trust, voting agreement, etc.),
except, in the case of shares of Common Stock previously issued to officers,
directors and employees of the Corporation, in favor of the Corporation. As used
herein, the term "ENCUMBRANCES" means any of the following: security interests,
liens, pledges, claims, charges, escrows, encumbrances, options, rights of first
refusal, mortgages, indentures, security agreements, judgments, or other
agreements, arrangements, contracts, commitments, understandings or obligations,
whether written or oral and whether or not relating in any way to credit or the
borrowing of money.
(d) All shares of the capital stock and other securities
issued by the Corporation prior to the Closing have been issued in transactions
exempt from registration under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and the rules and regulations promulgated thereunder and all
applicable state securities or "BLUE SKY" Laws. The Corporation has not violated
the Securities Act or any applicable state securities or "BLUE SKY" Laws in
connection with the issuance of any shares of capital stock or other securities
prior to the Closing.
3.6. EQUITY INVESTMENT.
The Corporation has never owned, nor does it presently own, any capital
stock or other equity interest in any corporation, association, trust,
partnership, joint venture or other Person.
3.7. FINANCIAL STATEMENTS.
(a) SCHEDULE 3.7 hereto contains the following financial
statements: the audited balance sheet (the "LATEST BALANCE Sheet") of the
Corporation dated as of December 31, 1996 (the "LATEST BALANCE SHEET DATE") and
the related audited statements of income, retained earnings and cash flows for
the fiscal year ended December 31, 1996, together with the accompanying
supplementary information and report of the auditor thereof (collectively, the
"FINANCIAL STATEMENTS").
(b) Each of the Financial Statements (A) has been prepared in
accordance with the books and records of the Corporation (which have been
maintained in accordance with good business practices and are true and complete,
in each case in all material respects), (B) is materially true and correct, (C)
fairly presents the financial condition, results of income, retained earnings
and cash flow which it purports to present as of the date thereof and for the
periods indicated thereon and (D) except as described therein or in the
footnotes thereto, has been prepared in accordance with United States generally
accepted accounting principles consistently applied ("GAAP") throughout the
periods covered thereby. Except as set forth in the
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Financial Statements or in the footnotes thereto or as required by applicable
Law or GAAP, there has been no change in (i) any accounting principle, procedure
or practice followed by the Corporation or (ii) the method of applying any such
principle, procedure or practice.
3.8. ABSENCE OF UNDISCLOSED LIABILITIES AND OBLIGATIONS.
The Corporation has no liabilities or obligations on the date hereof
not disclosed on or reflected in the Latest Balance Sheet, except for (i)
liabilities or obligations incurred after the Latest Balance Sheet Date in the
ordinary course of business consistent with past practice (none of which relates
to any breach of contract, default, breach of warranty, tort, infringement,
violation of Law or Proceeding) none of which has had, or is reasonably likely
to have, a Material Adverse Effect on the Corporation and its Subsidiaries (if
any) taken as a whole, (ii) liabilities or obligations which would not be
required to be disclosed on or reflected in a balance sheet prepared in
accordance with GAAP on the date hereof, and (iii) liabilities or obligations
incurred after the Latest Balance Sheet Date and set forth on SCHEDULE 3.8
hereto. All reserves set forth on the Latest Balance Sheet were adequate for the
purposes indicated therein at the Latest Balance Sheet Date, and, to the Best
Knowledge of the Corporation, continue to be adequate for the purposes indicated
therein as of the date hereof. There are no "LOSS CONTINGENCIES" (as such term
is used in Statement of Financial Accounting Standards No. 5 issued by the
Financial Accounting Standards Board in March 1975) that are not adequately
provided for on the Latest Balance Sheet.
3.9. EVENTS SUBSEQUENT TO THE LATEST BALANCE SHEET.
(a) Except as set forth on SCHEDULE 3.9 hereto and the
transactions contemplated by this Agreement and the Related Agreements, since
the Latest Balance Sheet Date, the Corporation has been operated in the ordinary
course of business consistent with past practice and there has not been:
(i) any material adverse change in the condition (financial or
otherwise), assets, liabilities, operations, earnings, business or
prospects of the Corporation;
(ii) any obligation, liability or indebtedness (whether
absolute, accrued, contingent or otherwise and whether due or to become
due) in excess of $10,000 incurred, or any transaction, contract or
commitment entered into, amended or terminated, with respect to the
Corporation, other than items incurred or entered into on an arms' length
basis in the ordinary course of business of the Corporation and consistent
with past practice;
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(iii) any acceleration, payment, discharge or satisfaction by
the Corporation of any liability, obligation, claim, lien or encumbrance
(whether fixed or contingent, matured or unmatured) in excess of $10,000,
except on an arms' length basis in the ordinary course of business and
consistent with past practice;
(iv) any declaration, setting aside or payment of any dividend
or other distribution with respect to any shares of capital stock of the
Corporation, or any direct or indirect redemption, purchase or other
acquisition of any thereof, or any other payments of any nature to any
Affiliate of the Corporation whether or not on or with respect to the any
shares of capital stock of the Corporation owned by such Affiliate;
(v) any issuance or sale, or any contract entered into for the
issuance or sale, of any shares of capital stock of the Corporation or
securities convertible into or exercisable or exchangeable for such capital
stock, except commitments by the Corporation to employees thereof to issue
options to purchase shares of Common Stock pursuant to the Corporation's
1996 Stock Incentive Plan, as set forth in the offer letters from the
Corporation to such employees copies of which have been delivered by the
Corporation to the Insight Investors;
(vi) any license, sale, transfer, pledge, mortgage, or other
disposition of any tangible or intangible asset of the Corporation, except
on an arms' length basis in the ordinary course of business and consistent
with past practice;
(vii) any extraordinary increase in the compensation paid or
payable to any stockholder, director, officer, employee, agent or Affiliate
of, or consultant to, the Corporation, or any loan to any of the foregoing
Persons, or any agreement or commitment therefor (other than advances to
such Persons in the ordinary course of business consistent with past
practice in connection with travel and travel-related expenses);
(viii) any change in the Tax or other accounting methods or
practices followed by the Corporation or any change in depreciation or
amortization policies or rates previously adopted;
(ix) any damage, destruction or loss (whether or not covered
by insurance) in excess of $10,000 affecting any asset or property of the
Corporation; or
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(x) any agreement, whether in writing or otherwise, to take any of
the actions specified in the foregoing CLAUSES (ii) through (viii).
(b) As used herein, the term "AFFILIATE" means a Person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, any other Person.
3.10. TITLE TO ASSETS, PROPERTIES AND RIGHTS.
The Corporation has good and marketable title to all the properties and
interests in properties and assets, whether personal or mixed, reflected as
being owned by the Corporation on the Latest Balance Sheet or acquired
subsequent thereto (except for those properties or interests subsequently
disposed of in the ordinary course of business), free and clear of all
Encumbrances, except for (i) those Encumbrances set forth on SCHEDULE 3.10
hereto, (ii) liens for current taxes, assessments and other governmental charges
not yet due and payable or being contested in good faith by appropriate
proceedings and for which there are adequate reserves on the books and records
of the Corporation, and (iii) mechanics', landlord's, materialman's, supplier's,
vendor's or similar liens arising in the ordinary course of business securing
amounts that are not delinquent. The assets, properties and rights of the
Corporation reflected as being owned on the Latest Balance Sheet or acquired
after the date thereof or leased for use by the Corporation are in all material
respects in good operating condition and repair (normal wear and tear excepted),
are suitable in all material respects for the uses for which they are used in
the Corporation's business, are not subject to any condition which interferes
with the use thereof in any material respect, and constitute all assets,
properties and rights necessary to permit the Corporation to carry on its
business after the Closing as generally conducted by the Corporation prior
thereto.
3.11. INTELLECTUAL PROPERTY.
(a) Except as set forth on SCHEDULE 3.11 hereto:
(i) the Corporation owns, has the right to use, sell,
license and dispose of, and has the right to bring actions for the
infringement of, all Intellectual Property Rights necessary or required for
the conduct of the business of the Corporation (collectively, the "OWNED
REQUISITE RIGHTS"), other than those Intellectual Property Rights for which
the Corporation has a valid license (collectively, the "LICENSED REQUISITE
RIGHTS"; and together with the Owned Requisite Rights, the "REQUISITE
RIGHTS");
(ii) the Requisite Rights are sufficient in all
material respects for the conduct of the business of the
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Corporation as currently conducted or as contemplated to be conducted;
(iii) to the Best Knowledge of the Corporation, there
are no royalties, honoraria, fees or other payments payable by the
Corporation to any Person by reason of the ownership, use, license, sale or
disposition of the Requisite Rights;
(iv) to the Best Knowledge of the Corporation, no
activity, service or procedure currently conducted or proposed to be
conducted by the Corporation violates or shall violate any contract,
instrument, license, commitment, lease or similar document of the
Corporation with any third Person relating to any Intellectual Property
Rights, or infringe any Intellectual Property Rights of any other Person;
(v) the Corporation has taken reasonable and
practicable steps (including, without limitation, entering into
confidentiality and nondisclosure agreements with all officers, directors
and employees of and consultants to the Corporation and other Persons with
access to or knowledge of confidential information of the Corporation)
designed to safeguard and maintain (i) the secrecy and confidentiality of
confidential information of the Corporation and (ii) the proprietary rights
of the Corporation in all Requisite Rights;
(vi) to the Best Knowledge of the Corporation, the
Corporation has not interfered with, infringed upon, misappropriated or
otherwise come into conflict in any material respect with any Intellectual
Property Rights of any Person or committed any acts of unfair competition,
and the Corporation has not received from any Person any written notice,
charge, complaint, claim or assertion thereof, and no such claim is
impliedly threatened by an offer to license from another Person under a
claim of use; and
(vii) the Corporation has not sent to any Person or
otherwise communicated to any Person, any written notice, charge,
complaint, claim or other assertion of any present, impending or threatened
infringement by or misappropriation of, or other conflict with, any
Intellectual Property Rights of the Corporation by such other Person or any
acts of unfair competition by such other Person with respect to the
Corporation, nor, to the Best Knowledge of the Corporation, is any such
infringement, misappropriation, conflict or act of unfair competition
occurring or threatened.
(b) SCHEDULE 3.11 contains a true and complete list of
all applications, filings and registrations pursuant to
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any Laws and any licenses made, taken or obtained by the Corporation, in each
case to acquire, perfect, or protect its interest in its Intellectual Property
Rights, including, without limitation, all patents, patent applications,
trademarks, trademark applications, servicemarks and servicemark applications.
(c) As used herein, the term "INTELLECTUAL PROPERTY RIGHTS"
means all industrial and intellectual property rights, including, without
limitation, patents, patent applications, patent rights, trademarks, trademark
applications, tradenames, servicemarks, servicemark applications, copyrights,
know-how, trade secrets, proprietary processes and formulae, confidential
information, franchises, licenses, inventions, trade dress and logos.
(d) To the Best Knowledge of the Corporation, the
Corporation's VALEX software product shall function without any material
interruption or required updates caused by the necessity to compare date
information prior to and after the change of the century (PROVIDED, HOWEVER, no
representation or warranty is being made by the Corporation pursuant to this
SECTION 3.11(d) as to any operating system on which the VALEX software product
may be used or any component part of the VALEX software product not developed by
the Corporation).
3.12. DIRECTORS, OFFICERS, EMPLOYEES AND CONSULTANTS.
Except as set forth on SCHEDULE 3.12 hereto, to the Best Knowledge of
the Corporation, no third party has asserted or threatened to assert any valid
claim against the Corporation or any present stockholder, director, officer or
employee of, or consultant to, the Corporation, involving (i) the employment by,
or association with, the Corporation, of any of the foregoing Persons or (ii)
the use, in connection with the business of the Corporation or any of the
foregoing Persons of any information which the Corporation or any such Persons
would be prohibited from using under any prior agreements or arrangements or any
legal considerations applicable to unfair competition, trade secrets or
proprietary information.
3.13. ERISA PLANS AND CONTRACTS.
(a) The Corporation does not maintain nor is it a party to (or
ever maintained or was a party to) any "EMPLOYEE WELFARE BENEFIT PLAN", as
defined in Section 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or any other written, unwritten, formal or informal plan
or agreement involving direct or indirect compensation other than workers'
compensation, unemployment compensation and other government programs, under
which the Corporation has any present or future obligation or liability. The
Corporation does not maintain nor is it a party to (or ever maintained or was a
party to) any "EMPLOYEE PENSION BENEFIT PLAN", as defined in Section
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3(2) of ERISA, and the Corporation does not contribute to any "MULTIEMPLOYER
PLAN" as defined in Section 3(37) of ERISA.
(b) There is no contract, agreement, plan or arrangement
covering any employee or former employee of the Corporation that, individually
or collectively, could give rise to the payment of any amount that would not be
deductible by reason of Section 280G of the Internal Revenue Code of 1986, as
amended (the "CODE") (other than potentially on the acceleration of stock
options or the vesting of restricted stock upon a change of control).
3.14. AGREEMENTS, ETC.
(a) SCHEDULE 3.14 hereto contains a true and complete
list and brief description of all contracts, agreements, commitments and other
instruments (whether written or oral) to which the Corporation is a party (other
than this Agreement and the Related Agreements) and (x) which were entered into
or made outside the ordinary course of business or (y) which were entered into
or made in the ordinary course of business and are described in CLAUSES (i)
through (xvi) of this SECTION 3.14. Except as set forth on SCHEDULE 3.14, the
Corporation is not a party to any of the following, whether written or oral:
(i) distributorship, dealer, sales, advertising,
agency, manufacturer's representative or other contract relating to the
payment of aggregate commissions in excess of $10,000;
(ii) contract for the future purchase of products,
equipment or services which is not terminable by the Corporation without
aggregate cost, forfeiture or other liability in excess of $30,000
individually or $100,000 in the aggregate for all such contracts;
(iii) contract or commitment for the employment of
any officer, employee or consultant or any other type of contract or
understanding with any officer, employee or consultant relating to the
payment of aggregate consideration or severance in excess of $50,000 (other
than the Employment Agreement dated as of November 15, 1996, between the
Corporation and Andrew J. Frawley and offer letters from the Corporation to
employees thereof (which are listed on SCHEDULE 3.14 and copies of which
have been delivered by the Corporation to the Insight Investors);
(iv) formal or informal profit sharing, bonus, stock
option, pension, retirement, disability, stock purchase, hospitalization,
insurance or similar plan or agreement providing benefits to any current or
former director, officer, employee or consultant, whether or not subject to
ERISA;
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(v) indenture, mortgage, promissory note, loan
agreement, pledge agreement, guarantee or other agreement or commitment for
the borrowing of money, for a line of credit or for a leasing transaction
of a type required to be capitalized in accordance with Statement of
Financial Accounting Standards No. 13 of the Financial Accounting Standards
Board;
(vi) contract or commitment for capital expenditures
in excess of $10,000 (excluding contracts or commitments for the purchase
of office equipment and personal computers in the ordinary course of
business);
(vii) agreement or arrangement for the sale of any
assets, properties or rights other than the sale of services or products in
the ordinary course of business;
(viii) lease or other agreement pursuant to which it
is a lessee of or holds or operates any machinery, equipment, motor
vehicles, office furniture, fixtures, products, merchandise or similar
personal property owned by any other Person;
(ix) contract with respect to the lending or
investing of funds in excess of $10,000;
(x) confidentiality or nondisclosure contract with
any Person (other than an Investor) who or which has (i) made or proposed
to make a financial investment in the Corporation in order to receive from
the Corporation goods, services, technology, expertise or other value in
addition to a monetary return on any such financial investment or (ii)
proposed to acquire the Corporation through a Sale of the Corporation (as
defined in the Stockholders Agreement);
(xi) contract or commitment to issue or sell any
securities of the Corporation (excluding any offer letter from the
Corporation to an employee thereof a copy of which has been delivered by
the Corporation to the Insight Investors);
(xii) contract which restricts the Corporation from
engaging in any aspect of its business anywhere in the world;
(xiii) contract or group of related contracts with
the same Person (excluding purchase orders entered into in the ordinary
course of business which are to be completed within three months of
entering into such purchase orders) for the purchase or sale of products or
services under which the undelivered balance of such products and services
has a selling price in excess of $10,000;
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(xiv) contract (x) that is not terminable by either
party thereto without penalty upon not more than 30 days' advance notice
and involves aggregate consideration in excess of $20,000 or (y) that
involves aggregate consideration in excess of $25,000 (excluding in the
case of CLAUSES (x) and (y) above any purchase order entered into in the
ordinary course of business which is to be completed within six months of
entering into such purchase order);
(xv) contract with any Affiliate of the Corporation;
or
(xvi) other contract material to the business of the
Corporation.
(b) To the Best Knowledge of the Corporation, all items
listed on SCHEDULE 3.14 are in full force and effect, constitute legal, valid
and binding obligations of the respective parties thereto, and are enforceable
in accordance with their respective terms. The Corporation has in all material
respects performed all of the obligations required to be performed by it to
date, and there exists no default, or any event which upon the giving of notice
or the passage of time, or both, would give rise to a claim of a default in the
performance by the Corporation or any other party to any of the foregoing of
their respective obligations thereunder, except where such actual or potential
default has not had, and in the future is not reasonably likely to have, a
Material Adverse Effect on the Corporation and its Subsidiaries (if any) taken
as a whole. The Corporation has previously furnished to the Insight Investors
true, complete and correct copies of all written items listed on SCHEDULE 3.14
and SCHEDULE 3.14 contains complete descriptions of all oral items listed on
SCHEDULE 3.14. No consent or approval by, or any notification or filing with,
any party to any of the agreements listed on SCHEDULE 3.14 is required in
connection with the execution, delivery and performance by the Corporation of
this Agreement or any of the Related Agreements or the consummation by the
Corporation of the transactions contemplated hereby or thereby, except for those
consents, approvals, notifications or filings set forth on SCHEDULE 3.14, which,
except as set forth on SCHEDULE 3.14, have been or shall be made or obtained
prior to the Closing.
3.15. COMPLIANCE; GOVERNMENTAL AUTHORIZATIONS.
(a) The Corporation (i) has complied with, and is in
compliance with, in all respects all Laws (including all Environmental and
Safety Requirements) applicable to it and its business (including, but not
limited to, any and all Laws relating in any manner to the environment or the
generation, treatment, storage, recycling, transportation, release or disposal
of any materials into the environment), except where such noncompliance has not
had, and is reasonably likely not to have, a Material Adverse Effect on the
Corporation and its
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Subsidiaries (if any) taken as a whole, and (ii) has all federal, state, local
and foreign governmental licenses and permits (collectively, "PERMITS") used or
necessary in the conduct of its business. Such Permits are in full force and
effect, no violations with respect to any thereof have occurred or are or have
been recorded, no Proceeding is pending or, to the Best Knowledge of the
Corporation, threatened to revoke or limit any thereof. SCHEDULE 3.15 hereto
contains a true and complete list of (i) all such Permits and (ii) all Orders
under which the Corporation is operating or bound. The Corporation has performed
in all material respects all of the obligations required to be performed by it
to date under all applicable Laws, Permits and Orders, and there exists no
condition, or any event which upon the giving of notice or the passage of time,
or both, would constitute a violation of any of such Laws, Permits or Orders,
except where such violation is not reasonably likely to have a Material Adverse
Effect on the Corporation and its Subsidiaries (if any) taken as a whole.
(b) The Corporation is not responsible, or potentially
responsible, for the remediation or cost of remediation of wastes, substances or
materials at, on or beneath any facilities or at, on or beneath any land
adjacent thereto or in connection with any site or location, wherever located
(including any well, tank, pit, sump, pond, lagoon, tailings pile, spoil pile,
impoundment, ditch, trench, drain, landfill, warehouse or waste storage
container), where pollutants, contaminants or hazardous or toxic wastes,
substances or materials have been deposited, stored, treated, reclaimed,
disposed of, placed or otherwise come to be located. The Corporation is not
liable, directly or indirectly, in connection with any release by it of
hazardous substance into the environment nor do there exist any facts upon which
a finding of such liability could be based.
(c) As used herein, the term "ENVIRONMENTAL AND SAFETY
REQUIREMENTS" means all Laws (including, but not limited to, common law), and
all contractual obligations concerning public health and safety, worker health
and safety, and pollution or protection of the environment, including, without
limitation, all those relating to the presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution, labeling,
testing, processing, discharge, release, threatened release, control, or cleanup
of any hazardous materials, substances or wastes, chemical substances or
mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum
products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation,
including, but not limited to, the Solid Waste Disposal Act, as amended, the
Clean Air Act, as amended, 42 U.S.C. ss. 7401 et seq., the Federal Water
Pollution Control Act, as amended, 33 U.S.C. ss. 1251 et seq., the EmergencY
Planning and Community Right-to-Know Act, as amended, 42 U.S.C. ss. 11001 et
seq., the Comprehensive Environmental Response, Compensation, and Liability Act,
as amended, the Hazardous Materials Transportation Uniform Safety Act, as
amended, 49 U.S.C. ss. 1804 et seq., the
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<PAGE> 20
Occupational Safety and Health Act oF 1970, as amended, and the rules and
regulations promulgated thereunder.
3.16. LABOR RELATIONS; EMPLOYEES.
Except as set forth on SCHEDULE 3.16 hereto, (i) the Corporation is
not delinquent in payments to any of its employees, for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed by
them to the date hereof or amounts required to be reimbursed to such employees,
(ii) there is no labor strike, dispute, slowdown or stoppage actually pending
or, to the Best Knowledge of the Corporation, threatened against or involving
the Corporation and (iii) the Corporation is not a party to or bound by any
collective bargaining agreement and neither any grievance nor any arbitration
Proceeding arising out of or under a collective bargaining agreement is pending
and, to the Best Knowledge of the Corporation, no such claim has been asserted.
To the Best Knowledge of the Corporation, the Corporation has not experienced,
and is not experiencing, any material labor relations problems.
3.17. LITIGATION.
Except as set forth on SCHEDULE 3.17 hereto, there are (i) no
Proceedings at law or in equity or by or before any Governmental Authority now
pending or, to the Best Knowledge of the Corporation, threatened against, or
affecting the assets or properties of, the Corporation, nor, to the Best
Knowledge of the Corporation, does there exist any basis for any such pending or
threatened Proceedings; (ii) customer claims of any nature against the
Corporation in excess of $10,000, nor does there exist any basis therefor; or
(iii) Orders of any Governmental Authority identifying the Corporation. As used
herein, the term "PROCEEDING" means any action, suit, complaint, charge,
hearing, inquiry, investigation or legal or administrative or arbitration
proceeding.
3.18. TAX MATTERS.
(a) Except as set forth on SCHEDULE 3.18 hereto, the
Corporation has (i) filed all returns, declarations of estimated Tax, Tax
reports, information returns and statements (collectively, the "RETURNS")
required to be filed by it prior to the Closing (other than those for which
extensions shall have been granted prior to the Closing) relating to any Taxes
with respect to any income, properties or operations of the Corporation prior to
the Closing; (ii) as of the time of filing, the Returns were complete and
correct in all material respects and the Corporation has paid all Taxes shown on
the Returns to be due; (iii) the Corporation has timely paid or made provisions
for all Taxes payable for any period that ended on or before the Closing and for
any period that began on or before the Closing and ends after the Closing, to
the extent such Taxes are
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attributable to the portion of any such period ending on the Closing; (iv) the
Corporation is not delinquent in the payment of any Taxes, nor has requested any
extension of time within which to file any Return, which Return has not since
been filed; (v) there are no pending Tax audits of any Returns of the
Corporation; (vi) no Tax liens have been filed and no deficiency or addition to
Taxes, interest or penalties for any Taxes with respect to any income,
properties or operations of the Corporation has been proposed, asserted or
assessed in writing against the Corporation; (vii) the Corporation has not
granted any extension of the statute of limitations applicable to any Return or
other Tax claim with respect to any income, properties or operations of the
Corporation; (viii) the Corporation has not been a personal holding company
within the meaning of Section 542 of the Code; and (ix) the Corporation has not
made any election under Section 341(f) of the Code.
(b) As used herein, the term "TAX" means any of the Taxes, and
the term "TAXES" means, with respect to any Person, (i) all income taxes
(including any tax on or based upon net income, gross income, income as
specially defined, earnings, profits or selected items of income, earnings or
profits) and all gross receipts, sales, use, ad valorem, transfer, franchise,
license, withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property or windfall profits taxes, alternative or add-on minimum
taxes, customs duties and other taxes, fees, assessments or charges of any kind
whatsoever, together with all interest and penalties, additions to tax and other
additional amounts imposed by any taxing authority (domestic or foreign) on such
Person (if any) and (ii) any liability for the payment of any amount of the type
described in CLAUSE (i) above as a result of being a "TRANSFEREE" (within the
meaning of Section 6901 of the Code or any other applicable Law) of another
Person or a member of an affiliated or combined group.
3.19. RELATED TRANSACTIONS.
Except for this Agreement and the Related Agreements, except as set
forth on SCHEDULE 3.19 hereto and in the Financial Statements and the footnotes
thereto and except for compensation to regular employees of the Corporation for
services rendered, no current or former Affiliate of the Corporation is
presently (i) a party to any transaction with the Corporation (including, but
not limited to, any contract, agreement or other arrangement providing for the
furnishing of services by, or rental of real or personal property from, or
otherwise requiring payments to, any such Affiliate) or (ii) to the Best
Knowledge of the Corporation, the direct or indirect owner of an interest in any
Person which is a present or potential competitor, supplier or customer of the
Corporation (other than non-affiliated holdings in publicly held companies),
nor, to the Best Knowledge of the Corporation, does any such Person receive
income from any source other than the Corporation which relates to the business
of, or should properly accrue to, the Corporation. Except as set forth on
SCHEDULE
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3.19, the Corporation is not a guarantor or otherwise liable for any actual or
potential liability or obligation, whether direct or indirect, of the
Corporation or any of its Affiliates.
3.20. OFFERING EXEMPTION.
Based in part upon the accuracy of the representations of the
Investors in SECTION 4.2, the offering, sale, issuance and delivery, as the case
may be, of the GPLP Common Shares, the CYRK/GPLP Preferred Shares, the Insight
Preferred Shares and the Reserved Shares are, or, as of the date of issuance,
shall be, exempt from registration under the Securities Act and the rules and
regulations promulgated thereunder, and such offering, sale, issuance and
delivery, as the case may be, is, or, as of the date of issuance, shall be, also
exempt from registration under applicable state securities and "BLUE SKY" Laws.
The Corporation has made or shall make all requisite filings and has taken or
shall take all action necessary to be taken to comply with such state securities
or "BLUE SKY" Laws.
3.21. BROKERS.
Neither the Corporation nor any of its officers, directors,
stockholders or employees (or any Affiliate of the foregoing) has employed any
broker or finder or incurred any actual or potential liability or obligation,
whether direct or indirect, for any brokerage fees, commissions or finders' fees
in connection with the transactions contemplated by this Agreement or any of the
Related Agreements.
3.22. REGISTRATION RIGHTS.
Except as contemplated by the Registration Rights Agreement (as defined
below), no Person has any right to cause the Corporation to effect the
registration under the Securities Act of any shares of common stock or any other
securities (including debt securities) of the Corporation.
3.23. INSURANCE.
All of the insurable properties of the Corporation are insured for its
benefit in amounts and against all risks that are normal and customary for
Persons conducting similar businesses and operating similar properties in the
localities where the business of the Corporation is conducted and the properties
of the Corporation are located, under policies in effect and issued by insurers
of recognized responsibility.
3.24. USE OF PROCEEDS.
Unless otherwise consented to by the Investors, of the proceeds
received by the Corporation from the sale of the Insight Preferred Shares, (i)
at the Closing, (w) $1,000,000 shall be
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paid by the Corporation to CYRK pursuant to SECTION 2.3(c)(i), FIRST, in
satisfaction of accrued and unpaid interest constituting the Subject
Indebtedness set forth on SCHEDULE 2.3 as being owed to CYRK by the Corporation,
and SECOND, in consideration of the Corporation's repurchase of outstanding
principal amount of the Subject Indebtedness set forth on SCHEDULE 2.3 as being
owed to CYRK by the Corporation, (x) $350,000 shall be disbursed by the
Corporation to Exchange Marketing Group, LLC, a Massachusetts limited liability
company ("NEWCO"), in accordance with the terms and conditions of the Newco Note
(as defined below), (y) up to $30,000 shall be paid by the Corporation in
accordance with the terms and conditions of SECTION 9(a)(ii) and (z) $250,000
shall be delivered by the Corporation to CYRK, by wire transfer, to be held as a
deposit by CYRK, in trust for the Corporation, to back up CYRK's reimbursement
obligations in respect of CYRK's letter of credit, in the face amount of
$250,000, securing the Office Lease dated as of July 9, 1996 and (ii) after the
Closing, the remainder of such proceeds shall be used for the general corporate
purposes of the Corporation, including the payment of expenses accrued in
connection with the consummation of the transactions contemplated hereby and by
the Related Agreements.
3.25. DISCLOSURE.
Neither this Agreement or any of the Related Agreements or any of the
SCHEDULES or EXHIBITS thereto or thereto, nor any other written material
delivered to the Insight Investors, when taken together, contains any untrue
statement of a material fact or omits a material fact necessary to make the
statements contained herein and therein, in light of the circumstances in which
they were made, not misleading. To the Best Knowledge of the Corporation, there
is no fact, circumstance or condition which has had, or in the future is
reasonably likely to have, a Material Adverse Effect on the Corporation and its
Subsidiaries (if any) taken as a whole which has not been set forth in this
Agreement, the Related Agreements or in the SCHEDULES or the EXHIBITS hereto or
thereto.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
Each Investor represents and warrants to the Corporation as to itself
severally, and not jointly as to the other Investors, as follows:
4.1. AUTHORIZATION OF THIS AGREEMENT AND THE RELATED AGREEMENTS.
Such Investor has all requisite power to execute, deliver and perform
this Agreement and the Related Agreements to which such Investor is a party and
the transactions contemplated hereby and thereby, and the execution, delivery
and performance by such Investor of this Agreement and the Related Agreements to
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which such Investor is a party have been duly authorized by all requisite action
by such Investor and constitute valid and binding obligations of such Investor,
enforceable against such Investor in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar Laws now or hereafter in effect and
public policy and subject to general principles of equity.
4.2. INVESTMENT REPRESENTATIONS.
(a) Such Investor is acquiring the GPLP Common Shares, the
Insight Preferred Shares or CYRK/GPLP Preferred Shares to be acquired by such
Investor hereunder and, in the event that such Investor should acquire any
Reserved Shares, shall be acquiring such Reserved Shares, for its own account,
for investment and not with a view to the distribution thereof in violation of
the Securities Act or applicable state securities Laws.
(b) Such Investor understands that (i) the GPLP Common Shares,
the Insight Preferred Shares or CYRK/GPLP Preferred Shares to be acquired by
such Investor hereunder have not been, and that the Reserved Shares shall not
be, registered under the Securities Act or applicable state securities Laws, by
reason of their issuance by the Corporation in a transaction exempt from the
registration requirements of the Securities Act and applicable state securities
Laws and (ii) any GPLP Common Shares, Insight Preferred Shares, CYRK/GPLP
Preferred Shares or Reserved Shares acquired by such Investor must be held by
such Investor indefinitely unless a subsequent disposition thereof is registered
under the Securities Act and applicable state securities Laws or is exempt from
registration.
(c) Each Investor further understands that, with respect to
any GPLP Common Shares, Insight Preferred Shares, CYRK/GPLP Preferred Shares or
Reserved Shares acquired by such Investor, the exemption from registration
afforded by Rule 144 (the provisions of which are known to such Investor)
promulgated under the Securities Act depends on the satisfaction of various
conditions, and that, if applicable, Rule 144 may only afford the basis for
sales only in limited amounts.
(d) Such Investor has not employed any broker or finder in
connection with the transactions contemplated by this Agreement or any of the
Related Agreements.
(e) Such Investor is an "ACCREDITED INVESTOR" (as defined in
Rule 501(a) of Regulation D promulgated under the Securities Act). The
Corporation has made available to such Investor or its representatives all
agreements, documents, records and books that such Investor has requested
relating to an investment in the GPLP Common Shares, Insight Preferred Shares,
CYRK/GPLP Preferred Shares or Reserved Shares being acquired by such Investor.
Such Investor has had an opportunity to ask
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questions of, and receive answers from, a Person or Persons acting on behalf of
the Corporation, concerning the terms and conditions of this investment, and
answers have been provided to all of such questions to the full satisfaction of
such Investor. No oral representations have been made or furnished to, or relied
on by, such Investor or its representatives in connection with an investment in
any GPLP Common Shares, Insight Preferred Shares, CYRK/GPLP Preferred Shares or
Reserved Shares. Such Investor has such knowledge and experience in financial
and business matters that it is capable of evaluating the risks and merits of
this investment.
SECTION 5. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE EXISTING
INVESTORS.
Each Existing Investor represents and warrants to the Corporation as to
itself severally, and not jointly as to the other Existing Investor, as follows:
(a) Such Existing Investor is the lawful record and beneficial
owner of all of the Subject Indebtedness set forth on SCHEDULE 2.3 as being owed
to such Existing Investor by the Corporation, with good and marketable title
thereto, free and clear of any Encumbrances, with all other incidents of
ownership pertaining thereto, and has the absolute right and power to transfer,
in the case of GPLP, the GPLP Notes, and, in the case of CYRK, the CYRK Note, to
the Corporation and all rights and benefits incident to the ownership thereof.
(b) There are no outstanding options, warrants or rights to
purchase or acquire any of the Subject Indebtedness set forth on SCHEDULE 2.3 as
being owed to such Existing Investor by the Corporation. No interest in or
rights under any of the Subject Indebtedness set forth on SCHEDULE 2.3 as being
owed to such Existing Investor by the Corporation has been sold, assigned or
otherwise transferred by such Existing Investor to any other Person. After
giving effect to the transactions contemplated hereby and by the Related
Agreements to be consummated at the Closing, neither such Existing Investor nor
any Affiliate thereof shall have any claims against the Corporation in respect
of indebtedness for borrowed money (whether due or to become due) or any
interest on or fees or other amounts due in respect of any such indebtedness for
borrowed money.
(c) Such Existing Investor acquired, in the case of CYRK, the
CYRK Notes and, in the case of GPLP, the GPLP Note in one or more transactions
exempt from registration under the Securities Act and in compliance with all
applicable state securities Laws. Except as contemplated by the Related
Agreements, upon the consummation at the Closing of the transactions
contemplated by this Agreement, neither such Existing Investor nor any Affiliate
thereof shall have any right whatsoever to receive or acquire any additional
capital stock or other securities of the Corporation.
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SECTION 6. CONDITIONS PRECEDENT TO THE INVESTORS' OBLIGATIONS AT THE
CLOSING.
The several obligations of the Investors to perform this Agreement are
subject to the satisfaction of the following conditions precedent:
6.1. REPRESENTATIONS AND WARRANTIES.
(a) With respect to the Existing Investors, the
representations and warranties of the Corporation set forth in SECTIONS 3.1
through 3.5 shall (i) if not qualified by materiality, be true and complete in
all material respects and (ii) if qualified by materiality, be true and complete
in all respects, in each case on the date hereof and at and as of the Closing
Date as though then made.
(b) With respect to the Insight Investors, the representations
and warranties of the Corporation set forth in SECTION 3 (i) which are not
qualified by materiality shall be true and complete in all material respects and
(ii) which are qualified by materiality shall be true and complete in all
respects, in each case on the date hereof and at and as of the Closing Date as
though then made.
6.2. PERFORMANCE OF OBLIGATIONS.
The Corporation shall have performed and complied in all material
respects with all agreements, obligations and conditions required to be
performed or complied with by the Corporation under this Agreement.
6.3. AUTHORIZATION.
All action necessary to authorize the execution, delivery and
performance by the Corporation of this Agreement and the Related Agreements, and
the consummation of the transactions contemplated hereby and thereby, shall have
been duly and validly taken, and the Corporation shall have full power and right
to consummate the transactions contemplated hereby and thereby.
6.4. OPINION OF COUNSEL.
The Investors shall have received an opinion dated the Closing Date and
addressed to the Investors of Bingham, Dana & Gould LLP, counsel to the
Corporation, in form and substance reasonably acceptable to the Investors.
6.5. CONSENTS AND APPROVALS.
All corporate, stockholder and other proceedings to be taken and all
waivers, consents, approvals, qualifications and registrations required to be
obtained or effected in connection
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with the issuance, sale, execution, delivery and performance by the Corporation
of this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby, including the reservation, issuance, sale and delivery, as
the case may be, of the GPLP Common Shares, CYRK/GPLP Preferred Shares, the
Insight Preferred Shares and the Reserved Shares, shall have been taken,
obtained or effected (except for the filing of any notice subsequent to the
Closing that may be required under applicable Federal or state securities Laws,
which notice shall be filed on a timely basis following the Closing as so
required), and all documents incident thereto shall be satisfactory in form and
substance to the Investors. The Investors shall have received all such originals
or certified or other copies of such documents as have been reasonably
requested.
6.6. FILING OF THE CERTIFICATE OF AMENDMENT.
The Certificate of Amendment shall have been filed by the Corporation
with and accepted by the Secretary of State of the State of Delaware (and
evidence of such filing and acceptance, in form satisfactory to the Investors,
shall have been delivered to the Investors).
6.7. CONVERSION OF THE OLD PREFERRED STOCK.
Following the satisfaction of the condition precedent set forth in
SECTION 6.6 but prior to any subsequent amendment or modification of the
Corporation's Certificate of Incorporation, the Existing Investors shall have
delivered to the Corporation the stock certificate or certificates representing
all of the outstanding shares of Old Preferred Stock of which they are the
holders, duly endorsed or assigned in blank or to the Corporation (if required
by it), accompanied by written notice, in form and substance satisfactory to the
Corporation (and evidence of such satisfaction shall have been delivered to the
Insight Investors), stating that the Existing Investors thereby elect to
convert, effective immediately, all of such shares into shares (the "GPLP COMMON
SHARES") of Common Stock and, pursuant to the Corporation's Certificate of
Incorporation as amended to such time and then in full force and effect, such
conversion shall have been deemed to be effected.
6.8. FILING OF THE AMENDED AND RESTATED CERTIFICATE.
Following the conversion by the Existing Investors of any outstanding
shares of Old Preferred Stock held by them into shares of Common Stock, the
Amended and Restated Certificate shall have been filed with and accepted by the
Secretary of State of the State of Delaware (and evidence of such filing and
acceptance, in form satisfactory to the Investors, shall have been delivered to
the Investors) and shall not in any respect have been amended or modified or
rescinded or revoked.
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6.9. RESIGNATIONS.
The Corporation shall have received resignations from Michael Feldman
("FELDMAN") and each of the Corporation's employees (together with Feldman,
collectively, the "DEPARTING EMPLOYEES") presently engaged in the provision of
marketing consulting services, who are listed on SCHEDULE 6.9, (and evidence of
such resignations, in form and substance satisfactory to the Investors, shall
have been delivered to the Investors).
6.10. AMENDMENT OF 1996 STOCK INCENTIVE PLAN.
The 1996 Stock Incentive Plan of the Corporation shall have been
amended to provide that, notwithstanding anything contained therein to the
contrary, subject to the completion of the Closing, the aggregate number of
shares of Common Stock that may be issued after the Closing pursuant thereto
shall be 1,848,388.
6.11. GOVERNMENT CONSENTS, AUTHORIZATIONS, ETC.
All consents, authorizations, orders and approvals of, filings or
registrations with and the expiration of all waiting periods imposed by, any
third party, including, without limitation, any Governmental Authority which are
required for or in connection with the execution and delivery by the Parties of
this Agreement and the Related Agreements to which they may be parties and the
consummation by the Parties of the transactions contemplated hereby and thereby
shall have been obtained or made, in form and substance satisfactory to the
Investors and shall be in full force and effect.
6.12. DUE DILIGENCE.
The Investors shall be satisfied in their sole discretion with the
results of their business, legal, environmental and accounting due diligence
investigation and review of the Corporation and its business, properties and
assets.
6.13. LAWS; PROCEEDINGS.
No Law shall have been enacted and no Proceeding shall be pending, the
effect of which would be to prohibit, restrict, impair or delay the consummation
of the transactions contemplated by this Agreement or any of the Related
Agreements or any of the conditions to the consummation of the transactions
contemplated hereby or thereby or to prohibit, restrict or otherwise impair the
ability of the Investors to own equity interests in the Corporation.
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6.14. BOARD AND GENERAL PARTNER APPROVALS.
The Investors each shall have obtained all requisite approvals from any
governing body thereof for the execution, delivery and performance of this
Agreement and the Related Agreements to which it is a party and the consummation
of the transactions contemplated hereby and thereby.
6.15. RELATED AGREEMENTS.
Each of the following agreements (the "RELATED AGREEMENTS") shall have
been executed and delivered by the parties thereto (excluding any Investor a
party thereto whose execution and delivery of such agreement would otherwise be
a condition precedent to the performance of its own obligations hereunder) and
the transactions contemplated by the Related Agreements consummated or effected,
as the case may be, in accordance with the terms thereof:
(a) the Registration Rights Agreement dated as of the Closing
Date (the "REGISTRATION RIGHTS AGREEMENT"), among the Corporation and the
Investors (as defined therein), substantially in the form of EXHIBIT D hereto;
(b) the Stockholders Agreement dated as of the Closing Date
(the "STOCKHOLDERS AGREEMENT"), among the Corporation and the Stockholders (as
defined therein), substantially in the form of EXHIBIT E hereto;
(c) the Operating Agreement of Newco, dated as of the Closing
Date, among the persons named on Schedule A thereto, in form and substance
reasonably acceptable to the Corporation and the Investors;
(d) the Promissory Note dated as of the Closing Date (the
"NEWCO NOTE"), issued by Newco to the Corporation in the original principal
amount of $350,000, in form and substance reasonably acceptable to the
Corporation and the Investors;
(e) the Intellectual Property License Agreement dated as of
the Closing Date, between GPLP and Newco, in form and substance reasonably
acceptable to the Corporation and the Investors;
(f) the Consulting Agreement dated as of the Closing Date,
between the Corporation and Newco, in form and substance reasonably acceptable
to the Corporation and the Investors;
(g) the Non-Recourse Pledge Agreement dated as of the Closing
Date, among Feldman and the Corporation, in form and substance reasonably
acceptable to the Corporation and the Investors;
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(h) a Termination and Release Agreement dated as of the
Closing Date, by each Departing Employee in favor of the Corporation, in form
and substance reasonably acceptable to the Corporation and the Investors;
(i) the Pay-off Agreement; and
(j) a Nondisclosure Agreement dated as of the Closing Date,
among the Corporation and each of the Investors, in form and substance
reasonably acceptable to the Corporation and such Investor.
6.16. RELATED CERTIFICATES.
Each of the following certificates (the "RELATED CERTIFICATES") shall
have been executed and/or delivered, as the case may be, by the Person who or
which is the subject thereof:
(i) certificate of the secretary of the Corporation,
certifying (i) that true and complete copies of the Corporation's
Certificate of Incorporation and By-Laws as amended to and in effect on the
Closing Date are attached thereto, (ii) as to the incumbency and
genuineness of the signatures of each officer of such Person executing this
Agreement or any of the Related Agreements on behalf of the Corporation;
and (iii) the genuineness of the resolutions of the board of directors of
the Corporation (the "BOARD") authorizing the execution, delivery and
performance of this Agreement and the Related Agreements and the
consummation of the transactions contemplated hereby and thereby;
(ii) certificates of the secretaries of state of the
States of Delaware and Massachusetts dated as of the Closing Date,
certifying as to the corporate good standing of the Corporation;
(iii) a certificate signed by a principal executive
officer of the Corporation, on behalf of the Corporation, dated as of the
Closing Date, addressed to the Existing Investors and certifying as to the
fulfillment of the conditions set forth in SECTION 6.1(a), SECTIONS 6.2
through 6.10 and SECTIONS 6.15 and 6.16 (but not as to the execution and
delivery by any of the Investors of any Related Agreements); and
(iv) a certificate signed by a principal executive
officer of the Corporation, on behalf of the Corporation, dated as of the
Closing Date, addressed to the Insight Investors and certifying as to the
fulfillment of the conditions set forth in SECTIONS 6.1(B) through 6.10 and
SECTIONS 6.15 and 6.16 (but not as to the execution and delivery by any of
the Investors of any Related Agreements).
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SECTION 7. CONDITIONS PRECEDENT TO THE CORPORATION'S OBLIGATIONS AT THE
CLOSING.
The obligation of the Corporation to issue and sell Preferred Shares
to each Investor at the Closing is subject to the following conditions
precedent:
7.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties made by such Investor and set forth
in SECTIONS 4 or 5, as the case may be, shall (i) if not qualified by
materiality, be true, correct and complete in all material respects and (ii) if
qualified by materiality, be true, correct and complete in all respects, in each
case on the date hereof and at and as of the Closing Date as though then made.
7.2. PERFORMANCE OF OBLIGATIONS.
Such Investor shall have performed and complied in all material
respects with all agreements, obligations and conditions required to be
performed or complied with by such Investor under this Agreement.
7.3. RELATED AGREEMENTS.
Each of the Related Agreements shall have been executed and delivered by the
parties thereto (other than the Corporation) and the transactions contemplated
thereby consummated or effected, as the case may be, in accordance with the
terms thereof.
7.4. RELATED CERTIFICATES.
Each of the Related Certificates shall have been executed and/or
delivered, as the case may be, by the Person (other than the Corporation) who or
which is the subject thereof.
SECTION 8. ADDITIONAL AGREEMENTS OF THE PARTIES.
8.1. EFFORTS TO CONSUMMATE.
Each Party shall use reasonable efforts to take or cause to be taken
all actions and do or cause to be done all things required under applicable
Laws, in order to consummate the transactions contemplated by this Agreement and
the Related Agreements.
8.2. FINANCIAL INFORMATION.
(a) The Corporation shall furnish to each Investor the
following reports:
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(i) As soon as practicable after the end of each
fiscal year of the Corporation, and in any event within 90 days thereafter,
consolidated balance sheets of the Corporation and its Subsidiaries (if
any) as of the end of such fiscal year, and consolidated statements of
income and consolidated statements of changes in cash flow of the
Corporation and its Subsidiaries for such fiscal year, prepared in
accordance with GAAP and setting forth in each case in comparative form the
figures for the previous fiscal year and the budgeted figures for the
current fiscal year, all in reasonable detail and audited by independent
public accountants of national standing commonly known as "BIG 6"
accountants selected by the Corporation.
(ii) As soon as practicable after the end of the
first, second and third quarterly accounting periods in each fiscal year of
the Corporation and in any event within 45 days thereafter, a consolidated
balance sheet of the Corporation and its Subsidiaries (if any) as of the
end of each such quarterly period, and consolidated statements of income
and consolidated statements of changes in cash flow of the Corporation and
its Subsidiaries for such period and for the current fiscal year to date,
prepared in accordance with GAAP (other than for accompanying notes),
subject to changes resulting from normal year-end audit adjustments, and
setting forth in each case in comparative form the figures for the same
periods of the previous fiscal year and the budgeted figures for the
current periods, all in reasonable detail and signed by the principal
financial or accounting officer of the Corporation.
(b) The Corporation shall, and shall cause its Subsidiaries
(if any) to, maintain a system of accounting sufficient to enable the
Corporation's independent certified public accountants to render the reports
specified in SECTION 8.2(a).
(c) The Corporation shall submit to the Board at least 60 days
prior to the beginning of each fiscal year, a budget (the "ANNUAL OPERATING
BUDGET") for the Corporation and its Subsidiaries (if any) that contains, at
least with respect to such fiscal year, annual, quarterly and monthly detail,
including, but not limited to, limitations on capital expenditures, operating
expenditures and the incurrence of unsecured, secured and aggregate
indebtedness, and shall be subject to the approval of the Board.
8.3. ADDITIONAL INFORMATION.
The Corporation shall deliver or provide to each Investor (i) as soon
as practicable after the end of each month and in any event within 45 days
thereafter an unaudited consolidated balance sheet and statements of income and
cash flow of the Corporation and its Subsidiaries (if any) for such month
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and for the year to date (in each case compared to the Annual Operating Budget
and to the corresponding period of the prior year), (ii) the Annual Operating
Budget as soon as practicable prior to the beginning of the next fiscal year,
(iii) other budgets or financial plans prepared by the Corporation and presented
to the Board, as soon as they are made available to the Board, (iv) a monthly
letter from the management of the Corporation discussing in reasonable detail
(A) the operations of the Corporation for the previous month period and (B) any
deviations in the actual performance for the previous month period of the
Corporation and its Subsidiaries from the projected performance of the
Corporation and its Subsidiaries set forth in the Annual Operating Budget, and
(v) with reasonable promptness, (A) all financial statements, reports, notices
and other documents sent by the Corporation to its stockholders generally or
released to the public and copies of all regular and periodic reports, if any,
filed by the Corporation with the Securities and Exchange Commission, (B) all
reports prepared for or delivered to the management of the Corporation and its
Subsidiaries by its accountants, and (C) such other information and data,
including access to books and records of the Corporation and its Subsidiaries as
any such Investor may from time to time reasonably request.
8.4. EMPLOYEE COMPENSATION.
Within 60 days after the Closing Date, the Corporation shall submit to
the Board a compensation plan (the "APPROVED COMPENSATION PLAN") acceptable to
the Board, (i) the eligible participants (the "ELIGIBLE PARTICIPANTS") of which
shall be limited to the senior management and key employees of the Corporation
(as determined by the Board in its sole discretion), (ii) the terms of which
shall be consistent with the compensation plans of other software and consulting
companies similar in size and development to the Corporation and the commitments
made by the Corporation to Eligible Participants prior to the date hereof, and
(iii) which shall provide that all future compensation (including bonuses) to
which any Eligible Participant may be entitled (other than pursuant to existing
commitments by the Corporation to Eligible Participants) shall be subject to the
prior, written approval of the Compensation Committee (as defined in the
Stockholders Agreement) in its sole discretion. The Corporation shall not
provide any compensation (including bonuses) to any Eligible Participant
(whether in respect of such Eligible Participant's services during the
Corporation's fiscal year ended December 31, 1996 or any other fiscal year)
other than (i) in accordance with either existing commitments by the Corporation
to Eligible Participants or the terms and conditions of the Approved
Compensation Plan, or (ii) upon the prior approval of the Compensation
Committee.
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8.5. RIGHTS OF INSPECTION.
Each Investor shall have the right, at its expense, to visit and
inspect any of the properties of the Corporation or any of its Subsidiaries and
to discuss their affairs, finances and accounts with their officers, all at such
reasonable times during normal business hours and as often as may be reasonably
requested.
8.6. INSURANCE.
The Corporation shall use its commercially reasonable efforts, and
shall cause its Subsidiaries (if any) to use their commercially reasonable
efforts, to obtain within 90 days after the Closing Date and to maintain
thereafter such other insurance, including director and officer insurance and
error and omission insurance, with such coverages and in such amounts as shall
be required to protect such Persons and their respective directors, officers and
employees against all risks usually insured against by Persons conducting
similar businesses and operating similar properties in the localities where the
business of the Corporation and its Subsidiaries is conducted under policies
issued by national insurers of recognized responsibility.
8.7. USE OF PROCEEDS.
The Corporation shall use the proceeds from the sale of the Insight
Preferred Shares in the manner specified in SECTION 3.24.
8.8. LITIGATION.
The Corporation, promptly upon becoming aware thereof, shall notify
each Investor in writing of any Proceeding in which it or any of its
Subsidiaries is involved and which might, if determined adversely, materially
and adversely effect the Corporation or any of its Subsidiaries.
8.9. COMPLIANCE WITH LAWS.
The Corporation shall, and shall cause its Subsidiaries (if any), each
to, (i) in carrying out its business to comply in all material respects with all
Laws applicable to it, its business and the ownership of its assets and (ii)
shall obtain and maintain in full force and effect all Permits material to and
necessary in the conduct of its business and such Permits shall be maintained in
full force and effect.
8.10. TAXES.
The Corporation shall, and shall cause each of its Subsidiaries to,
pay and discharge all Taxes imposed upon it or upon its income or profits, or
upon any property belonging to it,
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prior to the date on which penalties attach thereto, and all lawful claims
which, if unpaid, might become an Encumbrance upon its property, unless
contested in good faith by proceedings authorized by the Board.
8.11. TERMINATION.
Upon the closing of an Initial Public Offering (as defined in the
Stockholders Agreement), the provisions of SECTIONS 8.1 through 8.10 shall
terminate and shall be of no further force or effect and shall not be binding
upon the Corporation.
SECTION 9. FEES.
(a) The Corporation will pay, and save the Investors harmless
against all liability for the payment of, (i) all costs and other expenses
incurred from time to time by the Corporation in connection with the
Corporation's performance of and compliance with all agreements and conditions
contained herein on its part to be performed or complied with (including the
reasonable cost and expenses of counsel for the Corporation incurred in
connection with the review of this Agreement and the Related Agreements), and
(ii) the costs and expenses incurred by IVP I in connection with the
transactions contemplated by this Agreement and the Related Agreements,
including fees and charges of O'Sullivan Graev & Karabell, LLP, special counsel
to IVP I, for services in connection with the consummation of transactions
contemplated by this Agreement and the Related Agreements, which fees and
charges relating to the transactions contemplated hereby and thereby shall be
paid by the Corporation at the Closing (PROVIDED, HOWEVER, that the
Corporation's obligations under this CLAUSE (ii) shall not exceed $30,000).
(b) The Corporation further agrees that it shall pay, and will
save the Investors harmless from, any and all liability with respect to any
stamp or similar taxes which may be determined to be payable in connection with
the execution and delivery and performance of the Agreement and the Related
Agreements or any modification, amendment or alteration of the terms or
provisions of this Agreement or any of the Related Agreements, and that it shall
similarly pay and hold the Insight Investors harmless from all issue taxes in
respect of the issuance of the Reserved Shares to the Insight Investors.
SECTION 10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS,
ETC.
(a) All statements contained in this Agreement, any Related
Agreement, any Related Certificate or any other closing certificate (each, an
"OTHER CERTIFICATE") delivered by the Corporation to any Investor, pursuant to
this Agreement or in connection with the transactions contemplated by this
Agreement or any of the Related Agreements shall constitute representations
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and warranties by the Corporation under this Agreement to the Investors
identified as being the subject thereof and shall survive the Closing and the
consummation of the transactions contemplated hereby and thereby for a period of
18 months after the Closing Date; PROVIDED, HOWEVER, that the representations
and warranties of the Corporation to the Investors set forth in SECTION 3.1
through SECTION 3.5 shall survive indefinitely and the representations and
warranties of the Corporation to the Insight Investors set forth in SECTIONS
3.13, 3.15, 3.18 and 3.20 shall survive until the expiration of the respective
statutes of limitations applicable to the matters covered thereby.
(b) All statements contained in this Agreement, any Related
Agreement, any Related Certificate or any Other Certificate delivered by any
Investor to the Corporation pursuant to this Agreement or in connection with the
transactions contemplated by this Agreement or any of the Related Agreements
shall constitute representations and warranties by such Investor to the
Corporation under this Agreement and shall survive the Closing and the
consummation of the transactions contemplated hereby and thereby for a period of
18 months after the Closing Date; PROVIDED, HOWEVER, that the representations
and warranties of any Investor to the Corporation set forth in SECTION 4.1 and,
in the case of any Existing Investor, SECTION 5, shall survive indefinitely, and
the representations and warranties of any Investor to the Corporation set forth
in SECTION 4.2 shall survive until the expiration of the respective statutes of
limitations applicable to the matters covered thereby.
(c) All agreements contained herein shall survive indefinitely
until, by their respective terms, they are no longer operative.
(d) Anything in this Agreement express or implied to the
contrary notwithstanding, all (if any) representations and warranties made or
deemed made by the Corporation to the Existing Investors under this Agreement,
any Related Agreement, any Related Certificate or any other closing certificate
(other than pursuant to SECTIONS 3.1 through 3.5 of this Agreement) shall
terminate for all purposes upon the Closing.
SECTION 11. INDEMNIFICATION.
(a) The Corporation shall indemnify, defend and hold each
Investor harmless against all liability, loss or damage (including diminution in
value of the Insight Preferred Shares, CYRK/GPLP Preferred Shares or GPLP Common
Shares issued to such Investor pursuant to this Agreement or any Reserved Shares
issued upon the conversion of the Insight Preferred Shares), together with all
reasonable costs and expenses (including legal and accounting fees and expenses)
related thereto or incurred in enforcing this SECTION 11(a) (collectively,
"INVESTOR LOSSES"), (i) subject to SECTION 10, arising from the untruth,
inaccuracy
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or breach of any of the representations or warranties of the Corporation made to
such Investor contained in this Agreement or any Related Agreement, Related
Certificate or Other Certificate or any facts or circumstances constituting any
such untruth, inaccuracy or breach, (ii) subject to SECTION 10, arising from the
untruth or inaccuracy of any information delivered to such Investor pursuant to
the terms of this Agreement or any Related Agreement, Related Certificate or
Other Certificate, (iii) arising from the breach of any covenant or agreement of
the Corporation contained in this Agreement or any Related Agreement, Related
Certificate or Other Certificate or any facts or circumstances constituting such
breach, (iv) arising from any claim, demand, assessment, judgment, order,
decree, action, cause of action, litigation, suit, investigation or other
Proceeding by a third party (whenever made) arising out of or in connection with
(A) the status or conduct of the Corporation, (B) the execution, performance and
delivery of this Agreement or any Related Agreement, Related Certificate or
Other Certificate, or (C) any actions taken by or omitted to be taken by any of
the Investors in connection with this Agreement or any Related Agreement,
Related Certificate or Other Certificate, in each case by virtue of such
Investor's acquisition of shares of Preferred Stock or Common Stock or such
Investor or any Affiliate thereof acting as an adviser to the Corporation
(unless the act or omission giving rise to such Claim resulted primarily out of
or was based primarily upon the gross negligence, fraud or willful misconduct of
such Investor or Affiliate), or (v) with respect to any liability for any
brokers' or finders' fees or compensation owing or alleged to be owing in
connection with the transactions contemplated by this Agreement or any of the
Related Agreements due to the engagement by, or any other act of, the
Corporation.
(b) Each Investor severally as to itself only and not jointly
with or as to any other Investor, shall indemnify, defend and hold the
Corporation harmless against all liability, loss or damage, together with all
reasonable costs and expenses (including legal and accounting fees and expenses)
related thereto or incurred in enforcing this SECTION 11(b) (collectively,
"CORPORATION LOSSES"), arising from (i) the untruth, inaccuracy or breach of any
of the representations, warranties, covenants or agreements of such Investor
made to the Corporation contained in this Agreement or any Related Agreement,
Related Certificate, instrument or other writing delivered by or on behalf of
such Investor pursuant to or in connection with the consummation of the
transactions contemplated by this Agreement or any of the Related Agreements,
(ii) arising out of or relating to, in the case of GPLP, the GPLP Note, and in
the case of CYRK, either of the CYRK Notes, or any promissory note issued by
GPLP in connection with the Revolving Credit Agreement dated March 28, 1995 to
which GPLP and CYRK are parties, not being canceled or marked "PAID IN full".
(c) Notwithstanding the foregoing provisions of this SECTION
11, (i) the maximum liability of the Corporation to indemnify an Investor
pursuant to SECTION 11(a) for all Investor
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Losses arising under CLAUSES (i), (ii) and (iii) of SECTION 11(a) shall not
exceed an amount equal to the aggregate Original Issuance Price (as defined in
the Amended and Restated Certificate) of the shares of Preferred Stock acquired
by such Investor pursuant to this Agreement, plus, in the case of GPLP, $517,500
(but excluding from such amount any Investor Losses arising under CLAUSE (i) of
SECTION 11(a) by reason of the untruth, inaccuracy or breach of any of the
representations or warranties of the Corporation made to such Investor contained
in SECTION 3.5 of this Agreement), and (ii) the maximum liability of any
Investor to indemnify the Corporation pursuant to SECTION 11(b) for all
Corporation Losses arising under SECTION 11(b) shall not exceed the amount of
the maximum liability of the Corporation to indemnify such Investor pursuant to
the foregoing CLAUSE (i), plus, in the case of CYRK, $1,000,000.
SECTION 12. REMEDIES.
The Parties shall each have and retain all rights and remedies existing
in their favor under this Agreement, at law or equity, including rights to bring
actions for specific performance and injunctive and other equitable relief
(including, without limitation, the remedy of rescission) to enforce or prevent
a breach or any violation of this Agreement. All such rights and remedies shall
be cumulative and the existence, assertion, pursuit or exercise of any thereof
by a Party shall not preclude the assertion, pursuit or exercise by such Party
of any other rights or remedies available to it. Without limiting the generality
of the foregoing, the Parties hereby agree that in the event the Corporation
fails to convey, in accordance with the provisions of this Agreement, to any
Investor any GPLP Common Shares, Insight Preferred Shares, CYRK/GPLP Preferred
Shares or Reserved Shares being acquired by such Investor, such Investor's
remedy at law may be inadequate. In such event, such Investor shall have the
right, in addition to all other rights and remedies it may have, to specific
performance of the obligation of the Corporation to convey the GPLP Common
Shares, Insight Preferred Shares, CYRK/GPLP Preferred Shares or Reserved Shares
in accordance with the provisions of this Agreement.
SECTION 13. SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, this Agreement will bind and inure
to the benefit of and be enforceable by the Corporation and its successors and
assigns and the Investors and any subsequent holders of GPLP Common Shares,
Insight Preferred Shares, CYRK/GPLP Preferred Shares or Reserved Shares and the
respective successors and assigns of each of them, so long as they hold GPLP
Common Shares, Insight Preferred Shares, CYRK/GPLP Preferred Shares or Reserved
Shares.
SECTION 14. ENTIRE AGREEMENT.
This Agreement, together with the Related Agreements, embodies the
complete agreement and understanding among the
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Parties with respect to the subject matter hereof and thereof and supersede and
preempt any prior understandings, agreements or representations by or among the
Parties, written or oral, which may have related to the subject matter hereof or
thereof in any way.
SECTION 15. NOTICES.
All notices, consents or other communications which are required or
otherwise delivered hereunder shall be in writing and shall be deemed to have
been duly given if (i) personally delivered or sent by telecopier, (ii) sent by
nationally recognized overnight courier or (iii) sent by registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
If to the Corporation, to:
Exchange Applications, Inc.
150 Federal Street
Boston, Massachusetts 02110
Telephone: (617) 737-2244
Telecopy: (617) 443-9143
Attention: Andrew J. Frawley
with a copy to:
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110
Telephone: (617) 951-8866
Telecopy: (617) 951-8736
Attention: Neil W. Townsend, Esq.
If to an Investor, to it at its address set forth on SCHEDULE I
hereto;
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) when delivered, if
personally delivered or sent by telecopier, (ii) on the first Business Day after
dispatch, if sent by nationally recognized, overnight courier guaranteeing next
Business Day delivery and (iii) on the fifth Business Day following the date on
which the piece of mail containing such communication is posted, if sent by
mail.
SECTION 16. MODIFICATIONS; AMENDMENTS; AND WAIVERS.
The terms and provisions of this Agreement may not be modified or
amended, nor may any provision applicable to the Investors be waived, except
pursuant to a writing signed by the Corporation and those Investors which or who
hold in the aggregate at least 50% of the shares of Series B Preferred Stock
issued and sold pursuant to this Agreement and the shares of
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<PAGE> 40
Common Stock issued or issuable upon the conversion of the foregoing; PROVIDED,
HOWEVER, that any such modification or amendment that would adversely affect the
rights of any Investor (including the Existing Investors) without similarly
affecting the rights hereunder of all Investors hereunder shall not be effective
as to such Investor without its prior written consent. The failure of any party
to enforce any of the provisions of this Agreement shall in no way be construed
as a waiver of such provisions and shall not affect the right of such party
thereafter to enforce each and every provision of this Agreement in accordance
with its terms.
SECTION 17. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
SECTION 18. INTERPRETATION; CONSTRUCTION.
The term "THIS AGREEMENT" means this agreement together with all
schedules and exhibits hereto, as the same may from time to time be amended,
modified, supplemented or restated in accordance with the terms hereof. In this
Agreement, the term "BEST KNOWLEDGE" of any Person means (i) the actual
knowledge of such Person and (ii) that knowledge which should have been acquired
by such Person after making such due inquiry and exercising such due diligence
as a prudent businessperson would have made or exercised in the management of
his or her business affairs, including due inquiry of those key employees and
professional advisers (including attorneys, accountants and consultants) of the
Person who could reasonably be expected to have actual knowledge of the matters
in question. When used in the case of the Corporation, the term "BEST KNOWLEDGE"
shall include the Best Knowledge of the Corporation and its Subsidiaries (if
any). The use in this Agreement of the term "INCLUDING" means "INCLUDING,
WITHOUT LIMITATION." The words "HEREIN", "HEREOF", "HEREUNDER", "HEREBY",
"HERETO", "HEREINAFTER", and other words of similar import refer to this
Agreement as a whole, including the schedules and exhibits, as the same may from
time to time be amended, modified, supplemented or restated, and not to any
particular article, section, subsection, paragraph, subparagraph or clause
contained in this Agreement. All references to articles, sections, subsections,
clauses, paragraphs, schedules and exhibits mean such provisions of this
Agreement and the schedules and exhibits attached to this Agreement, except
where otherwise stated. The title of and the article, section and paragraph
headings in this Agreement are for convenience of reference only and shall not
govern or affect the interpretation of any of the terms or provisions of this
Agreement. The use herein of the masculine, feminine or neuter forms shall also
denote the other forms, as in each case the
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<PAGE> 41
context may require. Where specific language is used to clarify by example a
general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this Agreement has been
chosen by the parties to express their mutual intent, and no rule of strict
construction shall be applied against any party. Accounting terms used but not
otherwise defined herein shall have the meanings given to them under GAAP.
SECTION 19. GOVERNING LAW.
All questions concerning the construction, interpretation and validity
of this Agreement shall be governed by and construed and enforced in accordance
with the domestic laws of the Commonwealth of Massachusetts, without giving
effect to any choice or conflict of law provision or rule (whether in the
Commonwealth of Massachusetts or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the Commonwealth of
Massachusetts. In furtherance of the foregoing, the internal law of the
Commonwealth of Massachusetts will control the interpretation and construction
of this Agreement, even if under such jurisdiction's choice of law or conflict
of law analysis, the substantive law of some other jurisdiction would ordinarily
apply. Notwithstanding the foregoing provisions of this SECTION 19, those
provisions of this Agreement that relate to the internal governance of the
Corporation shall be governed by and construed and enforced in accordance with
the internal laws of the State of Delaware.
SECTION 20. MUTUAL WAIVER OF JURY TRIAL.
BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY (RATHER THAN
ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO
ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR ANY DOCUMENTS
RELATED HERETO.
SECTION 21. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
* * * * *
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<PAGE> 42
IN WITNESS WHEREOF, each of the undersigned has caused this Securities
Purchase Agreement to be executed as of the date first written above.
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
----------------------------------------
Andrew J. Frawley
President
<PAGE> 43
INVESTORS:
CYRK, INC.
By: /s/ Patrick Brady
----------------------------------------
Name: Patrick Brady
Title: President
GRANT & PARTNERS LIMITED PARTNERSHIP
BY: GRANT & PARTNERS, INC.,
its general partner
By: /s/ Alan W. H. Grant
----------------------------------------
Name: Alan W. H. Grant
Title: President
INSIGHT VENTURE PARTNERS I, L.P.
BY: INSIGHT VENTURE ASSOCIATES, LLC,
its general partner
By: /s/ Jeffrey L. Horing
----------------------------------------
Jeffrey L. Horing
Managing Member
GAP COINVESTMENT PARTNERS, L.P.
By: /s/ Stephen P. Reynolds
----------------------------------------
Name: Stephen P. Reynolds
Title: Managing Member
WEXFORD INSIGHT LLC
BY: WEXFORD MANAGEMENT LLC,
its investment manager
By: /s/ Robert Holtz
----------------------------------------
Name: Robert Holtz
Title: Principal
<PAGE> 1
EXHIBIT 10.10
================================================================================
EXCHANGE APPLICATIONS, INC.
-------------------------------------------------
SECURITIES PURCHASE AGREEMENT
-------------------------------------------------
DECEMBER 4, 1997
================================================================================
<PAGE> 2
ATTACHMENTS
EXHIBITS
Exhibit A - Amendment and Restated Certificate
Exhibit B - Form of Registration Rights Agreement
Exhibit C - Form of Stockholders Agreement
SCHEDULES
Schedule 3.1 - Organization; Good Standing; Qualifications
Schedule 3.1.1 - Certificate of Incorporation
Schedule 3.1.2 - By-Laws
Schedule 3.4 - No Consent or Approval Required
Schedule 3.5 - Capitalization
Schedule 3.7 - Financial Statements
Schedule 3.8 - Absence of Undisclosed Liabilities
Schedule 3.9 - Events Subsequent to the Latest Balance Sheet
Schedule 3.10 - Title to Assets, Properties and Rights
Schedule 3.11 - Intellectual Property
Schedule 3.12 - Directors, Officers, Employees and Consultants
Schedule 3.14 - Agreements, Etc.
Schedule 3.15 - Permits and Orders
Schedule 3.16 - Labor Relations; Employees
Schedule 3.17 - Litigation
Schedule 3.18 - Tax Matters
Schedule 3.19 - Related Transactions
<PAGE> 3
SECURITIES PURCHASE AGREEMENT dated as
December 4, 1997, by and among EXCHANGE
APPLICATIONS, INC., a Delaware corporation (the
"CORPORATION"), INSIGHT CAPITAL PARTNERS II, L.P.,
a Delaware limited partnership ("IVP II"), WEXFORD
INSIGHT LLC, a Delaware limited liability company
("WEXFORD"; and together with IVP II, the
"INVESTORS").
The Corporation desires to sell to each Investor, and each Investor
desires to purchase from the Corporation, shares of the capital stock of the
Corporation, on the terms and subject to the conditions set forth herein. The
Corporation and the Investors are referred to herein collectively as the
"Parties."
ACCORDINGLY, in consideration of the representations, warranties,
agreements, covenants and conditions contained in this Agreement, the Parties
hereby agree as follows:
SECTION 1. FILING OF CERTIFICATES.
Prior to the Closing, the Corporation shall file with the Secretary of
State of the State of Delaware an Amended and Restated Certificate of
Incorporation, in the form of EXHIBIT A hereto (the "AMENDED AND RESTATED
CERTIFICATE"), that, among other things, (i) authorizes 12,078,698 shares of
Common Stock, $.001 par value (the "COMMON STOCK"), (ii) authorizes 6,679,510
shares of Preferred Stock, $.001 par value (the "PREFERRED Stock"), of which (A)
2,900,000 shares shall be designated Series A Preferred Stock (the "SERIES A
PREFERRED STOCK"), (B) 2,555,556 shares shall be designated Series B Convertible
Preferred Stock (the "SERIES B PREFERRED STOCK"), and (C) 1,223,954 shares shall
be designated Series C Convertible Preferred Stock (the "SERIES C PREFERRED
STOCK"), and (iii) sets forth the terms, designations, powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions, of the Common Stock and the
Preferred Stock.
SECTION 2. AUTHORIZATION AND RESERVATION; ISSUANCE AND SALE; CLOSING.
2.1. AUTHORIZATION AND RESERVATION.
Subject to the terms and conditions hereof, the Corporation has
authorized (i) the issuance and sale of 1,223,954 shares of Series C Preferred
Stock (the "INSIGHT PREFERRED SHARES") to the Investors at the Closing, and (ii)
the reservation of an aggregate of 1,223,954 shares of Common Stock (the
"RESERVED SHARES") for issuance upon the conversion of the Insight Preferred
Shares.
<PAGE> 4
2.2. ISSUANCE AND SALE OF THE INSIGHT PREFERRED SHARES.
(a) At the Closing, on and subject to the terms and conditions
contained herein, the Corporation shall issue, sell and deliver to IVP II, and
IVP II shall purchase from the Corporation, upon the terms and subject to the
conditions hereinafter set forth, 611,977 Insight Preferred Shares for an
aggregate purchase price of $2,000,000 in cash (or a purchase price of $3.268
per share).
(b) At the Closing, on and subject to the terms and conditions
contained herein, the Corporation shall issue, sell and deliver to Wexford, and
Wexford shall purchase from the Corporation, upon the terms and subject to the
conditions hereinafter set forth, 611,977 Insight Preferred Shares for an
aggregate purchase price of $2,000,000 in cash (or a purchase price of $3.268
per share).
2.3. DELIVERIES AT CLOSING.
At the Closing, the Corporation shall deliver to each Investor stock
certificates representing the Insight Preferred Shares being acquired by such
Investor at the Closing, registered in the name of such Investor, against
receipt by the Corporation of a certified or official bank check payable to the
Corporation or a wire transfer of immediately available funds to an account
designated by the Corporation in an aggregate amount equal to the purchase price
for the Insight Preferred Shares being purchased by such Investor hereunder.
2.4. CLOSING.
The closing (the "CLOSING") hereunder with respect to the issuance,
sale and delivery of the Insight Preferred Shares and the consummation of the
related transactions contemplated by this Agreement and the Related Agreements
shall, subject to the satisfaction or waiver of the conditions set forth in
SECTIONS 5 and 6, take place at the offices of O'Sullivan Graev & Karabell, LLP,
30 Rockefeller Plaza, New York, New York 10112 on a business day (the "CLOSING
DATE") designated by the Corporation and IVP II, which date shall be no later
than five Business Days after the date on which all such conditions shall have
been satisfied to the satisfaction of, or otherwise waived by, the Parties whose
obligations are subject thereto. As used in this Agreement, the term "BUSINESS
DAY" means any day that is not a Saturday, Sunday, legal holiday or other day on
which banks are required to be closed in New York, New York or Boston,
Massachusetts.
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<PAGE> 5
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.
The Corporation hereby represents and warrants to the Investors as set
forth in the following SECTIONS 3.1 through 3.25:
3.1. ORGANIZATION; GOOD STANDING; QUALIFICATIONS.
(a) The Corporation is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Delaware and has
all requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business as now being conducted. The
Corporation has all requisite corporate power and authority to enter into this
Agreement and the Related Agreements to which it is a party, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The Corporation is duly qualified and in good
standing to do business in the Commonwealth of Massachusetts and every
jurisdiction in which such qualification is necessary because of the nature of
the property owned, leased or operated by it or the nature of the business
conducted by it therein, except where the failure to so qualify would not have a
material adverse effect (a "MATERIAL ADVERSE EFFECT") on the business,
operations, assets, condition (financial or otherwise), operating results,
liabilities, employee relations or business prospects of the Corporation and its
Subsidiaries (if any) taken as a whole (each of which jurisdictions is listed on
SCHEDULE 3.1 hereto). The Corporation has not conducted its business under any
fictitious or other names except those names listed on SCHEDULE 3.1. True and
complete copies of the Corporation's Certificate of Incorporation and By-Laws,
in each case as amended to and in effect on the date hereof, are attached hereto
as SCHEDULE 3.1.1 hereto and SCHEDULE 3.1.2 hereto, respectively. The
Corporation has in all material respects performed all of the obligations
required to be performed by it to date under its Certificate of Incorporation
and By-Laws, in each case as amended to and in effect on the date hereof, and
there exists no default, or any event which upon the giving of notice or the
passage of time, or both, would give rise to a claim of a default in the
performance by the Corporation of its obligations thereunder.
(b) As used herein, the term "GOVERNMENTAL AUTHORITY" means
any court, department, commission, board, bureau, agency or commission or other
governmental authority or instrumentality, domestic or foreign, federal, state
or local; the term "ORDER" means any judgments, writs, decrees, injunctions,
orders, compliance agreements or settlement agreements of any Governmental
Authority; and the term "LAWS" means federal, state, local or foreign laws,
statutes, rules, directives, ordinances requirements, regulations and Orders of
any Governmental Authority.
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<PAGE> 6
3.2. AUTHORITY OF THE CORPORATION.
(a) The execution, delivery and performance of this Agreement
and the Related Agreements to which the Corporation is a party and the
consummation by the Corporation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary action on the
part of the Corporation and its stockholders, and this Agreement and the Related
Agreements to which the Corporation is a party have been duly and validly
executed by the Corporation and are valid and binding obligations of the
Corporation, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or similar Laws now or hereafter in effect, public policy and general
principles of equity. The execution, delivery and performance of this Agreement
and the Related Agreements to which the Corporation is a party, the consummation
by the Corporation of the transactions contemplated hereby and thereby,
including the reservation, issuance, sale and delivery, as the case may be, of
the Insight Preferred Shares and the Reserved Shares, and the compliance by the
Corporation with all of the provisions hereof and thereof shall not (i) conflict
with or result in a breach of any provision of the Certificate of Incorporation
or By-Laws of the Corporation, in each case as amended to and in effect on the
date hereof, (ii) cause a default or give rise to any right of termination,
cancellation or acceleration (whether upon the giving of notice or the lapse of
time or both) under any of the terms, conditions or provisions of any note,
bond, lease, mortgage, indenture, license or other instrument or agreement to
which the Corporation is a party or by which the Corporation or any of its
properties or assets is or may be bound or affected, except where such defaults,
terminations, cancellations or accelerations taken as a whole would not have a
Material Adverse Effect on the Corporation and its Subsidiaries (if any) taken
as a whole, or (iii) violate any Law applicable to the Corporation or any of its
properties or assets. As used herein, the term "PERSON" shall be construed
broadly and shall include an individual, corporation, association, partnership,
joint venture or entity, organization or Governmental Authority; and the term
"SUBSIDIARY" means any Person (other than a natural Person) with respect to
which a specified Person (or a Subsidiary thereof) has the power to vote or
direct the voting of sufficient securities to elect a majority of the board of
directors or similar governing body.
SECTION 3.3. AUTHORIZATION OF INSIGHT PREFERRED SHARES AND
RESERVED SHARES.
The reservation, issuance, sale and delivery, as the case may be, of
the Insight Preferred Shares and the Reserved Shares have been duly authorized
by all requisite board, stockholder and other corporate action on the part of
the Corporation. As of the Closing, the Insight Preferred Shares, and, upon
their issuance in accordance with the Amended and Restated Certificate, the
Reserved Shares, shall be validly
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<PAGE> 7
issued and outstanding, fully paid and nonassessable, with no personal liability
attaching to the ownership thereof, and, except as contemplated by the Related
Agreements, not subject to any Encumbrances or any preemptive rights, rights of
first refusal or other similar rights of the stockholders of the Corporation.
3.4. NO CONSENT OR APPROVAL REQUIRED.
No consent or approval by, or any notification of or filing with, any
Person (governmental or private) is required in connection with the execution,
delivery and performance by the Corporation of this Agreement and the Related
Agreements to which the Corporation is a party or the consummation by the
Corporation of the transactions contemplated hereby and thereby, including the
valid reservation, issuance, sale and delivery, as the case may be, of the
Insight Preferred Shares and the Reserved Shares, except for stockholder
approval of the filings of the Amended and Restated Certificate as described in
SECTION 1, the filing of any notices subsequent to the Closing that may be
required under applicable Federal or state securities Laws (which notices shall
be filed on a timely basis following the Closing as so required) and those other
consents, approvals, notifications and filings set forth on SCHEDULE 3.4 hereto,
which, except as otherwise set forth on SCHEDULE 3.4, have been made or will be
obtained prior to the Closing.
3.5. CAPITALIZATION.
(a) Immediately upon the consummation at the Closing of
the transactions contemplated by this Agreement, the authorized capital stock of
the Corporation shall consist of:
(i) 12,078,698 shares of Common Stock, of which:
(A) 3,870,050 shares shall be validly issued
and outstanding, fully paid and nonassessable, with no personal
liability attaching to the ownership thereof;
(B) 2,555,556 shares shall be duly reserved
for issuance upon conversion of the Series B Preferred Stock;
(C) 1,223,954 shares shall be duly reserved
for issuance upon conversion of the Series C Preferred Stock; and
(D) 2,156,388 shares shall be duly reserved
for issuance upon the grant of such shares, or the exercise of options
granted therefor, pursuant to
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<PAGE> 8
the 1996 Stock Incentive Plan of the Corporation, as amended to and in
effect on the Closing Date; and
(ii) 6,679,510 shares of Preferred Stock, of
which:
(A) 2,900,000 shall have been duly
designated as Series A Preferred Stock, all of which shares shall have
been validly issued and shall be outstanding, fully paid and
nonassessable, with no personal liability attaching to the ownership
thereof;
(B) 2,555,556 shares shall have been duly
designated as Series B Preferred Stock, all of which shares shall have
been validly issued and shall be outstanding, fully paid and
nonassessable, with no personal liability attaching to the ownership
thereof; and
(C) 1,223,954 shares shall have been duly
designated as Series C Preferred Stock, all of which shares shall have
been validly issued and shall be outstanding, fully paid and
nonassessable, with no personal liability attaching to the ownership
thereof; and
all such outstanding shares in each case being owned of record by the Persons
identified on SCHEDULE 3.5 hereto in the amounts set forth thereon.
(b) SCHEDULE 3.5 contains a list, as of the date hereof and
assuming the consummation at the Closing of all transactions contemplated by
this Agreement and the Related Agreements, of all outstanding warrants, options,
agreements, convertible securities or other commitments pursuant to which the
Corporation or, to the Best Knowledge of the Corporation, any stockholder
thereof is or may become obligated to issue, sell or otherwise transfer any
shares of capital stock or other securities of the Corporation, which list names
all Persons entitled to receive such shares or other securities, indicates
whether or not such securities are entitled to any anti-dilution or similar
adjustments upon the issuance of additional securities of the Corporation or
otherwise and sets forth the shares of capital stock or other securities
required to be issued thereunder (calculated after giving effect to all such
anti-dilution and other similar adjustments resulting from the issuance of the
Insight Preferred Shares and the consummation of the transactions contemplated
by this Agreement and the Related Agreements).
(c) Except as set forth on SCHEDULE 3.5 or as contemplated by
the Related Agreements, immediately upon consummation at the Closing of the
transactions contemplated by this Agreement and the Related Agreements,
including the delivery
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<PAGE> 9
of each of the instruments described in SECTIONS 5 and 6, there shall be, (i) no
preemptive or similar rights to purchase or otherwise acquire any shares of the
capital stock or other securities of the Corporation pursuant to any provision
of Law, the Corporation's Certificate of Incorporation or By-Laws, in each case
as amended to and in effect on the date hereof, or any agreement to which the
Corporation or, to the Best Knowledge of the Corporation, any stockholder
thereof is a party; and (ii) with respect to the sale or voting of any shares of
capital stock or other securities of the Corporation (whether outstanding or
issuable upon the conversion, exercise or exchange of outstanding securities),
no Encumbrance or other restriction (such as a right of first refusal, right of
first offer, proxy, voting trust, voting agreement, etc.), except, in the case
of shares of Common Stock previously issued to officers, directors and employees
of the Corporation, in favor of the Corporation. As used herein, the term
"ENCUMBRANCES" means any of the following: security interests, liens, pledges,
claims, charges, escrows, encumbrances, options, rights of first refusal,
mortgages, indentures, security agreements, judgments, or other agreements,
arrangements, contracts, commitments, understandings or obligations, whether
written or oral and whether or not relating in any way to credit or the
borrowing of money.
(d) All shares of the capital stock and other securities
issued by the Corporation prior to the Closing have been issued in transactions
exempt from registration under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and the rules and regulations promulgated thereunder and all
applicable state securities or "BLUE SKY" Laws. The Corporation has not violated
the Securities Act or any applicable state securities or "BLUE SKY" Laws in
connection with the issuance of any shares of capital stock or other securities
prior to the Closing.
3.6. EQUITY INVESTMENT.
The Corporation has never owned, nor does it presently own, any capital
stock or other equity interest in any corporation, association, trust,
partnership, joint venture or other Person.
3.7. FINANCIAL STATEMENTS.
(a) SCHEDULE 3.7 hereto contains the following financial
statements: (i) the audited balance sheet (the "LATEST BALANCE SHEET") of the
Corporation dated as of December 31, 1996 (the "LATEST BALANCE SHEET DATE") and
the related audited statements of income, retained earnings and cash flows for
the fiscal year ended December 31, 1996, together with the accompanying
supplementary information and report of the auditor thereof, and (ii) the
unaudited balance sheet of the Corporation for the nine month period ended
September 30, 1997 and the related unaudited statements of income for the
Corporation,
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<PAGE> 10
retained earnings for the Corporation excluding Exchange Application Limited, a
subsidiary of the Company (the "Subsidiary") and cash flows for the Corporation
excluding the Subsidiary for such nine month period together with accompanying
supplementary information (collectively, the "FINANCIAL STATEMENTS").
(b) Each of the Financial Statements (A) has been prepared in
accordance with the books and records of the Corporation (which have been
maintained in accordance with good business practices and are true and complete,
in each case in all material respects), (B) is materially true and correct, (C)
fairly presents the financial condition, results of income, retained earnings
and cash flow which it purports to present as of the date thereof and for the
periods indicated thereon and (D) except as described therein or in the
footnotes thereto, has been prepared in accordance with United States generally
accepted accounting principles consistently applied ("GAAP") throughout the
periods covered thereby. Except as set forth in the Financial Statements or in
the footnotes thereto or as required by applicable Law or GAAP, there has been
no change in (i) any accounting principle, procedure or practice followed by the
Corporation or (ii) the method of applying any such principle, procedure or
practice.
3.8. ABSENCE OF UNDISCLOSED LIABILITIES AND OBLIGATIONS.
The Corporation has no liabilities or obligations on the date hereof
not disclosed on or reflected in the Latest Balance Sheet, except for (i)
liabilities or obligations incurred after the Latest Balance Sheet Date in the
ordinary course of business consistent with past practice (none of which relates
to any breach of contract, default, breach of warranty, tort, infringement,
violation of Law or Proceeding) none of which has had, or is reasonably likely
to have, a Material Adverse Effect on the Corporation and its Subsidiaries (if
any) taken as a whole, (ii) liabilities or obligations which would not be
required to be disclosed on or reflected in a balance sheet prepared in
accordance with GAAP on the date hereof, and (iii) liabilities or obligations
incurred after the Latest Balance Sheet Date and set forth on SCHEDULE 3.8
hereto. All reserves set forth on the Latest Balance Sheet were adequate for the
purposes indicated therein at the Latest Balance Sheet Date, and, to the Best
Knowledge of the Corporation, continue to be adequate for the purposes indicated
therein as of the date hereof. There are no "LOSS CONTINGENCIES" (as such term
is used in Statement of Financial Accounting Standards No. 5 issued by the
Financial Accounting Standards Board in March 1975) that are not adequately
provided for on the Latest Balance Sheet.
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<PAGE> 11
3.9. EVENTS SUBSEQUENT TO THE LATEST BALANCE SHEET.
(a) Except as set forth on SCHEDULE 3.9 hereto and the
transactions contemplated by this Agreement and the Related Agreements, since
the Latest Balance Sheet Date, the Corporation has been operated in the ordinary
course of business consistent with past practice and there has not been:
(i) any material adverse change in the condition
(financial or otherwise), assets, liabilities, operations, earnings,
business or prospects of the Corporation;
(ii) any obligation, liability or indebtedness
(whether absolute, accrued, contingent or otherwise and whether due or
to become due) in excess of $50,000 incurred, or any transaction,
contract or commitment entered into, amended or terminated, with
respect to the Corporation, other than items incurred or entered into
on an arms' length basis in the ordinary course of business of the
Corporation and consistent with past practice;
(iii) any acceleration, payment, discharge or
satisfaction by the Corporation of any liability, obligation, claim,
lien or encumbrance (whether fixed or contingent, matured or unmatured)
in excess of $50,000, except on an arms' length basis in the ordinary
course of business and consistent with past practice;
(iv) any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of capital
stock of the Corporation, or any direct or indirect redemption,
purchase or other acquisition of any thereof, or any other payments of
any nature to any Affiliate of the Corporation whether or not on or
with respect to any shares of capital stock of the Corporation owned by
such Affiliate;
(v) any issuance or sale, or any contract entered
into for the issuance or sale, of any shares of capital stock of the
Corporation or securities convertible into or exercisable or
exchangeable for such capital stock, except commitments by the
Corporation to employees thereof to issue options to purchase shares of
Common Stock pursuant to the Corporation's 1996 Stock Incentive Plan,
as set forth in the offer letters from the Corporation to such
employees copies of which have been delivered by the Corporation to the
Investors;
(vi) any license, sale, transfer, pledge, mortgage,
or other disposition of any tangible or intangible asset of the
Corporation, except on an arms' length basis in the ordinary course of
business and consistent with past practice;
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(vii) any extraordinary increase in the compensation
paid or payable to any stockholder, director, officer, employee, agent
or Affiliate of, or consultant to, the Corporation, or any loan to any
of the foregoing Persons, or any agreement or commitment therefor
(other than advances to such Persons in the ordinary course of business
consistent with past practice in connection with travel and
travel-related expenses);
(viii) any change in the Tax or other accounting
methods or practices followed by the Corporation or any change in
depreciation or amortization policies or rates previously adopted;
(ix) any damage, destruction or loss (whether or not
covered by insurance) in excess of $10,000 affecting any asset or
property of the Corporation; or
(x) any agreement, whether in writing or otherwise,
to take any of the actions specified in the foregoing CLAUSES (ii)
through (viii).
(b) As used herein, the term "AFFILIATE" means a Person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, any other Person.
3.10. TITLE TO ASSETS, PROPERTIES AND RIGHTS.
The Corporation has good and marketable title to all the properties
and interests in properties and assets, whether personal or mixed, reflected as
being owned by the Corporation on the Latest Balance Sheet or acquired
subsequent thereto (except for those properties or interests subsequently
disposed of in the ordinary course of business), free and clear of all
Encumbrances, except for (i) those Encumbrances set forth on SCHEDULE 3.10
hereto, (ii) liens for current taxes, assessments and other governmental charges
not yet due and payable or being contested in good faith by appropriate
proceedings and for which there are adequate reserves on the books and records
of the Corporation, and (iii) mechanics', landlord's, materialman's, supplier's,
vendor's or similar liens arising in the ordinary course of business securing
amounts that are not delinquent. The assets, properties and rights of the
Corporation reflected as being owned on the Latest Balance Sheet or acquired
after the date thereof or leased for use by the Corporation are in all material
respects in good operating condition and repair (normal wear and tear excepted),
are suitable in all material respects for the uses for which they are used in
the Corporation's business, are not subject to any condition which interferes
with the use thereof in any material respect, and constitute all assets,
properties and rights necessary to permit the Corporation to carry on its
business after the Closing as generally conducted by the Corporation prior
thereto.
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3.11. INTELLECTUAL PROPERTY.
(a) Except as set forth on SCHEDULE 3.11 hereto:
(i) the Corporation owns, has the right to use, sell,
license and dispose of, and, to the extent owned, has the right to
bring actions for the infringement of, all Intellectual Property Rights
necessary or required for the conduct of the business of the
Corporation (collectively, the "OWNED REQUISITE RIGHTS"), other than
those Intellectual Property Rights for which the Corporation has a
valid license (collectively, the "LICENSED REQUISITE RIGHTS"; and
together with the Owned Requisite Rights, the "REQUISITE RIGHTS");
(ii) the Requisite Rights are sufficient in all
material respects for the conduct of the business of the Corporation as
currently conducted or as contemplated to be conducted;
(iii) to the Best Knowledge of the Corporation, there
are no royalties, honoraria, fees or other payments payable by the
Corporation to any Person by reason of the ownership, use, license,
sale or disposition of the Requisite Rights;
(iv) to the Best Knowledge of the Corporation, no
activity, service or procedure currently conducted or proposed to be
conducted by the Corporation violates or shall violate any contract,
instrument, license, commitment, lease or similar document of the
Corporation with any third Person relating to any Intellectual Property
Rights, or infringe any Intellectual Property Rights of any other
Person;
(v) the Corporation has taken reasonable and
practicable steps (including, without limitation, entering into
confidentiality and nondisclosure agreements with all officers,
directors and employees of and consultants to the Corporation and other
Persons with access to or knowledge of confidential information of the
Corporation) designed to safeguard and maintain (i) the secrecy and
confidentiality of confidential information of the Corporation and (ii)
the proprietary rights of the Corporation in all Requisite Rights;
(vi) to the Best Knowledge of the Corporation, the
Corporation has not interfered with, infringed upon, misappropriated or
otherwise come into conflict in any material respect with any
Intellectual Property Rights of any Person or committed any acts of
unfair competition, and the Corporation has not received from any
Person any written notice, charge, complaint, claim or assertion
thereof, and no such claim is impliedly
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threatened by an offer to license from another Person under a claim of
use; and
(vii) the Corporation has not sent to any Person or
otherwise communicated to any Person, any written notice, charge,
complaint, claim or other assertion of any present, impending or
threatened infringement by or misappropriation of, or other conflict
with, any Intellectual Property Rights of the Corporation by such other
Person or any acts of unfair competition by such other Person with
respect to the Corporation, nor, to the Best Knowledge of the
Corporation, is any such infringement, misappropriation, conflict or
act of unfair competition occurring or threatened.
(b) SCHEDULE 3.11 contains a true and complete list of
all applications, filings and registrations pursuant to any Laws and any
licenses made, taken or obtained by the Corporation, in each case to acquire,
perfect, or protect its interest in its Intellectual Property Rights, including,
without limitation, all patents, patent applications, trademarks, trademark
applications, servicemarks and servicemark applications.
(c) As used herein, the term "INTELLECTUAL PROPERTY
RIGHTS" means all industrial and intellectual property rights, including,
without limitation, patents, patent applications, patent rights, trademarks,
trademark applications, tradenames, servicemarks, servicemark applications,
copyrights, know-how, trade secrets, proprietary processes and formulae,
confidential information, franchises, licenses, inventions, trade dress and
logos.
(d) To the Best Knowledge of the Corporation, the
Corporation's VALEX software product shall function without any material
interruption or required updates caused by the necessity to compare date
information prior to and after the change of the century (PROVIDED, HOWEVER, no
representation or warranty is being made by the Corporation pursuant to this
SECTION 3.11(d) as to any operating system on which the VALEX software product
may be used or any component part of the VALEX software product not developed by
the Corporation).
3.12. DIRECTORS, OFFICERS, EMPLOYEES AND CONSULTANTS.
Except as set forth on SCHEDULE 3.12 hereto, to the Best Knowledge of
the Corporation, no third party has asserted or threatened to assert any
material valid claim against the Corporation or any present stockholder,
director, officer or employee of, or consultant to, the Corporation, involving
(i) the employment by, or association with, the Corporation, of any of the
foregoing Persons or (ii) the use, in connection with the business of the
Corporation or any of the foregoing Persons of any information which the
Corporation or any such Persons would
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be prohibited from using under any prior agreements or arrangements or any legal
considerations applicable to unfair competition, trade secrets or proprietary
information.
3.13. ERISA PLANS AND CONTRACTS.
(a) The Corporation does not maintain nor is it a party
to (or ever maintained or was a party to) any "EMPLOYEE WELFARE BENEFIT PLAN",
as defined in Section 3(1) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or any other written, unwritten, formal or informal
plan or agreement involving direct or indirect compensation other than workers'
compensation, unemployment compensation and other government programs, under
which the Corporation has any present or future obligation or liability. The
Corporation does not maintain nor is it a party to (or ever maintained or was a
party to) any "EMPLOYEE PENSION BENEFIT PLAN", as defined in Section 3(2) of
ERISA, and the Corporation does not contribute to any "MULTIEMPLOYER PLAN" as
defined in Section 3(37) of ERISA.
(b) There is no contract, agreement, plan or arrangement
covering any employee or former employee of the Corporation that, individually
or collectively, could give rise to the payment of any amount that would not be
deductible by reason of Section 280G of the Internal Revenue Code of 1986, as
amended (the "CODE") (other than potentially on the acceleration of stock
options or the vesting of restricted stock upon a change of control).
3.14. AGREEMENTS, ETC.
(a) SCHEDULE 3.14 hereto contains a true and complete
list and brief description of all contracts, agreements, commitments and other
instruments (whether written or oral) to which the Corporation is a party (other
than this Agreement and the Related Agreements) and (x) which were entered into
or made outside the ordinary course of business or (y) which were entered into
or made in the ordinary course of business and are described in CLAUSES (i)
through (xvi) of this SECTION 3.14. Except as set forth on SCHEDULE 3.14, the
Corporation is not a party to any of the following, whether written or oral:
(i) distributorship, dealer, sales, advertising,
agency, manufacturer's representative or other contract relating to the
payment of aggregate commissions in excess of $50,000;
(ii) contract for the future purchase of products,
equipment or services which is not terminable by the Corporation
without aggregate cost, forfeiture or other liability in excess of
$30,000 individually or $100,000 in the aggregate for all such
contracts;
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(iii) contract or commitment for the employment of
any officer, employee or consultant or any other type of contract or
understanding with any officer, employee or consultant relating to the
payment of aggregate consideration or severance in excess of $50,000
(other than the Employment Agreement dated as of November 15, 1996,
between the Corporation and Andrew J. Frawley and offer letters from
the Corporation to employees thereof (which are listed on SCHEDULE 3.14
and copies of which have been delivered by the Corporation to the
Investors);
(iv) formal or informal profit sharing, bonus, stock
option, pension, retirement, disability, stock purchase,
hospitalization, insurance or similar plan or agreement providing
benefits to any current or former director, officer, employee or
consultant, whether or not subject to ERISA;
(v) indenture, mortgage, promissory note, loan
agreement, pledge agreement, guarantee or other agreement or commitment
for the borrowing of money, for a line of credit or for a leasing
transaction of a type required to be capitalized in accordance with
Statement of Financial Accounting Standards No. 13 of the Financial
Accounting Standards Board;
(vi) contract or commitment for capital expenditures
in excess of $75,000 (excluding contracts or commitments for the
purchase of office equipment and personal computers in the ordinary
course of business);
(vii) agreement or arrangement for the sale of any
assets, properties or rights other than the sale of services or
products in the ordinary course of business;
(viii) lease or other agreement pursuant to which it
is a lessee of or holds or operates any machinery, equipment, motor
vehicles, office furniture, fixtures, products, merchandise or similar
personal property owned by any other Person;
(ix) contract with respect to the lending or
investing of funds in excess of $75,000;
(x) confidentiality or nondisclosure contract with
any Person (other than an Investor) who or which has (i) made or
proposed to make a financial investment in the Corporation in order to
receive from the Corporation goods, services, technology, expertise or
other value in addition to a monetary return on any such financial
investment or (ii) proposed to acquire the Corporation through a Sale
of the Corporation (as defined in the Stockholders Agreement);
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<PAGE> 17
(xi) contract or commitment to issue or sell any
securities of the Corporation (excluding any offer letter from the
Corporation to an employee thereof a copy of which has been delivered
by the Corporation to the Investors);
(xii) contract which restricts the Corporation from
engaging in any aspect of its business anywhere in the world;
(xiii) contract or group of related contracts with
the same Person (excluding purchase orders entered into in the ordinary
course of business which are to be completed within three months of
entering into such purchase orders) for the purchase or sale of
products or services under which the undelivered balance of such
products and services has a selling price in excess of $10,000;
(xiv) contract (x) that is not terminable by either
party thereto without penalty upon not more than 30 days' advance
notice and involves aggregate consideration in excess of $75,000 or (y)
that involves aggregate consideration in excess of $75,000 (excluding
in the case of CLAUSES (x) and (y) above any purchase order entered
into in the ordinary course of business which is to be completed within
six months of entering into such purchase order);
(xv) contract with any Affiliate of the Corporation;
or
(xvi) other contract material to the business of the
Corporation.
(b) To the Best Knowledge of the Corporation, all items
listed on SCHEDULE 3.14 are in full force and effect, constitute legal, valid
and binding obligations of the respective parties thereto, and are enforceable
in accordance with their respective terms. The Corporation has in all material
respects performed all of the obligations required to be performed by it to
date, and there exists no default, or any event which upon the giving of notice
or the passage of time, or both, would give rise to a claim of a default in the
performance by the Corporation or any other party to any of the foregoing of
their respective obligations thereunder, except where such actual or potential
default has not had, and in the future is not reasonably likely to have, a
Material Adverse Effect on the Corporation and its Subsidiaries (if any) taken
as a whole. The Corporation has previously furnished to the Investors true,
complete and correct copies of all written items listed on SCHEDULE 3.14 and
SCHEDULE 3.14 contains complete descriptions of all oral items listed on
SCHEDULE 3.14. No consent or approval by, or any notification or filing with,
any party to any of the agreements listed on SCHEDULE 3.14 is required in
connection with the execution,
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delivery and performance by the Corporation of this Agreement or any of the
Related Agreements or the consummation by the Corporation of the transactions
contemplated hereby or thereby, except for those consents, approvals,
notifications or filings set forth on SCHEDULE 3.14, which, except as set forth
on SCHEDULE 3.14, have been or shall be made or obtained prior to the Closing.
3.15. COMPLIANCE; GOVERNMENTAL AUTHORIZATIONS.
(a) The Corporation (i) has complied with, and is in
compliance with, in all respects all Laws (including all Environmental and
Safety Requirements) applicable to it and its business (including, but not
limited to, any and all Laws relating in any manner to the environment or the
generation, treatment, storage, recycling, transportation, release or disposal
of any materials into the environment), except where such noncompliance has not
had, and is reasonably likely not to have, a Material Adverse Effect on the
Corporation and its Subsidiaries (if any) taken as a whole, and (ii) has all
federal, state, local and foreign governmental licenses and permits
(collectively, "PERMITS") used or necessary in the conduct of its business. Such
Permits are in full force and effect, no violations with respect to any thereof
have occurred or are or have been recorded, no Proceeding is pending or, to the
Best Knowledge of the Corporation, threatened to revoke or limit any thereof.
SCHEDULE 3.15 hereto contains a true and complete list of (i) all such Permits
and (ii) all Orders under which the Corporation is operating or bound. The
Corporation has performed in all material respects all of the obligations
required to be performed by it to date under all applicable Laws, Permits and
Orders, and there exists no condition, or any event which upon the giving of
notice or the passage of time, or both, would constitute a violation of any of
such Laws, Permits or Orders, except where such violation is not reasonably
likely to have a Material Adverse Effect on the Corporation and its Subsidiaries
(if any) taken as a whole.
(b) The Corporation is not responsible, or potentially
responsible, for the remediation or cost of remediation of wastes, substances or
materials at, on or beneath any facilities or at, on or beneath any land
adjacent thereto or in connection with any site or location, wherever located
(including any well, tank, pit, sump, pond, lagoon, tailings pile, spoil pile,
impoundment, ditch, trench, drain, landfill, warehouse or waste storage
container), where pollutants, contaminants or hazardous or toxic wastes,
substances or materials have been deposited, stored, treated, reclaimed,
disposed of, placed or otherwise come to be located. The Corporation is not
liable, directly or indirectly, in connection with any release by it of
hazardous substance into the environment nor do there exist any facts upon which
a finding of such liability could be based.
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(c) As used herein, the term "ENVIRONMENTAL AND SAFETY
REQUIREMENTS" means all Laws (including, but not limited to, common law), and
all contractual obligations concerning public health and safety, worker health
and safety, and pollution or protection of the environment, including, without
limitation, all those relating to the presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution, labeling,
testing, processing, discharge, release, threatened release, control, or cleanup
of any hazardous materials, substances or wastes, chemical substances or
mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum
products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation,
including, but not limited to, the Solid Waste Disposal Act, as amended, the
Clean Air Act, as amended, 42 U.S.C. ss. 7401 et seq., the Federal Water
Pollution Control Act, as amended, 33 U.S.C. ss. 1251 et seq., the Emergency
Planning and Community Right-to-Know Act, as amended, 42 U.S.C. ss. 11001 et
seq., the Comprehensive Environmental Response, Compensation, and Liability Act,
as amended, the Hazardous Materials Transportation Uniform Safety Act, as
amended, 49 U.S.C. ss. 1804 et seq., the Occupational Safety and Health Act of
1970, as amended, and the rules and regulations promulgated thereunder.
3.16. LABOR RELATIONS; EMPLOYEES.
Except as set forth on SCHEDULE 3.16 hereto, (i) the Corporation is
not delinquent in payments to any of its employees, for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed by
them to the date hereof or amounts required to be reimbursed to such employees,
(ii) there is no labor strike, dispute, slowdown or stoppage actually pending
or, to the Best Knowledge of the Corporation, threatened against or involving
the Corporation and (iii) the Corporation is not a party to or bound by any
collective bargaining agreement and neither any grievance nor any arbitration
Proceeding arising out of or under a collective bargaining agreement is pending
and, to the Best Knowledge of the Corporation, no such claim has been asserted.
To the Best Knowledge of the Corporation, the Corporation has not experienced,
and is not experiencing, any material labor relations problems.
3.17. LITIGATION.
Except as set forth on SCHEDULE 3.17 hereto, there are (i) no
Proceedings at law or in equity or by or before any Governmental Authority now
pending or, to the Best Knowledge of the Corporation, threatened against, or
affecting the assets or properties of, the Corporation, nor, to the Best
Knowledge of the Corporation, does there exist any basis for any such pending or
threatened Proceedings; (ii) customer claims of any nature against the
Corporation in excess of $10,000, nor does there exist any basis therefor; or
(iii) Orders of any Governmental Authority identifying the Corporation. As used
herein, the term
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"PROCEEDING" means any action, suit, complaint, charge, hearing, inquiry,
investigation or legal or administrative or arbitration proceeding.
3.18. TAX MATTERS.
(a) Except as set forth on SCHEDULE 3.18 hereto, the
Corporation has (i) filed all returns, declarations of estimated Tax, Tax
reports, information returns and statements (collectively, the "RETURNS")
required to be filed by it prior to the Closing (other than those for which
extensions shall have been granted prior to the Closing) relating to any Taxes
with respect to any income, properties or operations of the Corporation prior to
the Closing; (ii) as of the time of filing, the Returns were complete and
correct in all material respects and the Corporation has paid all Taxes shown on
the Returns to be due; (iii) the Corporation has timely paid or made provisions
for all Taxes payable for any period that ended on or before the Closing and for
any period that began on or before the Closing and ends after the Closing, to
the extent such Taxes are attributable to the portion of any such period ending
on the Closing; (iv) the Corporation is not delinquent in the payment of any
Taxes, nor has requested any extension of time within which to file any Return,
which Return has not since been filed; (v) there are no pending Tax audits of
any Returns of the Corporation; (vi) no Tax liens have been filed and no
deficiency or addition to Taxes, interest or penalties for any Taxes with
respect to any income, properties or operations of the Corporation has been
proposed, asserted or assessed in writing against the Corporation; (vii) the
Corporation has not been granted any extension of the statute of limitations
applicable to any Return or other Tax claim with respect to any income,
properties or operations of the Corporation; (viii) the Corporation has not been
a personal holding company within the meaning of Section 542 of the Code; and
(ix) the Corporation has not made any election under Section 341(f) of the Code.
(b) As used herein, the term "TAX" means any of the Taxes, and
the term "TAXES" means, with respect to any Person, (i) all income taxes
(including any tax on or based upon net income, gross income, income as
specially defined, earnings, profits or selected items of income, earnings or
profits) and all gross receipts, sales, use, ad valorem, transfer, franchise,
license, withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property or windfall profits taxes, alternative or add-on minimum
taxes, customs duties and other taxes, fees, assessments or charges of any kind
whatsoever, together with all interest and penalties, additions to tax and other
additional amounts imposed by any taxing authority (domestic or foreign) on such
Person (if any) and (ii) any liability for the payment of any amount of the type
described in CLAUSE (i) above as a result of being a "TRANSFEREE" (within the
meaning of Section 6901 of the Code or any other applicable Law) of another
Person or a member of an affiliated or combined group.
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3.19. RELATED TRANSACTIONS.
Except for this Agreement and the Related Agreements, except as set
forth on SCHEDULE 3.19 hereto and in the Financial Statements and the footnotes
thereto and except for compensation to regular employees of the Corporation for
services rendered, no current or former Affiliate of the Corporation is
presently (i) a party to any transaction with the Corporation (including, but
not limited to, any contract, agreement or other arrangement providing for the
furnishing of services by, or rental of real or personal property from, or
otherwise requiring payments to, any such Affiliate) or (ii) to the Best
Knowledge of the Corporation, the direct or indirect owner of an interest in any
Person which is a present or potential competitor, supplier or customer of the
Corporation (other than non-affiliated holdings in publicly held companies),
nor, to the Best Knowledge of the Corporation, does any such Person receive
income from any source other than the Corporation which relates to the business
of, or should properly accrue to, the Corporation. Except as set forth on
SCHEDULE 3.19, the Corporation is not a guarantor or otherwise liable for any
actual or potential liability or obligation, whether direct or indirect, of the
Corporation or any of its Affiliates.
3.20. OFFERING EXEMPTION.
Based in part upon the accuracy of the representations of the
Investors in SECTION 4.2, the offering, sale, issuance and delivery, as the case
may be, of the Insight Preferred Shares and the Reserved Shares are, or, as of
the date of issuance, shall be, exempt from registration under the Securities
Act and the rules and regulations promulgated thereunder, and such offering,
sale, issuance and delivery, as the case may be, is, or, as of the date of
issuance, shall be, also exempt from registration under applicable state
securities and "BLUE SKY" Laws. The Corporation has made or shall make all
requisite filings and has taken or shall take all action necessary to be taken
to comply with such state securities or "BLUE SKY" Laws.
3.21. BROKERS.
Neither the Corporation nor any of its officers, directors,
stockholders or employees (or any Affiliate of the foregoing) has employed any
broker or finder or incurred any actual or potential liability or obligation,
whether direct or indirect, for any brokerage fees, commissions or finders' fees
in connection with the transactions contemplated by this Agreement or any of the
Related Agreements.
3.22. REGISTRATION RIGHTS.
Except as contemplated by the Registration Rights Agreement (as
defined below), no Person has any right to cause the Corporation to effect the
registration under the Securities
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Act of any shares of common stock or any other securities (including debt
securities) of the Corporation.
3.23. INSURANCE.
All of the insurable properties of the Corporation are insured for its
benefit in amounts and against all risks that are normal and customary for
Persons conducting similar businesses and operating similar properties in the
localities where the business of the Corporation is conducted and the properties
of the Corporation are located, under policies in effect and issued by insurers
of recognized responsibility.
3.24. USE OF PROCEEDS.
The Company will use proceeds received from the sale of the Insight
Preferred Shares for the general corporate purposes of the Corporation,
including payment of expenses accrued in connection with the consummation of the
transaction contemplated hereby and by the Related Agreements. Additionally, a
portion of the proceeds may be used for the purpose of making a loan to Andrew
J. Frawley in order to purchase the Series B Preferred, PROVIDED, HOWEVER, that
such loan shall not exceed one hundred fifty thousand dollars ($150,000) and the
form shall be subject to approval by the Investors.
3.25. DISCLOSURE.
Neither this Agreement or any of the Related Agreements or any of the
SCHEDULES or EXHIBITS thereto or thereto, nor any other written material
delivered to any Investor, when taken together, contains any untrue statement of
a material fact or omits a material fact necessary to make the statements
contained herein and therein, in light of the circumstances in which they were
made, not misleading. To the Best Knowledge of the Corporation, there is no
fact, circumstance or condition which has had, or in the future is reasonably
likely to have, a Material Adverse Effect on the Corporation and its
Subsidiaries (if any) taken as a whole which has not been set forth in this
Agreement, the Related Agreements or in the SCHEDULES or the EXHIBITS hereto or
thereto.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
Each Investor, severally and not jointly, represents and warrants to
the Corporation as follows:
SECTION 4.1. AUTHORIZATION OF THIS AGREEMENT AND THE RELATED
AGREEMENTS.
Such Investor has all requisite power to execute, deliver and perform
this Agreement and the Related Agreements to
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which such Investor is a party and the transactions contemplated hereby and
thereby, and the execution, delivery and performance by such Investor of this
Agreement and the Related Agreements to which such Investor is a party have been
duly authorized by all requisite action by such Investor and constitute valid
and binding obligations of such Investor, enforceable against such Investor in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other similar
Laws now or hereafter in effect and public policy and subject to general
principles of equity.
4.2. INVESTMENT REPRESENTATIONS.
(a) Investors are acquiring the Insight Preferred Shares to be
acquired by Investors hereunder and, in the event that Investors should acquire
any Reserved Shares, shall be acquiring such Reserved Shares, for its own
account, for investment and not with a view to the distribution thereof in
violation of the Securities Act or applicable state securities Laws.
(b) Investors understand that (i) the Insight Preferred Shares
to be acquired by Investors hereunder have not been, and that the Reserved
Shares shall not be, registered under the Securities Act or applicable state
securities Laws, by reason of their issuance by the Corporation in a transaction
exempt from the registration requirements of the Securities Act and applicable
state securities Laws and (ii) any Insight Preferred Shares or Reserved Shares
acquired by Investors must be held by Investors indefinitely unless a subsequent
disposition thereof is registered under the Securities Act and applicable state
securities Laws or is exempt from registration.
(c) Investors further understand that, with respect to any
Insight Preferred Shares or Reserved Shares acquired by Investors, the exemption
from registration afforded by Rule 144 (the provisions of which are known to
Investors) promulgated under the Securities Act depends on the satisfaction of
various conditions, and that, if applicable, Rule 144 may only afford the basis
for sales only in limited amounts.
(d) Investors have not employed any broker or finder in
connection with the transactions contemplated by this Agreement or any of the
Related Agreements.
(e) Investors are "ACCREDITED INVESTORS" (as defined in Rule
501(a) of Regulation D promulgated under the Securities Act). The Corporation
has made available to Investors or its representatives all agreements,
documents, records and books that Investors have requested relating to an
investment in the Insight Preferred Shares or Reserved Shares being acquired by
Investors. Investors have had an opportunity to ask questions of, and receive
answers from, a Person or Persons acting on behalf of the Corporation,
concerning the terms and conditions of
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this investment, and answers have been provided to all of such questions to the
full satisfaction of such Investors. No oral representations have been made or
furnished to, or relied on by, Investors or Investors' representatives in
connection with an investment in any Insight Preferred Shares or Reserved
Shares. Investors have such knowledge and experience in financial and business
matters that it is capable of evaluating the risks and merits of this
investment.
SECTION 5. CONDITIONS PRECEDENT TO THE INVESTORS' OBLIGATIONS AT THE
CLOSING.
The several obligations of the Investors to perform this Agreement are
subject to the satisfaction of the following conditions precedent:
SECTION 5.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Corporation set forth in
SECTION 3 (i) which are not qualified by materiality shall be true and complete
in all material respects and (ii) which are qualified by materiality shall be
true and complete in all respects, in each case on the date hereof and at and as
of the Closing Date as though then made.
SECTION 5.2. PERFORMANCE OF OBLIGATIONS.
The Corporation shall have performed and complied in all material
respects with all agreements, obligations and conditions required to be
performed or complied with by the Corporation under this Agreement.
SECTION 5.3. AUTHORIZATION.
All action necessary to authorize the execution, delivery and
performance by the Corporation of this Agreement and the Related Agreements, and
the consummation of the transactions contemplated hereby and thereby, shall have
been duly and validly taken, and the Corporation shall have full power and right
to consummate the transactions contemplated hereby and thereby.
SECTION 5.4. OPINION OF COUNSEL.
The Investors shall have received an opinion dated the Closing Date
and addressed to the Investors of Bingham, Dana & Gould LLP, counsel to the
Corporation, in form and substance reasonably acceptable to the Investors.
SECTION 5.5. CONSENTS AND APPROVALS.
All corporate, stockholder and other proceedings to be taken and all
waivers, consents, approvals, qualifications and registrations required to be
obtained or effected in connection
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with the issuance, sale, execution, delivery and performance by the Corporation
of this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby, including the reservation, issuance, sale and delivery, as
the case may be, of the Insight Preferred Shares and the Reserved Shares, shall
have been taken, obtained or effected (except for the filing of any notice
subsequent to the Closing that may be required under applicable Federal or state
securities Laws, which notice shall be filed on a timely basis following the
Closing as so required), and all documents incident thereto shall be
satisfactory in form and substance to the Investors. The Investors shall have
received all such originals or certified or other copies of such documents as
have been reasonably requested.
5.6. AMENDMENT OF 1996 STOCK INCENTIVE PLAN.
The 1996 Stock Incentive Plan of the Corporation shall have been
amended to provide that, notwithstanding anything contained therein to the
contrary, subject to the completion of the Closing, the aggregate number of
shares of Common Stock that may be issued after the Closing pursuant thereto
shall be 2,156,388.
5.7. GOVERNMENT CONSENTS, AUTHORIZATIONS, ETC.
All consents, authorizations, orders and approvals of, filings or
registrations with and the expiration of all waiting periods imposed by, any
third party, including, without limitation, any Governmental Authority which are
required for or in connection with the execution and delivery by the Parties of
this Agreement and the Related Agreements to which they may be parties and the
consummation by the Parties of the transactions contemplated hereby and thereby
shall have been obtained or made, in form and substance satisfactory to the
Investors and shall be in full force and effect.
5.8. DUE DILIGENCE.
The Investors shall be satisfied in their sole discretion with the
results of their business, legal, environmental and accounting due diligence
investigation and review of the Corporation and its business, properties and
assets.
5.9. LAWS; PROCEEDINGS.
No Law shall have been enacted and no Proceeding shall be pending, the
effect of which would be to prohibit, restrict, impair or delay the consummation
of the transactions contemplated by this Agreement or any of the Related
Agreements or any of the conditions to the consummation of the transactions
contemplated hereby or thereby or to prohibit, restrict or otherwise impair the
ability of the Investors to own equity interests in the Corporation.
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5.10. BOARD AND GENERAL PARTNER APPROVALS.
The Investors each shall have obtained all requisite approvals from
any governing body thereof for the execution, delivery and performance of this
Agreement and the Related Agreements to which it is a party and the consummation
of the transactions contemplated hereby and thereby.
5.11. RELATED AGREEMENTS.
Each of the following agreements (the "RELATED AGREEMENTS") shall have
been executed and delivered by the parties thereto (excluding any Investor a
party thereto whose execution and delivery of such agreement would otherwise be
a condition precedent to the performance of its own obligations hereunder) and
the transactions contemplated by the Related Agreements consummated or effected,
as the case may be, in accordance with the terms thereof:
(a) the Amended and Restated Registration Rights Agreement
dated as of the Closing Date (the "REGISTRATION RIGHTS AGREEMENT"), among the
Corporation and the Investors (as defined therein), substantially in the form of
EXHIBIT B hereto; and,
(b) the Amended and Restated Stockholders Agreement dated as
of the Closing Date (the "STOCKHOLDERS AGREEMENT"), among the Corporation and
the Stockholders (as defined therein), substantially in the form of EXHIBIT C
hereto.
5.12. RELATED CERTIFICATES.
Each of the following certificates (the "RELATED CERTIFICATES") shall
have been executed and/or delivered, as the case may be, by the Person who or
which is the subject thereof:
(i) certificate of the secretary of the Corporation,
certifying (i) that true and complete copies of the Corporation's
Certificate of Incorporation and By-Laws as amended to and in effect on the
Closing Date are attached thereto, (ii) as to the incumbency and
genuineness of the signatures of each officer of such Person executing this
Agreement or any of the Related Agreements on behalf of the Corporation;
and (iii) the genuineness of the resolutions of the board of directors of
the Corporation (the "BOARD") authorizing the execution, delivery and
performance of this Agreement and the Related Agreements and the
consummation of the transactions contemplated hereby and thereby;
(ii) certificates of the secretaries of state of the
States of Delaware and Massachusetts dated as of the Closing Date,
certifying as to the corporate good standing of the Corporation; and
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(iii) a certificate signed by a principal executive
officer of the Corporation, on behalf of the Corporation, dated as of the
Closing Date, addressed to the Investors and certifying as to the
fulfillment of the conditions set forth in SECTIONS 5.1 through 5.12 (but
not as to the execution and delivery by any of the Investors of any Related
Agreements).
SECTION 6. CONDITIONS PRECEDENT TO THE CORPORATION'S OBLIGATIONS AT THE
CLOSING.
The obligation of the Corporation to issue and sell the Insight
Preferred Shares to Investors at the Closing is subject to the following
conditions precedent:
6.1. REPRESENTATIONS AND WARRANTIES.
The representations and warranties made by Investors and set forth in
SECTION 4, as the case may be, shall (i) if not qualified by materiality, be
true, correct and complete in all material respects and (ii) if qualified by
materiality, be true, correct and complete in all respects, in each case on the
date hereof and at and as of the Closing Date as though then made.
6.2. PERFORMANCE OF OBLIGATIONS.
The Investors shall have performed and complied in all material
respects with all agreements, obligations and conditions required to be
performed or complied with by the Investors under this Agreement.
6.3. RELATED AGREEMENTS.
Each of the Related Agreements shall have been executed and delivered
by the parties thereto (other than the Corporation) and the transactions
contemplated thereby consummated or effected, as the case may be, in accordance
with the terms thereof.
6.4. RELATED CERTIFICATES.
Each of the Related Certificates shall have been executed and/or
delivered, as the case may be, by the Person (other than the Corporation) who or
which is the subject thereof.
SECTION 7. ADDITIONAL AGREEMENTS OF THE PARTIES.
7.1. EFFORTS TO CONSUMMATE.
Each Party shall use reasonable efforts to take or cause to be taken
all actions and do or cause to be done all things required under applicable
Laws, in order to consummate the
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transactions contemplated by this Agreement and the Related Agreements.
7.2. FINANCIAL INFORMATION.
(a) The Corporation shall furnish to the Investors the
following reports:
(i) As soon as practicable after the end of each
fiscal year of the Corporation, and in any event within 90 days thereafter,
consolidated balance sheets of the Corporation and its Subsidiaries (if
any) as of the end of such fiscal year, and consolidated statements of
income and consolidated statements of changes in cash flow of the
Corporation and its Subsidiaries for such fiscal year, prepared in
accordance with GAAP and setting forth in each case in comparative form the
figures for the previous fiscal year and the budgeted figures for the
current fiscal year, all in reasonable detail and audited by independent
public accountants of national standing commonly known as "BIG 6"
accountants selected by the Corporation.
(ii) As soon as practicable after the end of the
first, second and third quarterly accounting periods in each fiscal year of
the Corporation and in any event within 45 days thereafter, a consolidated
balance sheet of the Corporation and its Subsidiaries (if any) as of the
end of each such quarterly period, and consolidated statements of income
and consolidated statements of changes in cash flow of the Corporation and
its Subsidiaries for such period and for the current fiscal year to date,
prepared in accordance with GAAP (other than for accompanying notes),
subject to changes resulting from normal year-end audit adjustments, and
setting forth in each case in comparative form the figures for the same
periods of the previous fiscal year and the budgeted figures for the
current periods, all in reasonable detail and signed by the principal
financial or accounting officer of the Corporation.
(b) The Corporation shall, and shall cause its Subsidiaries
(if any) to, maintain a system of accounting sufficient to enable the
Corporation's independent certified public accountants to render the reports
specified in SECTION 7.2(a).
(c) The Corporation shall submit to the Board at least 60 days
prior to the beginning of each fiscal year, a budget (the "ANNUAL OPERATING
BUDGET") for the Corporation and its Subsidiaries (if any) that contains, at
least with respect to such fiscal year, annual, quarterly and monthly detail,
including, but not limited to, limitations on capital expenditures, operating
expenditures and the incurrence of unsecured, secured and aggregate
indebtedness, and shall be subject to the approval of the Board.
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7.3. ADDITIONAL INFORMATION.
The Corporation shall deliver or provide to the Investors (i) as soon
as practicable after the end of each month and in any event within 45 days
thereafter an unaudited consolidated balance sheet and statements of income and
cash flow of the Corporation and its Subsidiaries (if any) for such month and
for the year to date (in each case compared to the Annual Operating Budget and
to the corresponding period of the prior year), (ii) the Annual Operating Budget
as soon as practicable prior to the beginning of the next fiscal year, (iii)
other budgets or financial plans prepared by the Corporation and presented to
the Board, as soon as they are made available to the Board, (iv) a monthly
letter from the management of the Corporation discussing in reasonable detail
(A) the operations of the Corporation for the previous month period and (B) any
deviations in the actual performance for the previous month period of the
Corporation and its Subsidiaries from the projected performance of the
Corporation and its Subsidiaries set forth in the Annual Operating Budget, and
(v) with reasonable promptness, (A) all financial statements, reports, notices
and other documents sent by the Corporation to its stockholders generally or
released to the public and copies of all regular and periodic reports, if any,
filed by the Corporation with the Securities and Exchange Commission, (B) all
reports prepared for or delivered to the management of the Corporation and its
Subsidiaries by its accountants, and (C) such other information and data,
including access to books and records of the Corporation and its Subsidiaries as
any Investor may from time to time reasonably request.
7.4. EMPLOYEE COMPENSATION.
The Corporation confirms that it submitted prior to May 16, 1997 to
the Board a compensation plan (the "APPROVED COMPENSATION PLAN") acceptable to
the Board, the eligible participants (the "ELIGIBLE PARTICIPANTS") of which are
limited to the senior management and key employees of the Corporation (as
determined by the Board in its sole discretion). The Corporation shall not
provide any compensation (including bonuses) to any Eligible Participant
(whether in respect of such Eligible Participant's services during the
Corporation's fiscal year ended December 31, 1996 or any other fiscal year)
other than (i) in accordance with either existing commitments by the Corporation
to Eligible Participants or the terms and conditions of the Approved
Compensation Plan, or (ii) upon the prior approval of the Compensation
Committee.
7.5. RIGHTS OF INSPECTION.
Each Investor shall have the right, at its expense, to visit and
inspect any of the properties of the Corporation or any of its Subsidiaries and
to discuss their affairs, finances and accounts with their officers, all at such
reasonable times during
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normal business hours and as often as may be reasonably requested.
7.6. INSURANCE.
The Corporation confirms that it and its Subsidiaries (if any), have
obtained and shall, in the future, maintain such insurance, including director
and officer insurance and error and omission insurance, with such coverages and
in such amounts as shall be required to protect such Persons and their
respective directors, officers and employees against all risks usually insured
against by Persons conducting similar businesses and operating similar
properties in the localities where the business of the Corporation and its
Subsidiaries is conducted under policies issued by national insurers of
recognized responsibility.
7.7. USE OF PROCEEDS.
The Corporation shall use the proceeds from the sale of the Insight
Preferred Shares in the manner specified in SECTION 3.24.
7.8. LITIGATION.
The Corporation, promptly upon becoming aware thereof, shall notify
each Investor in writing of any Proceeding in which it or any of its
Subsidiaries is involved and which might, if determined adversely, materially
and adversely effect the Corporation or any of its Subsidiaries.
7.9. COMPLIANCE WITH LAWS.
The Corporation shall, and shall cause its Subsidiaries (if any), each
to, (i) in carrying out its business to comply in all material respects with all
Laws applicable to it, its business and the ownership of its assets and (ii)
shall obtain and maintain in full force and effect all Permits material to and
necessary in the conduct of its business and such Permits shall be maintained in
full force and effect.
7.10. TAXES.
The Corporation shall, and shall cause each of its Subsidiaries to,
pay and discharge all Taxes imposed upon it or upon its income or profits, or
upon any property belonging to it, prior to the date on which penalties attach
thereto, and all lawful claims which, if unpaid, might become an Encumbrance
upon its property, unless contested in good faith by proceedings authorized by
the Board.
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7.11. TERMINATION.
Upon the closing of an Initial Public Offering (as defined in the
Stockholders Agreement), the provisions of SECTIONS 7.1 through 7.10 shall
terminate and shall be of no further force or effect and shall not be binding
upon the Corporation.
SECTION 8. FEES.
(a) The Corporation will pay, and save the Investors harmless
against all liability for the payment of, (i) all costs and other expenses
incurred from time to time by the Corporation in connection with the
Corporation's performance of and compliance with all agreements and conditions
contained herein on its part to be performed or complied with (including the
reasonable cost and expenses of counsel for the Corporation incurred in
connection with the review of this Agreement and the Related Agreements), and
(ii) the costs and expenses incurred by IVP II in connection with the
transactions contemplated by this Agreement and the Related Agreements,
including fees and charges of O'Sullivan Graev & Karabell, LLP, special counsel
to IVP II, for services in connection with the consummation of transactions
contemplated by this Agreement and the Related Agreements, which fees and
charges relating to the transactions contemplated hereby and thereby shall be
paid by the Corporation at the Closing (PROVIDED, HOWEVER, that the
Corporation's obligations under this CLAUSE (ii) shall not exceed $[12],000.
(b) The Corporation further agrees that it shall pay, and will
save the Investors harmless from, any and all liability with respect to any
stamp or similar taxes which may be determined to be payable in connection with
the execution and delivery and performance of the Agreement and the Related
Agreements or any modification, amendment or alteration of the terms or
provisions of this Agreement or any of the Related Agreements, and that it shall
similarly pay and hold the Investors harmless from all issue taxes in respect of
the issuance of the Reserved Shares to the Investors.
SECTION 9. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS, ETC.
(a) All statements contained in this Agreement, any Related
Agreement, any Related Certificate or any other closing certificate (each, an
"OTHER CERTIFICATE") delivered by the Corporation to any Investor, pursuant to
this Agreement or in connection with the transactions contemplated by this
Agreement or any of the Related Agreements shall constitute representations and
warranties by the Corporation under this Agreement to the Investors identified
as being the subject thereof and shall survive the Closing and the consummation
of the transactions contemplated hereby and thereby for a period of 18 months
after the Closing Date; PROVIDED, HOWEVER, that the representations and
warranties of the Corporation set forth in SECTION 3.1 through
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SECTION 3.5 shall survive indefinitely and the representations and warranties of
the Corporation set forth in SECTIONS 3.13, 3.15, 3.18 and 3.20 shall survive
until the expiration of the respective statutes of limitations applicable to the
matters covered thereby.
(b) All statements contained in this Agreement, any Related
Agreement, any Related Certificate or any Other Certificate delivered by any
Investor to the Corporation pursuant to this Agreement or in connection with the
transactions contemplated by this Agreement or any of the Related Agreements
shall constitute representations and warranties by such Investor to the
Corporation under this Agreement and shall survive the Closing and the
consummation of the transactions contemplated hereby and thereby for a period of
18 months after the Closing Date; PROVIDED, HOWEVER, that the representations
and warranties of any Investor set forth in SECTION 4.1 shall survive
indefinitely, and the representations and warranties of any Investor set forth
in SECTION 4.2 shall survive until the expiration of the respective statutes of
limitations applicable to the matters covered thereby.
(c) All agreements contained herein shall survive indefinitely
until, by their respective terms, they are no longer operative.
SECTION 10. INDEMNIFICATION.
(a) The Corporation shall indemnify, defend and hold each
Investor harmless against all liability, loss or damage (including diminution in
value of the Insight Preferred Shares issued to such Investor pursuant to this
Agreement or any Reserved Shares issued upon the conversion of the Insight
Preferred Shares), together with all reasonable costs and expenses (including
legal and accounting fees and expenses) related thereto or incurred in enforcing
this SECTION 10(a) (collectively, "INVESTOR LOSSES"), (i) subject to SECTION 9,
arising from the untruth, inaccuracy or breach of any of the representations or
warranties of the Corporation made to such Investor contained in this Agreement
or any Related Agreement, Related Certificate or Other Certificate or any facts
or circumstances constituting any such untruth, inaccuracy or breach, (ii)
subject to SECTION 9, arising from the untruth or inaccuracy of any information
delivered to such Investor pursuant to the terms of this Agreement or any
Related Agreement, Related Certificate or Other Certificate, (iii) arising from
the breach of any covenant or agreement of the Corporation contained in this
Agreement or any Related Agreement, Related Certificate or Other Certificate or
any facts or circumstances constituting such breach, (iv) arising from any
claim, demand, assessment, judgment, order, decree, action, cause of action,
litigation, suit, investigation or other Proceeding by a third party (whenever
made) arising out of or in connection with (A) the status or conduct of the
Corporation, (B) the execution,
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performance and delivery of this Agreement or any Related Agreement, Related
Certificate or Other Certificate, or (C) any actions taken by or omitted to be
taken by such Investor in connection with this Agreement or any Related
Agreement, Related Certificate or Other Certificate, in each case by virtue of
such Investor's acquisition of Insight Preferred Shares or such Investor or any
Affiliate thereof acting as an adviser to the Corporation (unless the act or
omission giving rise to such Claim resulted primarily out of or was based
primarily upon the gross negligence, fraud or willful misconduct of such
Investor or Affiliate), or (v) with respect to any liability for any brokers' or
finders' fees or compensation owing or alleged to be owing in connection with
the transactions contemplated by this Agreement or any of the Related Agreements
due to the engagement by, or any other act of, the Corporation.
(b) Each Investor severally as to itself only and not jointly
with or as to any other Investor, shall indemnify, defend and hold the
Corporation harmless against all liability, loss or damage, together with all
reasonable costs and expenses (including legal and accounting fees and expenses)
related thereto or incurred in enforcing this SECTION 10(b) (collectively,
"CORPORATION LOSSES"), arising from the untruth, inaccuracy or breach of any of
the representations, warranties, covenants or agreements of such Investor made
to the Corporation contained in this Agreement or any Related Agreement, Related
Certificate, instrument or other writing delivered by or on behalf of such
Investor pursuant to or in connection with the consummation of the transactions
contemplated by this Agreement or any of the Related Agreements.
(c) Notwithstanding the foregoing provisions of this SECTION
10, (i) the maximum liability of the Corporation to indemnify an Investor
pursuant to SECTION 10(a) for all Investor Losses arising under CLAUSES (i),
(ii) and (iii) of SECTION 10(a) shall not exceed an amount equal to the
aggregate Original Issuance Price (as defined in the Amended and Restated
Certificate) of the Insight Preferred Shares acquired by such Investor pursuant
to this Agreement, (but excluding from such amount any Investor Losses arising
under CLAUSE (i) of SECTION 10(a) by reason of the untruth, inaccuracy or breach
of any of the representations or warranties of the Corporation made to such
Investor contained in SECTION 3.5 of this Agreement), and (ii) the maximum
liability of any Investor to indemnify the Corporation pursuant to SECTION 10(b)
for all Corporation Losses arising under SECTION 10(b) shall not exceed the
amount of the maximum liability of the Corporation to indemnify such Investor
pursuant to the foregoing CLAUSE (i).
SECTION 11. REMEDIES.
The Parties shall each have and retain all rights and remedies
existing in their favor under this Agreement, at law or equity, including rights
to bring actions for specific
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performance and injunctive and other equitable relief (including, without
limitation, the remedy of rescission) to enforce or prevent a breach or any
violation of this Agreement. All such rights and remedies shall be cumulative
and the existence, assertion, pursuit or exercise of any thereof by a Party
shall not preclude the assertion, pursuit or exercise by such Party of any other
rights or remedies available to it. Without limiting the generality of the
foregoing, the Parties hereby agree that in the event the Corporation fails to
convey, in accordance with the provisions of this Agreement, to the Investors
Insight Preferred Shares or Reserved Shares being acquired by the Investors, the
Investors' remedy at law may be inadequate. In such event, the Investors shall
have the right, in addition to all other rights and remedies it may have, to
specific performance of the obligation of the Corporation to convey the Insight
Preferred Shares or Reserved Shares in accordance with the provisions of this
Agreement.
SECTION 12. SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, this Agreement will bind and
inure to the benefit of and be enforceable by the Corporation and its successors
and assigns and the Investors and any subsequent holders of Insight Preferred
Shares or Reserved Shares and the respective successors and assigns of each of
them, so long as they hold Insight Preferred Shares or Reserved Shares.
SECTION 13. ENTIRE AGREEMENT.
This Agreement, together with the Related Agreements, embodies the
complete agreement and understanding among the Parties with respect to the
subject matter hereof and thereof and supersede and preempt any prior
understandings, agreements or representations by or among the Parties, written
or oral, which may have related to the subject matter hereof or thereof in any
way.
SECTION 14. NOTICES.
All notices, consents or other communications which are required or
otherwise delivered hereunder shall be in writing and shall be deemed to have
been duly given if (i) personally delivered or sent by telecopier, (ii) sent by
nationally recognized overnight courier or (iii) sent by registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
If to the Corporation, to:
Exchange Applications, Inc.
695 Atlantic Avenue
Boston, Massachusetts 02110
Telephone: (617) 737-2244
Telecopy: (617) 443-9143
Attention: Andrew J. Frawley
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with a copy to:
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Telephone: (617) 951-8866
Telecopy: (617) 951-8736
Attention: Neil W. Townsend, Esq.
If to IVP II
Insight Capital Partners II, L.P.
c/o Insight Venture Associates II, LLC
411 West Putnam Avenue, Suite 125
Greenwich, Connecticut 06830
Telephone: (203) 862-7054
Telecopy: (203) 862-7357
Attention: Ramanan Raghavendran
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza, 41st Floor
New York, New York 10112
Telephone: (212) 408-2400
Telecopy: (212) 408-2420
Attention: John J. Suydam, Esq.
If to Wexford, to:
Wexford InSight LLC
c/o Wexford Management LLC
411 West Putnam Avenue, Suite 125
Greenwich, Connecticut 06830
Telephone: (203) 862-7054
Telecopy: (203) 862-7357
Attention: Robert Holtz
with a copy to:
Wexford InSight LLC
c/o Wexford Management LLC
411 West Putnam Avenue, Suite 125
Greenwich, Connecticut 06830
Telephone: (203) 862-7028
Telecopy: (203) 862-7328
Attention: Howard Sullivan, Esq.
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) when delivered, if
personally delivered or sent by telecopier, (ii) on the first Business Day
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after dispatch, if sent by nationally recognized, overnight courier guaranteeing
next Business Day delivery and (iii) on the fifth Business Day following the
date on which the piece of mail containing such communication is posted, if sent
by mail.
SECTION 15. MODIFICATIONS; AMENDMENTS; AND WAIVERS.
The terms and provisions of this Agreement may not be modified or
amended, nor may any provision applicable to the Investors be waived, except
pursuant to a writing signed by the Corporation and the Investors. The failure
of any party to enforce any of the provisions of this Agreement shall in no way
be construed as a waiver of such provisions and shall not affect the right of
such party thereafter to enforce each and every provision of this Agreement in
accordance with its terms.
SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
SECTION 17. INTERPRETATION; CONSTRUCTION.
The term "THIS AGREEMENT" means this agreement together with all
schedules and exhibits hereto, as the same may from time to time be amended,
modified, supplemented or restated in accordance with the terms hereof. In this
Agreement, the term "BEST KNOWLEDGE" of any Person means (i) the actual
knowledge of such Person and (ii) that knowledge which should have been acquired
by such Person after making such due inquiry and exercising such due diligence
as a prudent businessperson would have made or exercised in the management of
his or her business affairs, including due inquiry of those key employees and
professional advisers (including attorneys, accountants and consultants) of the
Person who could reasonably be expected to have actual knowledge of the matters
in question. When used in the case of the Corporation, the term "BEST KNOWLEDGE"
shall include the Best Knowledge of the Corporation and its Subsidiaries (if
any). The use in this Agreement of the term "INCLUDING" means "INCLUDING,
WITHOUT LIMITATION." The words "HEREIN", "HEREOF", "HEREUNDER", "HEREBY",
"HERETO", "HEREINAFTER", and other words of similar import refer to this
Agreement as a whole, including the schedules and exhibits, as the same may from
time to time be amended, modified, supplemented or restated, and not to any
particular article, section, subsection, paragraph, subparagraph or clause
contained in this Agreement. All references to articles, sections, subsections,
clauses, paragraphs, schedules and exhibits mean such provisions of this
Agreement and the schedules and exhibits attached to this Agreement, except
where otherwise stated. The title of and the article, section and paragraph
headings in this Agreement are for
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convenience of reference only and shall not govern or affect the interpretation
of any of the terms or provisions of this Agreement. The use herein of the
masculine, feminine or neuter forms shall also denote the other forms, as in
each case the context may require. Where specific language is used to clarify by
example a general statement contained herein, such specific language shall not
be deemed to modify, limit or restrict in any manner the construction of the
general statement to which it relates. The language used in this Agreement has
been chosen by the parties to express their mutual intent, and no rule of strict
construction shall be applied against any party. Accounting terms used but not
otherwise defined herein shall have the meanings given to them under GAAP.
SECTION 18. GOVERNING LAW.
All questions concerning the construction, interpretation and validity
of this Agreement shall be governed by and construed and enforced in accordance
with the domestic laws of the Commonwealth of Massachusetts, without giving
effect to any choice or conflict of law provision or rule (whether in the
Commonwealth of Massachusetts or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the Commonwealth of
Massachusetts. In furtherance of the foregoing, the internal law of the
Commonwealth of Massachusetts will control the interpretation and construction
of this Agreement, even if under such jurisdiction's choice of law or conflict
of law analysis, the substantive law of some other jurisdiction would ordinarily
apply. Notwithstanding the foregoing provisions of this SECTION 18, those
provisions of this Agreement that relate to the internal governance of the
Corporation shall be governed by and construed and enforced in accordance with
the internal laws of the State of Delaware.
SECTION 19. MUTUAL WAIVER OF JURY TRIAL.
BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY (RATHER THAN
ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO
ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR ANY DOCUMENTS
RELATED HERETO.
* * * * *
-35-
<PAGE> 38
IN WITNESS WHEREOF, each of the undersigned has caused this Securities
Purchase Agreement to be executed as of the date first written above.
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
--------------------------------
Andrew J. Frawley
President
<PAGE> 39
INVESTORS:
INSIGHT CAPITAL PARTNERS II, L.P.
BY: Insight Venture Associates II, LLC,
its general partner
By: /s/ Jeffrey Horing
--------------------------------
Name: Jeffrey Horing
Title:
WEXFORD INSIGHT LLC
BY: WEXFORD MANAGEMENT LLC,
its Investment Manager
By: /s/ Robert Holtz
--------------------------------
Name: Robert Holtz
Title: Principal
<PAGE> 1
EXHIBIT 10.11
STOCK PURCHASE AND WAIVER AGREEMENT
dated as of December 4, 1997 (this
"Agreement"), among Exchange Applications,
Inc., a Delaware corporation ("Exchange
Applications"), Insight Venture Partners I,
L.P., a Delaware limited partnership, Patrick
D. Brady, Gregory P. Shlopak, David H.
Brault, Ted C. Axelrod, Terry B. Angstadt,
James T. Brady, Dominic F. Mammola, James A.
Dooley, Diane K. Green, Andrew J. Frawley,
Steven Feldman, David McFarlane, Daniel Cox,
Patrick McHugh, Stewart Vassie and Michael
McGonagle, (all collectively, the
"Purchasers") and GAP Coinvestment Partners,
L.P., a New York limited partnership (the
"Seller").
WHEREAS, certain of the Purchasers, the Seller and Exchange
Applications, are parties to the Stockholders Agreement dated as of March 18,
1997 (the "Stockholders Agreement"); and
WHEREAS, the Seller is the owner of 246,006 shares of Series B
Convertible Preferred Stock of Exchange Applications $.001 par value (the
"Shares"). Upon the terms and subject to the conditions of this Agreement, each
of the Purchasers will purchase that number of Shares listed on Schedule I
hereto from the Seller, in each case for a cash purchase price listed on
Schedule I hereto for an aggregate purchase price of Eight hundred three
thousand, nine hundred forty-seven dollars and fifty eight cents ($803,947.58)
(the "Purchase Price").
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, the parties agree
as follows:
1. WAIVER OF RIGHTS. Each of the undersigned which is a party to the
Stockholders Agreement hereby waives its rights under Section 3 of the
Stockholders Agreement with respect to the transaction contemplated hereby.
2. SALE AND PURCHASE OF SHARES. Upon the terms and subject to the
conditions of this Agreement, the Seller shall sell, transfer and convey to each
of the Purchasers, and each of the Purchasers shall purchase and acquire from
the Seller, that number of Shares listed on Schedule I hereto for the cash
consideration set forth herein.
<PAGE> 2
3. DELIVERY.
(a) The Seller shall deliver to Exchange Applications for
cancellation, against delivery to the Seller by the Purchasers of the
aggregate purchase price therefor, a stock certificate representing the
aggregate number of Shares to be purchased by the Purchasers (the "Stock
Certificate"), with all necessary documentary or transfer tax stamps
affixed (the "Document"), free and clear of all security interests, liens,
pledges, claims, charges, escrows, encumbrances, options, rights of first
refusal, mortgages, indentures, security agreements or other agreements,
arrangements, contracts, commitments, understandings or obligations
(collectively, "Liens"), whether written or oral and whether or not
relating in any way to credit or the borrowing of money. Transfer of the
Securities shall be deemed to have occurred upon cancellation of the Stock
Certificate.
(b) upon receipt of an executed Agreement and the Document,
Exchange Applications shall cause to be issued certificates to each
Purchaser representing the number of shares to be purchased by such
Purchaser, free and clear of all Liens.
4. PAYMENT. Concurrently with the receipt by Exchange Applications of
an executed Agreement and the Document, each of the Purchasers shall deliver to
the Seller the portion of the Purchase Price to be paid by such Purchaser, by a
certified or bank check payable to the Seller or a wire transfer of immediately
available funds to an account designated by the Seller.
5. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents and warrants to each of the Purchasers as follows:
(a) the Seller has full partnership power and authority to
execute and deliver this Agreement and consummate the transactions
contemplated hereby;
(b) the execution and delivery by the Seller of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all requisite partnership action on the part of the Seller;
(c) this Agreement constitutes a legal, valid and binding
obligation of the Seller, enforceable in accordance with its terms, except
that such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the rights of
creditors generally or by general equitable principles;
2
<PAGE> 3
(d) the execution and delivery by the Seller of this Agreement
and the consummation by the Seller of the transactions contemplated hereby
(i) will not violate any law, statute, rule or regulation, (ii) will not
conflict with any provision of any partnership agreement, or other
organizational or constitutive instrument, if any, of the Seller, (iii)
will not require or make necessary any consent, approval or other action,
or notice to, any person, except for those that have been obtained or made,
and (iv) will not conflict with, or result in a violation of, any agreement
or other document or instrument to which the Seller is a party or by which
it, or any of its assets or properties, is bound; and
(e) the Seller has good and marketable title to all of the
Shares, free and clear of all Liens.
(f) the Seller has complied with, and shall continue to comply
with, the terms and conditions of the Investor Nondisclosure Agreement,
dated as of March 18, 1997 (the "NDA"), between the Seller and Exchange
Applications, provided that Exchange Application acknowledges that (i) the
Seller has not received any confidential information about Exchange
Application since not later than December 31, 1996 other than as set forth
in the Securities Purchase Agreement, dated as of March 18, 1997, among
Exchange Applications and the Investor, named therein, (ii) General
Atlantic Partners, LLC ("GAP LLC" an affiliate of the Seller), has, through
two of its affiliate, consummated an investment in Prime Response Group
Inc., a direct marketing enterprise software company, (iii) GAP LLC is in
the business of investing in companies in the software and information
technology industry and (iv) Exchange Application has not received notice
of and has no actual knowledge of any breach or violation of the NDA by the
Seller, GAP LLC or any partner, member or employee thereof.
6. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Each of the
Purchasers, severally and not jointly, represents and warrants to Seller as
follows:
(a) Such Purchaser has the full power and authority to execute
and deliver this Agreement and consummate the transactions contemplated
hereby (solely or to itself);
(b) the execution and delivery by such Purchaser of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all requisite action on the part of such Purchaser;
(c) the execution and delivery by such Purchaser of this
Agreement and the consummation by such Purchaser of
3
<PAGE> 4
the transactions contemplated hereby (i) will not violate any law, statute,
rule or regulation, (ii) will not conflict with any provision of any
partnership agreement, certificate of incorporation, or other
organizational or constitutive instrument, if any, of such Purchaser, (iii)
will not require or make necessary any consent approval or other action, or
notice to, any person, except for those that have been obtained or made,
and (iv) will not conflict with, or result in a violation of, any agreement
or other document or instrument to which such Purchaser is a party or by
which it, or any of its assets or properties, is bound; and
(d) this Agreement constitutes a legal, valid and binding
obligation of such Purchaser, enforceable in accordance with its terms,
except that such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the rights of
creditors generally or by general equitable principles;
(e) this Agreement is made with each of the Purchasers in
reliance upon such Purchaser's representation to the Seller, which by
executing this Agreement each Seller hereby severally confirms, that:
(i) with respect to Andrew J. Frawley, David McFarlane, Michael
McGonagle, Patrick D. Brady, Gregory P. Shlopak, Ted E.
Axelrod, Terry B. Angstadt and Insight, it is an "accredited
investor" as such term is defined in Rule 501(a) of
Regulation D promulgated under the Securities Act;
(ii) it understands that its interest in Exchange Applications
will not be registered or qualified under any state
securities or blue sky laws and cannot be resold without
such registration or qualification or an exemption
therefrom.
(iii) it understands that its Shares have not been registered
under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on an exemption from
registration thereunder for transactions not involving a
public offering, and that such Shares may not be sold,
transferred or otherwise disposed of except as permitted
under the Securities Act and applicable state securities
laws pursuant to registration or exemption therefrom;
(iv) it is acquiring its Shares for his own account for
investment purposes only and not with a
4
<PAGE> 5
view to resale, assignment or other distribution, in whole
or in part, and no other person has or will have a direct or
indirect beneficial interest in such Shares;
(v) it understands that the Shares are a speculative investment
and involve a high degree of risk, the transferability of
the Shares is substantially restricted, there will be no
public market for such Shares and it may not be possible for
such Purchaser to liquidate its investment in Exchange
Applications;
(vi) it is able to bear the substantial economic risks of an
investment in such Shares and can afford a complete loss of
such investment;
(vii) it has such knowledge and experience in financial,
investment and business matters so as to enable it, to use
the information made available to it in connection with the
purchase of such Shares, to evaluate the merits and risks of
such purchase, and to make an informed investment decision
with respect thereto;
(viii) it has carefully considered and has, to the extent it
believes such discussions necessary, discussed with its
professional legal, tax, accounting and financial advisors
he suitability of its purchase of such Shares;
(ix) it has had an opportunity to ask questions of, and receive
answers from, Exchange Applications, or a person or persons
acting on its behalf, concerning the terms and conditions of
his purchase of such Shares, and all such questions have
been answered to his full satisfaction;
(x) it has had the opportunity to review any documents relating
to Exchange Applications requested by it and to conduct due
diligence, and such due diligence review has been fully
satisfactory to it; and
(xi) it is not purchasing such Shares as a result of, or
subsequent to, any advertisement, article, notice or other
communication published in any newspaper, magazine or
similar medium or broadcast over radio or television, or any
seminar or meeting whose attendees have
5
<PAGE> 6
been invited by any general solicitation or general
advertising.
7. REPRESENTATION AND WARRANTY OF EXCHANGE APPLICATIONS. Exchange
Applications represents and warrants to the Seller that Exchange Applications
has not engaged, on behalf of the Seller, in any General Solicitation (as
defined under applicable Securities Laws), including, without limitation, acting
as underwriter, of the Shares.
8. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
9. ENTIRE AGREEMENT; INTERPRETATION. This Agreement, embodies the
complete agreement and understanding among the parties hereto with respect to
the subject matter hereof and thereof and supersedes and preempts any prior
understandings, agreements or representations by or among the Parties, written
or oral, which may have related to the subject matter hereof or thereof in any
way. Any terms defined in this Agreement shall apply to the singular and plural
forms of the terms defined. Whenever the context requires, any pronoun shall
include the corresponding masculine, feminine and neuter forms. The words
"include," "includes" and "including" shall be deemed to be followed by the
phrase "without limitation."
10. GOVERNING LAW. All questions concerning the construction,
interpretation and validity of this Agreement shall be governed by and construed
and enforced in accordance with the domestic laws of the State of New York,
without giving effect to any choice or conflict of law provision or rule
(whether in the State of New York or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of New
York. In furtherance of the foregoing, the internal law of the State of New York
will control the interpretation and construction of this Agreement, even if
under such jurisdiction's choice of law or conflict of law analysis, the
substantive law of some other jurisdiction would ordinarily apply.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered on the date first above written.
PURCHASERS:
/s/ Andrew J. Frawley
-------------------------------
Andrew J. Frawley
/s/ David McFarlane
-------------------------------
David McFarlane
/s/ Michael McGonagle
-------------------------------
Michael McGonagle
/s/ Daniel Cox
-------------------------------
Daniel Cox
/s/ Patrick McHugh
-------------------------------
Patrick McHugh
/s/ Stewart Vassie
-------------------------------
Stewart Vassie
/s/ Steven Feldman
-------------------------------
Steven Feldman
/s/ Patrick D. Brady
-------------------------------
Patrick D. Brady
/s/ Gregory P. Shlopak
-------------------------------
Gregory P. Shlopak
<PAGE> 8
/s/ David H. Brault
-------------------------------
David H. Brault
/s/ Ted L. Axelrod
-------------------------------
Ted L. Axelrod
/s/ Terry B. Angstadt
-------------------------------
Terry B. Angstadt
/s/ James T. Brady
-------------------------------
James T. Brady
/s/ Dominic F. Mammola
-------------------------------
Dominic F. Mammola
/s/ James A. Dooley
-------------------------------
James A. Dooley
/s/ Diane K. Green
-------------------------------
Diane K. Green
<PAGE> 9
INSIGHT VENTURE PARTNERS I, L.P.
By: INSIGHT VENTURE ASSOCIATES, LLC
its general partner
By: /s/ Jeffrey Horing
----------------------------------------
Name: Jeffrey Horing
Title:
FOR PURPOSES OF SECTION 1 ONLY:
GRANT & PARTNERS LIMITED PARTNERSHIP
By: GRANT & PARTNERS, INC.,
its general partner
By: /s/ Alan W. H. Grant
----------------------------------------
Name: Alan W. H. Grant
Title: President
CYRK, INC.
By: /s/ Patrick Brady
----------------------------------------
Name: Patrick Brady
Title: President
WEXFORD INSIGHT LLC
By: WEXFORD MANAGEMENT LLC
its investment manager
By: /s/ Robert Holtz
----------------------------------------
Name: Robert Holtz
Title: Principal
<PAGE> 10
SELLER:
GAP COINVESTMENT PARTNERS, L.P.
By: /s/ Steven A. Denning
----------------------------------
Name: Steven A. Denning
Title: a general partner
<PAGE> 11
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
----------------------------------
Andrew J. Frawley
President
<PAGE> 12
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Shares Purchase Price
Purchaser to be purchased to be paid Total
--------- --------------- -------------- -----------
<S> <C> <C> <C>
EXCHANGE APPLICATIONS, INC. INVESTORS
Andrew Frawley 38,249 shares $3.268 $124,997.73
David McFarlane 26,009 shares $3.268 $ 84,997.41
Daniel Cox 17,000 shares $3.268 $ 55,556.00
Patrick McHugh 10,000 shares $3.268 $ 32,680.00
Michael McGonagle 5,000 shares $3.268 $ 16,340.00
Stewart Vassie 12,851 shares $3.268 $ 41,997.07
Steven Feldman 6,119 shares $3.268 $ 19,996.89
Subtotal: 115,228 shares $376,565.10
CYRK, INC. INVESTORS
Patrick D. Brady 41,317 shares $3.268 $135,023.95
Gregory P. Shlopak 15,299 shares $3.268 $ 49,997.13
David H. Brault 4,589 shares $3.268 $ 14,996.85
Ted L. Axelrod 4,589 shares $3.268 $ 14,996.85
Terry B. Angstadt 3,059 shares $3.268 $ 9,996.81
James T. Brady 3,059 shares $3.268 $ 9,996.81
Dominic F. Mammola 1,529 shares $3.268 $ 4,996.77
James A. Dooley 1,529 shares $3.268 $ 4,996.77
Diane K. Green 1,529 shares $3.268 $ 4,996.77
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C> <C>
Subtotal: 76,499 shares $249,998.71
INSIGHT INVESTORS
Insight Venture 54,279 shares $3.268 $177,383.77
Partners I, L.P.
Total 246,006 $803,947.58
</TABLE>
<PAGE> 1
EXHIBIT 10.12
NON-NEGOTIABLE NOTE
$124,997.73 December 4, 1997
FOR VALUE RECEIVED, the undersigned, ANDREW J. FRAWLEY (the
"EXECUTIVE"), promises to pay to EXCHANGE APPLICATIONS, INC., a Delaware
corporation (the "COMPANY"), at 695 Atlantic Avenue, Boston, Massachusetts
02110, or at such other place as the holder hereof may from time to time
designate in writing, in lawful money of the United States of America and in
immediately available funds, the principal sum of ONE HUNDRED TWENTY-FOUR
THOUSAND NINE HUNDRED NINETY SEVEN DOLLARS AND SEVENTY-THREE CENTS ($124,997.73)
in the amounts and at the times set forth below. Interest shall accrue on the
outstanding principal amount hereof from the date hereof through and including
the date on which such principal amount is paid in full, computed on the basis
of a year of 365 or 366 days, as the case may be, at a rate per annum of 8%,
compounded annually and payable on the maturity hereof.
THIS NOTE SHALL NOT BE NEGOTIABLE, ASSIGNABLE OR OTHERWISE TRANSFERABLE
BY THE COMPANY. THE EXECUTIVE MAY NOT ASSIGN OR OTHERWISE TRANSFER THIS NOTE OR
ANY OF HIS OBLIGATIONS HEREUNDER.
The principal of this Note, if not earlier paid in full, shall be due
and payable in full on December 4, 2007.
The principal of and/or any accrued interest on this Note may be prepaid
in whole or in part at any time without premium or penalty and without prior
notice.
Any overdue payment of principal and, to the extent permitted by
applicable law, overdue interest, shall bear interest until such overdue
principal or interest is paid, computed on the basis of a year of 365 or 366
days, as the case may be, and paid for the actual number of days elapsed, at a
rate per annum of 12%.
In order to secure the due and punctual payment and performance of his
obligations hereunder, the Executive hereby pledges, assigns and grants a
continuing security interest in and lien on 38,249 shares of issued and
outstanding Series B Convertible Preferred Stock of the Company evidenced by
Certificate Number B-4, issued by the Company in the name of the Executive (the
"STOCK"), and all income therefrom, increases therein and
<PAGE> 2
-2-
proceeds thereof, to be held by the Company subject to the terms and conditions
hereinafter set forth. The certificate for the Stock, accompanied by stock
powers or other appropriate instruments of assignment thereof duly executed in
blank by the Executive, have been delivered to the Company simultaneously with
the execution and delivery of this Note.
The Executive shall not sell, assign or otherwise transfer any of his
right, title or interest in or to any Stock without the prior written consent of
the Company, except for (a) the pledge of the Stock to the Company pursuant
hereto, and (b) transfers of Stock pursuant to Section 3(a)(iv) of the Amended
and Restated Stockholders Agreement, dated as of December 4, 1997, by and among
the Company and the Stockholders named therein, provided that (i) any transfer
of Stock pursuant to clause (b) above shall be subject to the Company's
continuing security interest in and lien on such Stock hereunder and (ii) any
transferee of Stock transferred pursuant to clause (b) above shall have executed
and delivered to the Company a written acknowledgment in form and substance
reasonably satisfactory to the Company to the effect that the transfer of such
Stock is subject to the Company's continuing security interest in and lien on
such Stock hereunder.
The Executive shall be entitled to receive all cash dividends paid in
respect of the Stock and to vote the Stock and to give consents, waivers and
ratifications in respect of the Stock unless and until (a) the Executive shall
default in the payment of any installment of principal or interest due
hereunder, or (b) a voluntary proceeding is filed by the Executive or an
involuntary proceeding is filed against the Executive (which involuntary
proceeding shall continue for a period of more than sixty (60) days without
being dismissed) seeking liquidation, reorganization or an arrangement with the
Executive's creditors under any provision of the United States Bankruptcy Code
as then in effect (each of (a) and (b) above being referred to herein as an
"EVENT OF DEFAULT"). Except as set forth in the immediately preceding sentence,
all sums or other property paid or distributed upon or with respect to the Stock
shall be paid over and delivered to the Company to be held as further security
for the due and punctual payment and performance of the Executive's obligations
hereunder. In the event that, notwithstanding the immediately preceding
sentence, any such sums or other property are received by the Executive, such
sums or property shall be held in trust for the Company and promptly paid over
and delivered to the Company.
Upon the occurrence and during the continuance of an Event of Default,
the Company shall thereafter have the following rights and remedies (to the
extent permitted by applicable law) in addition to the rights and remedies of a
secured party under the Uniform Commercial Code of Massachusetts, all
<PAGE> 3
-3-
such rights and remedies being cumulative, not exclusive, and enforceable
alternatively, successively or concurrently:
(i) If the Company so elects and gives written notice of such
election to the Executive, the Company may vote any or all of the Stock
possessing voting rights (whether or not the same shall have been
transferred into its name or the name of its nominee or nominees) and
give all consents, waivers and ratifications in respect of the Stock and
otherwise act with respect thereto as though it were the outright owner
thereof, the Executive hereby irrevocably constituting and appointing
the Company the proxy and attorney-in-fact of the Executive, with full
power of substitution, to do so;
(ii) The Company may demand, sue for, collect or make any
compromise or settlement in respect of any Stock held by it hereunder
that it deems suitable;
(iii) After fifteen (15) days' written notice to the Executive,
the Company may sell, resell, assign and deliver, or otherwise dispose
of any or all of the Stock, for cash and/or credit and upon such terms
at such place or places and at such time or times and to such persons,
firms, companies or corporations as the Company shall approve, all
without demand for performance by the Executive or advertisement or any
further notice whatsoever except such as may be required by law; and
(iv) The Company may at any time, at its option, cause all or
any part of the Stock held by it to be transferred into its name or the
name of its nominee or nominees, receive any income thereon and hold
such income as additional collateral or apply it to the obligations
hereunder.
Notwithstanding anything herein to the contrary, upon the occurrence of
an Event of Default, all of the unpaid principal and interest hereunder shall be
immediately due and payable automatically and without any requirement of any
notice from or action by the Company and without presentment, demand, protest
and other notice of any kind, all of which are hereby expressly waived by the
Executive.
No provision of this Note shall require the payment of, or permit
contracting for, charging, receiving or collecting interest in excess of the
rate then permitted by applicable law. Regardless of any provision contained
herein, the Company shall not be entitled to contract for, charge, take,
reserve, receive or apply, as interest hereunder, any amount in excess of the
highest lawful rate, and, in the event the Company ever contracts for, charges,
takes, reserves, receives or applies as interest any such excess, it
<PAGE> 4
-4-
shall be deemed a partial prepayment of principal and treated hereunder as such,
and if the principal debt is paid in full, any remaining excess shall forthwith
be paid to the Executive.
The Executive hereby (i) waives presentment, demand, protest and notice
of presentment, notice of dishonor of this debt and each and every other notice
of any kind respecting this Note and (ii) agrees that this Note shall be binding
upon it and its successors and assigns.
The Executive shall pay on demand all collection costs and expenses,
including reasonable legal fees and disbursements, incurred by the holder of
this Note in enforcing payment hereof.
THIS NOTE SHALL BE DEEMED TO TAKE EFFECT AS A SEALED INSTRUMENT UNDER
AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW.
<PAGE> 5
-5-
IN WITNESS WHEREOF, the Executive has executed this Note as an
instrument under seal as of the day and year first above written.
THE EXECUTIVE:
--------------------------------
Andrew J. Frawley
<PAGE> 1
EXHIBIT 10.13
================================================================================
EXCHANGE APPLICATIONS, INC.
(a Delaware corporation)
------------------------
AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
------------------------
DECEMBER 4, 1997
================================================================================
<PAGE> 2
SCHEDULES:
Schedule I - Stockholders
Schedule II - Directors
EXHIBITS:
Exhibit A - Amended and Restated Certificate
of Incorporation
Exhibit B - Business Plan
Exhibit C - By-Laws
Exhibit D - Joinder Agreement
Exhibit E - Consent and Agreement of Spouse
<PAGE> 3
AMENDED AND RESTATED STOCKHOLDERS
AGREEMENT dated as of December 4, 1997, among
EXCHANGE APPLICATIONS, INC., a Delaware
corporation (the "CORPORATION"), and the
STOCKHOLDERS (as defined below).
Attached hereto as EXHIBIT A is a copy of the Amended and Restated
Certificate of Incorporation of the Corporation as filed with the Secretary of
State of the State of Delaware. It is deemed to be in the best interest of the
Corporation and the Stockholders that provision be made for the continuity and
stability of the business and policies of the Corporation and its Subsidiaries
(as defined below), as the same may exist from time to time (each, an "OPERATING
COMPANY"), and, to that end, the Corporation and the Stockholders desire to set
forth their agreement with respect to the shares of capital stock of the
Corporation owned by them.
ACCORDINGLY, in consideration of the mutual covenants and agreements
contained in this Agreement, the sufficiency of which is hereby acknowledged,
the parties agree as follows:
1. DEFINITIONS; RULES OF CONSTRUCTION.
(a) DEFINITIONS. As used in this Agreement, the following terms shall
have the meanings ascribed to them below:
"ACCEPTED SECURITIES" has the meaning ascribed to it in SECTION 4(B).
"AFFILIATE" means, with respect to any Person, any of (a) a director, officer or
partner of such Person, (b) a spouse, parent, sibling or descendant of such
Person (or a spouse, parent, sibling or descendant of a director, officer or
partner of such Person) and (c) any other Person that, directly or indirectly,
through one or more intermediaries, controls, or is controlled by, or is under
common control with, such Person. For the purpose of the above definition, the
term "CONTROL" (including, with correlative meaning, the terms "CONTROLLING",
"CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
"AGREEMENT" means this Stockholders Agreement.
"ANNUAL OPERATING BUDGET" has the meaning ascribed to it in the
Securities Purchase Agreement.
"APPLICABLE LAW" means with respect to any Person, all provisions of
laws, statutes, ordinances, rules, regulations,
<PAGE> 4
permits, certificates or orders of any Governmental Authority applicable to such
Person or any of such Person's assets or property or to which such Person or any
of its assets or property is subject, and all judgments, injunctions, orders and
decrees of all courts and arbitrators in proceedings or actions in which such
Person is a party or by which it or any of its assets or properties is or may be
bound or subject.
"ASSET SALE" means any sale, transfer, lease or other disposition of
all or any substantial part of the assets, properties or rights of the
Corporation or any of its Subsidiaries; PROVIDED, HOWEVER, that the term "ASSET
SALE" shall not include any sale, transfer, license, lease or other disposition
that (i) is in the ordinary course of business or (ii) is of worn-out or
obsolete assets or properties.
"BOARD" and "BOARD OF DIRECTORS" means the Board of Directors of the
Corporation.
"BUSINESS DAY" means any day that is not a Saturday, Sunday or other
day on which banks are not required to be open in New York, New York or Boston,
Massachusetts.
"BUSINESS PLAN" means the business plan for the Corporation and its
Subsidiaries (if any) delivered to the Insight Stockholders and the Insight II
Stockholders on or prior to the date hereof, a copy of which is attached hereto
as EXHIBIT B, which Business Plan has been material to the Insight Stockholders
and Insight II Stockholders in their respective decisions to enter into this
Agreement and the Related Agreements to which they are parties.
"BY-LAWS" means the By-Laws of the Corporation as amended, modified,
supplemented and restated and in effect from time to time. The By-Laws of the
Corporation as in effect on the date hereof are attached hereto as EXHIBIT C and
are hereby ratified, confirmed, adopted and approved by the Stockholders.
"CERTIFICATE OF INCORPORATION" means the Amended and Restated
Certificate of Incorporation of the Corporation as filed with the Secretary of
State of Delaware on December __, 1997, a copy of which is attached as EXHIBIT
A, as the same may hereafter be amended, modified, supplemented and restated and
in effect from time to time.
"COMMON STOCK" means the Common Stock, $.001 par value, of the
Corporation.
"COMMON STOCK EQUIVALENT" means (i) a share of Common Stock or (ii) the
right to acquire, whether or not immediately exercisable, one share of Common
Stock, whether evidenced by an option, warrant, convertible security or other
instrument or agreement.
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"COMPETING TRANSFEREE" has the meaning ascribed to it in
SECTION 3(a)(v).
"CORPORATION" has the meaning ascribed to it in the caption to this
Agreement.
"CO-SALE NOTICE" has the meaning ascribed to it in SECTION 3(c)(ii).
"CO-SALE PERCENTAGE" has the meaning ascribed to it in
SECTION 3(c)(iv).
"CYRK" means CYRK, Inc., a Delaware corporation.
"EXCLUDED SECURITIES" means any of the following Securities:
(i) shares of Common Stock or options to purchase shares of
Common Stock which may after March 18, 1997 be issued to employees,
officers and directors of, and consultants to, the Corporation or any
of its Subsidiaries, in each case upon the approval of the Compensation
Committee specified in SECTION 2(F) or pursuant to a commitment made by
the Corporation prior to March 18, 1997 reasonably documented in
writing, not exceeding 2,156,388 shares of Common Stock on a Common
Stock Equivalent basis in the aggregate (as adjusted to reflect any
stock dividend or distribution, stock split, reverse stock split or
combination or other similar PRO RATA recapitalization event affecting
the Common Stock and as increased by any such shares repurchased by the
Corporation at cost or any such options terminated upon any such
employees, officers or directors ceasing to be employees, officers or
directors of the Corporation, respectively);
(ii) Securities issued by the Corporation upon the conversion of
any shares of Series B Preferred Stock, Series C Preferred Stock, or
the exercise of any Common Stock Equivalents;
(iii) Securities issued by the Corporation to give effect to any
stock dividend or distribution, stock split, reverse stock split or
combination or other similar PRO RATA recapitalization event affecting
any class or series of the Corporation's capital stock;
(iv) shares of Common Stock issued by the Corporation in a Public
Offering; and
(v) shares of Common Stock issued by the Corporation as
consideration for the purchase or acquisition of the
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assets or Securities of another Person relating to a business concern
other than the Corporation.
"FELDMAN" means Michael J. Feldman, a stockholder of the Corporation.
"FIRST OFFER" has the meaning ascribed to it in SECTION 4(a).
"FIRST OFFER ACCEPTANCE NOTICE" has the meaning ascribed to it in
SECTION 4(b).
"FIRST OFFER NOTICE" has the meaning ascribed to it in SECTION 4(a).
"FIRST OFFER PERIOD" has the meaning ascribed to it in SECTION 4(a).
"FRAWLEY" means Andrew J. Frawley, a stockholder of the Corporation.
"FUNDAMENTAL DOCUMENTS" means the documents by which any Person (other
than a natural Person) establishes its legal existence or which govern its
internal affairs. The "FUNDAMENTAL DOCUMENTS" of the Corporation are the
Certificate of Incorporation and the By-Laws.
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"GOVERNMENTAL AUTHORITY" means any domestic or foreign government or
political subdivision thereof, whether on a federal, state or local level and
whether executive, legislative or judicial in nature, including any agency,
authority, board, bureau, commission, court, department or other instrumentality
thereof.
"GPLP" means Grant & Partners Limited Partnership, a Delaware limited
partnership.
"GROUP" means, with respect to any Person, (i) such Person, (ii) any of
such Person's stockholders, limited or general partners or members, (iii) any
corporation or other business organization to which such Person shall sell or
transfer all or substantially all of its assets or with which it shall be merged
and (iv) any Affiliate of such Person. For purposes of this Agreement, GPLP and
CYRK shall be deemed members of each other's Group, the Insight Stockholders
shall be deemed members of each other's Group, and the Insight II Stockholders
shall be deemed members of each others Group.
"INDEBTEDNESS" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money, (b) all
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<PAGE> 7
obligations of such Person with respect to deposits or advances of any kind not
occurring in the ordinary course of business, (c) all obligations of such Person
evidenced by (or which customarily would be evidenced by) bonds, debentures,
notes or similar instruments, (d) all reimbursement obligations of such Person
with respect to letters of credit and similar instruments, (e) all obligations
of such Person under conditional sale or other title retention agreements
relating to property or assets purchased by such Person, (f) all obligations of
such Person incurred, issued or assumed for the deferred purchase price of
property or services, other than accounts payable incurred and paid on terms
customary in the business of such Person, (g) all obligations secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any lien, security interest or other encumbrance on
property owned or acquired by such Person, whether or not the obligations
secured thereby have been assumed by such Person, (h) all obligations of such
Person under forward sales, futures, options and other similar hedging
arrangements, (i) all obligations of such Person to purchase or otherwise pay
for merchandise, materials, supplies, services or other property under an
arrangement which provides that payment for such merchandise, materials,
supplies, services or other property shall be made regardless of whether
delivery of such merchandise, materials, supplies, services or other property is
ever made or tendered, (j) all obligations, contingent or otherwise, of such
Person to guarantee or having the economic effect of guaranteeing any
Indebtedness or other obligation of any other Person in any manner, whether
directly or indirectly, and (k) all obligations of such Person under any lease
of any property (whether real, personal or mixed) by such Person which would, in
accordance with GAAP, be required to be accounted for as a capital lease on the
balance sheet of such Person.
"INITIAL PUBLIC OFFERING" means the initial Public Offering of the
Common Stock, registered pursuant to the Securities Act.
"INSIGHT" means Insight Venture Partners I, L.P., a Delaware limited
partnership.
"INSIGHT II" means Insight Capital Partners II, L.P., a Delaware
limited partnership
"INSIGHT STOCKHOLDERS" means Insight and Wexford.
"INSIGHT II STOCKHOLDERS" means Insight II and Wexford.
"JOINDER AGREEMENT" has the meaning ascribed to it in SECTION 3(a)(ii).
"NOTICE OF OFFER" has the meaning ascribed to it in SECTION 3(b)(i).
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"OFFER" has the meaning ascribed to it in SECTION 3(b)(i).
"OFFER PERCENTAGE" has the meaning ascribed to it in SECTION 3(b)(i).
"OFFER PERIOD" has the meaning ascribed to it in SECTION 3(b)(i).
"OFFERED SECURITIES" has the meaning ascribed to it in SECTION 4(a).
"OFFEREES" has the meaning ascribed to it in SECTION 3(b)(i).
"OFFEROR" has the meaning ascribed to it in SECTION 3(b)(i).
"OPERATING COMPANY" has the meaning ascribed to it in the preamble of
this Agreement and shall include any of the Corporation and any Subsidiary of
the Corporation.
"OTHER STOCKHOLDERS" has the meaning ascribed to it in
SECTION 3(c)(ii).
"PERMITTED DESIGNEES" has the meaning ascribed to it in SECTION 4(b).
"PERMITTED TRANSFER" has the meaning ascribed to it in
SECTION 3(a)(iv).
"PERMITTED TRANSFEREE" of any Person means another Person acquiring
Securities from such Person in a Permitted Transfer.
"PERSON" shall be construed broadly and shall include an individual, a
partnership, a corporation, an association, a joint stock company, a limited
liability company, a trust, a joint venture, an unincorporated organization and
a governmental entity or any department, agency or political subdivision
thereof.
"PREFERRED STOCK" means (i) the Series A Stock, (ii) the Series B
Stock, (iii) the Series C Stock, and (iv) each other series of the Corporation's
Preferred Stock, $.001 par value (if any).
"PUBLIC OFFERING" means a public offering of Common Stock pursuant to a
registration statement declared effective under the Securities Act, except that
a Public Offering shall not include an offering of Common Stock to be issued as
consideration in connection with a business acquisition or an offering of Common
Stock issuable pursuant to an employee benefit plan.
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"PUBLIC SALE" means any sale, occurring simultaneously with or after
the consummation of the Initial Public Offering, of Securities to the public
pursuant to an offering registered under the Securities Act or to the public
through a broker, dealer or market maker (pursuant to the provisions of Rule 144
or otherwise).
"REFUSED SECURITIES" has the meaning ascribed to it in SECTION 4(b).
"REGISTRATION RIGHTS AGREEMENT" means the Amended and Restated
Registration Rights Agreement dated as of the date hereof entered into
simultaneously with the execution and delivery of this Agreement among the
Corporation and the Investors named therein.
"REQUISITE COMMON STOCKHOLDERS" means those Stockholders (other than
holders of Preferred Stock) which or who hold in the aggregate in excess of 50%
of all of the shares of Common Stock held by all Stockholders.
"REQUISITE SERIES B STOCKHOLDERS" means those Stockholders which or who
hold in the aggregate in excess of 50% of all of the shares of Series B Stock
held by all Stockholders.
"REQUISITE SERIES C STOCKHOLDERS" means those Stockholders which or who
hold in the aggregate in excess of 50% of all of the shares of Series C Stock
held by all Stockholders.
"REQUISITE STOCKHOLDERS" means those Stockholders which or who hold in
the aggregate in excess of 50% of all of the Common Stock Equivalents held by
all Stockholders.
"RESTRICTED PAYMENT" has the meaning ascribed to it in
SECTION 2(i)(ii).
"RESTRICTED SECURITIES" shall mean all Securities of the Corporation
which have not theretofore been Transferred in a Public Sale.
"RULE 144" means Rule 144 promulgated by the Securities and Exchange
Commission under the Securities Act as such rule may be amended from time to
time, or any similar rule then in force.
"SALE OF THE CORPORATION" means (i) the sale of all or substantially
all of the Corporation's assets to any Person which or who is not a wholly owned
Subsidiary of the Corporation, (ii) the sale or transfer (or a series of related
sales or transfers) of the outstanding capital stock of the Corporation to one
or more Persons, or (iii) the merger or consolidation of the Corporation with or
into another Person (each, a "TRANSACTION"), in the case of CLAUSES (II) and
(III) above under circumstances in which the holders of a majority in voting
power of the
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outstanding capital stock of the Corporation, immediately prior to the
Transaction, own less than a majority in voting power of the outstanding capital
stock of the Corporation or the surviving or resulting corporation or acquirer,
as the case may be, immediately following such Transaction. A sale (or multiple
related sales) of one or more Subsidiaries of the Corporation (whether by way of
merger, consolidation, reorganization or sale of all or substantially all assets
or Securities) which constitutes all or substantially all of the consolidated
assets of the Corporation and its Subsidiaries to a Person (other than the
Corporation or a wholly owned Subsidiary thereof) shall be deemed a Sale of the
Corporation.
"SECURITIES" means, with respect to any Person, such Person's
"SECURITIES" as defined in Section 2(1) of the Securities Act and includes,
without limitation, such Person's capital stock or other equity interests or any
options, warrants or other securities that are directly or indirectly
convertible into, or exercisable or exchangeable for, such Person's capital
stock or other equity interests. Whenever a reference herein to Securities is
referring to any derivative Securities, the rights of a Stockholder shall apply
to such derivative Securities and all underlying Securities directly or
indirectly issuable upon conversion, exchange or exercise of such derivative
securities.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION" means the Securities and Exchange
Commission or any governmental body or agency succeeding to the functions
thereof.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any similar federal law then in force.
"SECURITIES PURCHASE AGREEMENT" means the Securities Purchase Agreement
dated as of the March 18, 1997 among the Corporation, the Insight Stockholders
and certain other parties.
"SECURITIES PURCHASE AGREEMENT II" means the Securities Purchase
Agreement dated as of the date hereof entered into simultaneously with the
execution and delivery of this Agreement among the Corporation and the Insight
II Stockholders.
"SERIES A STOCK" means the Corporation's Series A Preferred Stock,
$.001 par value.
"SERIES B STOCK" means the Corporation's Series B Convertible Preferred
Stock, $.001 par value.
"SERIES C STOCK" means the Corporation's Series C Convertible Preferred
Stock $.001 par value.
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"SHARES" means any shares or other units of Stock issued by the
Corporation and purchased or otherwise acquired by any Stockholder. As to any
particular Securities constituting Shares, such Securities will cease to be
Shares for all purposes of this Agreement when they (a) have been transferred in
a Public Sale or (b) cease to be outstanding.
"SPOUSAL CONSENT" has the meaning ascribed to it in SECTION 13.
"STOCK" means all Common Stock Equivalents and other capital stock or
equity Securities (including derivative Securities therefor) of the Corporation.
"STOCKHOLDERS" means the Persons holding Stock set forth on SCHEDULE I
hereto, as the same may hereafter be amended, modified, supplemented and
restated, in their capacities as holders of Stock, for so long as they hold
Stock, and any Person which or who hereafter becomes a party to this Agreement
as a Stockholder pursuant to a Joinder Agreement executed and delivered pursuant
to SECTION 3(a).
"SUBSIDIARY" means, with respect to any other Person, any Person (i)
whose shares of stock or other Securities having a majority of the general
voting power in electing the board of directors or equivalent governing body
(excluding shares or other Securities entitled to vote only upon the failure to
pay dividends thereon or other contingencies) are, at the time as of which any
determination is being made, owned by such other Person either directly or
indirectly through one or more other Persons constituting Subsidiaries of such
other Person or (ii) more than a 50% interest in the profits or capital of whom
is, at the time as of which any determination is being made, owned by such other
Person either directly or indirectly through one or more other Persons
constituting Subsidiaries of such other Person.
"TAG-ALONG NOTICE" has the meaning ascribed to it in SECTION 3(c)(iii).
"TRANSFER" shall be construed broadly and shall include any transfer
(whether voluntary, involuntary or by operation of law) of Securities of the
Corporation or any interest therein, including, without limitation, by way of
issuance, sale, participation, gift, bequeath, intestate transfer, division of
marital or community property, distribution, liquidation, merger or
consolidation, in each case whether voluntary or involuntary or by operation of
law or otherwise. "TRANSFEROR" means a Person Transferring Securities, and
"TRANSFEREE" means a Person acquiring Securities through a Transfer.
"TRANSFERRING STOCKHOLDER" has the meaning ascribed to it in
SECTION 3(c)(ii).
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"WEXFORD" means Wexford Insight LLC, a Delaware limited liability
company.
(b) RULES OF CONSTRUCTION. The use in this Agreement of the term
"INCLUDING" means "INCLUDING, WITHOUT LIMITATION." The words "HEREIN", "HEREOF",
"HEREUNDER" and other words of similar import refer to this Agreement as a
whole, including the schedules and exhibits, as the same may from time to time
be amended, modified, supplemented or restated, and not to any particular
section, subsection, paragraph, subparagraph or clause contained in this
Agreement. All references to sections, schedules and exhibits mean the sections
of this Agreement and the schedules and exhibits attached to this Agreement. The
title of and the section and paragraph headings in this Agreement are for
convenience of reference only and shall not govern or affect the interpretation
of any of the terms or provisions of this Agreement. The use herein of the
masculine, feminine or neuter forms shall also denote the other forms, as in
each case the context may require. Where specific language is used to clarify by
example a general statement contained herein, such specific language shall not
be deemed to modify, limit or restrict in any manner the construction of the
general statement to which it relates. The language used in this Agreement has
been chosen by the parties to express their mutual intent, and no rule of strict
construction shall be applied against any party.
2. BOARD OF DIRECTORS
(a) NUMBER OF DIRECTORS; COMPENSATION COMMITTEE. Each Stockholder
shall from time to time take such action, in its or his capacity as a
stockholder of the Corporation and including the voting, in person or by proxy,
of the Securities issued by the Corporation and owned or controlled by such
Stockholder and entitled to vote, as may be necessary (i) to cause the number of
Directors constituting the Board to be six (6) or seven (7), as provided in
SECTION 2(b) below, (ii) to cause the election or appointment to the Board as
Directors of the nominees specified in SECTION 2(b) below, each of whom shall
have one vote, and (iii) to ensure that the Corporation maintains a Compensation
Committee of the Board consisting of three members, each of whom shall have one
vote, one of whom shall be the Director nominated pursuant to SECTION 2(b)(i)
below, one of whom shall be a Director nominated pursuant to SECTION 2(b)(iii)
below, and one of whom shall be the Director nominated pursuant to SECTION
2(b)(iv) below.
(b) ELECTION OF DIRECTORS. Each Stockholder, in its or his capacity
as a stockholder of the Corporation, shall, promptly after the execution of this
Agreement and at any time and from time to time thereafter that Directors of the
Corporation are to be elected, vote, in person or by proxy, all of the
Securities issued by the Corporation and owned or controlled by such Stockholder
and entitled to vote at any annual or special meeting
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of the stockholders of the Corporation called for the purpose of voting on the
election of directors, or to execute a written consent in lieu thereof, and take
all such other action as may be necessary to provide for the election of the
Directors nominated as follows:
(i) one Person nominated by Frawley's Group of Stockholders;
(ii) one Person nominated by Feldman's Group of Stockholders;
(iii) two Persons nominated by Insight and Insight II;
(iv) one Person nominated by CYRK; and
(v) if Frawley ceases to be employed by the Corporation as its
Chief Executive Officer, one Person (who shall be an employee of the
Corporation) nominated by the Board in its sole discretion, who shall
have first been proposed by the senior management of the Corporation to
serve as a Director of the Corporation; and
(vi) Dean Goodermote, nominated by the Board of Directors on
_______, 1998.
At such time as Frawley's, Feldman's, the Insight Stockholders',
Insight II Stockholders or CYRK's and GPLP's Group collectively owns,
beneficially and of record, less than (x)(A) in the case of Frawley's or
Feldman's Group, 50% of the Common Stock Equivalents held by Frawley or Feldman
on March 18, 1997 (after giving effect to the transactions contemplated by the
Securities Purchase Agreement), (B) in the case of the Insight Stockholders'
Group, 50% of the Common Stock Equivalents purchased by the Insight Stockholders
pursuant to the Securities Purchase Agreement, and in the case of the Insight II
Stockholders' Group, 50% of the Common Stock purchased by the Insight II
Stockholders pursuant to the Securities Purchase Agreement II, and (C) in the
case of CYRK's and GPLP's Group, 50% of the shares of Common Stock acquired by
GPLP upon GPLP's conversion of the Old Preferred Stock (as defined in the
Securities Purchase Agreement) or (y) 3% of all outstanding Common Stock
Equivalents at such time, the provisions of this SECTION 2(B), as they relate to
the nomination by such Stockholder or by such Stockholder's Group of one or more
Persons as Directors of the Corporation, shall terminate automatically and be of
no further force and effect.
The execution and delivery of this Agreement by those Stockholders
entitled to vote for the election of Directors of the Corporation constitutes
such Stockholders' approval, by written consent pursuant to Section 228 of the
Delaware General Corporation Law, of the election as the Directors of the
Corporation of the nominees set forth on SCHEDULE II hereto.
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No Person shall be nominated as a Director if such Person is, or as a
Director would cause the Corporation to be, disqualified under Rule 262 of the
Securities Act, unless such nomination is approved by the Requisite
Stockholders.
(c) REMOVAL OF DIRECTORS.
(i) At all times, any Stockholder or Group of Stockholders
having the right to nominate a Director pursuant to this Agreement
shall have the right to require the removal, with or without cause, of
such Director.
(ii) In the event that any Stockholder or Group of Stockholders
acting as described in SECTION 2(C)(I) above shall, in accordance with
its or his rights specified therein, require the removal of any
Director or Directors with respect to whom it or he has such right,
then each of the other Stockholders hereby agrees to join with such
acting Stockholder in recommending such removal as described above, and
in causing the Corporation either to promptly hold a special meeting of
its stockholders and to vote, in person or by proxy, all of its
Securities issued by the Corporation and entitled to vote at such
meeting or to execute a written consent in lieu thereof, as the case
may be, in favor of such removal.
(d) VACANCIES. If a vacancy is created on the Board by reason of the
death, removal (in accordance with SECTION 2(c) above) or resignation of any
Director nominated by a Stockholder, Group of Stockholders or the Board pursuant
to SECTION 2(b) above, each of the Stockholders shall, in its or his capacity as
a stockholder of the Corporation, vote, in person or by proxy all of the
Securities issued by the Corporation and owned or controlled by such Stockholder
and entitled to vote at any annual or special meeting of the stockholders of the
Corporation called for the purpose of voting on the election of Directors, or to
execute a written consent in lieu thereof, and take all such other action as may
be necessary, to elect, a Person to fill such vacancy who is nominated by the
Stockholder, Group of Stockholders or the Board entitled to make such
nomination. Such election shall occur upon the earlier of the first meeting of
the Board of Directors, or the next presentation of a written consent of
Directors in lieu of a meeting, after such vacancy occurs. In the event the
remaining Directors fail to select a Director to fill any such vacancy within
such period or in the event such Directors fill such vacancy other than in
accordance with the nomination and selection procedures set forth in
SECTION 2(b) above, each Stockholder shall, in its or his capacity as a
stockholder of the Corporation, use its or his reasonable efforts to cause the
Corporation either to promptly hold a special meeting of stockholders or to
execute a written consent in lieu thereof and vote all of its or his Securities
issued by the Corporation and entitled to vote at such meeting, in person or by
proxy, or
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pursuant to such written consent of stockholders, in favor of the Person or
Persons nominated and selected in accordance with SECTION 2(b) above to fill
such vacancy and, if necessary, in favor of removing any Director elected to
fill such vacancy other than in accordance with the nomination and selection
procedures of SECTION 2(b) above.
(e) MEETINGS. The Corporation shall convene meetings of the Board at
least once every calendar quarter. Upon any failure by the Corporation to
convene any meeting required by this SECTION 2(e), the Requisite Series B
Stockholders or Requisite Series C Stockholders may request that a meeting be
convened, and if a meeting is not promptly convened, the Requisite Series B
Stockholders or Requisite Series C Stockholders may convene such meeting upon
giving the notice provided for in the By-Laws.
(f) COMPENSATION COMMITTEE. The Corporation shall establish and
maintain the Compensation Committee and such Compensation Committee shall be
responsible for approving (i) all future stock sales, stock option grants,
bonuses, salary adjustments and payments or other contractual arrangements
entered into by any Operating Company with any employee of the Corporation or
any of its Subsidiaries or any Affiliates of such employee and (ii) all
repurchases at other than cost of shares of Common Stock (whether vested or
otherwise) previously issued by the Corporation to any of the Persons described
in CLAUSE (i).
(g) SUBSIDIARIES. The Corporation shall use its best efforts, in its
capacity as a stockholder, partner or member of each of its Subsidiaries, to
cause the composition of the board of directors or equivalent governing body of
such Subsidiary to be identical, or as nearly identical as possible, to the
composition of the Board.
(h) EXPENSES. The Corporation shall pay such reasonable and customary
fees to compensate the Directors for serving as Directors of the Corporation as
the Board may from time to time approve and shall pay or reimburse each member
of the Board for the reasonable out-of-pocket expenses incurred by such member
in connection with attending the meetings of the Board and any committees
thereof.
(i) NEGATIVE COVENANTS. The Corporation shall not, and shall cause
its Subsidiaries not to, take any of the following actions or permit to occur or
exist any of the following events or conditions, without first obtaining the
approval of such action, event or condition by (x) the Board at a meeting duly
called for such purpose or by unanimous written consent and (y) at least one of
the Directors nominated by Insight and Insight II pursuant to SECTION 2(b)(iii):
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(i) issue any equity or equity-linked Security (including, but
not limited to, Common Stock Equivalents and nonconvertible Preferred
Stock), unless (A) such Security is issued to the Corporation or a
wholly owned Subsidiary of the Corporation or (B) such Security is an
Excluded Security;
(ii) declare or pay any dividends or make any other
distribution on or in respect of its capital stock or other ownership
interests, whether in cash, property, securities or a combination
thereof, or directly or indirectly redeem, repurchase, retire or
otherwise acquire for consideration, any shares of any class of its
capital stock or set apart any sum for the aforesaid purposes (any such
dividend, distribution, redemption, purchase, retirement or acquisition
being referred to herein as a "RESTRICTED PAYMENT"); PROVIDED, HOWEVER,
that (x) the Corporation may make the Restricted Payments specified in
SECTIONS 2(b), 3, 4, 4(a), and 5(b) of the Certificate of
Incorporation, (y) upon the approval of the Compensation Committee
(including the approval of the member thereof nominated by Insight and
Insight II as a Director pursuant to SECTION 2(b)(iii) above), the
Corporation may repurchase at cost any shares of Common Stock (whether
vested or otherwise) previously issued by the Corporation to any of the
Persons described in SECTION 2(f)(i) above, and (z) the Operating
Companies may make Restricted Payments to other Operating Companies
wholly owned by the Corporation (whether directly or indirectly);
(iii) effect any Asset Sale;
(iv) effect a Sale of the Corporation;
(v) purchase or acquire (whether by way of merger,
consolidation, operation of law or otherwise) all or a significant
portion of the assets or Securities of another Person in one or a
series of transactions involving aggregate consideration therefor in
excess of $1,000,000;
(vi) make any expenditure or series of expenditures in a fiscal
year which are not specified in the Annual Operating Budget for such
fiscal year and which in the aggregate are in excess of $500,000 for
such fiscal year;
(vii) appoint, retain or change auditors; PROVIDED, HOWEVER,
that the auditors may be changed from Coopers & Lybrand L.L.P. to
Arthur Andersen, LLP;
(viii) make any change in (A) any accounting policy, principle,
procedure or practice followed or (B) the method of applying any such
policy, principle, procedure or practice, in each case other than by
virtue of any change of
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auditors from Coopers & Lybrand L.L.P. to Arthur Andersen, LLP;
(ix) pledge or hypothecate any assets, other than in respect of
Indebtedness incurred (A) to a bank or other financial institution in
respect of working capital financing or (B) otherwise in the ordinary
course of business;
(x) amend, alter or repeal of any of the provisions of the
Fundamental Documents of the Operating Company, if such amendment,
alteration or repeal would have a material adverse effect on the rights
of the holders of any Preferred Stock;
(xi) engage or prepare to engage in any business or line of
business other than (A) the business of the Corporation and its
Subsidiaries as set forth in the Business Plan or previously approved
pursuant to this SECTION 2(i) or (B) businesses reasonably related
thereto;
(xii) enter into any dissolution, liquidation or winding up or
file a petition or commence any proceeding under any bankruptcy,
reorganization or insolvency law of any jurisdiction; or
(xiii) enter into any agreement or commitment or otherwise become
bound or obligated to do or perform any of the foregoing actions.
The covenants of the Corporation set forth in this SECTION 2(i) shall
terminate and be of no further force or effect if (i) the Group of Stockholders
to which the Insight Stockholders belong at any time collectively owns,
beneficially and of record, less than 50% of the then-outstanding Common Stock
Equivalents purchased by the Insight Stockholders pursuant to the Securities
Purchase Agreement; and (ii) the Group of Stockholders to which the Insight II
Stockholders belong at any time collectively owns, beneficially and of record,
less than 50% of the then-outstanding Common Stock Equivalents purchased by the
Insight II Stockholders pursuant to the Securities Purchase Agreement II.
3. TRANSFERS OF STOCK
(a) GENERAL; JOINDER AGREEMENT; ADDITIONAL SHARES.
(i) Anything contained in any agreement, contract, instrument,
commitment or similar document to which a Stockholder is a party or by
which a Stockholder may be bound to the contrary notwithstanding, the
provisions regarding Transfers of Stock contained in this SECTION 3
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shall apply to all Stock now owned or hereafter acquired by a
Stockholder, including, but not limited to, Stock acquired by reason of
original issuance, dividend, distribution, exchange, conversion, and
acquisitions of outstanding Stock from another Person, and such
provisions shall apply to any Stock obtained by a Stockholder upon the
exercise, exchange or conversion of any option, warrant or other
derivative Security.
(ii) No Stockholder shall Transfer any Stock to a Person not
already a party to this Agreement as a Stockholder (other than a
Transfer which constitutes a Public Sale), and the Corporation shall
not be required to record any such Transfer on its books, unless and
until such Person executes and delivers to the Corporation a joinder
agreement in substantially the form attached hereto as EXHIBIT D (the
"JOINDER AGREEMENT") and otherwise in form and substance reasonably
acceptable to the Corporation pursuant to which such Person will
thereupon become a party to, and be bound by and obligated to comply
with the terms and provisions of, this Agreement and the Registration
Rights Agreement.
(iii) If any Stock is issued by the Corporation at any time
during the term of this Agreement, the Corporation agrees that the
proposed recipient of such Stock, if not already a Stockholder and as a
condition to receiving such Stock, shall agree that, upon becoming the
owner, beneficially and of record, at any time of at least 1% of all
outstanding Common Stock Equivalents or any nonconvertible Preferred
Stock with an aggregate original issuance price of at least $500,000,
to become a party to, and be bound by the terms and provisions of, this
Agreement as a Stockholder and such recipient shall execute and deliver
a Joinder Agreement to the Corporation.
(iv) Except for Permitted Transfers and Transfers in accordance
with SECTIONS 3(b) and (c) below, no Transfer by a Stockholder of any
Stock shall be valid, and the Corporation shall not (nor shall it be
required to) record any such Transfer on its books. As used herein, a
"PERMITTED TRANSFER" shall mean any Transfer of Stock by (A) any member
of the Group to which Feldman belongs to any member of the Group to
which Frawley belongs or (B) a Stockholder (v) to the spouse or lineal
descendant of such Person (as applicable), (w) to any trust for the
benefit of such Person or his spouse or lineal descendants, (x) to the
estate of such Person, (y) to any member of the Group to which such
Person belongs, or (z) to any other Person, all of whose outstanding
Securities are held, beneficially and of record, by such Person and/or
such Person's Permitted Transferees described in CLAUSES (v) through
(y) of this sentence; PROVIDED, HOWEVER, that in each case such
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Permitted Transferee agrees to be bound by this Agreement and the
Registration Rights Agreement in the same capacity and to the same
extent as the Transferor.
(v) Anything contained herein to the contrary notwithstanding,
no Stockholder shall, without the prior written consent of the Board,
Transfer any Securities of the Operating Company, or any interest
therein, to any Person (a "COMPETING TRANSFEREE") which or who is
directly or indirectly engaged in any business or activity that
competes with the Operating Company, whether such engagement shall be
as an employee, director, officer, consultant, partner, owner or other
participant in any such business or activity; PROVIDED, HOWEVER, such
Transfer shall not be prohibited by this SECTION 3(a)(v) if the
proposed Competing Transferee is a member of the Group to which such
Stockholder belongs and is a Competing Transferee by virtue of its
investment in the Securities of other Competing Transferees.
(vi) Anything contained herein to the contrary notwithstanding,
(i) any member of Feldman's Group may pledge Stock as collateral
security to the Corporation for a bona fide obligation of Newco (as
defined in the Securities Purchase Agreement) to the Corporation,
pursuant to the Pledge Agreement (as defined in the Securities Purchase
Agreement), and (ii) any Stockholder may pledge Stock for a bona fide
obligation of such Stockholder or an Affiliate thereof to the proposed
pledgee, but only if the proposed pledgee, as a condition to such
Transfer, agrees to be bound by this Agreement and the Registration
Rights Agreement in the same capacity and to the same extent as such
Stockholder and such proposed pledgee executes and delivers a Joinder
Agreement to the Corporation. Anything contained herein to the contrary
notwithstanding, the provisions of SECTION 3(b) and (C) below shall not
be applicable to the exercise by the Corporation of any of its rights
and remedies as a secured creditor of Newco with respect to any Stock
pledged by any member of Feldman's Group pursuant to the Pledge
Agreement.
(vii) Anything contained herein to the contrary notwithstanding,
the provisions of this SECTION 3 shall not be applicable to the grant
by Wexford to either Insight, Insight II, or an Affiliate thereof, of a
proxy to vote or Transfer any Shares held by Wexford from time to time.
(b) RIGHT OF FIRST OFFER.
(i) If at any time prior to the effective date of a
registration statement relating to the Initial Public Offering, any
Stockholder (the "OFFEROR") desires to Transfer any Shares (other than
pursuant to a Permitted Transfer), such Offeror shall first
simultaneously deliver
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to the Corporation and each other Stockholder a notice (the "NOTICE OF
OFFER"), which shall be irrevocable for a period of 45 days after
delivery thereof (the "OFFER PERIOD"), offering (the "OFFER") to the
Corporation and the Stockholders other than the Offeror (the
"OFFEREES") all of the Shares proposed to be Transferred by the Offeror
at the purchase price and on the terms specified therein (which Notice
of Offer shall include all relevant terms of the proposed Transfer).
The Offeror shall also furnish to the Corporation and such other
Stockholders such additional information relating to the Offer as they
may reasonably request. The Corporation shall have the first right and
option, for a period of 30 days after delivery of the Notice of Offer
by the Offeror, to accept all or any portion of the Shares so offered
at the purchase price and on the terms stated in the Notice of Offer.
The Corporation shall, if it does not elect to purchase all of the
offered Securities, immediately upon such election deliver notice
thereof to the other Offerees. Each such Offeree shall have the right
and option, for a period of 15 days after the expiration of the 30-day
period provided above, (x) to accept all or any of its Offer Percentage
of the Shares so offered and not accepted by the Company at the
purchase price and on the terms stated in the Notice of Offer and (y)
to offer, in any notice of acceptance, to purchase any Shares not
accepted by the other Offerees, in which case the Shares not accepted
by the other Offerees shall be deemed to be reofferred on the same
terms and conditions from time to time during such 15-day period to and
accepted by the Offerees which or who exercised their option under this
CLAUSE (y), PRO RATA in accordance with their respective Offer
Percentages (computed without including the Offerees which or who have
not exercised their option to purchase Securities under this CLAUSE
(y)), until all such Shares are fully subscribed or until all such
Offerees have subscribed for all such offered Shares which they desire
to purchase. As used herein, "OFFER PERCENTAGE" means, as to each
Offeree, the fraction, expressed as a percentage, the numerator of
which is the total number of Common Stock Equivalents held by such
Offeree, and the denominator of which is the total number of Common
Stock Equivalents held by all Offerees.
(ii) Transfers of Shares under the terms of this SECTION 3(b)
shall be made at the offices of the Corporation on a mutually
satisfactory Business Day within 15 days after the expiration of the
45-day time period provided in SECTION 3(b)(i) above. Delivery of
certificates or other instruments evidencing such Shares, duly endorsed
for transfer, shall be made on such date against payment of the
purchase price therefor.
(iii) Nothing in this SECTION 3(b) shall preclude any
Stockholder from engaging in discussions with any investment
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<PAGE> 21
banker, potential Transferee of Shares or other Person with respect to
a possible sale of Shares by such Stockholder to any of them, so long
as the provisions of this SECTION 3(b) are complied with prior to the
consummation of any Transfer to which this SECTION 3(b) applies.
(iv) The Offeror may specify in the Notice of Offer that the
Offer mentioned therein is conditioned upon receipt from the
Corporation and the other Offerees, or any one of them, of notices of
binding acceptance with respect to all Shares mentioned in such Notice
of Offer.
(c) CO-SALE RIGHTS.
(i) If any shares of Common Stock, or Series B Stock or
Series C Stock offered for sale pursuant to a Notice of Offer not
accepted by any Offerees pursuant to SECTION 3(b) above but which are
proposed by the Offeror to be Transferred to a third party represent,
together with any other shares of any class or series being Transferred
by other Stockholders in one or a series of Transfers relating to the
proposed Transfer, in excess of 10% of all Common Stock Equivalents
outstanding at such time, such Shares may be so Transferred by the
Offeror only in accordance with the terms and conditions of this
SECTION 3(c). The Transfer of any Shares proposed to be Transferred by
the Offeror under circumstances other than those described in the
foregoing sentence shall not be subject to the terms and conditions of
this SECTION 3(c).
(ii) During the 180-day period after the expiration of the
Offer contained in the Notice of Offer, any proposed Transfer of Shares
by the Offeror which is subject to the terms and conditions of this
SECTION 3(c) shall be consummated only at a price and on such other
terms and conditions not more favorable to such third party than those
contained in such Notice of Offer. At least 30 days prior to the
closing of any proposed Transfer of Shares by the Offeror (other than
pursuant to a Permitted Transfer) which is subject to the terms and
conditions of this SECTION 3(c), the Offeror (the "TRANSFERRING
STOCKHOLDER") shall deliver a notice (the "CO-SALE NOTICE") to the
other Stockholders (the "OTHER STOCKHOLDERS") offering such Other
Stockholders the option to participate in such proposed Transfer. Such
Co-Sale Notice shall specify in reasonable detail the identity of the
prospective Transferee(s) and the terms and conditions of the Transfer.
(iii) Any such Other Stockholder may, within 15 days of the
receipt of a Co-Sale Notice, give notice (each, a "TAG-ALONG NOTICE")
to the Transferring Stockholder that such Other Stockholder wishes to
participate in such
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<PAGE> 22
proposed Transfer and specifying the amount of Shares that such Other
Stockholder desires to include in such proposed Transfer, which shall
be of the same class or series of Shares as any of the Shares proposed
to be transferred in the Co-Sale Notice. Any Share included in any
Tag-Along Notice in accordance with this SECTION 3(b)(iii) shall be
transferred upon the terms and conditions set forth in the Co-Sale
Notice.
(iv) If none of the Other Stockholders gives the Transferring
Stockholder a timely Tag-Along Notice with respect to the Transfer
proposed in the Co-Sale Notice, the Transferring Stockholder may
thereafter transfer the Shares specified in the Co-Sale Notice on
substantially the same terms and conditions set forth in the Co-Sale
Notice. If one or more Other Stockholders give the Transferring
Stockholder a timely Tag-Along Notice, then the Transferring
Stockholder shall use all reasonable efforts to cause each prospective
Transferee to agree to acquire all Shares identified in all Tag-Along
Notices that are timely given to the Transferring Stockholder, upon the
same terms and conditions. If such prospective Transferee is unwilling
or unable to acquire all Shares proposed to be included in such sale
upon such terms, then the Transferring Stockholder may elect either to
cancel such proposed Transfer or to allocate the maximum number of
Shares that each prospective Transferee is willing to purchase among
the Transferring Stockholder and the Other Stockholders giving timely
Tag-Along Notices in proportion to such Stockholders' (including the
Transferring Stockholder's) Co-Sale Percentages. As used herein,
"CO-SALE PERCENTAGE" means, as to each Other Shareholder which has
delivered a timely Tag-Along Notice, the fraction, expressed as a
percentage, the numerator of which is the number of Common Stock
Equivalents which such Other Shareholder requested to be sold in its or
his Tag-Along Notice and the denominator of which is the sum of (i) the
number of Common Stock Equivalents requested to be included in such
sale by all Other Stockholders delivering timely Tag-Along Notices and
(ii) the number of Common Stock Equivalents specified in the Co-Sale
Notice.
(v) In the event any Shares subject to SECTION 3(b) are not
Transferred (whether pursuant to this SECTION 3(c) or otherwise) by the
Transferring Stockholder during the 180-day period following the
expiration of the Offer contained in the related Notice of Offer, the
restrictions set forth in SECTIONS 3(b) and (c) shall again become
applicable to any Transfer of such Shares by the Transferring
Stockholder.
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<PAGE> 23
D. RIGHT TO PURCHASE SECURITIES.
(a) Except in the case of Excluded Securities, the Corporation shall
not, and shall cause its Subsidiaries not to, issue, sell or exchange, agree to
issue, sell or exchange, or reserve or set aside for issuance, sale or exchange,
(i) any equity Security of any Operating Company, (ii) any debt security of any
Operating Company which by its terms is convertible into or exchangeable for any
equity Security of such Operating Company, or (iii) any option, warrant or other
right to subscribe for, purchase or otherwise acquire any equity Security or any
debt Security referred to in CLAUSE (I) or (II) above, respectively, unless in
each case the Corporation shall have first offered, or caused such Subsidiary to
offer (the "FIRST OFFER"), to sell such Securities (the "OFFERED SECURITIES") to
the Insight Stockholders and the Insight II Stockholders by delivery to the
Insight Stockholders and Insight II Stockholders of notice of such offer (the
"FIRST OFFER NOTICE") stating that such Operating Company proposes to sell such
Offered Securities, the number or amount of the Offered Securities proposed to
be sold, the proposed purchase price therefor and any other terms and conditions
of such offer. The First Offer shall by its terms remain open and irrevocable
for a period of 30 days from the date it is delivered by such Operating Company
to either the Insight Stockholders or the Insight II Stockholders, whichever
occurs later (the "FIRST OFFER PERIOD"). The Operating Company making the First
Offer may condition the closing of the issuance and sale of Offered Securities
pursuant thereto on the receipt by such Operating Company of certain gross
proceeds or on the satisfaction of certain other conditions, determined by such
Operating Company in its sole discretion, including, but not limited to, the
sale of all of the Offered Securities (whether to the Insight Stockholders
alone, the Insight II Stockholders alone or either Group together with third
parties), and in either case may abandon any such proposed sale if such sale
will not result in such gross proceeds or if any of such conditions is not
satisfied.
(b) The Insight Stockholders and the Insight II Stockholders shall
have the option, exercisable at any time during the First Offer Period by
delivering notice to the Operating Company making the First Offer (a "FIRST
OFFER ACCEPTANCE NOTICE"), to subscribe for such number or amount of the Offered
Securities proposed to be issued (the "ACCEPTED SECURITIES") the product of (x)
the total number or amount of such Offered Securities proposed to be issued, and
(y) a fraction, the numerator of which is the total number of Common Stock
Equivalents held by the Group of Stockholders to which the Insight Stockholders
or the Insight II Stockholders, as the case may be, belong, and the denominator
of which is the total number of Common Stock Equivalents held by all Persons.
Each of the Insight Stockholders and the Insight II Stockholders may, in their
First Offer Acceptance Notice, (i) allocate their
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<PAGE> 24
subscription for the Accepted Securities among themselves and any members of
their respective Groups (the "PERMITTED DESIGNEES") by their mutual agreement,
and (ii) condition their subscription for the Accepted Securities upon the
satisfaction of certain conditions to be specified by them therein, including,
but not limited to, the sale by the Operating Company making the First Offer of
all of the Offered Securities which are not the subject of their subscription
(the "REFUSED SECURITIES").
(c) If a First Offer Acceptance Notice is not given by the Insight
Stockholders or the Insight II Stockholders for all of the Offered Securities,
the Operating Company making such First Offer shall have 180 days from the
expiration of the First Offer Period to sell all or any part of the Refused
Securities to any other Person(s), but only upon terms and conditions in all
respects, including, but not limited to, unit price and interest rates, which
are no more favorable, in the aggregate, to such other Person(s) or less
favorable to such Operating Company than those set forth in the First Offer.
Upon the closing, which shall include full payment of the purchase price to such
Operating Company, of the sale to such other Person(s) of all of the Refused
Securities, the Insight Stockholders, the Insight II Stockholders and the
Permitted Designees shall severally purchase from such Operating Company, and
such Operating Company shall sell to the Insight Stockholders, the Insight II
Stockholders and the Permitted Designees, the Accepted Securities as allocated
among the Insight Stockholders, the Insight II Stockholders and the Permitted
Designees in the First Offer Acceptance Notice, upon the terms specified in the
First Offer. Any Offered Securities not purchased by the Insight Stockholders,
the Insight II Stockholders and the Permitted Designees and not otherwise sold
by such Operating Company within the foregoing 180-day period in accordance with
this SECTION 4(c) may not be sold or otherwise disposed of until they are again
offered to the Insight Stockholders and the Insight II Stockholders under the
procedures specified in this SECTION 4.
(d) The rights granted to the Insight Stockholders under this
SECTION 4 shall terminate and be of no further force or effect if the Group of
Stockholders to which the Insight Stockholders belong at any time collectively
owns, beneficially and of record, less than 25% of the then-outstanding Common
Stock Equivalents purchased by the Insight Stockholders pursuant to the
Securities Purchase Agreement. The rights granted to the Insight II Stockholders
under this SECTION 4 shall terminate and be of no further force or effect if the
Group of Stockholders to which the Insight II Stockholders belong at any time
collectively owns, beneficially and of record, less than 50% of the
then-outstanding Common Stock Equivalents purchased by the Insight II
Stockholders pursuant to the Securities Purchase Agreement II.
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5. AMENDMENT AND WAIVER.
(a) Except as expressly set forth herein, the provisions of this
Agreement may only be amended or waived with the prior written consent of the
Board, the Requisite Series B Stockholders, the Requisite Series C Stockholders,
the Requisite Common Stockholders and the Requisite Stockholders; PROVIDED,
HOWEVER, that any such amendment or waiver that would adversely affect the
rights of any Stockholder (including CYRK and GPLP) under this Agreement without
similarly affecting the rights of all Stockholders under this Agreement shall
not be effective as to such Stockholder without its prior written consent, and
SCHEDULE I to this Agreement shall be deemed to be automatically amended from
time to time to reflect Transfers of Stock made in accordance with SECTION 3
above without requiring the consent of any party hereto, and the Corporation
shall distribute to the Stockholders a revised SCHEDULE I to reflect any such
changes.
(b) No course of dealing between the Corporation, its Subsidiaries
and the Stockholders (or any of them) or any delay in exercising any rights
hereunder will operate as a waiver of any rights of any party to this Agreement.
(c) For purposes of this Agreement, Shares held by the Corporation or
any Subsidiaries shall not be deemed to be outstanding.
(d) The failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions and shall
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
(e) In the event that the consent, waiver or approval of Insight is
required under provision of this Agreement with respect to any action, event or
condition, such consent, waiver or approval shall be deemed to have been given
if such action, event or condition is approved by either of the Directors
nominated by Insight and Insight II pursuant to SECTION 2(b)(iii) above.
(f) In the event that the consent, waiver or approval of Insight II
Stockholders is required under provision of this Agreement with respect to any
action, event or condition, such consent, waiver or approval shall be deemed to
have been given if such action, event or condition is approved by the Directors
appointed by Insight and Insight II.
(g) In the event that the consent, waiver or approval of GPLP or CYRK
is required under provision of this Agreement with respect to any action, event
or condition, such consent, waiver or approval shall be deemed to have been
given if such
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action, event or condition is approved by the Director nominated by CYRK
pursuant to SECTION 2(b)(iv).
6. SECURITIES LAW COMPLIANCE; LEGENDS.
(a) RESTRICTION ON TRANSFER. In addition to any other restrictions on
the Transfer of any Securities contained in this Agreement, the Stockholders
shall not Transfer any Restricted Securities except in compliance with the
conditions specified in this SECTION 6.
(b) RESTRICTIVE LEGENDS. Each certificate for the Restricted
Securities shall (unless otherwise provided by the provisions of SECTION 6(d)
below) be stamped or otherwise imprinted with a legend in substantially the
following terms:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933 OR ANY STATE SECURITIES OR
BLUE SKY LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT OR LAWS."
(c) NOTICE OF TRANSFER. The holder of any Restricted Securities, by
its acceptance or purchase thereof, agrees, prior to any Transfer of any such
Restricted Securities (except pursuant to an effective registration statement),
to give written notice to the Corporation of such holder's intention to effect
such Transfer and agrees to comply in all other respects with the provisions of
this SECTION 6. Each such notice shall describe the manner and circumstances of
the proposed Transfer and, unless waived by the Corporation, shall be
accompanied by the written opinion, addressed to the Corporation, of counsel for
the holder of such Restricted Securities (which counsel shall be reasonably
satisfactory to the Corporation), stating that in the opinion of such counsel
(which opinion shall be reasonably satisfactory to the Corporation) such
proposed Transfer does not involve a transaction requiring registration or
qualification of such Restricted Securities under the Securities Act or the
securities laws of any state of the United States. Subject to complying with the
other applicable provisions hereof, such holder of Restricted Securities shall
be entitled to consummate such Transfer in accordance with the terms of the
notice delivered by it to the Corporation if the Corporation does not object (on
the basis that such transfer violates the provisions of this SECTION 6) to such
transfer within five (5) days after the delivery of such notice. Each
certificate or other instrument evidencing the Securities issued upon the
transfer of any Restricted Securities (and each certificate or other instrument
evidencing any untransferred balance of such Securities) shall bear the legend
set forth in SECTION 6(b) above unless (i) in
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such opinion of such counsel registration of future transfer is not required by
the applicable provisions of the Securities Act or the securities laws of any
state of the United States or (ii) the Corporation shall have waived the
requirement of such legend.
(d) REMOVAL OF LEGENDS, ETC. Notwithstanding the foregoing provisions
of this SECTION 6, the restrictions imposed by SECTIONS 6(a) through (c) above
upon the transferability of any Restricted Securities shall cease and terminate
when (i) any such Restricted Securities are sold or otherwise disposed of in
accordance with the intended method of disposition by the seller or sellers
thereof set forth in a registration statement or are sold or otherwise disposed
of in a transaction contemplated by SECTION 6(c) above which does not require
that the Securities transferred bear the legend set forth in SECTION 6(b) above,
or (ii) the holder of such Restricted Securities has met the requirement of
transfer of such Restricted Securities pursuant to subparagraph (k) of Rule 144.
Whenever the restrictions imposed by SECTIONS 6(a) through (c) above shall
terminate, as herein provided, the holder of any Restricted Securities shall be
entitled to receive from the Corporation, without expense, a new certificate not
bearing the restrictive legend set forth in SECTION 6(B) above and not
containing any other reference to the restrictions imposed by SECTIONS 6(a)
through (c) above.
(e) ADDITIONAL LEGEND. Each certificate evidencing Shares and each
certificate issued in exchange for or upon the Transfer of any Shares (if such
Shares remain Shares after such Transfer) shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT
TO A STOCKHOLDERS AGREEMENT DATED AS OF DECEMBER 4, 1997 AMONG
THE ISSUER OF SUCH SECURITIES (THE "COMPANY") AND CERTAIN OF THE
COMPANY'S STOCKHOLDERS. THE TERMS OF SUCH STOCKHOLDERS AGREEMENT
INCLUDE, AMONG OTHER THINGS, VOTING AGREEMENTS AND RESTRICTIONS
ON TRANSFERS. A COPY OF SUCH STOCKHOLDERS AGREEMENT WILL BE
FURNISHED WITHOUT CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON
WRITTEN REQUEST."
The Corporation shall imprint such legends on certificates evidencing Shares
outstanding prior to the date hereof. The legend set forth above shall be
removed from any certificate evidencing Shares (i) when such Shares cease to be
Shares in accordance with the terms of this Agreement or (ii) upon the
occurrence of any of the events set forth in SECTION 7(a) below.
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7. TERMINATION.
(a) All of the provisions of this Agreement (other than SECTION 9)
shall terminate and be of no further force or effect and shall not be binding
upon any party hereto, upon the first to occur of (i) the dissolution,
liquidation or winding-up of the Corporation, (ii) the closing of a Sale of the
Corporation, (iii) the closing of an Initial Public Offering, and (iv) the
approval of such termination by the Corporation, the Requisite Series B
Stockholders, the Requisite Series C Stockholders, the Requisite Common
Stockholders and the Requisite Stockholders; PROVIDED, HOWEVER, the provisions
of SECTIONS 2(a) through (d) shall survive any Sale of the Corporation within
the meaning of CLAUSE (II) of the definition thereof until any other event
(other than such a Sale of the Corporation) occurs under any of CLAUSES (i)
through (iv) of this SECTION 7(a).
(b) As to any particular Stockholder, this Agreement shall no longer
be binding or of further force or effect as to such Stockholder, except as
otherwise expressly provided herein, as of the date such Stockholder has
Transferred all such Stockholder's interest in the Securities of the Corporation
and the transferee(s) of such Securities have, if required by SECTION 3(a)
above, executed a Joinder Agreement; PROVIDED, HOWEVER, that no such termination
shall be effective if such Stockholder is in breach of this Agreement.
8. SEVERABILITY.
It is the desire and intent of the parties hereto that the provisions
of this Agreement be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular provision of this Agreement shall be adjudicated
by a court of competent jurisdiction to be invalid, prohibited or unenforceable
for any reason, such provision, as to such jurisdiction, shall be ineffective,
without invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
9. TERMINATION OF EXISTING STOCKHOLDERS' AGREEMENT.
[Intentionally omitted]
10. ENTIRE AGREEMENT.
This Agreement, together with the Related Agreements, embodies
the complete agreement and understanding among the
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parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way; PROVIDED, HOWEVER, the Stockholders acknowledge and agree that all of
the provisions (other than the repurchase provisions) of any restricted stock
purchase agreements or similar agreements between the Corporation and any of the
Stockholders who are current or former employees, officers or directors of the
Corporation shall not be superseded or preempted by this Agreement or any of the
Related Agreements.
11. CERTAIN STOCKHOLDERS.
Each Stockholder that is an entity that was formed for the
purpose of acquiring Stock or that has no substantial assets other than Stock or
interests in such Stock agrees that (a) shares of its common stock or other
instruments reflecting equity interests in such (and the shares of common stock
or other equity interests in any similar entities controlling such Person) will
note the restrictions contained in this Agreement on the transfer of Stock as if
such common stock or other equity interests were Stock and (b) no shares of such
common stock or other equity interests may be transferred to any Person other
than in accordance with the terms and provisions of this Agreement as if such
common stock or other equity interests were Stock.
12. SUCCESSORS AND ASSIGNS.
Except as otherwise provided herein, this Agreement shall bind
and inure to the benefit of and be enforceable by the Corporation and its
successors and assigns and the Stockholders and any subsequent holders of Shares
and the respective successors and assigns of each of them, so long as they each
hold shares of Series A Preferred Stock or at least 1% of all outstanding Common
Stock Equivalents at the time in question. None of the provisions hereof shall
create, or be construed or deemed to create, any right to employment in favor of
any Person by the Corporation or any of its Subsidiaries. This Agreement is not
intended to create any third party beneficiaries.
13. CONSENT AND AGREEMENT OF SPOUSES.
If requested by the Corporation, each Stockholder shall cause his
or her spouse, as applicable, to execute and deliver to the Corporation a
separate consent and agreement in substantially the form attached hereto as
EXHIBIT E or otherwise reasonably acceptable to the Corporation (a "SPOUSAL
CONSENT"). The signature of a spouse on a Spousal Consent shall not be construed
as making such spouse a stockholder of the Corporation or a party to this
Agreement except as may otherwise be set forth in such consent. Each Stockholder
shall certify his or her marital status to the Corporation at the Corporation's
request.
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14. REMEDIES.
(a) Except as otherwise expressly provided in this Agreement, each
Stockholder shall have all rights and remedies reserved for such Stockholder
pursuant to this Agreement, the Related Agreements and the By-Laws and all
rights and remedies which such holder has been granted at any time under any
other agreement or contract and all of the rights which such holder has under
any law or at equity. Any Person having any rights under any provision of this
Agreement shall be entitled to enforce such rights specifically, to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law or equity.
(b) The parties hereto agree that if any parties seek to resolve any
dispute arising under this Agreement pursuant to a legal proceeding, the
prevailing parties to such proceeding shall be entitled to receive reasonable
fees and expenses (including reasonable attorneys' fees and expenses) incurred
in connection with such proceedings.
(c) It is acknowledged that it shall be impossible to measure in
money the damages that would be suffered if the parties fail to comply with any
of the obligations herein imposed on them and that in the event of any such
failure, an aggrieved Person will be irreparably damaged and shall not have an
adequate remedy at law. Any such Person shall, therefore, be entitled to
injunctive relief, including specific performance, to enforce such obligations,
and if any action should be brought in equity to enforce any of the provisions
of this Agreement, none of the parties hereto shall raise the defense that there
is an adequate remedy at law.
15. NOTICES.
All agreements, notices or other communications which are
required or otherwise delivered hereunder shall be in writing and shall be
deemed to have been duly given if (a) personally delivered or sent by
telecopier, (b) sent by nationally recognized overnight courier or (c) sent by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to the Corporation, to:
Exchange Applications, Inc.
695 Atlantic Avenue
Boston, Massachusetts 02111
Telephone: (617) 737-2244
Telecopy: (617) 790-2821
Attention: Andrew J. Frawley
with a copy to:
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Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Telephone: (617) 951-8866
Telecopy: (617) 951-8736
Attention: Neil W. Townsend, Esq.
If to a Stockholder, to him or it at his or its address set forth
on SCHEDULE I hereto;
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) when delivered, if
personally delivered or sent by telecopier, (ii) on the first Business Day after
dispatch, if sent by nationally recognized, overnight courier guaranteeing next
Business Day delivery and (iii) on the fifth Business Day following the date on
which the piece of mail containing such communication is posted, if sent by
mail.
16. GOVERNING LAW.
All questions concerning the construction, interpretation and
validity of this Agreement shall be governed by and construed and enforced in
accordance with the domestic laws of the Commonwealth of Massachusetts, without
giving effect to any choice or conflict of law provision or rule (whether in the
Commonwealth of Massachusetts or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the Commonwealth of
Massachusetts. In furtherance of the foregoing, the internal law of the
Commonwealth of Massachusetts will control the interpretation and construction
of this Agreement, even if under such jurisdiction's choice of law or conflict
of law analysis, the substantive law of some other jurisdiction would ordinarily
apply. Notwithstanding the foregoing provisions of this SECTION 16, those
provisions of this Agreement that relate to the internal governance of the
Corporation provisions shall be governed by and construed and enforced in
accordance with the internal laws of the State of Delaware.
17. FURTHER ASSURANCES.
Each party hereto shall do and perform or cause to be done and
performed all such further acts and things and shall execute and deliver all
such other agreements, certificates, instruments, and documents as any other
party hereto reasonably may request in order to carry out the provisions of this
Agreement and the consummation of the transactions contemplated hereby.
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<PAGE> 32
18. JURISDICTION; VENUE; PROCESS.
The parties to this Agreement agree that jurisdiction and venue
in any action brought by any party hereto pursuant to this Agreement shall
properly (but not exclusively) lie in any federal or state court located in the
Commonwealth of Massachusetts or the State of New York. By execution and
delivery of this Agreement, the parties hereto irrevocably submit to the
jurisdiction of such courts for itself or himself and in respect of its or his
property with respect to such action. The parties hereto irrevocably agree that
venue would be proper in such courts, and hereby waive any objection that any of
such courts is an improper or inconvenient forum for the resolution of such
action. The parties further agree that the mailing by certified or registered
mail, return receipt requested, of any process required by any such court shall
constitute valid and lawful service of process against them, without necessity
for service by any other means provided by statute or rule any of such court.
19. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.
The Corporation hereby represents and warrants to the
Stockholders that as of the date of this Agreement:
(a) it is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, it has full corporate power
and authority to execute, deliver and perform this Agreement and to consummate
the transactions contemplated hereby, and the execution, delivery and
performance by it of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action;
(b) this Agreement has been duly and validly executed and delivered
by the Corporation and constitutes a legal and binding obligation of the
Corporation, enforceable against the Corporation in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter in effect and
public policy and subject to general principles of equity; and
(c) the execution, delivery and performance by the Corporation of
this Agreement and the consummation by the Corporation of the transactions
contemplated hereby shall not, with or without the giving of notice or lapse of
time, or both (i) violate any Applicable Law, or (ii) conflict with, or result
in a breach or default under, any term or condition of the Certificate of
Incorporation or the By-Laws or any agreement or instrument to which the
Corporation is a party or by which it is bound.
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<PAGE> 33
20. REPRESENTATION AND WARRANTIES OF THE STOCKHOLDERS.
Each Stockholder (as to himself or itself only) represents and
warrants to the Corporation and the other Stockholders that, as of the time such
Stockholder becomes a party to this Agreement:
(a) if such Stockholder is not a natural Person, it is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its formation;
(b) this Agreement (or the separate joinder agreement executed by
such Stockholder) has been duly and validly executed and delivered by such
Stockholder and this Agreement constitutes a legal and binding obligation of
such Stockholder, enforceable against such Stockholder in accordance with its
terms; and
(c) the execution, delivery and performance by such Stockholder of
this Agreement and the consummation by such Stockholder of the transactions
contemplated hereby shall not, with or without the giving of notice or lapse of
time, or both (i) violate any Applicable Law, or (ii) conflict with, or result
in a breach or default under, any term or condition of any agreement or other
instrument to which such Stockholder is a party or by which such Stockholder is
bound.
21. CONFLICTING AGREEMENTS.
No Stockholder shall enter into any stockholder agreements or
arrangements of any kind with any Person with respect to any Shares on terms
inconsistent with the provisions of this Agreement (whether or not such
agreements or arrangements are with other Stockholders or with Persons that are
not parties to this Agreement), including but not limited to, agreements or
arrangements with respect to the acquisition or disposition of Shares in a
manner which is inconsistent with this Agreement.
22. MUTUAL WAIVER OF JURY TRIAL.
BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE LAWS TO APPLY (RATHER THAN
ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A
JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION
OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO
ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR ANY DOCUMENTS
RELATED HERETO.
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<PAGE> 34
23. COUNTERPARTS.
This Agreement may be executed simultaneously in two or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
* * * * *
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<PAGE> 35
IN WITNESS WHEREOF, the undersigned have duly executed this
Stockholders Agreement as of the date first written above.
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
-----------------------
Andrew J. Frawley
President
<PAGE> 36
STOCKHOLDERS:
INSIGHT VENTURE PARTNERS I, L.P.
BY: INSIGHT VENTURE ASSOCIATES, LLC,
its general partner
By: /s/ Jeffrey Horing
------------------------------------
Name: Jeffrey Horing
Title:
INSIGHT CAPITAL PARTNERS II, L.P.
BY: INSIGHT VENTURE ASSOCIATES II, LLC,
its general partner
By: /s/ Jeffrey Horing
------------------------------------
Name: Jeffrey Horing
Title:
WEXFORD INSIGHT LLC
BY: WEXFORD MANAGEMENT LLC,
its investment manager
By: /s/ Robert Holtz
------------------------------------
Name: Robert Holtz
Title: Principal
CYRK, INC.
By: /s/ Patrick Brady
------------------------------------
Name: Patrick Brady
Title: President
<PAGE> 37
GRANT & PARTNERS LIMITED PARTNERSHIP
BY: GRANT & PARTNERS, INC.,
its general partner
By: /s/ Alan W. H. Grant
----------------------------------------
Name: Alan W. H. Grant
Title: President, Grant & Partners, Inc.
<PAGE> 38
STOCKHOLDERS:
/s/ Andrew J. Frawley
----------------------------------------
Andrew J. Frawley
/s/ Michael J. Feldman
----------------------------------------
Michael J. Feldman
/s/ Michael McGonagle
----------------------------------------
Michael McGonagle
<PAGE> 1
EXHIBIT 10.14
================================================================================
EXCHANGE APPLICATIONS, INC.
(a Delaware corporation)
---------------------------------
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
---------------------------------
DECEMBER 4, 1997
================================================================================
<PAGE> 2
AMENDED AND RESTATED REGISTRATION
RIGHTS AGREEMENT dated as of December 4,
1997, among EXCHANGE APPLICATIONS, INC., a
Delaware corporation (the "CORPORATION"), and
the INVESTORS (as defined below).
The Investors own or have the right to purchase or otherwise acquire
(by the exercise, exchange or conversion of shares of the Corporation's capital
stock owned by the Investors) shares of the Corporation's Common Stock (as
defined below). The Corporation and the Investors deem it to be in their
respective best interests to set forth the rights of the Investors in connection
with public offerings and sales of the capital stock of the Corporation.
ACCORDINGLY, in consideration of the mutual covenants and agreements
contained herein, the sufficiency of which is hereby acknowledged, the parties
agree as follows:
1. DEFINITIONS; RULES OF CONSTRUCTION.
(a) DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings ascribed to them below:
"BUSINESS DAY" means any day that is not a Saturday, Sunday or other
day on which banks are not required to be open in New York, New York or Boston,
Massachusetts.
"COMMISSION" means the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
"COMMON STOCK" means the Common Stock, $.001 par value, of the Company.
"COMMON STOCK EQUIVALENT" means (i) one share of Common Stock or (ii)
the right to acquire, whether or not immediately exercisable, one share of
Common Stock, whether evidenced by an option, warrant, convertible security or
other instrument or agreement.
"CYRK" means CYRK, Inc., a Delaware corporation.
<PAGE> 3
"CYRK/GPLP INVESTORS" means, collectively, CYRK, GPLP and their
respective affiliates and partners, and each of their respective directors,
officers, employees, partners and stockholders, in each case who hold Restricted
Shares, and shall also include any successor to, or assignee or transferee of
Restricted Shares held by, any of the foregoing Persons who or which executes
and delivers to the Corporation an Investor Joinder.
"EXCHANGE ACT" means the Securities Exchange Act of 1934 or any
successor Federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
"GPLP" means Grant & Partners Limited Partnership, a Delaware limited
partnership.
"INITIAL PUBLIC OFFERING" means the initial Public Offering of the
Common Stock, registered pursuant to the Securities Act.
"INSIGHT" means Insight Venture Partners I, L.P., a Delaware limited
partnership.
"INSIGHT II" means Insight Capital Partners II, L.P., a Delaware
limited partnership.
"INSIGHT INVESTORS" means, collectively, Insight, Wexford and their
respective affiliates and partners, and each of their respective directors,
officers, employees, partners and stockholders, in each case who hold Restricted
Shares, and shall also include any successor to, or assignee or transferee of
Restricted Shares held by, any of the foregoing Persons who or which executes
and delivers to the Corporation an Investor Joinder.
"INSIGHT II INVESTORS" means, collectively, Insight II and Wexford and
their respective affiliates and partners, and each of their respective
directors, officers, employees, partners and stockholders, in each case who hold
Restricted Shares, and shall also include any successor to, or assignee or
transferee of Restricted Shares held by any of the foregoing Persons who or
which executes and delivers to the Corporation an Investor Joinder.
"INVESTOR JOINDER" means a joinder agreement, substantially in the form
of EXHIBIT A hereto, by which a Person may become an Investor after the date
hereof.
"INVESTORS" means, collectively, each of the Persons listed on Schedule
I hereto and any other Person who becomes a party to this Agreement as an
Investor, and includes any successor to, or assignee or transferee of, any such
Person and
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<PAGE> 4
who or which executes and delivers to the Corporation an Investor Joinder.
"MAJORITY OF THE INSIGHT INVESTORS" means those Insight Investors who
hold in the aggregate in excess of 50% of the Restricted Shares (on a Common
Stock Equivalent basis) held by all of the Insight Investors.
"MAJORITY OF THE INSIGHT II INVESTORS" means those Insight II Investors
who hold in the aggregate in excess of 50% of the Restricted Shares (on a Common
Stock Equivalent basis) held by all of the Insight II Investors.
"OTHER SHARES" means, at any time, those shares of Common Stock which
do not constitute Primary Shares or Registrable Shares.
"PERSON" shall be construed broadly and shall include an individual, a
partnership, an association, a joint stock company, a limited liability company,
a trust, a joint venture, an unincorporated organization and a governmental
entity or any department, agency or political subdivision thereof.
"PRIMARY SHARES" means, at any time, the authorized but unissued shares
of Common Stock and shares of Common Stock held by the Corporation in its
treasury.
"PUBLIC OFFERING" means a public offering of Common Stock pursuant to a
registration statement declared effective under the Securities Act, except that
a Public Offering shall not include an offering of Common Stock to be issued as
consideration in connection with a business acquisition or an offering of
Securities issuable pursuant to an employee benefit plan.
"REGISTRABLE SHARES" means Restricted Shares which constitute Common
Stock.
"REGISTRATION DATE" means the date upon which the registration
statement pursuant to which the Corporation shall have initially registered
shares of Common Stock under the Securities Act for sale to the public shall
have been declared effective.
"RESTRICTED SHARES" means, at any time and with respect to any
Investor, the shares of Common Stock and any other Securities issued by the
Corporation which by their terms are exercisable or exchangeable for or
convertible into Common Stock, and any Securities issued by the Corporation
received on or with respect to any such Common Stock, which are held by such
Investor and which heretofore have not been sold to the public pursuant to a
registration statement under the Securities Act or pursuant to Rule 144 or may
not be sold under Rule 144(k).
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<PAGE> 5
"RULE 144" means Rule 144 promulgated by the Securities and Exchange
Commission under the Securities Act as such rule may be amended from time to
time, or any similar rule then in force.
"SECURITIES" means, with respect to any Person, such Person's
"SECURITIES" as defined in Section 2(1) of the Securities Act and includes,
without limitation, such Person's capital stock or other equity interests or any
options, warrants or other securities that are directly or indirectly
convertible into, or exercisable or exchangeable for, such Person's capital
stock or other equity interests.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"WEXFORD" means Wexford Insight LLC, a Delaware limited liability
company. RULES OF CONSTRUCTION. The use in this Agreement of the term
"INCLUDING" means "INCLUDING, WITHOUT LIMITATION." The words "herein", "HEREOF",
"HEREUNDER" and other words of similar import refer to this Agreement as a
whole, including the schedules and exhibits, as the same may from time to time
be amended, modified, supplemented or restated, and not to any particular
section, subsection, paragraph, subparagraph or clause contained in this
Agreement. All references to sections, schedules and exhibits mean the sections
of this Agreement and the schedules and exhibits attached to this Agreement. The
title of and the section and paragraph headings in this Agreement are for
convenience of reference only and shall not govern or affect the interpretation
of any of the terms or provisions of this Agreement. The use herein of the
masculine, feminine or neuter forms shall also denote the other forms, as in
each case the context may require. Where specific language is used to clarify by
example a general statement contained herein, such specific language shall not
be deemed to modify, limit or restrict in any manner the construction of the
general statement to which it relates. The language used in this Agreement has
been chosen by the parties to express their mutual intent, and no rule of strict
construction shall be applied against any party.
2. REQUIRED REGISTRATION.
(a) If at any time from and after the Registration Date, the
Corporation shall be requested by either a Majority of the Insight Investors or
by a Majority of the Insight II Investors to effect the registration under the
Securities Act of Registrable Shares with an anticipated aggregate offering
price of at least $5,000,000 in a firm commitment, underwritten Public Offering
to be managed by an underwriter selected by the Company and reasonably
acceptable to a Majority of the Insight Investors, in the case where
Registration was requested by the
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<PAGE> 6
Insight Investors, or by a Majority of the Insight II Investors, in the case
where registration was requested by the Insight II Investors, it shall promptly
give written notice to the other Investors of its requirement so to register
such Registrable Shares and, upon the written request, delivered to the
Corporation within 30 days after delivery of any such notice by the Corporation,
of the other Investors to include in such registration Registrable Shares (which
request shall specify the number of Registrable Shares proposed to be included
in such registration), the Corporation shall, subject to SECTION 2(b), promptly
use its best efforts to effect such registration under the Securities Act of the
Registrable Shares which the Corporation has been so requested to register.
(b) Anything contained in SECTION 2(a) to the contrary
notwithstanding, the Corporation shall not be obligated to effect pursuant to
SECTION 2(a) any registration under the Securities Act except in accordance with
the following provisions:
(i) the Corporation shall not be obligated to use its best
efforts to file and cause to become effective
(A) more than (1) two registration statements on Form S-1
(or any successor form thereto) (the "S-1 Registration") initiated
pursuant to SECTION 2(a) by a majority of the Insight Investors
and (2) two S-1 Registrations initiated by a Majority of the
Insight II Investors pursuant to which the Registrable Shares
requested to be included therein have been effectively sold
thereunder or
(B) any registration statement during any period in which
any other registration statement (other than on Form S-4 or Form
S-8 promulgated under the Securities Act or any successor forms
thereto) pursuant to which Primary Shares are to be or were sold
has been filed and not withdrawn or has been declared effective
within the prior 90 days;
(ii) the Corporation may delay the filing or effectiveness of
any registration statement for a period of up to 90 days after the date
of a request for registration pursuant to SECTION 2(a) if at the time
of such request the Corporation is engaged, or has fixed plans to
engage within 90 days of the time of such request, in a firm
commitment, underwritten Public Offering of Primary Shares in which the
holders of Registrable Shares may include Registrable Shares pursuant
to SECTION 3;
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<PAGE> 7
(iii) with respect to any registration pursuant to SECTION 2(A),
the Corporation may include in such registration any Primary Shares or
Other Shares; PROVIDED, HOWEVER, that if the managing underwriter
advises the Corporation that the inclusion of all of the Registrable
Shares, Primary Shares and/or Other Shares proposed to be included in
such registration would interfere with the successful marketing
(including pricing) of all of such securities, then the number of
Registrable Shares, Primary Shares and/or Other Shares proposed to be
included in such registration shall be included in the following order:
(A) FIRST, the Registrable Shares requested by the Insight
Investors and Insight II Investors to be included in such
registration (or, if necessary, such Registrable Shares PRO RATA
among the holders thereof based upon the number of Registrable
Shares requested to be registered by each such holder);
(B) SECOND, the Registrable Shares requested by the
CYRK/GPLP Investors to be included in such registration (or, if
necessary, such Registrable Shares PRO RATA among the holders
thereof based upon the number of Registrable Shares requested to
be registered by each such holder);
(C) THIRD, the Registrable Shares requested by Investors
(other than the Insight Investors, Insight II Investors or the
CYRK/GPLP Investors) to be included in such registration (or, if
necessary, such Registrable Shares PRO RATA among the holders
thereof based upon the number of Registrable Shares requested to
be registered by each such holder);
(D) FOURTH, the Primary Shares; and
(E) FIFTH, the Other Shares.
(c) A requested registration under SECTION 2(a) may be rescinded
prior to such registration being declared effective by the Commission by written
notice to the Corporation either from the Majority of Insight Investors
initiating such registration, in the case where the Insight Investors initiated
registration pursuant to SECTION 2(a), or from the Majority of Insight II
Investors initiating such registration, in the case where the Insight II
Investors initiated registration pursuant to SECTION 2(a); PROVIDED, HOWEVER,
that such rescinded registration shall not be deemed a registration statement
initiated pursuant to SECTION 2(a) for the purpose of SECTION 2(a)(i)(A) if (x)
such request of withdrawal shall have been caused by, or made in response to,
the material adverse effect of an event on the business, operations, assets or
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<PAGE> 8
condition (financial or otherwise) of the Corporation and its subsidiaries taken
as a whole or (y) the Corporation shall have been reimbursed for all
out-of-pocket expenses incurred by the Corporation in connection with such
rescinded registration.
3. PIGGYBACK REGISTRATION.
If the Corporation at any time proposes for any reason to register
Primary Shares or Other Shares under the Securities Act (other than on Form S-4
or Form S-8 promulgated under the Securities Act or any successor forms thereto)
(but not in connection with any Initial Public Offering), it shall promptly give
written notice to the Investors of its intention to so register such Primary
Shares or Other Shares and, upon the written request, delivered to the
Corporation within 30 days after delivery of any such notice by the Corporation,
of any Investor to include in such registration Registrable Shares (which
request shall specify the number of Registrable Shares proposed to be included
in such registration), the Corporation shall use its best efforts to cause all
such Registrable Shares to be included in such registration on the same terms
and conditions as the securities otherwise being sold in such registration;
PROVIDED, HOWEVER, that if the managing underwriter advises the Corporation that
the inclusion of all Registrable Shares requested to be included in such
registration would interfere with the successful marketing (including pricing)
of the Primary Shares or Other Shares proposed to be registered by the
Corporation, then the number of Primary Shares, Registrable Shares and Other
Shares proposed to be included in such registration shall be included in the
following order:
(i) FIRST, the Primary Shares;
(ii) SECOND, the Registrable Shares requested to be included in
such registration (or, if necessary, PRO RATA among the holders
thereof, based upon the number of Registrable Shares requested to be
registered by each such holder); and
(iii) THIRD, the Other Shares.
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<PAGE> 9
4. REGISTRATIONS ON FORM S-3.
Anything contained in SECTION 2 to the contrary notwithstanding, at
such time as the Corporation shall have qualified for the use of Form S-3
promulgated under the Securities Act or any successor form thereto, a Majority
of the Insight Investors and a Majority of the Insight II Investors shall have
the right to request in writing an unlimited number of registrations on Form S-3
(or any successor form thereto) of Registrable Shares, which request or requests
shall (i) specify the number of Registrable Shares intended to be sold or
disposed of and the holders thereof, which shall have an anticipated aggregate
offering price of at least $2,500,000, and (ii) state the intended method of
disposition of such Registrable Shares. A requested registration on Form S-3 or
any such successor form in compliance with this SECTION 4 shall not count as a
registration statement initiated pursuant to SECTION 2 but shall otherwise be
treated as a registration initiated pursuant to, and shall, except as otherwise
expressly provided in this SECTION 4, be subject to SECTION 2.
5. HOLDBACK AGREEMENT.
If the Corporation at any time shall register shares of Common Stock
under the Securities Act (including any registration pursuant to SECTION 2) for
sale to the public, the Investors shall not sell publicly, make any short sale
of, grant any option for the purchase of, or otherwise dispose publicly of, any
Registrable Shares (other than those shares of Common Stock included in such
registration pursuant to SECTIONS 2, 3 or 4) without the prior written consent
of the Corporation for a period designated by the Corporation in writing to the
Investors, which period shall begin not more than 10 days prior to the
effectiveness of the registration statement pursuant to which such Public
Offering shall be made and shall not last more than 180 days after the effective
date of such registration statement. The Corporation shall obtain the agreement
of any Person permitted to sell shares of stock in a registration to be bound by
and to comply with this SECTION 5 as if such Person was an Investor hereunder.
6. PREPARATION AND FILING.
If and whenever the Corporation is under an obligation pursuant to the
provisions of this Agreement to use its best efforts to effect the registration
of any Registrable Shares, the Corporation shall, as expeditiously as
practicable:
(a) use its best efforts to cause a registration statement that
registers such Registrable Shares to become and remain effective for a period of
180 days or until all of such Registrable Shares have been disposed of (if
earlier);
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<PAGE> 10
(b) furnish, at least five business days before filing a
registration statement that registers such Registrable Shares, a prospectus
relating thereto or any amendments or supplements relating to such a
registration statement or prospectus, to one counsel selected by Insight and
Insight II (the "INVESTORS' COUNSEL"), copies of all such documents proposed to
be filed (it being understood that such five-business-day period need not apply
to successive drafts of the same document proposed to be filed so long as such
successive drafts are supplied to the Investors' Counsel in advance of the
proposed filing by a period of time that is customary and reasonable under the
circumstances);
(c) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
at least a period of 180 days or until all of such Registrable Shares have been
disposed of (if earlier) and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of such Registrable Shares;
(d) notify in writing the Investors' Counsel promptly of (i) the
receipt by the Corporation of any notification with respect to any comments by
the Commission with respect to such registration statement or prospectus or any
amendment or supplement thereto or any request by the Commission for the
amending or supplementing thereof or for additional information with respect
thereto, (ii) the issuance by the Commission of any stop order suspending the
effectiveness of such registration statement or prospectus or any amendment or
supplement thereto or the initiation or threatening of any proceeding for that
purpose (and the Corporation shall use its best efforts to prevent the issuance
thereof or, if issued, to obtain its withdrawal) and (iii) the receipt by the
Corporation of any notification with respect to the suspension of the
qualification of such Registrable Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purposes;
(e) use its best efforts to register or qualify such Registrable
Shares under such other securities or blue sky laws of such jurisdictions as any
seller of Registrable Shares reasonably requests, to keep such registrations or
qualifications in effect for so long as the registration statement covering such
Registrable Shares remains in effect and do any and all other acts and things
which may be reasonably necessary or advisable to enable such seller of
Registrable Shares to consummate the disposition in such jurisdictions of the
Registrable Shares owned by such seller; PROVIDED, HOWEVER, that the Corporation
will not be required to qualify generally to do business, subject itself to
general taxation or consent to
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<PAGE> 11
general service of process in any jurisdiction where it would not otherwise be
required to do so but for this SECTION 6(e);
(f) furnish to each seller of Registrable Shares such number of
copies of a summary prospectus, if any, or other prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as such seller of Registrable Shares may
reasonably request in order to facilitate the public sale or other disposition
of such Registrable Shares;
(g) use its best efforts to cause such Registrable Shares to be
registered with or approved by such other governmental agencies or authorities
as may be necessary by virtue of the business and operations of the Corporation
to enable the seller or sellers thereof to consummate the disposition of such
Registrable Shares;
(h) notify on a timely basis each seller of such Registrable Shares
at any time when a prospectus relating to such Registrable Shares is required to
be delivered under the Securities Act within the appropriate period mentioned in
SECTION 6(A), of the happening of any event known to the Corporation as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing and, at the
request of such seller, prepare and furnish to such seller a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the offerees of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
(i) make available upon reasonable notice and during normal business
hours, for inspection by any seller of Registrable Shares, any underwriter
participating in any disposition pursuant to such registration statement and any
attorney, accountant or other agent retained by any such seller or underwriter
(collectively, the "INSPECTORS"), all pertinent financial and other records,
pertinent corporate documents and properties of the Corporation (collectively,
the "RECORDS"), as shall be reasonably necessary to enable them to exercise
their due diligence responsibility, and cause the Corporation's officers,
directors and employees to supply all information (together with the Records,
the "INFORMATION") reasonably requested by any such Inspector in connection with
such registration statement (any of the Information which the Corporation
determines in good faith to be confidential, and of
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<PAGE> 12
which determination the Inspectors are so notified, shall not be disclosed by
the Inspectors, unless (i) the disclosure of such Information is necessary to
avoid or correct a misstatement or omission in the registration statement, (ii)
the release of such Information is ordered pursuant to a subpoena or other order
from a court of competent jurisdiction or, upon the written advice of counsel,
is otherwise required by law, or (iii) such Information has been made generally
available to the public, and each seller of Registrable Shares agrees that it
will, upon learning that disclosure of such Information is sought in a court of
competent jurisdiction, give notice to the Corporation and allow the
Corporation, at the Corporation's expense, to undertake appropriate action to
prevent disclosure of the Information deemed confidential);
(j) use its best efforts to obtain from its independent certified
public accountants "COLD COMFORT" letters in customary form and at customary
times and covering matters of the type customarily covered by cold comfort
letters;
(k) use its best efforts to obtain from its counsel an opinion or
opinions in customary form, naming each seller of Registrable Shares as an
additional addressee or party who may rely thereon;
(l) provide a transfer agent and registrar (which may be the same
Person and which may be the Corporation) for such Registrable Shares;
(m) issue to any underwriter to which any seller of Registrable
Shares may sell shares in such offering, certificates evidencing such
Registrable Shares;
(n) list such Registrable Shares on any national securities exchange
on which any shares of the Common Stock are listed or, if the Common Stock is
not listed on a national securities exchange, use its best efforts to qualify
such Registrable Shares for inclusion on the automated quotation system of the
National Association of Securities Dealers, Inc. (the "NASD"), or such other
national securities exchange as the holders of a majority of such Registrable
Shares shall request;
(o) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission and make available to its
securityholders, as soon as reasonably practicable, earnings statements (which
need not be audited) covering a period of 12 months beginning within three
months after the effective date of the registration statement, which earnings
statements shall satisfy the provisions of Section 11(a) of the Securities Act;
and
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<PAGE> 13
(p) use its best efforts to take all other steps necessary to effect
the registration of such Registrable Shares contemplated hereby.
7. EXPENSES.
All expenses incurred by the Corporation in complying with SECTION 6,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the NASD), fees and expenses of complying with
securities and blue sky laws, printing expenses, fees and expenses of the
Corporation's counsel and accountants and fees and expenses of the Investors'
Counsel, shall be paid by the Corporation; PROVIDED, HOWEVER, that all
underwriting discounts and selling commissions applicable to the Registrable
Shares and Other Shares shall not be borne by the Corporation but shall be borne
by the seller or sellers thereof, in proportion to the number of Registrable
Shares and Other Shares sold by each such holder.
8. INDEMNIFICATION.
(a) In connection with any registration of any Registrable Shares
under the Securities Act pursuant to this Agreement, the Corporation shall
indemnify and hold harmless each seller of such Registrable Shares, each
underwriter, broker or any other Person acting on behalf of such seller and each
other Person, if any, who controls any of the foregoing Persons within the
meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several (or actions in respect thereof), to which any of
the foregoing Persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or allegedly untrue
statement of a material fact contained in the registration statement under which
such Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein or otherwise filed
with the Commission, any amendment or supplement thereto or any document
incident to registration or qualification of any Registrable Shares, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or, with respect to any prospectus, necessary to make the
statements therein in light of the circumstances under which they were made not
misleading, or any violation by the Corporation of the Securities Act or state
securities or blue sky laws applicable to the Corporation and relating to action
or inaction required of the Corporation in connection with such registration or
qualification under such state securities or blue sky laws; and shall reimburse
such seller, such underwriter, such broker or such other Person acting on behalf
of such seller and each such controlling Person for any legal or other expenses
reasonably incurred by any of them in connection with
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<PAGE> 14
investigating or defending any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the Corporation shall not be liable in any such case to
the extent that any such loss, claim, damage, liability or action arises out of
or is based upon an untrue statement or allegedly untrue statement or omission
or alleged omission made in said registration statement, preliminary prospectus,
final prospectus, amendment, supplement or document incident to registration or
qualification of any Registrable Shares in reliance upon and in conformity with
written information furnished to the Corporation through an instrument duly
executed by such seller or underwriter specifically for use in the preparation
thereof.
(b) In connection with any registration of Registrable Shares under
the Securities Act pursuant to this Agreement, each seller of Registrable Shares
shall severally and not jointly indemnify and hold harmless (in the same manner
and to the same extent as set forth in SECTION 8(a)) the Corporation, each
director of the Corporation, each officer of the Corporation who shall sign such
registration statement, each underwriter, broker or other Person acting on
behalf of such seller and each Person who controls any of the foregoing Persons
within the meaning of the Securities Act and each other seller of Registrable
Shares under such registration statement with respect to any statement or
omission from such registration statement, any preliminary prospectus or final
prospectus contained therein or otherwise filed with the Commission, any
amendment or supplement thereto or any document incident to registration or
qualification of any Registrable Shares, if such statement or omission was made
in reliance upon and in conformity with written information furnished to the
Corporation or such underwriter through an instrument duly executed by such
seller or a Person duly acting on their behalf specifically for use in
connection with the preparation of such registration statement, preliminary
prospectus, final prospectus, amendment or supplement; PROVIDED, HOWEVER, that
the maximum amount of liability in respect of such indemnification shall be
limited, in the case of each seller of Registrable Shares, to an amount equal to
the net proceeds actually received by such seller from the sale of Registrable
Shares effected pursuant to such registration.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in SECTIONS 8(a) and
(b), such indemnified party will, if a claim in respect thereof is made against
an indemnifying party, give written notice to the latter of the commencement of
such action. In case any such action is brought against an indemnified party,
the indemnifying party will be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified to
the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the
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<PAGE> 15
defense thereof, the indemnifying party shall not be responsible for any legal
or other expenses subsequently incurred by the indemnified party in connection
with the defense thereof; PROVIDED, HOWEVER, that if any indemnified party shall
have reasonably concluded that there may be one or more legal or equitable
defenses available to such indemnified party which are additional to or conflict
with those available to the indemnifying party, or that such claim or litigation
involves or could have an effect upon matters beyond the scope of the indemnity
agreement provided in this SECTION 8, the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party
and such indemnifying party shall reimburse such indemnified party and any
Person controlling such indemnified party for that portion of the fees and
expenses of any counsel retained by the indemnified party which are reasonably
related to the matters covered by the indemnity agreement provided in this
SECTION 8. The indemnifying party shall not be liable to indemnify any
indemnified party for any settlement of any claim or action effected without the
consent of the indemnifying party. The indemnifying party may not settle any
claim or action brought against an indemnified party unless such indemnified
party is released from all and any liability as part of such settlement.
(d) If the indemnification provided for in this SECTION 8 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, claim, damage, liability or action referred to herein, then
the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amounts paid or payable by such indemnified
party as a result of such loss, claim, damage, liability or action in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions which resulted in such loss, claim, damage,
liability or action as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
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<PAGE> 16
9. UNDERWRITING AGREEMENT.
Notwithstanding the provisions of SECTIONS 5 through 8, to the extent
that the Investors shall enter into an underwriting or similar agreement, which
agreement contains provisions covering one or more issues addressed in such
SECTIONS, the provisions contained in such SECTIONS addressing such issue or
issues shall be of no force or effect with respect to such registration, but
this provision shall not apply to the Corporation if the Corporation is not a
party to the underwriting or similar agreement.
10. INFORMATION BY HOLDER.
Each holder of Registrable Shares to be included in any such
registration shall furnish to the Corporation and the managing underwriter such
written information regarding such holder and the distribution proposed by such
holder as the Corporation or the managing underwriter may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Agreement.
11. EXCHANGE ACT COMPLIANCE.
From the Registration Date or such earlier date as a registration
statement filed by the Corporation pursuant to the Exchange Act relating to any
class of the Corporation's securities shall have become effective, the
Corporation shall comply with all of the reporting requirements of the Exchange
Act applicable to it (whether or not it shall be required to do so) and shall
comply with all other public information reporting requirements of the
Commission which are conditions to the availability of Rule 144 for the sale of
the Common Stock. The Corporation shall cooperate with each Investor in
supplying such information as may be necessary for such Investor to complete and
file any information reporting forms presently or hereafter required by the
Commission as a condition to the availability of Rule 144.
12. MERGERS, ETC.
The Corporation shall not, directly or indirectly, enter into any
merger, consolidation or reorganization in which the Corporation shall not be
the surviving corporation unless the surviving corporation shall, prior to such
merger, consolidation or reorganization, agree in writing to assume the
obligations of the Corporation under this Agreement, and for that purpose
references hereunder to "REGISTRABLE SHARES" shall be deemed to include the
shares of common stock, if any, that holders of Registrable Shares would be
entitled to receive in exchange for Common Stock under any such merger,
consolidation or reorganization; PROVIDED, HOWEVER, that, to the extent holders
of
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<PAGE> 17
Registrable Shares receive securities that are by their terms convertible into
shares of common stock of the issuer thereof, then only such shares of common
stock as are issued or issuable upon conversion of said convertible securities
shall be included within the definition of "REGISTRABLE SHARES."
13. NEW CERTIFICATES.
As expeditiously as possible after the effectiveness of any
registration statement filed pursuant to this Agreement, the Corporation will
deliver in exchange for any legended certificate evidencing Restricted Shares so
registered, new stock certificates not bearing any restrictive legends, provided
that in the event less than all of the Restricted Shares evidenced by such
legended certificate are registered, the holder thereof agrees that a new
certificate evidencing such unregistered shares will be issued bearing the
appropriate restrictive legend.
14. NO CONFLICT OF RIGHTS.
The Corporation represents and warrants that the registration rights
granted to the Investors hereby do not conflict with or impair any other
registration rights granted by the Corporation. The Corporation shall not, after
the date hereof, grant any registration rights which conflict with or impair the
registration rights granted hereby, including, but not limited to, (i)
registration rights superior to the registration rights granted herein, and (ii)
registration rights that would allow any Person to register any Registrable
Shares or Other Shares in a registration initiated under SECTIONS 2 or 4 other
than in the manner and priority contemplated by such SECTIONS.
15. TERMINATION.
This Agreement shall terminate and be of no further force or effect
when there shall no longer be any Restricted Shares outstanding.
16. SUCCESSORS AND ASSIGNS.
This Agreement shall bind and inure to the benefit of the Corporation
and the Investors and, subject to SECTION 17, their respective successors and
assigns.
17. ASSIGNMENT.
Each Investor may assign its rights hereunder to any purchaser or
transferee from such Investor of Restricted Shares; PROVIDED, HOWEVER, that such
purchaser or transferee shall, as a condition to the effectiveness of such
assignment, be required to execute an Investor Joinder, whereupon such purchaser
or transferee shall have the benefits of, and shall be subject to the
restrictions contained in, this Agreement as if such
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<PAGE> 18
purchaser or transferee was originally included in the definition of "INVESTOR"
herein and had originally been a party hereto.
18. SEVERABILITY.
It is the desire and intent of the parties hereto that the provisions
of this Agreement be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular provision of this Agreement shall be adjudicated
by a court of competent jurisdiction to be invalid, prohibited or unenforceable
for any reason, such provision, as to such jurisdiction, shall be ineffective,
without invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction. Notwithstanding the
foregoing, if such provision could be more narrowly drawn so as not to be
invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such
jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
19. ENTIRE AGREEMENT.
This Agreement contains the entire agreement among the parties with
respect to the subject matter hereof and supersedes all prior arrangements or
understandings with respect thereto.
20. NOTICES.
All notices or other communications which are required or otherwise
delivered hereunder shall be in writing and shall be deemed to have been duly
given if (a) personally delivered or sent by telecopier, (b) sent by nationally
recognized overnight courier or (c) sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
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<PAGE> 19
If to the Corporation, to:
Exchange Applications, Inc.
695 Atlantic Avenue
Boston, Massachusetts 02111
Telephone: (617) 737-2244
Telecopy: (617) 790-2821
Attention: Andrew Frawley
with a copy to:
Bingham, Dana & Gould LLP
150 Federal Street
Boston, Massachusetts 02110
Telephone: (617) 951-8866
Telecopy: (617) 951-8736
Attention: Neil W. Townsend, Esq.
If to an Investor, at his or its address set forth on SCHEDULE I
hereto.
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such notice
or communication shall be deemed to have been received (i) when delivered, if
personally delivered or sent by telecopier, (ii) on the first Business Day after
dispatch, if sent by nationally recognized, overnight courier guaranteeing next
Business Day delivery and (iii) on the fifth Business Day following the date on
which the piece of mail containing such communication is posted, if sent by
mail.
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<PAGE> 20
21. MODIFICATIONS; AMENDMENTS; WAIVERS.
The terms and provisions of this Agreement may not be modified or
amended, nor may any provision applicable to the Investors be waived, except
pursuant to a writing signed by (i) the Corporation, (ii) a Majority of the
Insight Investors, (iii) a Majority of the Insight II Investors and (iv) the
holders of at least a majority of the Restricted Shares (on a Common Stock
Equivalent basis) held by all Investors (unless such amendment, modification or
waiver affects such Investors in the same fashion as all Investors). The failure
of any party to enforce any of the provisions of this Agreement shall in no way
be construed as a waiver of such provisions and shall not affect the right of
such party thereafter to enforce each and every provision of this Agreement in
accordance with its terms.
22. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the domestic laws of the Commonwealth of Massachusetts, without giving effect to
any choice of law or conflicting provision or rule (whether of the Commonwealth
of Massachusetts or any other jurisdiction) that would cause the laws of any
jurisdiction other than the Commonwealth of Massachusetts to be applied, except
to the extent that this Agreement relates to the internal affairs of the
Corporation, which shall be governed by and construed in accordance with the
laws of the State of Delaware without giving effect to any choice of law or
conflicting provision or rule (whether of the State of Delaware or any other
jurisdiction) that would cause the laws of any jurisdiction other than the State
of Delaware to be applied to such matters. In furtherance of the foregoing, the
internal law of the Commonwealth of Massachusetts or the State of Delaware, as
the case may be, shall control the interpretation and construction of this
Agreement, even if under such jurisdiction's choice of law or conflict of law
analysis, the substantive law of some other jurisdiction would ordinarily apply.
23. COUNTERPARTS; VALIDITY.
This Agreement may be executed in any number of counterparts, and each
such counterpart hereof shall be deemed to be an original instrument, but all
such counterparts together shall constitute but one agreement. The failure of
any Person holding Registrable Shares to execute this Agreement does not make it
invalid as against any other Person holding Registrable Shares.
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<PAGE> 21
24. HEADINGS.
The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement.
* * * * *
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<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first written above.
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
-----------------------
Andrew J. Frawley
President
<PAGE> 23
INVESTORS:
INSIGHT VENTURE PARTNERS I, L.P.
BY: INSIGHT VENTURE ASSOCIATES, LLC,
its general partner
By: /s/ Jeffrey Horing
-----------------------------------
Name: Jeffrey Horing
Title:
INSIGHT CAPITAL PARTNERS II, L.P.
BY: INSIGHT VENTURE ASSOCIATES II, LLC,
its general partner
By: /s/ Jeffrey Horing
-----------------------------------
Name: Jeffrey Horing
Title:
<PAGE> 24
WEXFORD INSIGHT LLC
BY: WEXFORD MANAGEMENT LLC,
its investment manager
By: /s/ Robert Holtz
--------------------------------
Name: Robert Holtz
Title: Principal
CYRK, INC.
By: /s/ Patrick Brady
--------------------------------
Name: Patrick Brady
Title: President
<PAGE> 25
INVESTORS:
GRANT & PARTNERS LIMITED PARTNERSHIP
BY: GRANT & PARTNERS, INC.,
its general partner
By: /s/ Alan W. H. Grant
-----------------------------------------
Name: Alan W. H. Grant
Title: President, Grant & Partners, Inc.
/s/ Andrew J. Frawley
---------------------------------------------
Andrew J. Frawley
/s/ Michael J. Feldman
---------------------------------------------
Michael J. Feldman
/s/ Michael McGonagle
---------------------------------------------
Michael McGonagle
<PAGE> 1
EXHIBIT 10.15
EXCHANGE APPLICATIONS, INC.
695 Atlantic Avenue
Boston, MA 02111
December 22, 1997
Fleet National Bank
75 State Street
Boston, MA 02109
Gentlemen:
This letter agreement will set forth certain understandings between
Exchange Applications, Inc., a Delaware corporation (the "Borrower") and Fleet
National Bank (the "Bank") with respect to Revolving Loans (hereinafter defined)
to be made by the Bank to the Borrower and with respect to letters of credit
which may hereafter be issued by the Bank for the account of the Borrower. In
consideration of the mutual promises contained herein and in the other documents
referred to below, and for other good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:
I. AMOUNTS AND TERMS
1.1. REFERENCE TO DOCUMENTS. Reference is made to (i) that certain
$2,000,000 face principal amount promissory note (the "Revolving Note") of even
date herewith made by the Borrower and payable to the order of the Bank, (ii)
that certain Inventory, Accounts Receivable and Intangibles Security Agreement
and that certain Supplementary Security Agreement -Security Interest in Goods
and Chattels, each of even date herewith, from the Borrower to the Bank
(collectively, the "Security Agreement"), and (iii) assignments and notices of
assignment (collectively, the "Intellectual Property Assignments") from the
Borrower to the Bank relating to the Borrower's registered trademarks, patents
and copyrights, if any.
1.2. THE BORROWING; REVOLVING NOTE. Subject to the terms and conditions
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within-described revolving financing arrangements pursuant to
ss.5.2 or ss.6.7; provided, however, that (1) the aggregate principal amount of
Revolving Loans outstanding shall at no time exceed the Maximum Revolving Amount
(hereinafter defined) and (2) the Aggregate Bank Liabilities (hereinafter
defined) shall at no time exceed the Borrowing Base (hereinafter defined).
Within such limits, and subject to the terms and conditions hereof, the Borrower
may obtain Revolving Loans, repay Revolving Loans and obtain Revolving Loans
again on one or more occasions. The Revolving Loans shall be evidenced by the
Revolving Note and interest thereon shall be payable at the times and at the
rate provided for in the Revolving Note. Overdue principal of the Revolving
Loans and, to the extent permitted by law, overdue interest shall bear interest
at a fluctuating rate per annum which at all times shall be equal to the
<PAGE> 2
sum of (i) four (4%) percent per annum plus (ii) the per annum rate otherwise
payable under the Revolving Note (but in no event in excess of the maximum rate
from time to time permitted by then applicable law), compounded monthly and
payable on demand. The Borrower hereby irrevocably authorizes the Bank to make
or cause to be made, on a schedule attached to the Revolving Note or on the
books of the Bank, at or following the time of making each Revolving Loan and of
receiving any payment of principal, an appropriate notation reflecting such
transaction and the then aggregate unpaid principal balance of the Revolving
Loans. The amount so noted shall constitute presumptive evidence as to the
amount owed by the Borrower with respect to principal of the Revolving Loans.
Failure of the Bank to make any such notation shall not, however, affect any
obligation of the Borrower or any right of the Bank hereunder or under the
Revolving Note. All payments of interest, principal and any other sum payable
hereunder and/or under the Revolving Note shall be made to the Bank, in lawful
currency of the United States in immediately available funds, at its office at
75 State Street, Boston, MA 02109 or to such other address as the Bank may from
time to time direct. All payments received by the Bank after 2:00 p.m. on any
day shall be deemed received as of the next succeeding Business Day. All monies
received by the Bank shall be applied first to fees, charges, costs and expenses
payable to the Bank under this letter agreement, the Revolving Note and/or any
of the other Loan Documents, next to interest then accrued on account of any
Revolving Loans or letter of credit reimbursement obligations and only
thereafter to principal of the Revolving Loans and letter of credit
reimbursement obligations. All interest and fees payable hereunder and/or under
the Revolving Note shall be calculated on the basis of a 360-day year for the
actual number of days elapsed.
1.3. REPAYMENT; RENEWAL. The Borrower shall repay in full all Revolving
Loans and all interest thereon upon the first to occur of: (i) the Expiration
Date or (ii) an acceleration under ss.5.2(a) following an Event of Default. The
Borrower may repay, at any time, without penalty or premium, the whole or any
portion of any Revolving Loan. In addition, if at any time the Borrowing Base is
in an amount which is less than the then outstanding Aggregate Bank Liabilities,
the Borrower will forthwith prepay so much of the Revolving Loans as may be
required (or arrange for the termination of such letters of credit as may be
required) so that the Aggregate Bank Liabilities will not exceed the Borrowing
Base. The Bank may, at its sole discretion, renew the financing arrangements
described in this letter agreement by extending the Expiration Date in a writing
signed by the Bank and accepted by the Borrower. Neither the inclusion in this
letter agreement or elsewhere of covenants relating to periods of time after the
Expiration Date, nor any other provision hereof, nor any action (except a
written extension pursuant to the immediately preceding sentence), non-action or
course of dealing on the part of the Bank will be deemed an extension of, or
agreement on the part of the Bank to extend, the Expiration Date.
1.4. ADVANCES AND PAYMENTS. The proceeds of all Revolving Loans shall be
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank. The proceeds of each Revolving Loan will be used by the Borrower
solely for working capital purposes.
<PAGE> 3
The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums due, from
time to time, under this letter agreement and/or the Revolving Note and/or with
respect to any letter of credit; and will thereafter notify the Borrower of the
amount so charged. The failure of the Bank so to charge any account or to give
any such notice shall not affect the obligation of the Borrower to pay interest,
principal or other sums as provided herein or in the Revolving Note or with
respect to any letter of credit.
Whenever any payment to be made to the Bank hereunder or under the
Revolving Note or with respect to any letter of credit shall be stated to be due
on a day which is not a Business Day, such payment may be made on the next
succeeding Business Day, and interest payable on each such date shall include
the amount thereof which shall accrue during the period of such extension of
time. All payments by the Borrower hereunder and/or in respect of the Revolving
Note and/or with respect to any letter of credit shall be made net of any
impositions or taxes and without deduction, set-off or counterclaim,
notwithstanding any claim which the Borrower may now or at any time hereafter
have against the Bank.
1.5. LETTERS OF CREDIT. At the Borrower's request, the Bank will, from
time to time, subject to the conditions set forth in Section 1.6 issue one or
more letters of credit for the account of the Borrower; provided that at the
time of such issuance and after giving effect thereto (1) the Aggregate Letter
of Credit Liabilities will in no event exceed $800,000 and (2) the Aggregate
Bank Liabilities will in no event exceed the lesser of (i) $2,000,000 or (ii)
the then effective Borrowing Base. Any such letter of credit will be issued for
issuance and /or commitment fees as may be agreed upon by the Bank and the
Borrower at the time of issuance and will be governed by the Bank's then
customary documentation for similar credits. The Borrower hereby authorizes the
Bank, without further request from the Borrower, to cause the Borrower's
liability to the Bank for reimbursement of funds drawn under any such letter of
credit to be repaid from the proceeds of a Revolving Loan to be made hereunder.
The Borrower hereby irrevocably requests that such Revolving Loans be made.
1.6. CONDITIONS TO ADVANCE. Prior to the making of the initial Revolving
Loan or the issuance of any letter of credit hereunder, the Borrower shall
deliver to the Bank duly executed copies of this letter agreement, the Security
Agreement, the Intellectual Property Assignments, the Revolving Note and the
documents and other items listed on the Closing Agenda delivered herewith by the
Bank to the Borrower, all of which, as well as all legal matters incident to the
transactions contemplated hereby, shall be satisfactory in form and substance to
the Bank and its counsel.
Without limiting the foregoing, any Revolving Loan or letter of credit
issuance (including the initial Revolving Loan or letter of credit issuance) is
subject to the further conditions precedent that on the date on which such
Revolving Loan is made or such letter of credit is issued (and after giving
effect thereto):
<PAGE> 4
(a) All statements, representations and warranties of the Borrower made
in this letter agreement and/or in the Security Agreement shall continue to be
correct in all material respects as of the date of such Revolving Loan or the
date of issuance of such letter of credit, as the case may be.
(b) All covenants and agreements of the Borrower contained herein and/or
in any of the other Loan Documents shall have been complied with in all material
respects on and as of the date of such Revolving Loan or the date of issuance of
such letter of credit, as the case may be.
(c) No event which constitutes, or which with notice or lapse of time or
both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.
Each request by the Borrower for any Revolving Loan or for the issuance of
any letter of credit, and each acceptance by the Borrower of the proceeds of any
Revolving Loan or delivery of a letter of credit, will be deemed a
representation and warranty by the Borrower that at the date of such Revolving
Loan or the date of issuance of such letter of credit, as the case may be, and
after giving effect thereto all of the conditions set forth in the foregoing
clauses (a)-(d) of this ss.1.6 will be satisfied. Each request for a Revolving
Loan or letter of credit issuance will be accompanied by a borrowing base
certificate on a form satisfactory to the Bank, executed by the chief financial
officer of the Borrower, unless such a certificate shall have been previously
furnished setting forth the Borrowing Base as at a date not more than 30 days
prior to the date of the requested borrowing or the requested letter of credit
issuance, as the case may be.
II. REPRESENTATIONS AND WARRANTIES
2.1. REPRESENTATIONS AND WARRANTIES. In order to induce the Bank to enter
into this letter agreement and to make Revolving Loans hereunder and/or issue
letters of credit hereunder, the Borrower warrants and represents to the Bank as
follows:
(a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of Delaware. The Borrower has full corporate
power to own its property and conduct its business as now conducted, to grant
the security interests contemplated by the Security Agreement and the
Intellectual Property Assignments and to enter into and perform this letter
agreement and the other Loan Documents. The Borrower is duly qualified to do
business and is in good standing in Massachusetts and is also duly qualified to
do business in and is in good standing in each other jurisdiction in which the
Borrower maintains any facility, sales office, warehouse or other location, and
in each other jurisdiction where the failure so to qualify could (singly or in
the aggregate with all other such failures) have a material adverse effect on
the financial condition, business or prospects of the Borrower, all such
jurisdictions being listed on item 2.1(a) of the attached Disclosure Schedule.
At the date hereof, the Borrower has no
<PAGE> 5
Subsidiaries, except as shown on said item 2.1(a) of the attached Disclosure
Schedule. The Borrower is not a member of any partnership or joint venture.
(b) At the date of this letter agreement, all of the outstanding capital
stock of the Borrower is owned, of record and beneficially, as set forth on item
2.1(b) of the attached Disclosure Schedule.
(c) The execution, delivery and performance by the Borrower of this
letter agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate and other action and do not and will not:
(i) violate any provision of, or require any filings (other than
filings under the Uniform Commercial Code), registration, consent or
approval under, any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower;
(ii) violate any provision of the charter or by-laws of the
Borrower, or result in a breach of or constitute a default or require any
waiver or consent under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which the Borrower is a
party or by which the Borrower or any of its properties may be bound or
affected or require any other consent of any Person, except for such
consents as shall have been duly obtained and are in full force and effect
as of the date hereof; or
(iii) result in, or require, the creation or imposition of any lien,
security interest or other encumbrance (other than in favor of the Bank),
upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.
(e) Except as described on item 2.1(e) of the attached Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which could hinder or
prevent the consummation of the transactions contemplated hereby or call into
question the validity of this letter agreement or any of the other Loan
Documents or any action taken or to be taken in connection with the transactions
contemplated hereby or thereby or which in any single case or in the aggregate
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Borrower or any Subsidiary.
(f) The Borrower is not in violation of any term of its charter or
by-laws as now in effect. Neither the Borrower nor any Subsidiary of the
Borrower is in material violation of any
<PAGE> 6
term of any mortgage, indenture or judgment, decree or order, or any other
instrument, contract or agreement to which it is a party or by which any of its
property is bound.
(g) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, state and local tax returns, reports and estimates required
to be filed by the Borrower and/or by any such Subsidiary. All such filed
returns, reports and estimates are proper and accurate and the Borrower or the
relevant Subsidiary has paid all taxes, assessments, impositions, fees and other
governmental charges required to be paid in respect of the periods covered by
such returns, reports or estimates. No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material tax liability or basis therefor.
(h) The Borrower is in compliance (and each Subsidiary of the Borrower
is in compliance) with all requirements of law, federal, state and local, and
all requirements of all governmental bodies or agencies having jurisdiction over
it, the conduct of its business, the use of its properties and assets, and all
premises occupied by it, failure to comply with any of which could (singly or in
the aggregate with all other such failures) have a material adverse effect upon
the assets, business, financial condition or prospects of the Borrower or any
such Subsidiary. Without limiting the foregoing, the Borrower has all the
franchises, licenses, leases, permits, certificates and authorizations needed
for the conduct of its business and the use of its properties and all premises
occupied by it, as now conducted, owned and used.
(i) The audited financial statements of the Borrower as at December 31,
1996 and the management-generated statements of the Borrower as at September 30,
1997, each heretofore delivered to the Bank, are complete and accurate and
fairly present the financial condition of the Borrower as at the respective
dates thereof and for the periods covered thereby, except that the
management-generated statements do not have footnotes and thus do not present
the information which would normally be contained in footnotes to financial
statements. The Borrower has no liability, contingent or otherwise, not
disclosed in the aforesaid financial statements or in any notes thereto that
could materially affect the financial condition of the Borrower. Since December
31, 1996, there has been no material adverse development in the business,
condition or prospects of the Borrower, and the Borrower has not entered into
any material transaction other than in the ordinary course and except as set
forth on item 2.1(i).
(j) The principal place of business and chief executive offices of the
Borrower are located at 695 Atlantic Avenue, Boston, MA 02111 (the "Premises").
All of the books and records of the Borrower are located at said address. Except
as described on item 2.1(j) of the attached Disclosure Schedule, no assets of
the Borrower are located at any other address. Said item 2.1(j) of the attached
Disclosure Schedule sets forth the names and addresses of all record owners of
the Premises.
(k) The Borrower owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises ("Intellectual
Property") now being used to conduct its business, all of which are described on
item 2.1(k) of the attached Disclosure Schedule. None of the Intellectual
Property owned by the Borrower is represented by a
<PAGE> 7
registered copyright, trademark, patent or other federal or state registration,
except as shown on said item 2.1(k). To the Borrower's best knowledge, the
conduct of the Borrower's business as now operated does not conflict with valid
patents, licenses, copyrights, trademarks, trade names or franchises of others
in any manner that could materially adversely affect the business, prospects,
assets or condition, financial or otherwise, of the Borrower.
(l) None of the executive officers or key employees of the Borrower is
subject to any agreement in favor of anyone other than the Borrower which limits
or restricts that person's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions or other ideas susceptible
to legal protection developed or conceived by any such officer or key employee.
(m) The Borrower is not a party to any contract or agreement which now
has or, as far as can be foreseen by the Borrower at the date hereof, may have a
material adverse effect on the financial condition, business, prospects or
properties of the Borrower.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding or any letter of credit
issued hereunder shall be outstanding:
3.1. LEGAL EXISTENCE; QUALIFICATION; COMPLIANCE. The Borrower will
maintain (and will cause each Subsidiary of the Borrower to maintain) its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will remain qualified to do business and in good standing in
Massachusetts. Further, the Borrower will qualify to do business and will remain
qualified and in good standing (and the Borrower will cause each Subsidiary of
the Borrower to qualify and remain qualified and in good standing) in each other
jurisdiction where the Borrower or such Subsidiary, as the case may be,
maintains any facility, sales office, warehouse or other location and in each
other jurisdiction in which the failure so to qualify could (singly or in the
aggregate with all other such failures) have a material adverse effect on the
financial condition, business or prospects of the Borrower or any such
Subsidiary. The Borrower will comply (and will cause each Subsidiary of the
Borrower to comply) with its charter documents and by-laws. The Borrower will
comply with (and will cause each Subsidiary of the Borrower to comply with) all
applicable laws, rules and regulations (including, without limitation, ERISA and
those relating to environmental protection) other than (i) laws, rules or
regulations the validity or applicability of which the Borrower or such
Subsidiary shall be contesting in good faith by proceedings which serve as a
matter of law to stay the enforcement thereof and (ii) those laws, rules and
regulations the failure to comply with any of which could not (singly or in the
aggregate) have a material adverse effect on the financial condition, business
or prospects of the Borrower or any such Subsidiary.
<PAGE> 8
3.2. MAINTENANCE OF PROPERTY; INSURANCE. The Borrower will maintain and
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its fixed assets in good working order and condition, making
all necessary repairs thereto and replacements thereof. The Borrower will
maintain all such insurance as may be required under the Security Agreement and
will also maintain, with financially sound and reputable insurers, insurance
with respect to its property and business against such liabilities, casualties
and contingencies and of such types and in such amounts as shall be reasonably
satisfactory to the Bank from time to time and in any event all such insurance
as may from time to time be customary for companies conducting a business
similar to that of the Borrower in similar locales.
3.3. PAYMENT OF TAXES AND CHARGES. The Borrower will pay and discharge
(and will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including, without limitation, taxes, assessments, charges
or levies relating to real and personal property, franchises, income,
unemployment, old age benefits, withholding, or sales or use, prior to the date
on which penalties would attach thereto, and all lawful claims (whether for any
of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon
any property of the Borrower or any such Subsidiary, except any of the foregoing
which is being contested in good faith and by appropriate proceedings which
serve as a matter of law to stay the enforcement thereof and for which the
Borrower has established and is maintaining adequate reserves. The Borrower will
pay, and will cause each of its Subsidiaries to pay, in a timely manner, all
lease obligations, all trade debt, purchase money obligations, equipment lease
obligations and all of its other material Indebtedness. The Borrower will
perform and fulfill all material covenants and agreements under any leases of
real estate, agreements relating to purchase money debt, equipment leases and
other material contracts. The Borrower will maintain in full force and effect,
and comply with the terms and conditions of, all permits, permissions and
licenses necessary or desirable for its business.
3.4. ACCOUNTS. The Borrower will maintain its principal depository and
operating accounts with the Bank.
3.5. CONDUCT OF BUSINESS. The Borrower will conduct, in the ordinary
course, the business in which it is presently engaged. The Borrower will not,
without the prior written consent of the Bank, directly or indirectly (itself or
through any Subsidiary) enter into any other lines of business, businesses or
ventures materially different from those conducted by the Borrower at the date
of this letter agreement.
3.6. REPORTING REQUIREMENTS. The Borrower will furnish to the Bank:
(i) Within 120 days after the end of each fiscal year of the
Borrower, a copy of the annual audit report for such fiscal year for the
Borrower, including therein consolidated and consolidating balance sheets
of the Borrower and Subsidiaries as at the end of such fiscal year and
related consolidated and consolidating statements of income, stockholders'
equity and cash flow for the fiscal year then ended. The annual
<PAGE> 9
consolidated financial statements shall be certified by independent public
accountants selected by the Borrower and reasonably acceptable to the Bank,
such certification to be in such form as is generally recognized as
"unqualified".
(ii) Within 45 days after the end of each fiscal quarter of the
Borrower, consolidated and consolidating balance sheets of the Borrower and
its Subsidiaries and related consolidated and consolidating statements of
income and stockholders' equity and cash flow, unaudited but complete and
accurate and prepared in accordance with generally accepted accounting
principles consistently applied fairly presenting the financial condition
of the Borrower as at the dates thereof and for the periods covered thereby
(except that such quarterly statements need not contain footnotes) and
certified as accurate (subject to normal year-end audit adjustments, which
shall not be material) by the chief financial officer of the Borrower, such
balance sheets to be as at the end of such fiscal quarter and such
statements of income and stockholders' equity and cash flow to be for such
fiscal quarter and for the fiscal year to date, in each case together with
a comparison to budget.
(iii) Within 30 days after the end of each month, consolidated and
consolidating balance sheets of the Borrower and its Subsidiaries and
related consolidated and consolidating statements of income and
stockholders' equity and cash flow, unaudited but complete and accurate and
prepared in accordance with generally accepted accounting principles
consistently applied fairly presenting the financial condition of the
Borrower as at the dates thereof and for the periods covered thereby
(except that such monthly statements need not contain footnotes) and
certified as accurate (subject to normal year-end audit adjustments, which
shall not be material) by the chief financial officer of the Borrower, such
balance sheets to be as at the end of such month and such statements of
income and stockholders' equity and cash flow to be for such month and for
the fiscal year to date, in each case together with a comparison to budget.
(iv) At the time of delivery of each annual or quarterly statement
of the Borrower, a certificate executed by the chief financial officer of
the Borrower stating that he or she has reviewed this letter agreement and
the other Loan Documents and has no knowledge of any default by the
Borrower in the performance or observance of any of the provisions of this
letter agreement or of any of the other Loan Documents or, if he or she has
such knowledge, specifying each such default and the nature thereof. Each
financial statement given as at the end of any fiscal quarter of the
Borrower will also set forth the calculations necessary to evidence
compliance with ss.ss.3.7-3.10.
(v) Monthly, within 10 days after the end of each month, (A) an
aging report in form satisfactory to the Bank covering all Receivables of
the Borrower outstanding as at the end of such month, and (B) a certificate
of the chief financial officer of the Borrower setting forth the Borrowing
Base as at the end of such month, all in form reasonably satisfactory to
the Bank.
<PAGE> 10
(vi) Promptly after receipt, a copy of all audits or reports
submitted to the Borrower by independent public accountants in connection
with any annual, special or interim audits of the books of the Borrower and
any "management letter" prepared by any such accountants.
(vii) As soon as possible and in any event within five days of the
occurrence of any Event of Default or any event which, with the giving of
notice or passage of time or both, would constitute an Event of Default,
the statement of the Borrower setting forth details of each such Event of
Default or event and the action which the Borrower proposes to take with
respect thereto.
(viii) Promptly after the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
to which the Borrower or any Subsidiary of the Borrower is a party.
(ix) Promptly upon filing any registration statement or listing
application (or any supplement or amendment to any registration statement
or listing application) with the Securities and Exchange Commission ("SEC")
or any successor agency or with any stock exchange or with the National
Association of Securities Dealers quotations system, a copy of same.
(x) If the Borrower becomes a publicly-traded company, a copy of
each periodic or current report filed with the SEC or any successor agency
and each annual report, proxy statement and other communication sent to
shareholders or other securityholders generally, such copy to be provided
to the Bank promptly upon such filing with the SEC or such communication
with shareholders or securityholders, as the case may be.
(xi) Promptly upon applying for, or being granted, a federal or
state registration for any copyright, trademark or patent or purchasing any
registered copyright, trademark or patent, written notice to the Bank
describing same, together with all such documents as may be required to
give the Bank a fully perfected first priority security interest in each
such copyright, trademark or patent.
(xi) Promptly after the Borrower has knowledge thereof, written
notice of any development or circumstance which may reasonably be expected
to have a material adverse effect on the Borrower or its business,
properties, assets, Subsidiaries or condition, financial or otherwise.
(xii) Promptly upon request, such other information respecting the
financial condition, operations, Receivables, inventory, machinery or
equipment of the Borrower or any Subsidiary as the Bank may from time to
time reasonably request.
<PAGE> 11
3.7. DEBT TO WORTH. The Borrower will maintain as at the end of each
fiscal quarter (commencing with its results as at December 31, 1997) on a
consolidated basis a Leverage Ratio of not more than 1.0 to 1. As used herein,
"Leverage Ratio" means, as at any date when same is to be determined, the ratio
of (x) all Indebtedness of the Borrower and/or its Subsidiaries then outstanding
to (y) the Borrower's then consolidated Tangible Net Worth.
3.8. NET WORTH. The Borrower will maintain as at the end of each fiscal
quarter (commencing with its results as at December 31, 1997) a consolidated
Tangible Net Worth of not less than $3,750,000.
3.9. PROFITABILITY. The Borrower will not incur a consolidated quarterly
Net Loss in excess of $425,000 for its fiscal quarter ending December 31, 1997.
For each period of two consecutive fiscal quarters thereafter (commencing with
the six months ending March 31, 1998), the Borrower will achieve consolidated
Net Income of not less than $1.00.
3.10. LIQUIDITY. The Borrower will maintain as at the end of each fiscal
quarter of Borrower (commencing with its results as at December 31, 1997) a
ratio of Net Quick Assets to Current Liabilities, which ratio shall be not less
than 1.75 to 1.
3.11. BOOKS AND RECORDS. The Borrower will maintain (and will cause each
of its Subsidiaries to maintain) complete and accurate books, records and
accounts which will at all times accurately and fairly reflect all of its
transactions in accordance with generally accepted accounting principles
consistently applied. The Borrower will, at any reasonable time and from time to
time upon reasonable notice and during normal business hours (and at any time
and without any necessity for notice following the occurrence of an Event of
Default), permit the Bank, and any agents or representatives thereof, to examine
and make copies of and take abstracts from the records and books of account of,
and visit the properties of the Borrower and any of its Subsidiaries, and to
discuss its affairs, finances and accounts with its officers, directors and/or
independent accountants, all of whom are hereby authorized and directed to
cooperate with the Bank in carrying out the intent of this ss.3.11. Each
financial statement of the Borrower hereafter delivered pursuant to this letter
agreement will be complete and accurate and will fairly present the financial
condition of the Borrower and its Subsidiaries as at the date thereof and for
the periods covered thereby.
3.12. LANDLORD'S WAIVER. Prior to the Bank making the first Revolving
Loan, the Borrower will obtain, and will thereafter maintain in effect at all
times, waivers from the owners of all premises in which any material amount of
Collateral is located, such waivers to be in form and substance satisfactory to
the Bank.
<PAGE> 12
IV. NEGATIVE COVENANTS
Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding or any letter of credit
issued hereunder shall be outstanding:
4.1. INDEBTEDNESS. The Borrower will not create, incur, assume or suffer
to exist any Indebtedness (nor allow any of its Subsidiaries to create, incur,
assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation,
the Indebtedness represented by the Revolving Note and any Indebtedness in
respect of letters of credit issued by the Bank;
(ii) Indebtedness of the Borrower or any Subsidiary for taxes,
assessments and governmental charges or levies not yet due and payable;
(iii) unsecured current liabilities of the Borrower or any
Subsidiary (other than for money borrowed or for purchase money
Indebtedness with respect to fixed assets) incurred upon customary terms in
the ordinary course of business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to equipment
vendors and/or lessors for equipment purchased or leased by the Borrower
for use in the Borrower's business, provided that the total of Indebtedness
permitted under this clause (iv) plus presently-existing equipment
financing permitted under clause (v) of this ss.4.1 will not exceed
$750,000 in the aggregate outstanding at any one time;
(v) other Indebtedness existing at the date hereof, but only to the
extent set forth on item 4.1 of the attached Disclosure Schedule; and
(vi) any guaranties or other contingent liabilities expressly
permitted pursuant to ss.4.3.
4.2. LIENS. The Borrower will not create, incur, assume or suffer to
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens"), upon or with respect
to any of its property or assets, now owned or hereafter acquired, except that
the foregoing restrictions shall not apply to:
<PAGE> 13
(i) Liens for taxes, assessments or governmental charges or levies
on property of the Borrower or any of its Subsidiaries if the same shall
not at the time be delinquent or thereafter can be paid without interest or
penalty;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course of
business for sums not yet due or which are being contested in good faith
and by appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and as to which adequate reserves have been made;
(iii) pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing
purchase money Indebtedness to the extent permitted by clause (iv) of
ss.4.1; provided that no such Lien will extend to any property of the
Borrower other than the specific items of equipment financed; or
(vi) other Liens existing at the date hereof, but only to the extent
and with the relative priorities set forth on item 4.2 of the attached
Disclosure Schedule.
4.3. GUARANTIES. The Borrower will not, without the prior written consent
of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business and (ii) guaranties
existing at the date hereof and described on item 4.3 of the attached Disclosure
Schedule.
4.4. DIVIDENDS. The Borrower will not, without the prior written consent
of the Bank, make any distributions to its shareholders, pay any dividends
(other than dividends payable solely in capital stock of the Borrower) or
redeem, purchase or otherwise acquire, directly or indirectly any of its capital
stock, except that the Borrower may repurchase its common stock for a nominal
price per share pursuant to restricted stock purchase agreements between the
Borrower and its employees, provided (i) such repurchases shall not exceed
$50,000 in the aggregate during the term of the revolving facility described
herein, as such term may be extended from time to time, (ii) no default or Event
of Default exists at the time of such repurchase, and (iii) immediately prior to
and after giving effect to such repurchases, the Borrower is in compliance with
ss.ss. 3.7, 3.8 and 3.10 (compliance with each of said Sections being determined
for this purpose as at the date of such repurchase, even if not a fiscal quarter
end).
<PAGE> 14
4.5. LOANS AND ADVANCES. The Borrower will not make (and will not permit
any Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except advances to
such directors, officers or employees with respect to expenses incurred by them
in the ordinary course of their duties and advances against salary, all of which
advances will not exceed, in the aggregate, $250,000 outstanding at any one
time.
4.6. INVESTMENTS. The Borrower will not, without the Bank's prior written
consent, invest in, hold or purchase any stock or securities of any Person (nor
will the Borrower permit any of its Subsidiaries to invest in, purchase or hold
any such stock or securities) except (i) readily marketable direct obligations
of, or obligations guarantied by, the United States of America or any agency
thereof, (ii) other investment grade debt securities, (iii) mutual funds, the
assets of which are primarily invested in items of the kind described in the
foregoing clauses (i) and (ii) of this ss.4.6, (iv) deposits with or
certificates of deposit issued by the Bank and any other obligations of the Bank
or the Bank's parent, (v) deposits in any other bank organized in the United
States having capital in excess of $100,000,000, and (vi) investments in any
Subsidiaries now existing or hereafter created by the Borrower pursuant to
ss.4.7 below; provided that in any event the Tangible Net Worth of the Borrower
alone (exclusive of its investment in Subsidiaries and any debt owed by any
Subsidiary to the Borrower) will not be less than 90% of the consolidated
Tangible Net Worth of the Borrower and Subsidiaries.
4.7. SUBSIDIARIES; ACQUISITIONS. The Borrower will not, without the prior
written consent of the Bank, form or acquire any Subsidiary or make any other
acquisition of the stock of any other Person or of all or substantially all of
the assets of any other Person. The Borrower will not become a partner in any
partnership.
4.8. MERGER. The Borrower will not, without the prior written consent of
the Bank, merge or consolidate with any Person, or sell, lease, transfer or
otherwise dispose of any material portion of its assets (whether in one or more
transactions), other than sale of inventory in the ordinary course.
4.9. AFFILIATE TRANSACTIONS. The Borrower will not, without prior written
consent of the Bank, enter into any transaction, including, without limitation,
the purchase, sale or exchange of any property or the rendering of any service,
with any affiliate of the Borrower, except in the ordinary course of and
pursuant to the reasonable requirements of the Borrower's business and upon fair
and reasonable terms no less favorable to the Borrower than would be obtained in
a comparable arms'-length transaction with any Person not an affiliate; provided
that nothing in this ss.4.9 shall be deemed to prohibit the payment of salary,
bonuses or other similar payments to any officer or director of the Borrower at
a level consistent with the salary and other payments being paid at the date of
this letter agreement and heretofore disclosed in writing to the Bank, nor to
prevent the hiring of additional officers at a salary level consistent with
industry practice, nor to prevent reasonable periodic increases in salary and
bonus. For the purposes of this letter agreement, "affiliate" means any Person
which, directly or indirectly, controls or is controlled by
<PAGE> 15
or is under common control with the Borrower; any officer or director or former
officer or director of the Borrower; any Person owning of record or
beneficially, directly or indirectly, 5% or more of any class of capital stock
of the Borrower or 5% or more of any class of capital stock or other equity
interest having voting power (under ordinary circumstances) of any of the other
Persons described above; and any member of the immediate family of any of the
foregoing. "Control" means possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of any Person,
whether through ownership of voting equity, by contract or otherwise.
4.10. CHANGE OF ADDRESS, ETC. The Borrower will not change its name or
legal structure, nor will the Borrower move its chief executive offices or
principal place of business from the address described in the first sentence of
ss.2.1(j) above, nor will the Borrower remove any books or records from such
address, nor will the Borrower keep any Collateral at any location other than
the Premises without, in each instance, giving the Bank at least 30 days' prior
written notice and providing all such financing statements, certificates and
other documentation as the Bank may request in order to maintain the perfection
and priority of the security interests granted or intended to be granted
pursuant to the Security Agreement. The Borrower will not change its fiscal year
or methods of financial reporting unless, in each instance, prior written notice
of such change is given to the Bank and prior to such change the Borrower enters
into amendments to this letter agreement in form and substance satisfactory to
the Bank in order to preserve unimpaired the rights of the Bank and the
obligations of the Borrower hereunder.
4.11. HAZARDOUS WASTE. Except as provided below, the Borrower will not
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any known release or known
threat of release of any hazardous material or oil at or from any site or vessel
owned, occupied or operated by the Borrower or any Subsidiary of the Borrower,
and (iii) any incurrence of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
Borrower and its Subsidiaries may use, store and transport, and need not notify
the Bank of the use, storage or transportation of, (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries, in reasonable quantities, as long as in any case the Borrower
or the Subsidiary concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses
<PAGE> 16
and approvals, complies with all requirements of applicable federal, state and
local law relating to such use, storage or transportation, follows the
protective and safety procedures that a prudent businessperson conducting a
business the same as or similar to that of the Borrower or such Subsidiary (as
the case may be) would follow, and disposes of such materials (not consumed in
the ordinary course) only through licensed providers of hazardous waste removal
services.
4.12. NO MARGIN STOCK. No proceeds of any Revolving Loan shall be used
directly or indirectly to purchase or carry any margin security.
V. DEFAULT AND REMEDIES
5.1. EVENTS OF DEFAULT. The occurrence of any one of the following events
shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or
interest on the Revolving Note on or before the date when due; or the Borrower
shall fail to pay when due any amount owed to the Bank in respect of any letter
of credit now or hereafter issued by the Bank; or
(b) Any representation or warranty of the Borrower contained herein
shall at any time prove to have been incorrect in any material respect when made
or any representation or warranty made by the Borrower in connection with any
Revolving Loan or letter of credit shall at any time prove to have been
incorrect in any material respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of sections 3.1, 3.3, 3.6, 3.7, 3.8, 3.9 or
3.10 or Article IV; or
(d) The Borrower (or any Subsidiary of the Borrower, as applicable)
shall default in the performance of any other term, covenant or agreement
contained in this letter agreement or in any foreign exchange contract or letter
of credit agreement entered into with the Bank (or any affiliate of the Bank)
and such default shall continue unremedied for 30 days after notice thereof
shall have been given to the Borrower; or
(e) Any default shall exist and remain unwaived or uncured with respect
to any other Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess of $100,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $100,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any event or circumstance shall occur which permits, or with the
lapse of time or the giving of notice or both would permit, the acceleration of
the maturity of any such Indebtedness by the holder of holders thereof; or
<PAGE> 17
(f) The Borrower shall be dissolved, or the Borrower or any Subsidiary
of the Borrower shall become insolvent or bankrupt or shall cease paying its
debts as they mature or shall make an assignment for the benefit of creditors,
or a trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within 60 days following the institution thereof);
or
(g) Any attachment, execution or similar process shall be issued or
levied against any of the property of the Borrower or any Subsidiary and such
attachment, execution or similar process shall not be paid, stayed, released,
vacated or fully bonded within 10 days after its issue or levy; or
(h) Any final uninsured judgment in excess of $100,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction; or
(i) The Borrower or any Subsidiary of the Borrower shall fail to meet
its minimum funding requirements under ERISA with respect to any employee
benefit plan (or other class of benefit which the PBGC has elected to insure) or
any such plan shall be the subject of termination proceedings (whether voluntary
or involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(j) The Security Agreement or any other Loan Document shall for any
reason (other than due to payment in full of all amounts secured or evidenced
thereby or due to discharge in writing by the Bank) not remain in full force and
effect; or
(k) The security interests and liens of the Bank in and on any of the
Collateral shall for any reason (other than due to payment in full of all
amounts secured thereby or due to written release by the Bank) not be fully
perfected liens and security interests; or
(l) At any time, 50% or more of the outstanding shares of any class of
equity securities of the Borrower shall be owned by any Person or by any "group"
(as defined in the Securities Exchange Act of 1934, as amended, and the
regulations thereunder), other than by one or more of the Persons listed on item
5.1(l) of the attached Disclosure Schedule; or
(m) Andrew J. Frawley shall for any reason not be an executive officer
of the Borrower actively involved in the management of the Borrower.
5.2. RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the
<PAGE> 18
Bank may exercise any one or more of the following rights and remedies (all of
which shall be cumulative):
(a) Declare the entire unpaid principal amount of the Revolving Note
then outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the revolving financing arrangements provided for by this
letter agreement.
(c) Exercise all rights and remedies hereunder, under the Revolving
Note, under the Security Agreement, under the Intellectual Property Assignments
and under each and any other agreement with the Bank; and exercise all other
rights and remedies which the Bank may have under applicable law.
5.3. SET-OFF. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence and during the continuance of any Event of Default, the Bank is
hereby authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to the Borrower or to any other Person, all
of which are hereby expressly waived, to set off and to appropriate and apply
any and all deposits and any other Indebtedness at any time held or owing by the
Bank or any affiliate thereof to or for the credit or the account of the
Borrower against and on account of the obligations and liabilities of the
Borrower to the Bank under this letter agreement or otherwise, irrespective of
whether or not the Bank shall have made any demand hereunder and although said
obligations, liabilities or claims, or any of them, may then be contingent or
unmatured and without regard for the availability or adequacy of other
collateral. As further security for the Obligations, the Borrower also grants to
the Bank a security interest with respect to all its deposits and all securities
or other property in the possession of the Bank or any affiliate of the Bank
from time to time, and, upon the occurrence of any Event of Default, the Bank
may exercise all rights and remedies of a secured party under the Uniform
Commercial Code. ANY AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS
OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY OF THE
OBLIGATIONS PRIOR TO THE EXERCISE BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS
SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
5.4. LETTERS OF CREDIT. Without limitation of any other right or remedy
of the Bank, (i) if an Event of Default shall have occurred and the Bank shall
have accelerated the Revolving Loans or (ii) if this letter agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal
<PAGE> 19
to the total of all then undrawn amounts of all outstanding letters of credit
issued by the Bank for the account of the Borrower.
VI. MISCELLANEOUS
6.1. COSTS AND EXPENSES. The Borrower agrees to pay on demand all costs
and expenses (including, without limitation, reasonable legal fees) of the Bank
in connection with the preparation, execution and delivery of this letter
agreement, the Security Agreement, the Revolving Note and all other instruments
and documents to be delivered in connection with any Revolving Loan or any
letter of credit issued hereunder and any amendments or modifications of any of
the foregoing, as well as the costs and expenses (including, without limitation,
the reasonable fees and expenses of legal counsel) incurred by the Bank in
connection with preserving, enforcing or exercising, upon default, any rights or
remedies under this letter agreement, the Security Agreement, the Revolving Note
and all other instruments and documents delivered or to be delivered hereunder
or in connection herewith, all whether or not legal action is instituted. In
addition, the Borrower shall be obligated to pay any and all stamp and other
taxes payable or determined to be payable in connection with the execution and
delivery of this letter agreement, the Security Agreement, the Revolving Note
and all other instruments and documents to be delivered in connection with any
Obligation. Any fees, expenses or other charges which the Bank is entitled to
receive from the Borrower under this Section shall bear interest from the date
of any demand therefor until the date when paid at a rate per annum equal to 4%
per annum plus the per annum rate otherwise payable under the Revolving Note
(but in no event in excess of the maximum rate permitted by then applicable
law).
6.2. CAPITAL ADEQUACY. If the Bank shall have determined that the
adoption or phase-in after the date hereof of any applicable law, rule or
regulation regarding capital requirements for banks or bank holding companies,
or any change therein after the date hereof, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity regarding
capital adequacy (whether or not having the force of law) has or would have the
effect of reducing the return on the Bank's capital with respect to the
Revolving Loans, the within-described revolving loan facility and/or letters of
credit issued for the account of the Borrower to a level below that which the
Bank could have achieved (taking into consideration the Bank's policies with
respect to capital adequacy immediately before such adoption, phase-in, change
or compliance and assuming that the Bank's capital was then fully utilized) but
for such adoption, phase-in, change or compliance by any amount deemed by the
Bank to be material: (i) the Bank shall promptly after its determination of such
occurrence give notice thereof to the Borrower; and (ii) the Borrower shall pay
forthwith to the Bank as an additional fee such amount as the Bank certifies to
be the amount that will compensate it for such reduction with respect to the
Revolving Loans, the within-described revolving loan facility and/or such
letters of credit.
A certificate of the Bank claiming compensation under this Section shall be
conclusive in the absence of manifest error. Such certificate shall set forth
the nature of the occurrence giving
<PAGE> 20
rise to such compensation, the additional amount or amounts to be paid to it
hereunder and the method by which such amounts were determined. In determining
such amounts, the Bank may use any reasonable averaging and attribution methods.
No failure on the part of the Bank to demand compensation on any one occasion
shall constitute a waiver of its right to demand such compensation on any other
occasion and no failure on the part of the Bank to deliver any certificate in a
timely manner shall in any way reduce any obligation of the Borrower to the Bank
under this Section.
6.3. FACILITY FEES. With respect to the within arrangements for Revolving
Loans, the Borrower will pay to the Bank, at the time of execution and delivery
of this letter agreement and on the first day of each calendar quarter
thereafter (commencing January 2, 1998), a non-refundable quarterly facility fee
of $2,500.00 per calendar quarter (appropriately pro-rated for any partial
calendar quarter), payable in advance. In addition, if the within-described
revolving financing arrangements are terminated by the Borrower for any reason
or by the Bank as the result of the Borrower's default, the Borrower shall
forthwith upon such termination pay to the Bank a sum equal to all of the fees
which would have become due pursuant to the immediately preceding sentence from
the date of such termination through the Expiration Date. The fees described in
this Section are in addition to any balances and fees required by the Bank or
any of its affiliates in connection with any other services now or hereafter
made available to the Borrower.
6.4. OTHER AGREEMENTS. The provisions of this letter agreement are not in
derogation or limitation of any obligations, liabilities or duties of the
Borrower or any Subsidiary of the Borrower under any of the other Loan Documents
or under any foreign exchange contract or letter of credit agreement with or for
the benefit of the Bank (or any affiliate of the Bank). No inconsistency in
default provisions between this letter agreement and any of the other Loan
Documents or any such other agreement will be deemed to create any additional
grace period or otherwise derogate from the express terms of each such default
provision. No covenant, agreement or obligation of the Borrower contained
herein, nor any right or remedy of the Bank contained herein, shall in any
respect be limited by or be deemed in limitation of any inconsistent or
additional provisions contained in any of the other Loan Documents or any such
other agreement.
6.5. GOVERNING LAW. This letter agreement and the Revolving Note shall be
governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.6. ADDRESSES FOR NOTICES, ETC. All notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
If to the Borrower:
Exchange Applications, Inc.
<PAGE> 21
695 Atlantic Avenue
Boston, MA 02111
Attention: John O'Brien, Chief Financial Officer
If to the Bank:
Fleet National Bank
High Technology Group
75 State Street, Mail Stop: MABOF04M
Boston, MA 02109
Attention: Olaperi Onipede, Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid.
6.7. BINDING EFFECT; ASSIGNMENT; TERMINATION. This letter agreement shall
be binding upon the Borrower and the Bank and their respective successors and
assigns and shall inure to the benefit of the Borrower and the Bank and their
respective permitted successors and assigns. The Borrower may not assign this
letter agreement or any rights hereunder without the express written consent of
the Bank. The Bank may, in accordance with applicable law, from time to time
assign or grant participations in this letter agreement, the Revolving Loans or
the Revolving Note. Without limitation of the foregoing generality,
(i) The Bank may at any time pledge all or any portion of its
rights under the Loan Documents (including any portion of the
Revolving Note) to any of the 12 Federal Reserve Banks
organized under Section 4 of the Federal Reserve Act, 12
U.S.C. Section 341. No such pledge or the enforcement thereof
shall release the Bank from its obligations under any of the
Loan Documents.
(ii) The Bank shall have the unrestricted right at any time and
from time to time, and without the consent of or notice to
the Borrower, to grant to one or more banks or other
financial institutions (each, a "Participant") participating
interests in the Bank's obligation to lend hereunder and/or
any or all of the Revolving Loans held by the Bank hereunder.
In the event of any such grant by a Bank of a participating
interest to a Participant, whether or not upon notice to the
Borrower, the Bank shall remain responsible for the
performance of its obligations hereunder and the Borrower
shall continue to deal solely and directly with the Bank in
connection with the Bank's rights and obligations hereunder.
The Bank
<PAGE> 22
may furnish any information concerning the Borrower in its
possession from time to time to prospective assignees and
Participants; provided that the Bank shall require any such
prospective assignee or Participant to agree in writing to
maintain the confidentiality of such information to the same
extent as the Bank would be required to maintain such
confidentiality.
The Borrower may terminate this letter agreement and the financing arrangements
made herein by giving written notice of such termination to the Bank, provided
that no such termination will release or waive any of the Bank's rights or
remedies or any of the Borrower's obligations under this letter agreement or any
of the other Loan Documents unless and until the Borrower has paid in full the
Revolving Loans and all interest thereon and all fees and charges payable in
connection therewith.
6.8. CONSENT TO JURISDICTION. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Revolving Note. The Borrower irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of venue
of any such suit, action or proceeding brought in such a court and any claim
that any such suit, action or proceeding has been brought in an inconvenient
forum. The Borrower agrees that final judgment in any such suit, action or
proceeding brought in such a court shall be enforced in any court of proper
jurisdiction by a suit upon such judgment, provided that service of process in
such action, suit or proceeding shall have been effected upon the Borrower in
one of the manners specified in the following paragraph of this ss.6.8 or as
otherwise permitted by law.
The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this ss.6.8
either (i) by mailing a copy thereof by registered or certified mail, postage
prepaid, return receipt requested, to it at its address set forth in ss.6.6 (as
such address may be changed from time to time pursuant to said ss.6.6) or (ii)
by serving a copy thereof upon it at its address set forth in ss.6.6 (as such
address may be changed from time to time pursuant to said ss.6.6).
6.9. SEVERABILITY. In the event that any provision of this letter
agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this letter agreement, and the application of such provision to Persons,
properties or circumstances other than those as to which it has been held
invalid and unenforceable, shall not be affected thereby, and each provision of
this letter agreement shall be valid and enforced to the fullest extent
permitted by law.
6.10. REPLACEMENT NOTE. Upon receipt of an affidavit of an officer of the
Bank as to the loss, theft, destruction or mutilation of the Revolving Note or
of any other Loan Document which is not of public record and, in the case of any
such mutilation, upon surrender and cancellation of such Revolving Note or other
Loan Document, the Borrower will issue, in lieu thereof, a
<PAGE> 23
replacement Revolving Note or other Loan Document in the same principal amount
(as to the Revolving Note) and in any event of like tenor.
6.11. USURY. All agreements between the Borrower and the Bank are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the Revolving Note or otherwise, shall the
amount paid or agreed to be paid to the Bank for the use or the forbearance of
the Indebtedness represented by the Revolving Note exceed the maximum
permissible under applicable law. In this regard, it is expressly agreed that it
is the intent of the Borrower and the Bank, in the execution, delivery and
acceptance of the Revolving Note, to contract in strict compliance with the laws
of The Commonwealth of Massachusetts. If, under any circumstances whatsoever,
performance or fulfillment of any provision of the Revolving Note or any of the
other Loan Documents at the time such provision is to be performed or fulfilled
shall involve exceeding the limit of validity prescribed by applicable law, then
the obligation so to be performed or fulfilled shall be reduced automatically to
the limits of such validity, and if under any circumstances whatsoever the Bank
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced by the Revolving Note and not to
the payment of interest. The provisions of this Section 6.11 shall control every
other provision of this letter agreement and of the Revolving Note.
6.12. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS LETTER AGREEMENT, THE REVOLVING NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ENTER INTO THIS LETTER AGREEMENT AND TO MAKE THE REVOLVING LOANS AS
CONTEMPLATED HEREIN.
VII. DEFINED TERMS
7.1. DEFINITIONS. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Aggregate Bank Liabilities" - At any time, the sum of (i) the principal
amount of all Revolving Loans then outstanding, PLUS (ii) all then undrawn
amounts of letters of credit issued by the Bank for the account of the Borrower,
PLUS (iii) all amounts then drawn on any such letter of credit which at said
date shall not have been reimbursed to the Bank by the Borrower.
"Aggregate Letter of Credit Liabilities" - At any time, the sum of (i) all
then undrawn amounts of letters of credit issued by the Bank for the account of
the Borrower, PLUS (ii) all
<PAGE> 24
amounts then drawn on any such letter of credit which at said date shall not
have been reimbursed to the Bank by the Borrower.
"Borrowing Base" - As determined at any date, 75% of the aggregate
principal amount of the Qualified Receivables of the Borrower then outstanding.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth of
Massachusetts applicable to a national bank.
"Collateral" - All property now or hereafter owned by the Borrower or in
which the Borrower now or hereafter has any interest which is described as
"Collateral" in the Security Agreement or in ss.7.2(b) below.
"Current Liabilities" - All Indebtedness of the Borrower and/or any of its
Subsidiaries which would properly be shown as current liabilities on a
consolidated balance sheet of the Borrower prepared consistently with the
financial statements and projections furnished by the Borrower to the Bank prior
to the date of this letter agreement.
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
"Expiration Date" - August 31, 1998, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.
"Indebtedness" - All obligations of a Person, whether current or long-term,
senior or subordinated, which in accordance with generally accepted accounting
principles would be included as liabilities upon such Person's balance sheet at
the date as of which Indebtedness, is to be determined, and shall also include
guaranties, endorsements (other than for collection in the ordinary course of
business) or other arrangements whereby responsibility is assumed for the
obligations of others, whether by agreement to purchase or otherwise acquire the
obligations of others, including any agreement, contingent or otherwise, to
furnish funds through the purchase of goods, supplies or services for the
purpose of payment of the obligations of others.
"Loan Documents" - Each of this letter agreement, the Revolving Note, the
Security Agreement, the Intellectual Property Assignments and each other
instrument, document or agreement evidencing, securing, guaranteeing or relating
in any way to any of the Revolving Loans or any of the letters of credit issued
hereunder, all whether now existing or hereafter arising or entered into.
"Maximum Revolving Amount" - At any date as of which same is to be
determined, the amount by which (x) $2,000,000 exceeds (y) the then-existing
Aggregate Letter of Credit Liabilities.
<PAGE> 25
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles applied consistently with the
projections heretofore furnished to the Bank by the Borrower.
"Net Quick Assets" - Such current assets of the Borrower as consist of
cash, cash-equivalents and Receivables (less an allowance for bad debt
consistent with the Borrower's prior experience).
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower or any
Subsidiary of the Borrower with or for the benefit of the Bank or owed by the
Borrower to the Bank relating to this letter agreement, any letter of credit
agreement or any foreign exchange contract.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.
"Person" - An individual, corporation, company, partnership, joint venture,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof.
"Qualified Receivables" - Only those Receivables of the Borrower which
arise out of BONA FIDE sales made to customers of the Borrower (which customers
are located in the United States and are unrelated to the Borrower) in the
ordinary course of the Borrower's business and which remain unpaid no more than
90 days past the respective invoice dates of such Receivables, the payment of
which is not in dispute. Unless the Bank in its sole discretion otherwise
determines with respect to any Receivable, a Receivable which would otherwise be
a Qualified Receivable shall be deemed not to be a Qualified Receivable (i) if
the Bank does not have a fully perfected first priority security interest in
such Receivable; (ii) if such Receivable is not free and clear of all adverse
interests in favor of any Person other than the Bank; (iii) if such Receivable
is subject to any deduction, off-set, contra account, counterclaim or condition;
(iv) if a field examination made by the Bank fails to confirm that such
Receivable exists and satisfies all of the criteria set forth herein to be a
Qualified Receivable; (v) if such Receivable is not properly invoiced at the
date of sale; (vi) if the customer or account debtor has disputed liability or
made any claim with respect to the Receivable or the merchandise covered thereby
or with respect to any other Receivable due from said customer to the Borrower;
(vii) if the customer or account debtor has filed a petition for bankruptcy or
any other application for relief under the Bankruptcy Code or has effected an
assignment for the benefit of creditors, or if any petition or any other
application for relief under the Bankruptcy Code has been filed against said
customer or account debtor, or if the customer or account debtor has suspended
business, become insolvent, ceased to pay its debts as they become due, or had
or suffered a receiver or trustee to be appointed for any of its assets or
affairs; (viii) if the customer or account debtor has failed to pay other
Receivables so that an aggregate of 25% of the total Receivables owing to the
Borrower by such customer or account debtor has been outstanding for more than
90 days past their respective due dates; (ix) if such Receivable is owed by the
United States government or any agency or department thereof (unless assigned to
the Bank under the Federal Assignment of Claims Act); or (x) if the Bank
<PAGE> 26
reasonably believes that collection of such Receivable is insecure or that it
may not be paid by reason of financial inability to pay or otherwise, or that
such Receivable is not for any reason suitable for use as a basis for borrowing
hereunder.
"Receivables" - All of the Borrower's present and future accounts, accounts
receivable and notes, drafts, acceptances and other instruments representing or
evidencing a right to payment for goods sold or for services rendered.
"Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the outstanding
capital stock or other ownership interest having general voting power (under
ordinary circumstances).
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding (i) the total intangible assets of such Person and (ii) any assets
representing amounts due from any officer or employee of such Person or from any
Subsidiary of such Person) minus the total liabilities of such Person. Total
intangible assets shall be deemed to include, but shall not be limited to, the
excess of cost over book value of acquired businesses accounted for by the
purchase method, formulae, trademarks, trade names, patents, patent rights and
deferred expenses (including, but not limited to, unamortized debt discount and
expense, organizational expense, capitalized software costs and experimental and
development expenses).
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class. Any defined term used
in the singular preceded by "any" shall be taken to indicate any number of the
members of the relevant class.
7.2. SECURITY AGREEMENT. (a) The Borrower acknowledges and agrees that
the "Obligations" described in and secured by the Security Agreement include,
without limitation, all of the obligations of the Borrower under the Revolving
Note and/or this letter agreement and/or with respect to any letter of credit
which may be issued by the Bank for the account of the Borrower.
(b) The Security Agreement is hereby modified to provide as follows:
(i) That the "Collateral" subject thereto includes, without
limitation and in addition to the Collateral described therein, all of the
Borrower's files, books and records (including, without limitation, all
electronically recorded data) all whether now owned or existing or
hereafter acquired, created or arising. The Borrower hereby grants to the
Bank a security interest in all such Collateral in order to secure the full
and prompt payment and performance of all of the Obligations.
(ii) That, upon the occurrence of any Event of Default (as defined
in ss.5.1 of this letter agreement), the Bank may, at any time, notify
account debtors that the Collateral has been assigned to the Bank and that
payments by such account debtors shall
<PAGE> 27
be made directly to the Bank. At any time after the occurrence of an Event of
Default, the Bank may collect the Borrower's Receivables, or any of same,
directly from account debtors and may charge the collection costs and expenses
to the Borrower.
<PAGE> 28
This letter agreement is executed, as an instrument under seal, as of
the day and year first above written.
Very truly yours,
EXCHANGE APPLICATIONS, INC.
By: John G. O'Brien
------------------------------
Name: John G. O'Brien
Title: Chief Financial Officer
Accepted and agreed:
FLEET NATIONAL BANK
By: ???????? ??????
------------------------------
Its VP
By: ???????? ??????
------------------------------
Its ARP
<PAGE> 29
PROMISSORY NOTE
$2,000,000.00 Boston, Massachusetts
December 22, 1997
FOR VALUE RECEIVED, the undersigned Exchange Applications, Inc., a Delaware
corporation (the "Borrower") hereby promises to pay to the order of FLEET
NATIONAL BANK (the "Bank") the principal amount of Two Million and 00/100
($2,000,000.00) Dollars or such portion thereof as may be advanced by the Bank
pursuant to ss.1.2 of that certain letter agreement of even date herewith
between the Bank and the Borrower (the "Letter Agreement") and remains
outstanding from time to time hereunder ("Principal"), with interest, at the
rate hereinafter set forth, on the daily balance of all unpaid Principal, from
the date hereof until payment in full of all Principal hereunder.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed) which shall at all times be equal to
the sum of (i) three-quarters of one (0.75%) percent plus annum plus (ii) the
Prime Rate as in effect from time to time (but in no event in excess of the
maximum rate permitted by then applicable law). A change in the aforesaid rate
of interest shall become effective on the same day on which any change in the
Prime Rate is effective. Overdue Principal and, to the extent permitted by law,
overdue interest shall bear interest at a fluctuating rate per annum which at
all times shall be equal to the sum of (i) four (4%) percent per annum plus (ii)
the per annum rate otherwise payable under this note (but in no event in excess
of the maximum rate permitted by then applicable law), compounded monthly and
payable on demand. As used herein, "Prime Rate" means the variable rate of
interest per annum designated by the Bank from time to time as its prime rate,
it being understood that such rate is merely a reference rate and does not
necessarily represent the lowest or best rate being charged to any customer. If
the entire amount of any required Principal and/or interest is not paid within
ten (10) days after the same is due, the Borrower shall pay to the Bank a late
fee equal to five percent (5%) of the required payment, provided that such late
fee shall be reduced to three percent (3%) of any required Principal and
interest that is not paid within fifteen (15) days of the date it is due if this
note is secured by a mortgage on an owner-occupied residence of 1-4 units.
All outstanding Principal and all interest accrued thereon shall be due and
payable in full on the first to occur of: (i) an acceleration under ss.5.2 of
the Letter Agreement or (ii) August 31, 1998. The Borrower may at any time and
from time to time prepay all or any portion of said Principal, without premium
or penalty. Under certain circumstances set forth in the Letter Agreement,
prepayments of Principal may be required.
<PAGE> 30
Payments of both Principal and interest shall be made, in lawful currency
of the United States in immediately available funds, at the office of the Bank
located at 75 State Street, Boston, Massachusetts 02109, or at such other
address as the Bank may from time to time designate.
The undersigned Borrower irrevocably authorizes the Bank to make or cause
to be made, on a schedule attached to this note or on the books of the Bank, at
or following the time of making any Revolving Loan (as defined in the Letter
Agreement) and of receiving any payment of Principal, an appropriate notation
reflecting such transaction and the then aggregate unpaid balance of Principal.
Failure of the Bank to make any such notation shall not, however, affect any
obligation of the Borrower hereunder or under the Letter Agreement. The unpaid
Principal amount of this note, as recorded by the Bank from time to time on such
schedule or on such books, shall constitute presumptive evidence of the
aggregate unpaid principal amount of the Revolving Loans.
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally in connection with the delivery, acceptance,
performance, default or enforcement of or under this note, and (c) agrees to
pay, to the extent permitted by law, all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred or paid by the Bank in
enforcing this note and any collateral or security therefor, all whether or not
litigation is commenced.
This note is the Revolving Note referred to in the Letter Agreement. This
note is secured by, and is entitled to the benefit of, the Security Agreement
(as defined in the Letter Agreement). This note is subject to prepayment as set
forth in the Letter Agreement. The maturity of this note may be accelerated upon
the occurrence of an Event of Default, as provided in the Letter Agreement.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ACCEPT THIS NOTE AND TO MAKE THE REVOLVING LOANS AS CONTEMPLATED IN THE
LETTER AGREEMENT.
-2-
<PAGE> 31
Executed, as an instrument under seal, as of the day and year first above
written.
CORPORATE SEAL EXCHANGE APPLICATIONS, INC.
ATTEST:
By: /s/ John G. O'Brien
- --------------------------- ------------------------------
Secretary Name: John G. O'Brien
Title: Chief Financial Officer
-3-
<PAGE> 32
EXHIBIT 10.15
June 24th, 1998
Mr. John O'Brien
Chief Financial Officer
Exchange Applications, Inc.
695 Atlantic Avenue
Boston, MA 02111
Dear John:
Reference is hereby made to the Letter Agreement (the "Agreement") dated
December 22, 1997, by and between Exchange Applications, Inc. ("Borrower" or the
"Company") and Fleet National Bank (the "Bank"). I am pleased to inform you that
we have approved the renewal your $2,000,000 line of credit from through May
30th, 1999.
The Borrower has informed the Bank that for the fourth fiscal quarter ended
December 30, 1997 it is in violation of "Section 3.9 Profitability" with a loss
for the quarter of $857,000, compared to a requirement that losses do not exceed
$425,000. In addition, the Borrower is in violation of the requirement to
achieve at least $1.00 for the two consecutive quarters ended March 31, 1998;
net losses for the two consecutive quarters ended March 31, 1998 totaled
$1,242,000. The Borrower has requested a waiver of these two Profitability
violations.
The Bank hereby waives the Borrower's violation of Section 3.9 as described
above. This waiver is for the specific time period detailed above only and does
not amend in any manner any other terms of the Agreement. This change will
become effective upon our receipt of a countersigned copy of this letter.
The Borrower has informed the Bank that it wishes to revise certain financial
covenants for the fiscal quarter ending June 30, 1998 and thereafter,
specifically:
- - TANGIBLE NET WORTH (SECTION 3.8): We have revised this covenant by setting the
minimum base at $5,500,000 as of June 30, 1998. In addition, there will be a
step-up added to the base which is defined as 80% of new equity raised and
subordinated debt raised on or after June 30, 1998 and 80% of Net Income
earned beginning with the quarter ending June 30, 1998.
- - PROFITABILITY (SECTION 3.9): We have revised the definition of this covenant
such that Profitability must exceed $1.00 for the fiscal year ending December
31, 1998. We have revised the quarterly requirements as shown below:
--------------------------------------------------------------------
Quarter ending June 30, 1998 $500,000 maximum losses
--------------------------------------------------------------------
Quarter ending September 30, 1998 $500,000 maximum losses
--------------------------------------------------------------------
Each quarter thereafter $1.00 minimum profit
--------------------------------------------------------------------
- - LIQUIDITY (SECTION 3.10): We have revised this covenant so that the Borrower
must report a ratio that is equal to or exceeds 1.50:1.00 for the quarter
ending June 30, 1998 and thereafter.
<PAGE> 33
These changes are for the specific time period detailed above only and do not
amend in any manner any other terms of the Agreement. These changes will become
effective upon our receipt of a countersigned copy of this letter.
John, we are pleased to continue our relationship with Exchange Applications
and look forward to expanding it in the future.
Sincerely,
Agreed and Accepted:
/s/ Olaperi Onipede By: /s/ John G. O'Brien
- --------------------------- -------------------------
Olaperi Onipede John G. O'Brien
Vice President Title: Vice President/CFO
High Technology Division Date: June 30, 1998
<PAGE> 34
ALLONGE TO PROMISSORY NOTE
The maturity date of the attached Promissory Note dated December 22, 1997 for
$2,000,000 is hereby extended to May 30, 1999 from August 31, 1998. The
interest rate shall remain at Prime +3/4%.
This Allonge will be governed by the terms and conditions of the Letter
Agreement between Exchange Application, Inc. (the "Borrower") dated December
22, 1997 and Fleet National Bank (the "Bank"), referred to as the "Agreement".
Nothing herein shall be deemed to constitute a waiver, release or amendment of
any terms of the Agreement.
/s/ George Abatjoglou /s/ John G. O'Brien
- ---------------------------------- ----------------------------------
Witness John G. O'Brien
Chief Financial Officer
Exchange Applications, Inc.
/s/ Olaperi Onipede
- ---------------------------------- ----------------------------------
Witness Olaperi Onipede
Vice President
Fleet National Bank
<PAGE> 1
EXHIBIT 10.16
STOCK PURCHASE AGREEMENT dated as
of June 25, 1998 (this "Agreement"), among
EXCHANGE APPLICATIONS, INC., a Delaware
corporation ("Exchange Applications"),
INSIGHT CAPITAL PARTNERS II, L.P., a Delaware
limited partnership (the "Seller"), and
MICHAEL J. FELDMAN (the "Purchaser").
WHEREAS, the Purchaser, the Seller, Exchange Applications, and certain
other persons are parties to an Amended and Restated Stockholders Agreement, as
amended, dated as of December 4, 1997 (the "Stockholders Agreement"); and
WHEREAS, the Seller is the owner of 30,000 shares of Series C
Convertible Preferred Stock of Exchange Applications $.001 par value (the
"Shares"). Upon the terms and subject to the conditions of this Agreement, the
Purchaser will purchase a total of 30,000 Shares from the Purchasers for a
Purchase Price of $3.268 per Share and an aggregate purchase price of
Ninety-eight thousand, forty dollars and no cents $98,040.00 (the "Purchase
Price").
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, the parties agree
as follows:
1. WAIVER OF RIGHTS. Exchange Applications waives its rights under
Section 6(c) of the Stockholders Agreement with respect to the transaction
contemplated hereby.
2. SALE AND PURCHASE OF SHARES. Upon the terms and subject to the
conditions of this Agreement, the Seller shall sell, transfer and convey to the
Purchaser, and the Purchaser shall purchase and acquire from the Seller, 30,000
shares for the cash consideration of $98,040.00.
3. DELIVERY.
(a) The Seller shall deliver to Exchange Applications for
cancellation, against delivery to the Seller by the Purchaser of the
aggregate purchase price therefor, a stock certificate representing the
aggregate number of Shares to be purchased by the Purchaser (the "Stock
Certificates") from the Seller, with all necessary documentary or
transfer tax stamps affixed (the "Document"), free an clear of all
security interests, liens, pledges, claims, charges, escrows,
encumbrances, options, rights of first refusal, mortgages, indentures,
security agreements or other agreements, arrangements, contracts,
commitments,
<PAGE> 2
understandings or obligations (collectively, "Liens"), whether written
or oral and whether or not relating in any way to credit or the
borrowing of money.
(b) upon receipt of an executed Agreement, Exchange
Applications shall cause to be issued to the Purchaser, or such other
individual or entity as the Purchaser has designated in a written
request submitted to the Company and the Seller, a certificate
representing the number of Shares to be purchased by the Purchaser from
the Seller, free and clear of all Liens.
(c) Exchange Applications shall also cause a certificate, free
and clear of all Liens, to be issued to the Seller representing the
difference between the number of Shares delivered by the Seller to
Exchange Applications under subsection (a) of this Section 3 and the
number of Shares sold, transferred and conveyed by the Seller to the
Purchaser under Section 2 of this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents and warrants to the Purchaser as follows:
(a) the Seller has full legal power and authority to execute
and deliver this Agreement and consummate the transactions contemplated
hereby;
(b) the execution and delivery by the Seller of this Agreement
and the consummation of the transactions contemplated hereby have been
duly authorized by all requisite action on the part of the Seller;
(c) this Agreement constitutes a legal, valid and binding
obligation to the Seller, enforceable in accordance with its terms,
except that such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the rights of creditors generally or by general equitable principles
(d) Seller has good and marketable title to all of the Shares,
free and clear of all Liens; and
(e) the execution and delivery by the Seller of this Agreement
and the consummation by the Seller of the transactions contemplated
hereby (i) will not violate any law, statute, rule or regulation, (ii)
after giving effect to the waiver Agreement dated June 25, 1998 will
not conflict with any provision of any agreement, certificate of
incorporation, or other organizational or constitutive instrument, if
any, of the Seller, (iii) will not require or make necessary any
consent, approval or other action, or notice to, any person, except for
those that have been
2
<PAGE> 3
obtained or made, and (iv) will not conflict with, or result in a
violation of, any agreement or other document or instrument to which
the Seller is a party or by which it, or any of its assets or
properties, is bound.
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER. The Purchaser
represents and warrants to the Seller as follows:
(a) the execution and delivery by the Purchaser of this
Agreement and the consummation by the Purchaser of the transactions
contemplated hereby (i) will not violate any law, statute, rule or
regulation, (ii) will not conflict with any provision of any agreement,
certificate of incorporation, or other organizational or constitutive
instrument, if any, of the Purchaser, (iii) will not require or make
necessary any consent, approval or other action, or notice to, any
person, except for those that have been obtained or made, and (iv) will
not conflict with, or result in a violation of, any agreement or other
document or instrument to which the Purchaser is a party or by which
it, or any of its assets or properties, is bound; and
(b) this Agreement constitutes a legal, valid and binding
obligation of the Purchaser, enforceable in accordance with its terms,
except that such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the rights of creditors generally or by general equitable principles;
(c) the Purchaser confirms that:
(i) he is an "accredited investor" as such term is defined in
Rule 501(a) of Regulation D promulgated under the
Securities Act;
(ii) he understands that his interest in Exchange Applications
will not be registered or qualified under any state
securities or blue sky laws and cannot be resold without
such registration or qualification or an exemption
therefrom.
(iii) he understands that his Shares have not been registered
under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on an exemption from
registration thereunder for transactions not involving a
public offering, and that such Shares may not be sold,
transferred or otherwise disposed of except as permitted
under the Securities Act and applicable state securities
laws pursuant to registration or exemption therefrom;
3
<PAGE> 4
(iv) he is acquiring the Shares for his own account for
investment purposes only and not with a view to resale,
assignment or other distribution, in whole or in part, and
no other person has or will have a direct or indirect
beneficial interest in such Shares;
(v) he understands that the Shares are a speculative investment
and involve a high degree of risk, the transferability of
the Shares is substantially restricted, there will be no
public market for such Shares and it may not be possible
for such Purchaser to liquidate his investment in Exchange
Applications;
(vi) he is able to bear the substantial economic risks of an
investment in such Shares and can afford a complete loss of
such investment;
(vii) he has such knowledge and experience in financial,
investment and business matters so as to enable him, to use
the information made available to him in connection with
the purchase of such Shares, to evaluate the merits and
risks of such purchase, and to make an informed investment
decision with respect thereto;
(viii) he has carefully considered and has, to the extent he
believes such discussions necessary, discussed with his
professional legal, tax, accounting and financial advisors
the suitability of his purchase of such Shares;
(ix) he has had an opportunity to ask questions of, and receive
answers from, Exchange Applications, or a person or persons
acting on its behalf, concerning the terms and conditions
of his purchase of such Shares, and all such questions have
been answered to his full satisfaction;
(x) he has had the opportunity to review any documents relating
to Exchange Applications requested by him and to conduct
due diligence, and such due diligence review has been fully
satisfactory to him; and
(xi) he is not purchasing such Shares as a result of, or
subsequent to, any advertisement, article, notice or other
communication published in any newspaper, magazine or
similar
4
<PAGE> 5
medium or broadcast over radio or television, or any
seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
6. REGISTRATION RIGHTS AGREEMENT JOINDER. By execution and delivering
this Agreement to the Corporation, the Purchaser hereby agrees to become a party
to, to be bound by, and to comply with the provisions of the Amended and
Restated Registration Rights Agreement dated as of December 4, 1997 among
Exchange Applications and the Investors named therein as an Insight II Investor
thereunder (as such term is defined and used therein), in the same manner as if
the undersigned were an original signatory to the Registration Rights Agreement.
7. REPRESENTATION AND WARRANTY OF EXCHANGE APPLICATIONS. Exchange
Applications represents and warrants to the Seller that Exchange Applications
has not engaged, on behalf of the Seller, in any General Solicitation (as
defined under applicable Securities Laws), including, without limitation, acting
as underwriter, of the Shares.
8. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
9. ENTIRE AGREEMENT; INTERPRETATION. This Agreement, embodies the
complete agreement and understanding among the parties hereto with respect to
the subject matter hereof and thereof and supersedes and preempts any prior
understandings, agreements or representations by or among the Parties, written
or oral, which may have related to the subject matter hereof or thereof in any
way. Any terms defined in this Agreement shall apply to the singular and plural
forms of the terms defined. Whenever the context requires, any pronoun shall
include the corresponding masculine, feminine and neuter forms. The words
"include," "includes" and "including" shall be deemed to be followed by the
phrase "without limitation."
10. GOVERNING LAW. All questions concerning the construction,
interpretation and validity of this Agreement shall be governed by and construed
and enforced in accordance with the domestic laws of the State of New York,
without giving effect to any choice or conflict of law provision or rule
(whether in the State of New York or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of New
York. In furtherance of the foregoing, the internal law of the State of New York
will control the interpretation and construction of this Agreement, even if
under such jurisdiction's choice of law or conflict of law analysis, the
substantive law of some other jurisdiction would ordinarily apply.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered on the date first above written.
PURCHASER:
/s/ Michael J. Feldman
-------------------------------
Michael J. Feldman
<PAGE> 7
SELLER:
INSIGHT CAPITAL PARTNERS II, L.P.
By: INSIGHT VENTURE ASSOCIATES II, LLC
its general partner
By: /s/ ???????
----------------------------------
Name:
Title:
<PAGE> 8
FOR PURPOSES OF SECTIONS
1, 3 AND 7:
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
----------------------------------
Andrew J. Frawley
President
<PAGE> 9
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
as of the date first written above.
EXCHANGE APPLICATIONS, INC.
By: /s/ Andrew J. Frawley
----------------------------------
Andrew J. Frawley
President
<PAGE> 10
WAIVER AGREEMENT
RELATING TO THE AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
WAIVER AGREEMENT (this "Agreement") dated as June 25, 1998 RELATING TO
THE AMENDED AND RESTATED STOCKHOLDERS AGREEMENT dated as of December 4, 1997
among Exchange Applications, Inc., a Delaware corporation (the "Company") and
the Stockholders (as such term is defined therein).
PRELIMINARY STATEMENTS:
1. The Company, InSight Capital Partners II, L.P. ("InSight") and the
other Stockholders thereto have entered into the Stockholders Agreement, dated
as of December 4, 1997 (the "Stockholders Agreement"). Capitalized terms not
otherwise defined in this Amendment have the same meanings as specified in the
Stockholders Agreement.
2. InSight and Michael J. Feldman have requested the Company and the
Stockholders to waive and amend certain provisions of the Stockholders Agreement
in order to permit InSight to complete the sale of 30,000 shares of the
Company's Series C Preferred Stock, $.001 par value (the "Series C Preferred")
to Michael J. Feldman (this "Transaction") for an aggregate purchase price of
$98,040.00.
3. The Company and the Stockholders are, on the terms and conditions
stated below, willing to grant the requests of InSight, and the Company, InSight
and the Stockholders have agreed to waive the Stockholders Agreement as
hereinafter set forth.
Section 1. WAIVERS.
(a) The Company hereby waives any and all rights under
Section 6(c) of the Stockholders Agreement with respect to the Transaction.
(b) The Stockholders and the Company hereby agree that the
Transaction shall be deemed to be a "Permitted Transfer" under the Stockholders
Agreement and for all purposes of the Stockholders Agreement.
Section 2. REFERENCE TO AND EFFECT ON THE STOCKHOLDERS AGREEMENT
(a) On and after the effectiveness of this Agreement, each
reference in the Stockholders Agreement to the Stockholders Agreement shall mean
and be a reference to the Stockholders Agreement, as waived by this Agreement.
(b) The Stockholders Agreement, as specifically amended by
this Agreement, is and shall continue to be in full force and effect and is
hereby in all respect ratified and confirmed.
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<PAGE> 11
(c) The execution, delivery and effectiveness of this
Agreement shall not operate as a waiver of any right, power or remedy of any
Stockholder under the Stockholders Agreement, nor constitute a waiver of any
provision of the Stockholders Agreement.
Section 3. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement.
SECTION 4. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Massachusetts.
SECTION 5. EFFECTIVE TIME. This Agreement shall be effective upon (i)
written consent of the Board and (ii) execution and delivery of this Agreement
by (w) the Requisite Series B Stockholders, (x) the Requisite Series C
Stockholders, (y) the Requisite Common Stockholders and (z) the Requisite
Stockholders.
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<PAGE> 12
STOCKHOLDERS:
INSIGHT VENTURE PARTNERS I, L.P.
BY: INSIGHT VENTURE ASSOCIATES, LLC,
its general partner
By: /s/ Jeffrey Horing
----------------------------------
Name: Jeffrey Horing
Title:
INSIGHT CAPITAL PARTNERS II, L.P.
BY: INSIGHT VENTURE ASSOCIATES II, LLC
its general partner
By: /s/ Jeffrey Horing
----------------------------------
Name: Jeffrey Horing
Title:
WEXFORD INSIGHT LLC
BY: WEXFORD MANAGEMENT LLC
its investment manager
By: /s/ Robert Holtz
----------------------------------
Name: Robert Holtz
Title: Principal
CYRK, INC.
By: /s/ Ted L. Axelrod
----------------------------------
Name: Ted L. Axelrod
Title: Executive Vice President
<PAGE> 13
GRANT & PARTNERS LIMITED PARTNERSHIP
BY: GRANT & PARTNERS, INC.,
its general partner
By: /s/ Alan W. H. Grant
-----------------------------------------
Name: Alan W. H. Grant
Title: President, Grant & Partners, Inc.
<PAGE> 14
STOCKHOLDERS:
/s/ Andrew J. Frawley
------------------------------
Andrew J. Frawley
/s/ Michael J. Feldman
------------------------------
Michael J. Feldman
/s/ Michael McGonagle
------------------------------
Michael McGonagle
/s/ David McFarlane
------------------------------
David McFarlane
/s/ Daniel Cox
------------------------------
Daniel Cox
/s/ Patrick McHugh
------------------------------
Patrick McHugh
/s/ Stewart Vassie
------------------------------
Stewart Vassie
/s/ Steven Feldman
------------------------------
Steven Feldman
/s/ Patrick D. Brady
------------------------------
Patrick D. Brady
/s/ Gregory P. Schlopak
------------------------------
Gregory P. Schlopak
/s/ David H. Brault
------------------------------
David H. Brault
<PAGE> 15
/s/ Ted L. Axelrod
------------------------------
Ted L. Axelrod
/s/ Terry B. Angstadt
------------------------------
Terry B. Angstadt
/s/ James T. Brady
------------------------------
James T. Brady
/s/ Dominic F. Mammola
------------------------------
Dominic F. Mammola
/s/ James A. Dooley
------------------------------
James A. Dooley
/s/ Diane K. Green
------------------------------
Diane K. Green
<PAGE> 1
EXHIBIT 10.17
STANDARD FORM COMMERCIAL LEASE
THIS INSTRUMENT IS A LEASE, dated as of November 15, 1997, in which the
LESSOR and LESSEE are the parties hereinafter named, and which relates to space
in the building (the "Building") located at 89 South Street, Boston,
Massachusetts. The parties to this instrument hereby agree with each other as
follows:
1. BASIC LEASE PROVISIONS: The following set forth basic data and,
where appropriate, constitute definitions of the terms hereinafter listed.
A. BASIC DATA.
LESSOR: Lincoln Plaza Limited Partnership, a
Massachusetts limited partnership
LESSOR'S Address: c/o Capital Properties, Inc., 80
Lincoln Street, Boston, MA 02111
LESSEE: Exchange Applications, Inc., a Delaware
corporation
LESSEE'S Original Address: 695 Atlantic Avenue,
Boston, MA 02111
LESSEE'S Notice Address / Prior to Commencement Date
(Section 20): Mr. John O'Brien, VP/CFO, Exchange Applications,
Inc., 695 Atlantic Avenue, Boston, MA 02111
LESSEE'S Notice Address / After Commencement Date
(Section 20): Mr. John O'Brien, VP/CFO, Exchange Applications,
Inc., at the Premises
With a copy to Neil Townsend, Esq., Bingham, Dana &
Gould, 150 Federal Street, Boston, MA 02110
Basic Rent: The sum of $1,080,000 ($27 per square
foot Of Premises Rentable Area) per annum as the same may be
adjusted and/or abated.
Premises Rentable Area: Agreed to be 40,000 square
feet located on the seventh and eighth floor of the Building.
Permitted Uses: General business office use.
Escalation Factor: 17.32%, as computed in accordance
with the Escalation Factor Computation.
Construction Completion Date:
Approximately June 1, 1998.
Initial Term: Five years commencing on the
Commencement Date and expiring at the close of the day
immediately preceding the fifth anniversary of the
Commencement
<PAGE> 2
Date, except that if the Commencement Date shall
be other than the first day of a calendar month, the
expiration of the Initial Term shall be at the close of the
day on the last day of the calendar month on which such
anniversary shall fall.
<TABLE>
<CAPTION>
<S> <C>
Lease Security:
Thirty days prior to the commencement of LESSEE shall provide LESSOR with a Letter
construction (approximately) January 1, 1998 of Credit in the amount of $600,000.
At the second anniversary of the The Letter of Credit may reduce to
Commencement Date $480,000 so long as there has been no
default from the Commencement Date through
this reduction date.
At the third anniversary of the The Letter of Credit may reduce to
Commencement Date $360,000 so long as there has been no
default from the Commencement Date through
his reduction date.
At the fourth anniversary of the The Letter of Credit may reduce to
Commencement Date $240,000 so long as there has been no
default from the Commencement Date through
this reduction date.
</TABLE>
Base Operating Expenses: The actual Operating
Expenses for the calendar year commencing January 1, 1998 and
ending December 31, 1998.
Base Taxes: The actual Taxes for the Tax Year
commencing July 1, 1997 and ending June 1, 1998.
Broker: CB/Whittier Partners
B. ADDITIONAL DEFINITIONS.
Agent: Capital Properties, Inc., 80 Lincoln Street,
Boston, Massachusetts 02111.
Business Days: All days except Saturday, Sunday, New
Year's Day, President's Day, Patriot's Day, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, Christmas Day (and the following Monday when
any such day occurs on Sunday). Unless specifically referred
to herein as Business Days, all references in this Lease to
"days" shall mean calendar days.
Commencement Date: June 1, 1998 or upon substantial
completion of LESSOR'S Work, whichever is later.
Escalation Factor Computation: Premises Rentable Area
divided by 100% of building rentable area. (the total building
rentable area is 231,000 square feet.)
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Initial Public Liability Insurance: $1,000,000.00 per
occurrence (combined single limit) for property damage,
personal injury or death.
LESSOR'S Work: As defined in Section 26.
LESSOR'S Plans: As defined in Section 26.Premises: A
portion of the Building as shown on Exhibit A attached hereto.
Extended Term: As defined in Section 34.
First Offered Space: As defined in Section 35.
2. PREMISES. A portion of the building owned by LESSOR consisting of
approximately 40,000 SQUARE FEET OF RENTABLE AREA ON THE SEVENTH AND EIGHTH
FLOORS OF THE BUILDING AND SUBSTANTIALLY KNOWN AS SUITES 701 & 801 on the plan
attached hereto as "Exhibit A" (the "Premises") together with the right to use
in common, with others entitled thereto, the hallways, stairways, and elevators,
necessary for access to said Premises. and lavatories nearest thereto.
3. TERM. The term of this lease shall be for five years commencing on
the Commencement Date and ending sixty months later.
4. BASIC RENT. The LESSEE shall pay to the LESSOR rent at the rate of
$1,080,000 per year, payable in advance on the first day of each month
commencing without deduction or set off in sixty monthly installments of
$90,000.
5. SECURITY DEPOSIT. Upon the execution of this lease, the LESSEE shall
provide LESSOR with a Letter of Credit in accordance with Section I of this
Lease. The Letter of Credit shall be held as security for the LESSEE'S
performance as herein provided and may be drawn in the event that LESSEE is in
default of this Lease.
6. ADDITIONAL RENT.
A. TAX. If, in any tax year, the real estate taxes on the land
and buildings, of which the Premises are a part, are in excess of the
amount of the Base Taxes, as finally abated (hereinafter called the
"Base Year"), LESSEE will pay to LESSOR, as additional rent hereunder,
when and as designated by notice in writing by LESSOR, the amount of
the excess multiplied by the Escalation Factor. If the LESSOR obtains
an abatement of any such excess real estate tax, a proportionate share
of such abatement, less the reasonable fees and costs incurred in
obtaining the same, if any, shall be refunded to the LESSEE.
B. OPERATING. If, in any calendar year, the Operating Expenses
for the Property of which the Premises are a part, are in excess of the
amount of the Base Operating Expenses, LESSEE will pay to LESSOR, as
additional rent hereunder, when and as designated by notice in writing
by LESSOR, the amount of the excess multiplied by the Escalation
Factor. Operating expenses are defined for the purposes of this
agreement as: The aggregate costs or expenses reasonably incurred by
LESSOR with respect to the operation, administration, cleaning, repair,
maintenance and management of the premises including, without
limitation, those items enumerated in "Exhibit C" attached hereto. Any
such accounting by LESSOR shall be binding and conclusive upon LESSEE
unless within thirty (30) days after that giving by LESSOR of such
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<PAGE> 4
accounting, LESSEE shall notify LESSOR that LESSEE disputes the
correctness of such accounting, specifying the particular respects in
which the accounting is claimed to be incorrect.
7. UTILITIES. The LESSEE shall pay, as they become due, all bills for
electricity and other utilities that are furnished to the Premises and presently
separately metered or check metered by LESSOR. The LESSOR agrees to provide all
other utility service and to furnish reasonably hot and cold water and
reasonable heat and air conditioning to the Premises, the hallways, stairways,
elevators, and lavatories during normal building business hours (8:00 A.M. -
6:00 P.M. on weekdays and 8:00 A.M - 12:00 NOON on Saturdays) on regular
Business Days as outlined in Section I above of the heating and air conditioning
seasons of each year, to furnish elevator service and to light passageways and
stairways and to furnish such cleaning service as is customary in similar
buildings in said city or town, all subject to interruption due to any accident,
to the making of repairs, alterations, or improvements, to labor difficulties,
to inability to obtain fuel, electricity, service, or supplies from the sources
from which they are usually obtained for said building, or to any cause beyond
the LESSOR'S control. LESSOR reserves the right to charge for after hours HVAC
so long as this charge shall apply uniformly to the majority of tenants in the
building.
LESSOR shall have no obligation to provide utilities or equipment other than the
utilities and equipment within the premises as of the commencement date of this
lease. In the event LESSEE requires additional utilities or equipment, the
installation and maintenance thereof shall be the LESSEE'S sole obligation,
provided that such installation shall be subject to the written consent of the
LESSOR.
8. USE OF LEASED PREMISES. The LESSEE agrees to use the Premises in a
manner consistent with the nature of the building and consistent with the other
LESSEES in the building. The LESSEE shall use the Premises only for the purpose
of listed in Section I of this Lease. LESSEE shall have access to the Premises
twenty four hours a day, seven days a week, fifty-two weeks per year.
9. COMPLIANCE WITH THE LAWS. The LESSEE acknowledges that no trade or
occupation shall be conducted in the Premises or use made thereof which will be
unlawful, improper, noisy or offensive, or contrary to any law or any municipal
by-law or ordinance in force in the city or town in which the Premises are
situated. LESSEE agrees to comply with all such laws. LESSOR makes no
representation that uses contemplated by the LESSEE are permitted by law.
10. FIRE INSURANCE. The LESSEE shall not permit any use of the Premises
which will make voidable any insurance on the property of which the Premises are
a part, or on the contents of said property or which shall be contrary to any
law or regulation from time to time established by the New England Fire
Insurance Rating Association, or any similar body, succeeding to its powers. The
LESSEE shall not use the Premises in any way which will cause an extra insurance
premium. However, in the event that LESSEE does so, the LESSEE shall, on demand,
reimburse the LESSOR, and all other lessees, all extra insurance premiums caused
by the LESSEE'S use of the Premises.
11. MAINTENANCE OBLIGATIONS. The LESSEE agrees to maintain the
Premises, in good condition, damage by fire and other casualty only excepted,
and whenever necessary, to replace plate glass and other glass therein.
A. LESSEE'S OBLIGATIONS. The Premises are now in good order
and the glass whole. The LESSEE shall not permit the Premises to be
overloaded, damaged, stripped, or defaced, nor suffer any waste. LESSEE
shall obtain written consent of LESSOR before erecting any sign on the
Premises. The LESSEE shall keep and maintain the Premises in good order
and repair at its own expense. The LESSOR shall at LESSEE'S expense and
upon LESSEE'S request,
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<PAGE> 5
furnish and install all replacement lamps, lighting tubes, bulbs and
ballast's which may be required in the Premises during the terms hereof
B. LESSOR'S OBLIGATIONS. The LESSOR agrees to maintain the
structure of the building of which the Premises are a part in the same
condition as it is at the commencement of the Term or as it may be put
in during the Term of this Lease, reasonable wear and Lear, damage by
fire and other casualty only excepted, unless such maintenance is
required because of the LESSEE or those for whose conduct the LESSEE is
legally responsible.
LESSOR shall never be liable for any failure to make repairs unless
LESSEE has given notice to LESSOR of the need to make such repairs and
LESSOR has failed to commence to make such repairs within a reasonable
time after receipt of such notice, or fails to proceed with reasonable
diligence to complete such repairs.
12. ADDITIONS & ALTERATIONS. The LESSEE shall not make structural
alterations or additions to the Premises or that will affect the building's
systems, but may make non-structural alterations provided the LESSOR consents
thereto in writing, which consent shall not be unreasonably withheld or delayed.
Minor Alterations which costs LESSEE less than $1,000 may be made without
LESSOR'S prior written consent. All such allowed alterations shall be at
LESSEE'S expense and shall be in quality at least equal to the present
construction. LESSEE shall not permit any mechanics' liens, or similar liens, to
remain upon the Premises for labor and material furnished to LESSEE or claimed
to have been furnished to LESSEE in connection with work of any character
performed or claimed to have been performed at the direction of LESSEE and shall
cause any such lien to be released of record forthwith without cost to LESSOR.
Any alterations or improvements made by the LESSEE shall become the property of
the LESSOR at the termination of occupancy as provided herein.
13. ASSIGNMENT & SUBLEASING.
A. Short Term - Sublease(s) of up to 10,000 square feet for
the first two years of the term. The LESSEE shall not assign or sublet
the whole or any part of the Premises without LESSOR'S prior written
consent, which consent shall not be unreasonably withheld or delayed.
Notwithstanding such consent, LESSEE shall remain liable to LESSOR for
the payment of all rent and for the full performance of the covenants
and conditions of this lease. If SUBLESSEE is paying rent at an amount
greater than outlined in Section 4 of this agreement, the amount over
less LESSEE'S subleasing expenses which shall include tenant
improvement costs, legal fees and brokerage fees shall be due to
LESSOR. LESSOR'S permission shall also be necessary for any subdivision
of the Premises.
B. Long Term - Sublease(s) which begin or extend past the
second anniversary of the Commencement Date or for space in excess of
10,000 square feet for any portion of the Term. The LESSEE shall not
assign or sublet the whole or any part of the Premises without LESSOR'S
prior written consent, such consent shall not be withheld or delayed.
Notwithstanding such consent, LESSEE shall remain liable to LESSOR for
the payment of all rent and for the full performance of the covenants
and conditions of this lease. If SUBLESSEE is paying rent at an amount
greater than outlined in Section 4 of this agreement, the amount over
less LESSEE'S subleasing expenses which shall include tenant
improvement costs, legal fees and brokerage fees shall be due to
LESSOR. LESSEE shall not sublease to a current or prospective tenant of
the Building. Prospective tenants are those tenants who have been
introduced to the Property within thirty (30) days of the sublease
proposal or any tenant in negotiation with LESSOR. LESSEE shall not
sublease below Fair Market Value, without LESSOR'S prior written
consent.
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<PAGE> 6
Fair Market Value shall take the length of the proposed term into
consideration. LESSOR shall designate Fair Market Value, (the "Fair
Market Value") by written notice to LESSEE within five (5) days of
receipt of notice of intent to sublease from LESSEE. If LESSEE
disagrees with such designation, (the "Designation"), LESSEE shall by
written notice, advise LESSOR of such disagreement; otherwise LESSEE
shall conclusively be deemed to have agreed to such Designation.
In the event that the Parties are unable to agree, each Party shall
appoint appraiser. Each appraiser so appointed shall be instructed to
determine independently the Fair Market Value and then confer. If the
two appraisers are unable to determine a Designation acceptable to both
parties, they shall appoint a third appraiser. The Designation of this
appraiser shall be considered final.
LESSOR may also elect to recapture the proposed sublease premises.
14. SUBORDINATION. This Lease shall be subject and subordinate to any
and all mortgages, deeds of trust and other instruments in the nature of a
mortgage, now or at any time hereafter, a lien or liens on the property of which
the Premises are a part and the LESSEE shall, when requested, promptly execute
and deliver written instruments as shall be necessary to show the subordination
of this lease to said mortgages, deeds of trust or other such instruments in the
nature of a mortgage. At LESSEE'S request and at LESSEE'S expense, LESSOR shall
use good efforts to secure a so-called subordination and non-disturb agreement
from LESSOR'S lender. In the event that LESSEE fails or refuses to execute same,
LESSOR MAY DO SO AS LESSEE'S Attorney-in-Fact.
15. LESSOR'S ACCESS. The LESSOR or agents of the LESSOR may, at
reasonable times and with reasonable notice, enter to view the Premises and may
remove placards and signs not approved and affixed as herein provided, and make
repairs and alterations as LESSOR should elect to do and may show the Premises
to others, and at any time within six (6) months before the expiration of the
term.
16. INDEMNIFICATION AND LIABILITY. LESSEE shall save LESSOR harmless,
and shall exonerate and indemnify LESSOR, from and against any and all claims,
liabilities or penalties or asserted by or on behalf of any person, firm,
corporation or public authority:
(i) on account of or based upon any injury to
person, or loss of or damage to property
sustained or occurring or emanating from the
Premises on account of or based upon the
act, omission, fault, negligence or
misconduct of any person except LESSOR;
(ii) on account of or based upon any injury to
person, or loss of or damage to property,
sustained on or occurring elsewhere (other
than on the Premises) in or about the
Property (and, in particular, without
limitation, the elevators, stairways, public
corridors, sidewalks, parking areas,
concourses, arcades, approaches, areaways,
roof, or other appurtenances and facilities
used in connection with the Property or the
Premises) arising out of the use or
occupancy of the Property or Premises by the
LESSEE or by any person claiming by, through
or under LESSEE, except where such injury,
loss or damage was caused by the negligence,
fault or misconduct of the LESSOR;
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and in addition to and not in limitation of
either of the foregoing subdivisions (i) and
(ii);
(iii) on account of or based upon (including
moneys due on account of) any work or thing
whatsoever done (other than by LESSOR or its
contractors, or agents or employees or
either) on the Leased Premises; and, in
respect of any of the foregoing, from and
against all costs, expenses (including
reasonable attorneys' fees), and liabilities
incurred in or in connection with any such
claim, or any action or proceeding brought
thereon; and in case any action or
proceeding be brought against LESSOR by
reason of any such claim. LESSEE upon notice
from LESSOR shall at LESSEE'S expense resist
or defend such action or proceeding and
employ counsel therefore reasonably
satisfactory to LESSOR, it being agreed that
such counsel as may act for insurance
underwriters of LESSEE engaged in such
defense shall be deemed satisfactory.
17. LESSEE'S LIABILITY INSURANCE. The LESSEE shall maintain with
respect to the Premises and the property of which the Premises are a part
commercial general liability insurance in the amount of $1,000,000 with property
damage insurance in limits of $100,000 in responsible companies qualified to do
business in Massachusetts and in good standing therein insuring the LESSOR as
well as LESSEE against injury to persons or damage to property as provided.
LESSEE agrees to increase limits as LESSOR'S mortgagee reasonably requires. The
LESSEE shall deposit with the LESSOR certificates for such insurance at or prior
to the commencement of the Term, and thereafter within thirty (30) days prior to
the expiration of any such policies. All such insurance certificates shall
provide that such policies shall not be canceled without at least ten (10) days
prior written notice to each assured named therein.
18. FIRE, CASUALTY, EMINENT DOMAIN. Should a substantial portion of the
Premises, or of the property of which they are a part, be substantially damaged
by fire or other casualty, or be taken by eminent domain, the LESSOR may elect
to terminate this lease. When such fire, casualty, or taking renders the
Premises substantially unsuitable for their intended use, a just and
proportionate abatement of rent shall be made, and the LESSEE may elect to
terminate this lease if:
(a) The LESSOR fails to give written notice within thirty (30)
days of the event of its intention to restore Premises, or
(b) The LESSOR fails to restore the Premises to a condition
substantially suitable for their intended use within ninety (90) days
of said fire, casualty or taking, as such date may be extended ninety
(90) days if LESSOR is diligently working to restore the Premises and
extended an additional ninety (90) days for force majeure. LESSOR
reserves, and the LESSEE grants the LESSOR, all rights which the LESSEE
may have for damages or injury to the Premises for any taking by
eminent domain, except for damage to the LESSEE'S fixtures, property,
or equipment.
19. DEFAULT AND BANKRUPTCY. In the event that:
(a) The LESSEE shall default in the payment of any installment
of rent or other sum herein specified and such default shall continue
for five (5) days after written notice thereof; or
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(b) The LESSEE shall default in the observance or performance
of any other of the LESSEE'S covenants, agreements, or obligations
hereunder and such default shall not be corrected within fifteen (15)
days after written notice thereof; or
(c) The LESSEE shall file or be filed against in any
bankruptcy, insolvency or reorganization petition; or
(d) The LESSEE shall be declared bankrupt or insolvent
according to law, or, if any assignment shall be made of LESSEE'S
property for the benefit of creditors, or
(e) Any attachment is made of the leasehold interest outlined
in this lease; or
(f) The LESSEE shall abandon the premises; or
(g) A receiver is appointed to conduct LESSEE'S business
(whether or not LESSOR has re-entered the premises) then the LESSOR
shall have the right thereafter, while such default continues, to
re-enter and take complete possession of the Premises, to terminate
this lease, and remove the LESSEE'S effects without prejudice to any
remedies which might be otherwise used for arrears of rent or other
default. The LESSEE shall indemnify the LESSOR against all loss of rent
and additional rent and other payments which the LESSOR may incur by
reason of such termination during the residue of the term. If the
LESSEE shall default, after reasonable notice thereof; in the
observance or performance of any conditions or covenants on LESSEE'S
part to be observed or performed under or by virtue of any of the
provisions in any article of this lease, the LESSOR, without being
under any obligation to do so and without thereby waiving such default,
may remedy such default for the account and at the expense of the
LESSEE. If the LESSOR makes any expenditures or incurs any obligations
for the payment of money in connection therewith, including but not
limited to, reasonable attorney's fees in instituting, prosecuting or
defending any action or proceeding, such sums paid or obligations
insured, with interest at the rate of 18 per cent per annum. and costs,
shall be paid to the LESSOR by the LESSEE as additional rent. Any sums
not paid when due shall bear interest at 18 per cent per annum until
paid. LESSEE shall pay an administrative fee if a check does not clear.
20. NOTICE. Any Notice from the LESSOR to the LESSEE relating to the
Premises or to the occupancy thereof, shall be in writing and be deemed duly
served, if mailed to the Notice Address in Section I of this Lease, registered
or certified mail, return receipt requested, postage prepaid or by overnight
carrier, addressed to the LESSEE. Any Notice from the LESSEE to the LESSOR
relating to the Premises or to the occupancy thereof, shall be deemed duly
served, if mailed to the LESSOR by registered or certified mail, return receipt
requested, postage prepaid or by overnight carrier, addressed to the LESSOR at
the address in Section 1 of this Lease or such other address as the LESSOR may
from time to time advise in writing. All rent notices shall be paid and sent to
the LESSOR at its notice address or such other address as may be designated by
LESSOR.
21. SURRENDER. The LESSEE shall at the expiration or other termination
of this Lease remove all LESSEE'S goods and effects from the Premises,
(including, without hereby limiting the generality of the foregoing, all signs
and lettering affixed or painted by the LESSEE, either inside or outside the
Premises). LESSEE shall deliver to the LESSOR the Premises and all keys, locks
thereto, and other fixtures connected therewith and all alterations and
additions made to or upon the Premises, in good condition, damage by fire or
other casualty only excepted. In the event of the LESSEE'S failure to remove any
of LESSEE'S property from the Premises, LESSOR is hereby authorized, without
liability to LESSEE for loss or damage thereto, and at the sole risk of LESSEE,
to remove and store any of the
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property at LESSEE'S expense, or to retain same under LESSOR'S control or to
sell at public or private sale, without notice any or all of the property not so
removed and to apply the net proceeds of such sale to the payment of any sum due
hereunder, or to destroy such property. The LESSEE shall restore all damage to
the Premises which may have occurred during the use of Premises or while
vacating the Premises. Any items which the LESSEE installs, which replace items
on the Premises when LESSEE took occupancy are deemed to be LESSOR'S property.
22. BROKERAGE. LESSEE warrants and represents that LESSEE has dealt
with no broker other than the broker listed in Section I of this lease in
connection with the consummation of this Lease and, in the event of any
brokerage claims against LESSOR predicated upon prior dealings with LESSEE,
LESSEE agrees to defend the same and indemnify LESSOR against any such claim.
23. LESSOR'S LIABILITY. The LESSOR is not personally liable under this
Lease. (a) LESSEE specifically agrees to look solely to the LESSORS then equity
in the property of which the Premises are a part for recovery of any judgment
from LESSOR it being specifically agreed that LESSOR (original or successor)
shall never be personally liable for any such judgment or for the payment of any
monetary obligation to LESSEE. The provisions contained in the foregoing
sentence are not intended to, and shall not, limit any right the LESSEE might
otherwise have to obtain injunctive relief against LESSOR or to take any action
not involving the liability of LESSOR to respond in monetary damages from
LESSOR'S assets other than from such property.
24. WAIVER. Failure on the part of the LESSOR or LESSEE to complain of
any action or non-action on the part of the other, no matter how long the same
may continue, shall never be a waiver by LESSOR or LESSEE, respectively, of its
rights hereunder. Further, no waiver at any time of the provisions hereof, by
LESSOR or LESSEE shall be construed as a waiver of any of the other provisions
hereof, and a waiver at any time of any of the provisions hereof shall not be
construed as a waiver at any subsequent time of the provisions. The consent or
approval of LESSOR or LESSEE to or of any action by the other requiring such
consent or approval shall not be construed to waive or render unnecessary
LESSOR'S or LESSEE'S consent or approval to or of any subsequent similar act by
the other.
25. STATUS REPORT. Recognizing that both parties may find it necessary
to establish to third parties, from time to time, the then current status of
performance hereunder, either party will, within ten (10) days after receipt of
a request therefore, furnish a statement of the status of any matter pertaining
to this Lease, including without limitation, acknowledgments that (or the extent
to which) each party is in compliance with its obligations under the terms of
the Lease.
26. CONDITION AND AREA. Except as otherwise provided in this Section,
the Premises are being delivered strictly in their condition "as is" and LESSEE
acknowledges that it has inspected the same and found them satisfactory. LESSOR
WILL BUILD SPACE IN ACCORDANCE WITH LESSEE'S SPECIFICATIONS USING BUILDING
STANDARD MATERIALS IN AN AMOUNT NOT TO EXCEED $15 PER SQUARE FOOT. On the
Commencement Date, all mechanical and electrical systems shall be in working
order.
A. PREPARATION OF THE PREMISES: Promptly upon execution of the
Lease, LESSOR will have prepared, at its sole cost and expense, certain
plans ("LESSOR'S Plans") for improvements to be made in the Premises
and adjacent areas of the Building to prepare the Premises for LESSEE'S
occupancy. Upon completion of LESSOR'S Plans, LESSOR shall submit the
same to LESSEE for LESSEE'S approval, which approval shall not be
unreasonably delayed or withheld. To the extent that LESSEE does not
disapprove LESSOR'S Plans in writing, and provide specific remedies
that will make LESSOR'S Plans acceptable, within
9
<PAGE> 10
fourteen (14) days after submission of the same by LESSOR, LESSEE shall
be conclusively deemed to have approved LESSOR'S Plans. Promptly after
approval of LESSOR'S Plans, LESSOR shall exercise all reasonable
efforts to complete, at its sole cost and expense the work specified in
LESSOR'S Plans. The work shall collectively be referred to as "LESSOR'S
Work" Tenant shall have no claim against LESSOR for failure so to
complete such Work. LESSOR shall bid LESSOR'S work to at least three
contractors and shall share the bids with LESSEE.
B. SUBSTANTIAL COMPLETION: The Premises shall be deemed ready
for occupancy on the first day (the "'Substantial Completion Date") as
of which LESSOR'S Work has been completed except for items of work
(and, if applicable, adjustment of equipment and fixtures) which can be
completed after occupancy has been taken without causing undue
interference with LESSEE'S use of the Premises (i.e. so-called "punch
list" items) and LESSEE has been given notice thereof. LESSOR shall
complete as soon as conditions permit all "punch list" items and LESSEE
shall afford LESSOR access to the Premises for such purposes.
If the Substantial Completion Date has not occurred by August
1, 1998 (the "Construction Completion Date") as it may be extended
pursuant to section 26.D. LESSEE shall have the right to terminate this
Lease by giving notice to LESSOR not later than thirty (30) days after
the Construction Completion Date (as so extended), of Tenant's desire
so to do; and this Lease shall cease and come to an end without further
liability or obligation on the part of either party thirty (30) days
after the giving of such notice, unless, within such 30-day period,
LESSOR substantially completes LESSOR'S Work; and such right of
termination shall be LESSEE'S sole and exclusive remedy at law or in
equity for LESSOR'S failure so to complete such Work.
C. CONCLUSIVENESS OF LESSOR'S PERFORMANCE. Except to the
extent to which LESSEE shall have given LESSOR notice, not later than
the end of the second full calendar month of the Term of the Lease next
beginning after the Commencement Date, of any respects in which LESSOR
has not performed LESSOR'S Work, LESSOR shall be deemed to have
completed LESSOR'S Work as of the Commencement Date of this Lease.
D. LESSEES' DELAYS:
1. If a delay shall occur in the Substantial
Completion Date as the result of:
i. Any request by LESSEE that LESSOR delay
in the commencement of completion of
LESSOR'S Work for any reason;
ii. Any change by LESSEE in any of LESSOR'S
Plans after LESSEE'S approval thereof'.
iii. Any other act or omission of LESSEE or
its officers, agents, servants or
contractors:
iv. Any special requirement of LESSOR'S
Plans not in accordance with LESSOR'S Plans
not in accordance with LESSOR'S building
standards; or
v. Any reasonably necessary displacement of
any of LESSORS Work from its place in
LESSOR'S construction schedule resulting
from any of the causes for delay referred to
in clauses (i), (ii), (iii), (iv), or this
10
<PAGE> 11
paragraph and the filling of such Work back
into such schedule; then LESSEE shall, from
time to time and within ten (10) business
days after demand therefor, pay to LESSOR
for each day of such delay the amount of
Basic Rent, Escalation Charges and other
charges that would have been payable
hereunder and the LESSEE'S obligation to pay
Basic Rent commenced immediately prior to
such delay.
2. If a delay in the Substantial Completion Date, or
if any substantial portion of such delay, is the result of
Force Majeure, and such delay would not have occurred but for
a delay described in paragraph above, such delay shall be
deemed added to the delay described in that paragraph.
The delays referred to above are herein referred to
collectively and individually as "LESSEE'S Delay."
3. If, as a result of LESSEE'S Delay(s), the
Substantial Completion Date is delayed in the aggregate for
more than thirty (30) days, LESSOR may (but shall not be
required to) at any time thereafter terminate this Lease by
giving written notice of such termination to LESSEE and
thereupon this Lease shall terminate without further liability
or obligation on the part of either party, except that LESSEE
shall pay to LESSOR the cost theretofore incurred by LESSOR in
performing LESSOR'S Work, plus an amount equal to LESSOR'S
out-of-pocket expenses incurred in connection with this Lease,
including, without limitation, brokerage and legal fees,
together with any amount required to be paid pursuant to
Section 26 through the effective termination date.
4. The Construction Completion Date shall
automatically be extended for the period of any delays caused
by LESSEE'S Delay(s) or Force Majeure.
27. LESSOR'S WARRANTY. LESSOR warrants and represents that it is the
owner of record of the Premises and that it has authority to grant the leasehold
interest conveyed hereby.
28. SEVERABILITY. If any term or provision of this Lease, or the
application thereof to any person or circumstance shall, to the extent the same
shall be invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
29. RECORDING. LESSEE agrees not to record this Lease, but, if the Term
of this Lease (including any extended term) is seven (7) years or longer, each
party hereto agrees, on the request of the other, to execute a so-called Notice
of Lease in recordable form and complying with applicable law and reasonably
satisfactory to LESSOR'S attorneys. Such document shall expressly state that it
is executed pursuant to the provisions contained in this Lease, and is not
intended to vary the terms and conditions of this Lease.
30. HOLDING OVER. Any Holding Over by LESSEE after the expiration of
the Term of this Lease shall be treated as a tenancy at sufferance at a rate
equal to one and one half times the Basic Rent then in effect plus Additional
Rent and other charges herein provided. LESSEE shall also pay to LESSOR all
damages, direct and/or indirect, sustained by reason of any such as far as
applicable.
11
<PAGE> 12
31. GOVERNING LAW. This Lease shall be governed exclusively by the
provisions hereof and by the laws of the Commonwealth of Massachusetts, as the
same may from time to time exist.
32. RELOCATION. Deleted.
33. ENTIRE AGREEMENT. This Lease and the Exhibits made a part hereof
contain the entire and only agreement between the parties and any and all
statements and representations, written and oral, including previous
correspondence and agreements between the parties hereto, are merged herein.
LESSEE acknowledges that all representations and statements upon which it relied
in executing this Lease are contained herein and that the LESSEE in no way
relied upon any other statements or representations, written or oral. Any
executory agreement hereafter made shall be ineffective to change, modify,
discharge or effect an abandonment of this Lease in whole or in part unless such
executory agreement is in writing and signed by the party against whom
enforcement of the change, modification, discharge or abandonment is sought.
34. OPTION TO EXTEND: Provided that at the time of such exercise (i)
there then exists no Default of LESSEE, (ii) this Lease is then in full force
and effect, and (iii) LESSEE is in actual occupancy of all or substantially all
of the Premises, LESSEE shall have the right and option to extend the term of
this Lease for one (1) extended term of five years (the "Extended Term'). The
Extended Term shall commence on the day immediately succeeding the expiration
date of the Initial Term, and shall end on the day immediately preceding the
fifth anniversary of the first day of such Extended Term. LESSEE shall exercise
such option to extend by giving written notice to LESSOR of its desire to do so
not earlier than twelve (12) months and not later than nine (9) months prior to
the expiration date of the Initial Term. Provided the conditions of clauses (i),
(ii) and (iii) of this section shall have been satisfied, the giving of such
notice by LESSEE shall automatically extend the Term of this Lease for the
Extended Term, and no instrument of renewal need be executed. In the event that
LESSEE fails to give such notice to LESSOR, this Lease shall automatically
terminate at the end of the Initial Term, and LESSEE shall have no further
option to extend the Term of this Lease. It is agreed that time is of the
essence with respect to the giving of such notice. The Extended Term shall be on
all the terms and conditions of this Lease, except that (I) option to extend
that Term of this Lease shall be deleted, and (II) the Basic Rent for the
Extended Term shall be at Fair Market Value, not less than the sum of the rent
and all additional rent being paid by LESSEE during the final year of the
Initial Term. LESSOR shall designate Fair Market Value, (the "Fair Market
Value") by written notice to LESSEE within sixty (60) days of receipt of notice
from LESSEE. If LESSEE disagrees with such designation, (the "Designation"),
LESSEE shall by written notice, advise LESSOR of such disagreement; otherwise
LESSEE shall conclusively be deemed to have agreed to such Designation.
In the event that the Parties are unable to agree, each Party shall
appoint an appraiser. Each appraiser so appointed shall be instructed to
determine independently the Fair Market Value and then confer. If the two
appraisers are unable to determine a Designation acceptable to both parties,
they shall appoint a third appraiser. The Designation of this appraiser shall be
considered final.
35. RIGHT OF FIRST OFFER. If at any time during the Term of this Lease,
LESSOR shall desire to lease any space on the third, fourth, fifth or sixth
floor of the Building (the "First Offer Space"), LESSOR shall notify LESSEE and
set forth the terms and conditions on which LESSOR is willing to lease all or a
part of the First Offer Space, including, without limitation, rent, build-out
allowance and other incentives or inducements to lease, if any. Provided that
the time of such exercise (i) there then exists no Default of LESSEE, (ii) this
Lease is then in full force and effect, and (iii) LESSEE is in actual occupancy
of the entire Premises demised thereunder, LESSEE may, by giving notice in
writing to LESSOR within five (5) business days after receipt of LESSOR'S
notice, elect to lease the First Offer
12
<PAGE> 13
Space on the terms so offered by LESSOR. If LESSEE shall so elect to lease the
First Offer Space, it shall within ten (10) business days after such election
enter into an amendment to this Lease incorporating the terms and contained in
LESSOR'S notice. If LESSEE shall not elect to lease the First Offer Space within
such five (5) business day period, or shall fail to enter into such amendment to
this Lease within such ten-day period, LESSEE shall have no further rights under
this section with respect to that portion of the First Offer Space and LESSOR
shall be free to lease any or all of such space offered to other parties.
IN WITNESS WHEREOF, the said parties hereunto set their hands and seals
this 15th day of November, 1997.
LESSEE: Exchange Applications, Inc. LESSOR: Lincoln Plaza Limited
Partnership
BY: L.P. Properties, Inc. - its
General Partner
BY: Richard D. Cohen - its President
By: /s/ John G. O'Brien By: /s/ Richard D. Cohen
-------------------------- ---------------------------
John G. O'Brien Richard D. Cohen
Vice President and CFO
Hereunto Duly Authorized
13
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant
1. Exchange Applications Limited (United Kingdom)
2. Exchange Applications Pty. Ltd. (Australia)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made part of this
registration statement.
Arthur Andersen LLP
Boston, Massachusetts
July 21, 1998
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7,208
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<MULTIPLIER> 1,000
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<PERIOD-START> JAN-01-1996
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7,088
1
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<TOTAL-LIABILITY-AND-EQUITY> 11,400
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